1990 (2) TMI 144 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of expenditure incurred in connection with the Vth World Tamil Conference.
2. Classification of the expenditure as entertainment expenditure.
3. Determination of the expenditure as business expenditure under Section 37(1) of the Income-tax Act.

Detailed Analysis:

1. Disallowance of Expenditure:
The appellant, a public limited company engaged in the manufacture and sale of industrial alcohol, contested the disallowance of Rs. 20,564 incurred for providing lunch to delegates of the Vth World Tamil Conference. The Income-tax Officer (ITO) disallowed this expenditure, labeling it as "Dinner expenses for Tamil Conference" without providing reasons. The CIT (Appeals) upheld this disallowance, stating there was no direct nexus between the expenditure and the appellant's business. The appellant argued that the expenditure should be viewed as business expenditure incurred out of commercial expediency.

2. Classification as Entertainment Expenditure:
The CIT (Appeals) and the departmental representative contended that the expenditure fell under the category of entertainment expenditure as defined in Explanation 2 to Section 37(2A) of the Income-tax Act. However, the Tribunal disagreed, noting that the expenditure was a small portion of the overall expenses incurred by the Government of Tamil Nadu for the conference and was paid to the Special Officer, not directly to the hotel. Therefore, it did not fall within the mischief of Explanation 2 to Section 37(2A).

3. Determination as Business Expenditure:
The Tribunal considered the expenditure as business expenditure incurred out of commercial expediency. The appellant needed to maintain a good image and earn goodwill among the public and state officials, which was crucial for its operations involving industrial alcohol. The Tribunal cited several precedents, including the Full Bench decision of the Madhya Pradesh High Court in Kuber Singh Bhagwandas, which held that contributions made out of commercial expediency are allowable business expenditures under Section 37(1). The Tribunal emphasized that commercial expediency is not limited to existing practices and can include voluntary expenditures if they facilitate business operations.

Supporting Precedents:
- Kuber Singh Bhagwandas: Contributions for obtaining export permits were considered business expenditure.
- Sassoon J. David & Co. (P.) Ltd. v. CIT: Expenditure incurred voluntarily and without necessity, if for promoting business, is deductible.
- Amarjothi Pictures: Expenses for the Silver Jubilee run of a picture were allowed as business expenditure.
- CIT v. Tata Sons (P.) Ltd.: Contribution to managed mills for Golden Jubilee celebrations was allowed.
- CIT v. Delhi Cloth & General Mills Co. Ltd.: Expenses for organizing sports tournaments were allowed.
- CIT v. Dascroi Taluka Co-operative Purchase & Sales Union Ltd.: Expenses for silver jubilee celebrations were allowed.
- R.B. Narain Singh Sugar Mills (P.) Ltd. v. CIT: Contributions to a government-sponsored scheme were allowed.
- Vijayakumar Mills Ltd.: Expenditure on flood relief was allowed.
- Varadhalakshmi Mills Ltd.: Donation to the Chief Minister's Public Relief Fund was allowed.

Conclusion:
The Tribunal concluded that the expenditure incurred by the appellant for the Vth World Tamil Conference was allowable as business expenditure under Section 37(1) of the Income-tax Act. The disallowance of Rs. 20,564 was deleted, and the appeal was allowed.