1976 (7) TMI 54 - HC - Income Tax

Business Income, Expenditure In The Nature Of Entertainment Expenditure, Income From Business, Income Tax Act, Total Income

Summary

Issues Involved:
1. Whether the expenses incurred by the assessee in supplying coffee, tea, cigarettes, etc., to customers are in the nature of entertainment expenditure within the meaning of section 37(2A) of the Income-tax Act, 1961, for the assessment year 1970-71.

Issue-wise Detailed Analysis:

1. Nature of Expenses as Entertainment Expenditure:
The primary issue was whether the expenses incurred by the assessee in supplying coffee, tea, cigarettes, and occasionally meals to customers constituted "expenditure in the nature of entertainment expenditure" under section 37(2A) of the Income-tax Act, 1961. The Tribunal had previously held that these expenses were not entertainment expenditure, stating that the expenses were nominal and customary, and did not involve any element of entertainment.

Legislative History and Interpretation:
The court examined the legislative history of section 37, noting that originally, under the Indian Income-tax Act, 1922, all non-capital expenditures wholly and exclusively for business purposes were deductible. Over time, Parliament imposed restrictions on entertainment expenditure to prevent abuse. The Finance Act, 1961, imposed ceiling limits on such expenditures for companies, and the Taxation Laws (Amendment) Act, 1967, extended similar restrictions to all assessees. The Finance Act, 1970, introduced sub-section (2B), which disallowed any entertainment expenditure incurred within India after February 28, 1970.

Definition and Scope of Entertainment Expenditure:
The term "entertainment expenditure" was not defined in the Act, so the court interpreted it based on its ordinary meaning, considering the legislative intent. The court emphasized that the phrase "expenditure in the nature of entertainment expenditure" is broader than just "entertainment expenditure," encompassing expenditures with characteristics of entertainment. The court concluded that "entertainment" should be understood as hospitality extended by the assessee in connection with its business.

Application to the Present Case:
The court held that supplying coffee, tea, cigarettes, and meals to customers constituted hospitality and thus fell within the scope of "entertainment expenditure." The court rejected the argument that only lavish or extravagant hospitality would qualify as entertainment, noting that any kind of hospitality extended in connection with business is covered.

Precedents and Comparative Jurisprudence:
The court disagreed with the Gujarat High Court's view in Commissioner of Income-tax v. Patel Brothers & Co. Ltd., which suggested that only lavish hospitality constitutes entertainment. Instead, the court aligned with the Allahabad High Court's decision in Brij Raman Dass and Sons v. Commissioner of Income-tax, which held that all expenditures on customer refreshments are entertainment expenditures.

Conclusion:
The Tribunal was found to be in error for holding that the expenses incurred by the assessee were not in the nature of entertainment expenditure. The court answered the question in the negative, favoring the department and against the assessee. The parties were directed to bear their respective costs. A copy of the judgment was ordered to be forwarded to the Tribunal as required by section 260(1) of the Act.