1988 (12) TMI 83 - HC - Income Tax

Court disallows Rs. 7,190 as entertainment expenditure under Income-tax Act; customer messing included.

The court affirmed the disallowance of Rs. 7,190 expenditure under section 37(2B) of the Income-tax Act, 1961, as 'entertainment expenditure.' It held ... Business Expenditure, Entertainment Expenditure Issues Involved:1. Whether the expenditure of Rs. 7,190 could be disallowed u/s 37(2B) of the Income-tax Act, 1961.2. Interpretation of the term 'entertainment expenditure' u/s 37(2A) and (2B) of the Act.Summary:Issue 1: Disallowance of Expenditure u/s 37(2B)Phool Chand Gaj Anand, a registered firm, claimed a deduction of Rs. 7,190 for messing expenses of its customers during the assessment year 1974-75. The Income-tax Officer disallowed the claim u/s 37(2B) of the Income-tax Act, 1961. The Appellate Assistant Commissioner allowed the appeal, but the Income-tax Appellate Tribunal reversed this decision, disallowing the expenditure as 'entertainment expenditure' following the precedent set in Brij Raman Dass and Sons v. CIT [1976] 104 ITR 541. The question referred to the High Court was whether this expenditure could be disallowed u/s 37(2B).Issue 2: Interpretation of 'Entertainment Expenditure'The court examined the legislative history of section 37 of the Act and the object underlying the introduction of section 37(2B). Initially, under the Indian Income-tax Act, 1922, entertainment expenses were allowable. However, due to misuse, the Legislature introduced ceilings and restrictions, culminating in the insertion of sub-section (2B) by the Finance Act, 1970, which disallowed any entertainment expenditure incurred within India after February 28, 1970.The court noted divergent judicial opinions on the interpretation of 'entertainment expenditure.' The Gujarat High Court in CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424 held that only lavish and grand-scale expenditures were disallowable. In contrast, the Kerala High Court in CIT v. Veeriah Reddiar [1977] 106 ITR 610 and the Punjab and Haryana High Court in CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336 took a broader view, including all hospitality expenses within the ambit of 'entertainment expenditure.'The court concluded that the phrase 'in the nature of entertainment expenditure' has a wide amplitude, covering all types of hospitality, whether modest or lavish. The intention of the Legislature was to curb all forms of entertainment expenditure at the cost of the public exchequer. Therefore, the court held that any expenditure incurred by an assessee for the messing of its customers falls within the purview of 'expenditure in the nature of entertainment expenditure' u/s 37(2A) and (2B) of the Act.Conclusion:The court affirmed the decision in Brij Raman Dass and Sons v. CIT [1976] 104 ITR 541 (All) and disagreed with the Gujarat High Court's view in CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424. The expenditure of Rs. 7,190 was rightly disallowed u/s 37(2B) of the Act. The matter was referred back to the Division Bench for a decision in accordance with this opinion.