9911796707
TMI Blog1999 (8) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... eard Shri G. K. Joshi, appearing on behalf of the Revenue, and Shri A. K. Maheswari, appearing for the assessee-respondent. Briefly the facts giving rise to the questions referred are that the assessee claimed sales promotion expenses to the tune of Rs. 3,41,031 for the assessment year 1987-88. According to the assessee, the expenditure was so incurred, on account of incentive payable to different registered dealers of the assessee on the basis of the sales made by them. The incentive was to be given to the dealers by way of tours to different countries as well as by way of gifts on achieving given targets fixed by the assessee-company. According to the assessee, 21 of its registered dealers had crossed the target to whom incentive by way of foreign tour was made, admissible by adjustments made in the bills. The Deputy Commissioner of Income-tax, Assessment, Special Range-I, Guwahati, disallowed the claim of the assessee on account of sales promotion incentive scheme holding that there was no claim of general nature applicable to all the registered dealers of the assessee-company. Different dealers were to achieve different targets fixed by the assessee by sending letters. It is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er part, viz., disallowance deleted by the Commissioner of Income-tax and upheld by the Tribunal was not correct. The expenditure incurred is allowable business expenditure but not in full. The submission which has been advanced by Shri G. K. Joshi is that allowability of the business expenditure for sales promotion would be restricted or controlled by sub-section (2A) of section 37 of the Income-tax Act, 1961, since the expenditure which has been allowed for the foreign tours of the dealers is an expenditure in the nature of entertainment. Therefore, it is submitted that question No. 2 is also to be answered in the affirmative restricting the allowability of the expenditure within the limits as provided under section 37(2A) of the Income-tax Act. Section 37 of the Income-tax Act reads as under : "37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 33A or in respect of entertainment expenditure) Explanation.---For the purposes of this sub-section, 'entertainment expenditure' includes--- (i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person; (ii) the amount of any expenditure in the nature of entertainment expenditure [not being expenditure incurred out of an allowance of the nature referred to in clause (i)] incurred for the purposes of the business or profession of the assessee by any employee or other person ; (iii) expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision on is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work. . . " In view of the above provisions it has been vehemently urged that any expenditure which is in the nature of entertainment expenditure, its allowability as business expenditure would be restricted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424, it has been held : "As already observed by us, having regard to the legislative history of the provisions contained in sub-sections (2A) and (2B) which we have traced, and the significant use of the expression 'expenditure in the nature of entertainment expenditure' in both the sub-sections, it is obvious that the intention of Parliament was to bring within the scope of those sub-sections all expenditure incurred by an assessee on hospitality of any kind extended to the clients, customers or constituents directly in connection with the business or profession of the assessee." In Central Paints Ltd. v. CIT [ 1984] 146 ITR 212 (MP), it was held that an expenditure incurred on entertaining the customers and business constituents to lunches and dinners in posh hotels was rightly disallowed as the expenditure was not in the nature of routine refreshments given to customers and business constituents within the premises of the assessee-company. Shri A. K. Maheswari, learned counsel appearing for the assessee, submitted that the expenditure incurred by the assessee cannot be termed as expenditure on entertainment or of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely, CIT v. Delhi Safe Deposit Co. Ltd. [1982].133 ITR 756 (SC) ; Addl. CIP v. Kuber Singh Bhagwandas [ 1979] 118 ITR 379 (MP) [FB]; Delhi Cloth and General Mills Co. Ltd. v. CIT [1972] 85 ITR 261 (Delhi) and R. G. S. Industries v. CIT [1990] 183 ITR 31 (Gauhati) relied on by the counsel for the assessee. It has next been submitted that the expenditure incurred by the assessee on the foreign tours of its dealers is neither expenditure on their entertainment nor of the like nature. Reliance has been placed upon a decision reported in CIT v. Eskaps (India) Pvt. Ltd. [1991] 191 ITR 674 (Cal). The assessee was a company on behalf of foreign buyers of jute and jute goods. On the visits of their representatives to this country for the purpose of business, experts from different jute mills were invited. The subject of quality control of jute and jute goods was to be discussed. For that purpose they were all invited to a dinner at Grand Hotel, Calcutta. The expenditure incurred on the dinner was disallowed under section 37(2B) of the Income-tax Act as entertainment expenditure. It was held that where the representatives had come from different European countries and experts from diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g ordinary meals to customers coming in connection with business. It was held that it was a bare necessity and could not be termed as "entertainment". It was further held that before the insertion of Explanation 2 to section 37(2A) of the Act, an expenditure incurred for commercial expediency or usage of the trade is a permissible deduction unless it partakes of the character of entertainment expenditure, in which case, the permissible limit is specified. Any expenditure incurred on customers or clients cannot be termed as entertainment expenditure. The Supreme Court further observed, "generally, 'entertainment expenditure' is an expression of wide import". However, in the context of disallowance of entertainment expenditure it must be construed strictly and not expansively. Ordinarily, "entertainment" connotes something which may be beneficial for the mental or physical well being but is not essential or indispensable for human existence. An ordinary meal would be a necessity, hence expenditure incurred for providing meals to the outstation customers would not be expenditure on entertainment. The object of sub-section (2A) of section 37 of the Act is to disallow any lavish expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the transaction, which would remain the same, namely, on the part of the assessee providing incentive to the dealers to achieve higher target of sale of his goods and expectation of award or reward on the part of the dealers. Merely because the reward is given in the manner that it may provide some pleasure, the expenditure would not partake of the character of "entertainment expenditure" or of in the like nature as used under section 37(2A) of the Income-tax Act. From the different decisions referred to above, it is clear that there has to be an element of hospitality. Such an expenditure as involved in the present case as explained above is definitely different from the nature of expenditure involved in different cases relied on by the Revenue as referred to above. They are more or less incidental to the day-to-day business activity. A customary meal to the clients or such facility is treated to be hospitality. What is sought to be excluded is wasteful, lavish expenditure in entertaining clients, customers or constituents. In the context of such matters, to us it appears that entertainment is an extended form of hospitality though the two may be mutually exclusive of each o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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