1986 (9) TMI 52 - HC - Income Tax

Deductions Allowed for Customer Hospitality and Contract Non-Fulfillment Expenses

The court allowed the deduction of Rs. 53,487 for expenditure on hospitality to customers as it was considered a common courtesy and not entertainment ... Business Expenditure, Entertainment Expenditure, Speculation Issues Involved:1. Allowability of expenditure under Section 37(2B) of the Income-tax Act, 1961.2. Allowability of deduction for non-fulfillment of contract.Detailed Analysis:Issue 1: Allowability of Expenditure under Section 37(2B) of the Income-tax Act, 1961The primary issue was whether the expenditure of Rs. 53,487 on cigarettes and other items supplied to customers by the assessee could be allowed as a deduction under Section 37(2B) of the Income-tax Act, 1961. The Commissioner of Income-tax initiated proceedings under Section 263, arguing that this expenditure was on entertainment and thus not allowable.The Tribunal noted its earlier decision in the case of the same assessee for the subsequent assessment year 1973-74, where it had followed the Gujarat High Court decision in CIT v. Patel Brothers & Co. Ltd. [1977] 106 ITR 424. The Tribunal held that the expenditure was incurred out of commercial expediency and to meet customary hospitality and restored the original assessment by the Income-tax Officer, allowing the deduction.The Revenue argued that there was a divergence of opinion among High Courts on this issue. Several High Courts, including the Allahabad High Court in Brij Raman Dass & Sons v. CIT [1976] 104 ITR 541, 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, had held that such expenditures were in the nature of entertainment and thus not allowable. These courts interpreted the term 'entertainment' broadly to include any hospitality extended in connection with business.Conversely, the assessee argued that other High Courts, including the Gujarat High Court in Patel Brothers & Co. Ltd. [1977] 106 ITR 424, the Bombay High Court in CIT v. Shah Nanji Nagsi [1979] 116 ITR 292, and the Karnataka High Court in CIT v. Corporation Bank Ltd. [1979] 117 ITR 271, had taken a different view. These courts held that not all hospitality constitutes entertainment and that expenditures incurred out of ordinary business courtesy or necessity should not be disallowed.The court noted that the controversy was settled by Explanation 2 introduced in Section 37(2A) of the Income-tax Act by the Finance Act, 1983, which clarified that 'entertainment expenditure' includes hospitality of every kind. However, since the expenditure in question was incurred before this amendment, the court had to consider the law as it stood before the incorporation of the Explanation.The court agreed with the view of the Gujarat High Court in Patel Brothers & Co. Ltd. [1977] 106 ITR 424, recognizing a distinction between entertainment and hospitality. The court held that expenditure incurred by an assessee in rendering acts of hospitality to its customers as a common courtesy could not be considered entertainment. Therefore, the expenditure of Rs. 53,487 was allowable as a deduction.Issue 2: Allowability of Deduction for Non-Fulfillment of ContractThe second issue was whether the amount of Rs. 48,440 paid for non-fulfillment of a contract for the supply of flour and cement bags was an allowable deduction in computing the total income for the assessment year 1972-73. The court noted that this issue was already covered by its earlier decisions in CIT v. Pioneer Trading Company Private Ltd. [1968] 70 ITR 347 and CIT v. Ramjeewan Sarawgee & Sons [1977] 107 ITR 845. The Supreme Court had also approved these decisions in CIT v. Shantilal (P) Ltd. [1983] 144 ITR 57.Based on these precedents, the court held that the amount paid for non-fulfillment of the contract was an allowable deduction. Therefore, the question was answered in the affirmative and in favor of the assessee.ConclusionThe court concluded by answering both questions in the affirmative and in favor of the assessee, allowing the deductions claimed. There was no order as to costs.