1991 (3) TMI 215 - AT - Income Tax

Accounting Year, Additional Depreciation, Advance Tax, Bona Fide, Business Expenditure, Carrying On Business, Investment Allowance, Plant And Machinery, Sales Tax Act, Sales Tax Liability

Issues Involved:

1. Disallowance of hotel bills of foreign customers as entertainment expenditure.
2. Disallowance of expenses on coffee, tea, snacks, etc., as entertainment expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Hotel Bills of Foreign Customers as Entertainment Expenditure:

The appellant, a partnership firm engaged in the export of handloom garments, contested the disallowance of Rs. 1,44,085 spent on hotel bills for foreign customers, which was treated as entertainment expenditure by the Income-tax Officer. The officer allowed Rs. 5,000 under section 37(2) of the Income-tax Act but disallowed the balance of Rs. 1,70,433, a decision upheld by the Appellate Assistant Commissioner.

The appellant's Chartered Accountant referenced the Appellate Tribunal's decision in the case of Madras Loom House (P.) Ltd., arguing that only 1/10th of the hotel bill amounts should be disallowed as entertainment expenditure, with the remaining amount being admissible as business expenditure. The Chartered Accountant provided detailed information about the foreign customers and their transactions, emphasizing that the expenses were incurred under the Reserve Bank of India's permission for meeting the local living and internal travel expenses of foreign nationals visiting India.

The departmental representative relied on the Karnataka High Court's decision in Mysodet (P.) Ltd. v. CIT, which denied the deduction of similar expenses, and cited Explanation 2 to section 37(2A) of the Act, which includes "expenditure on provision of hospitality of every kind" as entertainment expenditure. He argued that the hotel bills, including room rent, fell under this definition and thus justified the disallowance.

In response, the appellant's Chartered Accountant argued that the Karnataka High Court's decision was not applicable as the expenses were incurred for business purposes, inviting foreign customers to select handloom fabrics. He cited several High Court decisions, including CIT v. Patel Bros. & Co. Ltd. and Addl. CIT v. Maddi Venkataratnam & Co. Ltd., which allowed similar expenses as business expenditure. He also referred to CIT v. K.P.V. Shaik Mohamed Rowther & Co., where the Madras High Court laid down the principle for allowing such expenditure, emphasizing that the expenses were not lavish but the barest minimum allowed by the Reserve Bank of India.

The Tribunal examined the contentions and the relevant authorities, noting that the allowability of the expenditure must be considered in light of Explanation 2 to section 37(2A). The Tribunal referred to the Madras High Court's decision in K.P.V. Shaik Mohamed Rowther & Co., which provided tests for determining whether the expenditure was incurred wholly and exclusively for business purposes and whether it could be regarded as entertainment. The Tribunal concluded that the expenditure on hotel bills for foreign customers, permitted by the Reserve Bank of India, did not fall within the mischief of the Explanation, as it included room rent and not just food and beverages.

The Tribunal followed the decision in the case of Madras Loom House (P.) Ltd., which estimated the entertainment component at 1/10th of the hotel bills. Accordingly, the Tribunal directed the Income-tax Officer to disallow Rs. 14,408 (10% of Rs. 1,44,085) and allow the balance of Rs. 1,29,677 as business expenditure under section 37(1) of the Act.

2. Disallowance of Expenses on Coffee, Tea, Snacks, etc., as Entertainment Expenditure:

The appellant also contested the disallowance of Rs. 31,348 spent on coffee, tea, snacks, etc., which was treated as entertainment expenditure by the departmental authorities. However, the appellant's Chartered Accountant did not press this ground during the hearing.

Therefore, the Tribunal rejected this ground and sustained the disallowance of Rs. 31,348 as entertainment expenditure.

Conclusion:

The appeal was partly allowed. The Tribunal directed the Income-tax Officer to allow Rs. 1,29,677 as business expenditure and disallow Rs. 14,408 as entertainment expenditure. The disallowance of Rs. 31,348 on coffee, tea, snacks, etc., was sustained.

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