1985 (4) TMI 45 - HC - Income Tax

Court rules messing expenses not entertainment expenditure under Income-tax Act

The court ruled in favor of the assessee and against the Revenue, holding that the messing expenses claimed were not entertainment expenditure under ... Entertainment expenditure - tests for determining entertainment expenditure (as laid down in Patel Bros.) - allowability of messing expenses as business expenditure - Explanation 2 to s.37(2A) (deeming effect contested) - remand for quantification/verification of quantumEntertainment expenditure - tests for determining entertainment expenditure (as laid down in Patel Bros.) - allowability of messing expenses as business expenditure - Messing expenses claimed for the assessment years 1972-73 and 1973-74 were in the nature of entertainment expenditure within the meaning of s.37(2B) of the Act - HELD THAT: - The Court analysed divergent High Court authorities and expressly adopted the fourfold tests formulated in Patel Bros. for determining whether provision of food, drink or refreshment to clients or constituents amounts to entertainment expenditure. Applying those tests and having regard to the commercial practice and the limited nature of the hospitality in the present case (provision of food and soft drinks to customers and adatiyas), the Court held that such messing expenses do not partake the nature of entertainment expenditure under s.37(2B) as it stood in the relevant years. The Court noted that the Tribunal had relied only on authorities taking the contrary view and had not adverted to decisions applying the Patel Bros. tests; the Patel Bros. approach was followed as consistent with commercial practice and binding on the facts.Answered in the negative - the messing expenses for 1972-73 and 1973-74 are not entertainment expenditure and thus are not disallowable under s.37(2B) on that ground.Remand for quantification/verification of quantum - allowability of messing expenses as business expenditure - Quantum of messing expenses to be allowed for assessment years 1972-73 and 1973-74 - HELD THAT: - Although the Court held the messing expenses were not entertainment expenditure, it did not finally determine the precise amount to be allowed. The AAC had allowed Rs.3,000 for each year but the assessee contended for full allowance; the Tribunal had restored full disallowance. In view of the Court's substantive finding, the question of the exact quantum was left to the Tribunal to decide in the light of the AAC's findings and the Court's conclusion that the expenses were not entertainment expenditure.Remitted to the Tribunal to determine the quantum of messing expenses to be allowed for 1972-73 and 1973-74 in accordance with the Court's finding that such expenses are not entertainment expenditure.Entertainment expenditure - allowability of messing expenses as business expenditure - Expenditure on providing food to outstation constituents for assessment year 1974-75 was in the nature of entertainment expenditure within the meaning of s.37(2B) of the Act - HELD THAT: - The Court applied the same legal tests and authorities and concluded that, on the facts before it, the expenditure incurred in providing food to outside constituents did not amount to entertainment expenditure. The Court therefore held that the Tribunal was not justified in disallowing the entire claimed expenditure for 1974-75 under s.37(2B).Both referred questions for 1974-75 answered in the negative - the expenditure is not entertainment expenditure and the entire expenditure could not be disallowed under s.37(2B).Explanation 2 to s.37(2A) (deeming effect contested) - Applicability of Explanation 2 (inserted by later amendment) to the assessment years in question - HELD THAT: - The Court considered the contention that Explanation 2 to s.37(2A), inserted by later amendment and sought to be given retrospective effect, should be applied to the assessments for 1972-73, 1973-74 and 1974-75. The Court held that the questions should be answered having regard to s.37(2B) as it existed in those assessment years and did not apply the later Explanation 2 for deciding the referred questions.Questions answered with reference to s.37(2B) as it stood in the relevant assessment years; Explanation 2 inserted later was not applied to these assessments.Final Conclusion: The Court held that the messing and food-provision expenses in dispute for assessment years 1972-73, 1973-74 and 1974-75 are not entertainment expenditure within the meaning of s.37(2B) as it then stood; the Tribunal's disallowances were set aside. The question of the exact quantum for 1972-73 and 1973-74 was remitted to the Tribunal for determination consistent with the Court's finding; Explanation 2 inserted later was not applied to these years. Parties to bear their own costs. Issues Involved:1. Whether the messing expenses claimed by the assessee were in the nature of entertainment expenditure within the meaning of Section 37(2B) of the Income-tax Act, 1961.2. Whether the Tribunal was justified in restoring the disallowance of messing expenses for the assessment years in question.3. The applicability of Explanation 2 to Section 37(2A) of the Act, inserted with effect from April 1, 1976, to the assessments completed prior to this date.Issue-Wise Detailed Analysis:1. Nature of Messing Expenses:The primary issue was whether the messing expenses claimed by the assessee for the assessment years 1972-73, 1973-74, and 1974-75 were in the nature of entertainment expenditure as per Section 37(2B) of the Income-tax Act, 1961. The Tribunal had opined that expenses incurred for providing food and soft drinks like coca cola, coffee, tea, etc., to constituents or entertaining them were in the nature of entertainment expenditure. However, the court noted a divergence of judicial opinion among various High Courts on this matter.The court referred to the Gujarat High Court's decision in CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424, which laid down four tests to determine the nature of entertainment expenditure:1. Lavish and extravagant provision of food or drinks is entertainment per se.2. Provision of food or drinks as a bare necessity, ordinary courtesy, or as an express or implied term of the contract does not amount to entertainment.3. Liberal and friendly provision of food or drinks may amount to entertainment depending on the place, item, and cost.4. Provision of amusement to clients or customers is always entertainment.The court found these tests to be correct and noted that the Tribunal had not considered decisions that took a contrary view to the one it adopted. The court agreed with the view that ordinary courtesies shown to customers, such as providing food and drinks, do not amount to entertainment expenditure.2. Justification of Disallowance:The Tribunal had restored the disallowance of Rs. 4,500 and Rs. 4,800 for the assessment years 1972-73 and 1973-74, respectively, claiming these as entertainment expenditure. However, the court held that the messing expenses claimed by the assessee were not in the nature of entertainment expenditure within the meaning of Section 37(2B) of the Act. The court directed the Tribunal to reconsider the quantum of allowable messing expenses, taking into account the AAC's finding that such expenses were not entertainment expenditure.3. Applicability of Explanation 2 to Section 37(2A):The Revenue argued that Explanation 2 to Section 37(2A), inserted with effect from April 1, 1976, should be deemed to have been inserted from April 1, 1970, and thus applicable to the assessment years in question. However, the court held that Explanation 2, which clarifies that 'entertainment expenditure' includes hospitality of every kind, was effective from April 1, 1976, and therefore not applicable to assessments completed before this date. The court decided that the questions referred by the Tribunal should be answered based on Section 37(2B) as it existed during the assessment years 1972-73, 1973-74, and 1974-75.Conclusion:- For Reference No. 9 of 1977, the court answered both questions in the negative, in favor of the assessee and against the Revenue. The court held that the messing expenses were not entertainment expenditure, and the Tribunal should determine the allowable quantum based on the AAC's findings.- For Reference No. 42 of 1977, the court similarly answered both questions in the negative, in favor of the assessee and against the Revenue, concluding that the expenses incurred for providing food to outside constituents were not in the nature of entertainment expenditure.The parties were directed to bear their own costs, and the answers were to be returned to the Tribunal in accordance with Section 260(2) of the Act.