1977 (10) TMI 11 - HC - Income Tax

Summary

Issues involved: Determination of whether expenditure on messing charges and tea and pan provided to customers by an assessee firm constitutes entertainment expenditure under section 37(2B) of the Income Tax Act, 1961.

Judgment Details:

The assessee-firm derived income from Pakki adat and trading in grains and pulses. The Income Tax Officer (ITO) disallowed Rs. 5,000 for tea and pan to customers and Rs. 15,110 for messing, treating it as entertainment expenses due to the insertion of section 37(2B). The Appellate Authority Commission (AAC) partially accepted the claim, allowing only a portion of the expenses. The Tribunal later permitted the full deduction, relying on a decision of the Gujarat High Court.

The main question referred to the High Court was whether the mentioned expenditures qualified as entertainment expenses under section 37(2B). The revenue argued that post the introduction of section 37(2B), such expenses were not deductible. They cited a decision of the Full Bench of the Kerala High Court in support.

Section 37(1) allows for deduction of expenses laid out wholly and exclusively for business purposes. Section 37(2B), introduced in 1970, disallows entertainment expenditure incurred after February 28, 1970. The interpretation of "entertainment expenditure" was crucial in this case.

The Full Bench of the Kerala High Court defined "entertainment expenditure" broadly, including hospitality extended in connection with business. However, the Gujarat High Court's interpretation focused on the commercial practice and customs of trade, stating that hospitality provided in the course of business does not necessarily constitute entertainment.

The High Court agreed with the Gujarat High Court's view, emphasizing that the expenses in question were essential parts of the business rather than entertainment. Therefore, the Tribunal's decision to allow the deductions under section 37(1) was upheld.

In conclusion, the High Court ruled against the revenue, stating that the messing charges and tea and pan expenses were not entertainment expenditures under section 37(2B). The revenue was directed to bear the costs of the assessee.