1996 (7) TMI 180 - AT - Income Tax

Assessing Officer, Assessment Year, Auction Sale, Entertainment Expenditure, Expenditure Incurred

Summary

Issues: Revenue's appeal against CIT(Appeals) order allowing entertainment expenses exceeding limit under section 37(2A) of the Income-tax Act, 1961.

The judgment by the Appellate Tribunal ITAT Cochin involved the revenue's appeals challenging the CIT(Appeals) orders allowing entertainment expenses beyond the prescribed limit under section 37(2A) of the Income-tax Act, 1961. The revenue contended that the insertion of Explanation 2 to section 37(2A by Finance Act, 1983, limited the allowable expenses to Rs. 5,000. The assessee had claimed incidental expenses during cardamom auctions for the assessment years 1986-87 and 1987-88, which were initially disallowed by the Assessing Officer but later allowed in full by the CIT(Appeals). The revenue argued that the expenses on providing food to bidders should be considered entertainment expenses falling under section 37(2A). The assessee, on the other hand, claimed these were business expenses under section 37(1) and not entertainment expenses.

The assessee explained that the incidental expenses were necessary due to the lack of boarding facilities at the auction venue and were incurred to provide food to bidders as a business necessity, not as hospitality. The revenue, however, relied on Explanation 2 to section 37(2A, arguing that any provision of food or beverages, regardless of the reason, falls under entertainment expenses. The assessee cited a Gujarat High Court decision to distinguish between lavish entertainment and bare necessity expenses, asserting that the phrase "bare necessity" was not included in Explanation 2, making the expenses distinguishable from entertainment.

The revenue contended that the entire expenditure on providing food to outsiders or customers cannot be allowed beyond the prescribed limit of Rs. 5,000 under section 37(2A). They referred to a Kerala High Court decision that categorized expenses like providing cigarettes, coffee, and meals to customers as entertainment expenditure. The revenue argued that the Tribunal was bound by the Kerala High Court decision, which differed from the Gujarat High Court's approach. The Tribunal analyzed the facts, noting that even expenses on bare necessity items like food or drinks were considered entertainment expenditure under Explanation 2 to section 37(2A. They held that allowing the entire expenditure beyond Rs. 5,000 was incorrect, as each assessment year is independent, and the principle of res judicata did not apply. Consequently, the revenue's appeals were allowed, and the expenses were restricted to the prescribed limit of Rs. 5,000.