1988 (4) TMI 118 - AT - Income Tax

Issues Involved:

1. Classification of expenses as entertainment expenditure.
2. Disallowance of expenses incurred for the 11th Anniversary Celebrations.
3. Disallowance of expenses related to incentives for additional subscribers.
4. Disallowance of tea and coffee expenses.
5. Disallowance of club membership fee for the Managing Director.
6. Disallowance of donations.
7. Additional ground regarding disallowance under Rule 6B of the IT Rules.

Issue-wise Detailed Analysis:

1. Classification of Expenses as Entertainment Expenditure:

The primary issue revolves around whether various expenses incurred by the assessee, a Private Limited Company running Chit Funds, qualify as entertainment expenditure under Section 37(2A) of the Income Tax Act. The assessee argued that these expenses were business expenditures allowable under Section 37(1), while the Income Tax Officer (ITO) treated them as entertainment expenditure.

2. Disallowance of Expenses Incurred for the 11th Anniversary Celebrations:

The assessee incurred expenses totaling Rs. 35,843 for the 11th Anniversary Celebrations, including payments to Sargam Orchestra and other incidental expenses. The ITO disallowed these expenses as entertainment expenditure. The Tribunal noted that the Bombay High Court in CIT vs. Tata Sons Pvt. Ltd. (1978) 111 ITR 290 (Bom) recognized such expenses as business expenses. The Tribunal concluded that the provision of music and related expenses did not fall within the definition of entertainment expenditure and should be considered as sales promotion expenses.

3. Disallowance of Expenses Related to Incentives for Additional Subscribers:

The assessee offered incentives, including a free trip to Kathmandu or a cash alternative, to members who brought in additional subscribers. The ITO disallowed these expenses, amounting to Rs. 1,54,254 for the trips and Rs. 72,546 for the cash alternatives, as entertainment expenditure. The Tribunal held that these expenses were not entertainment expenditure but were part of a contractual obligation, similar to commission paid to agents. Thus, they were allowable business expenses.

4. Disallowance of Tea and Coffee Expenses:

The assessee incurred Rs. 13,451 on tea and coffee expenses, which the ITO disallowed as entertainment expenditure. The Tribunal upheld the disallowance, agreeing with the Commissioner(A) that these expenses were in the nature of entertainment expenditure.

5. Disallowance of Club Membership Fee for the Managing Director:

The assessee paid Rs. 5,000 for the life membership of the Managing Director at the Nizam Club, arguing it was necessary for business purposes. The ITO and Commissioner(A) disallowed this expense as personal expenditure. The Tribunal, however, accepted the assessee's submission, recognizing it as business expenditure necessary for maintaining business contacts.

6. Disallowance of Donations:

The Tribunal upheld the disallowance of Rs. 2,931, which were treated as donations and not business expenditure.

7. Additional Ground Regarding Disallowance under Rule 6B of the IT Rules:

The assessee sought to raise an additional ground regarding the disallowance of Rs. 8,883 incurred in connection with the 11th Anniversary Celebrations, invoking Rule 6B of the IT Rules. The Tribunal declined to entertain this additional ground, noting that it was not raised before the Commissioner(A).

Conclusion:

The appeal was partly allowed. The Tribunal ruled that expenses related to the 11th Anniversary Celebrations and incentives for additional subscribers were not entertainment expenditure and should be allowed as business expenses. However, it upheld the disallowance of tea and coffee expenses and donations. The club membership fee for the Managing Director was allowed as business expenditure. The additional ground regarding Rule 6B was not entertained.

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