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TMI Blog1987 (3) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... 1970-71 and 1971-72 ? 3. Whether, on the facts and in the circumstances of the case, interest paid to Sri Ramratan Lal Rajgarhia and Shri Maniklal Rajgarhia has been correctly added while computing the income of the assessee firm by applying the provision of section 40(b) of the Income-tax Act in the assessment of the firm for the assessment year 1972-73 ? " The relevant facts for answering question No. 1, in short, are that the assessee has a mica business during the course of which it has to receive several foreign guests and visitors. In the assessment year 1970-71, the assessee spent Rs. 42,625 as expenditure in entertaining the foreign guests and visitors. The Income-tax Officer allowed the expenditure to the extent of Rs. 5,000 out of the aforesaid expenditure claimed by the assessee and disallowed the balance sum of Rs. 37,625. The assessee took the matter in appeal and the Appellate Assistant Commissioner remanded the matter to the Income-tax Officer as the details of expenditure were not furnished by the assessee and the assessee was not entitled to claim any expenditure incurred on this count after February 28, 1970. In the assessment years 1971-72 and 1972-73, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and (2B) of the Act. For answering this question it is necessary to go into the legislative history of section 37 of the Act. Under section 10(2)(xv) of the Indian Income-tax Act, 1922, the amount spent by an assessee for the entertainment of his business constituents and customers was deductible against the income under the head " Profits or gains of any business, profession or vocation carried on by an assessee " on the ground that such hospitality or entertainment is extended wholly for the purpose of promotion of the assessee's business or profession. It appears that this provision was being misused by assessees as there had been a growing tendency on the part of companies and their directors and executives to entertain on a lavish scale at the expense of the company and claim the same as expenditure. In order to check the abuse of this provision, it was found expedient to put restrictions on entertainment expenditure and, therefore, by the Finance Act of 1961 with effect from April 1, 1962, a proviso was inserted in section 10(2)(xv) of the Indian Income-tax Act, 1922 which imposed a ceiling on all expenses in the nature of entertainment expenditure which can be allowed to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evious year which expires after the 30th day of September, 1967, as is in excess of the aggregate amount computed as hereunder : (i) on the first Rs. 10,00,000 of the profits at the rate of 1/2% or and gains of the business or profession (computed Rs. 5,000, whichever before making any allowance under section 33 or is higher ; section 33A or in respect of entertainment expenditure) (ii) on the next Rs. 40,00,000 of the pro- at the rate of 1/4% ; fits and gains of the business or profession (computed in the manner aforesaid) (iii) on the next Rs. 1,20,00,000 of the at the rate of 1/8%; profits and gains of the business or profession (computed in the manner aforesaid) (iv) on the balance of the profits and Nil : gains of the business or profession (computed in the manner aforesaid) Provided that where the previous year of any assessee falls partly before and partly after the 30th day of September, 1967, the allowance in respect of such expenditure incurred during the previous year shall not exceed (a) in the case of a company (i) in respect of such expenditure incurred before the 1st day of October, 1967, the sum which bears to the aggregate amount computed at the rate or rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y wide and would embrace within its ambit not merely expenditure which can be strictly considered as entertainment expenditure but also the expenditure of allied nature. It appears that Parliament has deliberately used the expression " expenditure in the nature of entertainment expenditure " so that all types of expenditure on entertainment could be covered under section 37(2A) and (2B) of the Act. The leading case on this question is the Full Bench decision of the Kerala High Court in CIT v. Veeriah Reddiar [1977] 106 ITR 610, wherein the assessee claimed that the amount spent by him in supplying cigarettes, coffee, meals etc., to its customers cannot come within the expression " expenditure in the nature of entertainment expenditure " within the meaning of sub-sections (2A) and (2B) of section 37 of the Act and he was entitled to claim the same under section 37(1) of the Act. Repelling the contention of the assessee, Eradi J., as he then was, expressly dissenting from the view of the Gujarat High Court in the case of CIT v. Patel Brothers Co. Ltd. [1977] 106 ITR 424, laid down the law as follows 1977] 106 ITR 610 (Ker) [FB] at page 617): " A reference to the leading dictionar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be similar to entertainment expenditure, even though it does not strictly fall, within the meaning of this expression. The reason is obvious, because the Legislature intended to curb the expenditure of providing hospitality of any kind at the cost of the public exchequer. " A Full Bench of the Punjab High Court also, after considering all the previous decisions, has taken a similar view in CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336 and concluded as follows (p. 348): "To conclude on this aspect it appears to me that on the larger principle of safeguarding the public exchequer, on the broad scheme of Chap. IV of the Act in general and Part ' D ' thereof in particular, in the context of the legislative history of section 37 of the Act and its predecessor provision of section 10(2)(xv) of the 1922 Act, and the specific language and phraseology used in sub-sections (2) and (2A) of section 37, it must be held that all hospitality extended for the purpose of business, whether lavish or frugal, is within the wide net of the compendious phrase ' in the nature of entertainment expenditure ' purposely employed by Parliament." The same view has been taken by the Karnataka Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court is contrary to the intention of the Legislature. For these reasons, I am in respectful disagreement with the view taken by the Gujarat High Court. Besides the Gujarat High Court, some other High Courts have either followed that decision or decided the cases on the same lines. Those decisions are of the Karnataka High Court in CIT v. Corporation Bank Ltd. [1979] 117 ITR 271, the Madras High Court in CIT v. Karuppuswamy Nadar and Sons [1979] 120 ITR 140, the Madhya Pradesh High Court in CIT v. Lakhmichand Muchhal [1982] 134 ITR 234 and the Rajasthan High Court in Devichand Bastimal v. CIT [1985] 156 ITR 166. For the same reasons, I am in respectful disagreement with the view expressed in the aforesaid decisions. So far as the judgment of the Andhra Pradesh High Court in Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514 is concerned, the same was with regard to the expenses entirely incurred for the maintenance of a guest house. This case was specifically covered by sub-section (3) of section 37 of the Act. Therefore, this case is entirely distinguishable from the case on hand and the ratio laid down therein cannot affect the cases which are covered under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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