1993 (3) TMI 36 - HC - Income Tax

High Court rules on deductibility of inaugural expenses under Income-tax Act, emphasizes business vs. entertainment expenditure

The High Court held that the Income-tax Appellate Tribunal erred in disallowing inaugural expenses as business expenditure. The Court directed a ... Business Expenditure, Inaugural Expenses Issues:Disallowance of inaugural expenses under Income-tax Act for assessment year 1977-78.Analysis:The case involved a dispute over the disallowance of inaugural expenses claimed by an assessee company under the head 'Inaugural expenses' for the assessment year 1977-78. The Income-tax Officer disallowed a portion of the claimed expenses, rejecting the contention that the expenses were incurred for business purposes. The Commissioner of Income-tax (Appeals) upheld the disallowance, stating that the expenses were not for the purposes of business. The Income-tax Appellate Tribunal also disallowed the expenses, citing lack of nexus between the expenditure and commercial expediency. The Tribunal relied on the decision in ACC-Vickers Babcock Ltd. v. CIT [1976] 103 ITR 321, stating that inaugural expenses are not allowable as business expenditure.The assessee contended that the expenses were wholly and exclusively for the purposes of business, citing examples of expenses incurred for inviting guests, Ministers, and other persons during the inauguration. The assessee argued that the expenses were incurred to facilitate the carrying on of the business and were not solely entertainment expenses. The assessee relied on previous judgments, such as CIT v. Merck Sharp and Dohme of India Ltd. [1983] 140 ITR 332 and Delhi Cloth and General Mills Co. Ltd. v. CIT [1992] 198 ITR 500 (Delhi), where similar expenses were allowed as business expenditure.The High Court analyzed the provisions of section 37(2) of the Income-tax Act, which restricts entertainment expenditure exceeding specified limits. The Court emphasized that expenses on hospitality or provision of food and beverages fall under entertainment expenditure, subject to the restrictions of the Act. The Court noted that inaugural functions are typically for business purposes, and in this case, the production had already commenced before the inauguration. Therefore, the Court held that the disallowance should only apply to expenses categorized as entertainment expenditure.Consequently, the High Court held that the Income-tax Appellate Tribunal erred in disallowing the inaugural expenses to the extent of Rs. 22,863. The Court directed the Tribunal to reexamine the expenses, allowing deductions for expenses related to the inaugural function that do not constitute entertainment expenses. The judgment favored the assessee, ruling against the Revenue.In conclusion, the Court's decision clarified the treatment of inaugural expenses under the Income-tax Act, emphasizing the distinction between business-related expenses and entertainment expenditure. The judgment provided guidance on allowable deductions for expenses incurred during inaugural functions, ensuring compliance with the statutory provisions governing entertainment expenditure.