1970 (12) TMI 8 - HC - Income Tax

Whether the exception under section 7(2)(ii) of the Income-tax Act, 1922, was a bar to the deductibility of the entertainment allowance or any portion thereof received by the assessee

Summary

Issues:
1. Interpretation of section 7(2)(ii) of the Income-tax Act, 1922 regarding the deductibility of entertainment allowance.
2. Whether the entertainment allowance received by the assessee is deductible under section 7(2)(ii) of the Act.

Analysis:
The judgment dealt with the interpretation of section 7(2)(ii) of the Income-tax Act, 1922, regarding the deductibility of entertainment allowance. The case involved the late Shri Prem Nath, who was receiving a salary as a governing director and included an entertainment allowance in his income tax return for the assessment year 1957-58. The Income-tax Officer initially disallowed the claim, but the Appellate Assistant Commissioner allowed a deduction of Rs. 4,800 under section 7(2)(ii). The Income-tax Appellate Tribunal went further, allowing the entire entertainment allowance to be deducted. However, the revenue contended that the entertainment allowance was not deductible as the assessee had not received it before April 1, 1955, leading to the reference to the High Court.

The judgment highlighted the legislative changes brought about by the Finance Act, 1955, which excluded entertainment allowance from section 4(3)(vi) and introduced a new provision under section 7(2)(ii) for the deduction of entertainment allowance from salary. The court emphasized that only entertainment allowances received before April 1, 1955, were eligible for deduction under section 7(2)(ii), subject to a limit of one-fifth of the salary or Rs. 7,500, whichever is less. The legislative intent was to restrict the deduction of entertainment allowances received after April 1, 1955, and limit the extent of deduction for allowances received before that date.

The court's interpretation focused on the language of section 7(2)(ii), emphasizing that only entertainment allowances received before April 1, 1955, were qualified for deduction, subject to the specified limits. The judgment noted a drafting flaw in the clause but affirmed that entertainment allowances not received before the specified date were not eligible for deduction. The court answered the referred question in favor of the revenue, concluding that the entertainment allowance in question was not deductible under section 7(2)(ii) of the Act. The judgment provided a detailed analysis of the legislative history and the specific provisions governing the deductibility of entertainment allowances under the Income-tax Act, 1922.