1983 (10) TMI 91 - AT - Income Tax

Summary

Issues:
1. Whether medical expenses reimbursed by the assessee were in the nature of perquisites for disallowance under section 40A(5) of the Income-tax Act, 1961.
2. Whether the sum spent on giving free samples of whisky as sales promotion expenses was rightly allowed as a deduction or should be disallowed under section 37(2A) of the Act.

Analysis:

Issue 1:
The appeal involved a dispute regarding the treatment of medical expenses reimbursed by the assessee as perquisites under section 40A(5) of the Income-tax Act, 1961. The Commissioner (Appeals) had ruled in favor of the assessee, a limited company deriving income from various business activities, including commission agency. The department contended that the medical expenses should be treated as perquisites under section 40A(5). The Tribunal, referencing the case law of Blackie & Sons (India) Ltd. v. ITO [1983] 3 SOT 72 (Bom.), upheld the Commissioner's decision, stating that the questions raised had been previously answered in favor of the assessee. Thus, the Tribunal rejected the department's appeal on this ground.

Issue 2:
The second ground of appeal revolved around the deduction of a sum spent on distributing free samples of whisky as sales promotion expenses. The department argued that the distribution of whisky bottles constituted lavish entertainment, disallowed under section 37(2A) of the Act. The Commissioner (Appeals) had allowed the deduction, considering it as sales promotion expenses rather than entertainment. The Tribunal deliberated on the nature of the expenses, with the assessee justifying them as necessary for promoting sales due to restrictions on direct advertising. However, the Tribunal, referring to the retrospective amendment introduced by Explanation 2 to section 37 from 1-4-1976, held that the provision of food or beverages, including whisky, as hospitality was considered entertainment expenditure, irrespective of the motive behind it. Consequently, the Tribunal reversed the Commissioner's decision and restored the disallowance of the sum spent on whisky samples. As a result, the appeal was partly allowed by the Tribunal.

This detailed analysis provides an overview of the legal issues, arguments presented, relevant case law references, and the Tribunal's final decision on each issue raised in the appeal.