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Issues Involved:
1. Whether the expenses of Rs. 4,500 allowed under the head 'Kitchen expenses' were in the nature of entertainment expenses. 2. Whether the Tribunal's finding that certain debts had become bad was perverse. Detailed Analysis: Issue 1: Nature of Kitchen Expenses The primary question addressed was whether the "kitchen expenses" incurred by the assessee for business purposes fall within the ambit of "entertainment expenditure" under Section 37(2A) of the Income Tax Act, 1961. The respondent assessee, a registered firm, claimed deductions for kitchen expenses, which the Income Tax Officer (ITO) deemed as entertainment expenditure, thereby limiting the allowable deduction to Rs. 5,000. The Appellate Assistant Commissioner (AAC) partially agreed with the assessee, reducing the disallowance but still treating a portion of the kitchen expenses as entertainment expenditure. The Income Tax Appellate Tribunal (ITAT) further reduced the disallowance, arguing that items like tea, cigarettes, and pan should not be considered lavish or pleasurable, thus not fitting the definition of entertainment expenditure. The High Court examined the legislative history and the broader scheme of the Income Tax Act. It noted that the phrase "in the nature of entertainment expenditure" used in Section 37(2) and (2A) is deliberately broad, encompassing all types of business hospitality, whether lavish or frugal. The Court emphasized that the legislative intent was to curb excessive business entertainment expenses at the cost of the public exchequer. The Court referenced various precedents, including the Full Bench judgment of the Kerala High Court in CIT v. Veeriah Reddiar, which held that hospitality of any kind extended for business purposes falls within the ambit of entertainment expenditure. The Court also noted the legislative history, including the amendments and restrictions progressively placed on entertainment expenditure, highlighting the intent to limit such deductions. The judgment concluded that all hospitality extended for business purposes, whether lavish or frugal, falls within the wide net of "in the nature of entertainment expenditure." Therefore, the kitchen expenses incurred by the assessee were deemed to be in the nature of entertainment expenditure and subject to the ceiling limits prescribed in Section 37(2A). Issue 2: Tribunal's Finding on Bad Debts The second issue concerning the Tribunal's finding on bad debts was not addressed in detail in this judgment. The parties agreed that this issue did not involve any complexity or conflict of precedent and should be decided by the Division Bench. Conclusion: The High Court answered the first question in the negative, favoring the revenue and holding that the kitchen expenses incurred were in the nature of entertainment expenditure. The case was then referred back to the Division Bench for consideration of the second question regarding the bad debts.
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