1995 (7) TMI 27 - HC - Income Tax

Court affirms disallowance of expenditure under Income-tax Act based on expanded definition of entertainment expenses.

The court upheld the Tribunal's decision to reinstate the disallowance of an expenditure under section 37(2A) of the Income-tax Act, 1961, based on the ... Business Expenditure, Entertainment Expenditure, High Court Issues:1. Disallowance of expenditure under section 37(2A) of the Income-tax Act, 1961.Analysis:The case involved a tax dispute regarding the disallowance of an expenditure amounting to Rs. 1,93,417 by the Income-tax Officer under section 37(2A) of the Income-tax Act, 1961. The Tribunal's order set aside the Commissioner of Income-tax (Appeals) decision and reinstated the disallowance. The key contention was the applicability of Explanation 2 to section 37(2A), introduced by the Finance Act, 1983, with retrospective effect from April 1, 1976. The Revenue argued in favor of the Tribunal's decision, emphasizing the applicability of the said Explanation, which broadened the scope of 'entertainment expenditure.' The primary question before the court was whether the Tribunal was correct in restoring the disallowance of the expenditure.The Commissioner of Income-tax (Appeals) had initially deleted the disallowance, citing the company's argument that the expenditure on providing tea, coffee, etc., for staff or customers did not fall under entertainment as it was not lavish and was insignificant compared to turnover and profit. However, the Tribunal considered the retrospective operation of Explanation 2 and reinstated the disallowance. The Tribunal's decision was based on the amendment to section 37(2A) and the expanded definition of entertainment expenditure under Explanation 2, which included hospitality provided by the assessee to any person. The Tribunal concluded that the expenditure related to customers was entertainment in nature, justifying the disallowance.The court rejected the applicant's request for a supplementary statement of the case, noting that the facts regarding the expenditure's relation to customers or employees were not raised before the Tribunal. The court emphasized that a question of law must be dealt with or raised before the Tribunal to be considered arising out of its order. Since the factual features were not established during the Tribunal proceedings, no supplementary statement of the case was deemed necessary. The court upheld the Tribunal's decision, answering the question in favor of the Revenue, and no costs were awarded in the case.