1996 (7) TMI 107 - HC - Income Tax

Supreme Court rules on entertainment expenditure deduction for company under Income-tax Act

The Supreme Court ruled in favor of the respondent-assessee, a public limited company, in a case concerning the deduction allowed for entertainment ... Entertainment Expenditure, Expenditure Incurred Issues: The judgment involves a reference u/s 256(2) of the Income-tax Act, 1961 regarding the deduction allowed for entertainment expenditure.Summary: The respondent-assessee, a public limited company, claimed a deduction for expenditure on providing tea, coffee, etc., to customers, staff, and technicians. The Income-tax Officer disallowed the deduction as entertainment expenditure, but the Commissioner of Income-tax (Appeals) reduced it to Rs. 29,040 as allowable deduction. The Income-tax Appellate Tribunal upheld this decision. The main contention was whether this expenditure qualifies as entertainment expenditure.The petitioner argued that the expenditure falls under entertainment expenditure due to an amendment to Explanation 2 of section 37, which includes hospitality expenses. However, the assessee's counsel contended that the expenditure is not entertainment expenditure and had been accepted as such by the appellate authority and the Tribunal.Explanation 2, inserted by the Finance Act, 1983, broadened the definition of entertainment expenditure to include hospitality expenses provided by the assessee to any person. The Supreme Court clarified that entertainment expenditure is not allowable beyond a specified limit and must be strictly construed.The judgment emphasized that prior to the amendment, hospitality expenses were not considered entertainment expenditure. In this case, the expenditure on providing tea, coffee, etc., to both customers and employees does not fall under the expanded definition of entertainment expenditure. As the expenditure was not segregated between customers and employees, it cannot be considered entertainment expenditure. Therefore, the Tribunal's decision to allow the deduction was upheld in favor of the assessee.In conclusion, the court answered the question in favor of the assessee, stating that the expenditure on hospitality provided to customers and employees does not qualify as entertainment expenditure.