1983 (4) TMI 22 - HC - Income Tax

High Court allows deduction for customer refreshments as business expense under Income-tax Act

The High Court ruled in favor of the assessee, holding that the claimed deduction of Rs. 7,359 for expenses on providing tea and cool drinks to customers ... Business Expenditure, Entertainment Expenditure Issues:Interpretation of 'entertainment expenditure' under section 37(2B) of the Income-tax Act, 1961.Analysis:The case involved an income-tax reference concerning the deduction of a sum claimed as sales promotion expenses by the assessee for the assessment year 1972-73. The assessee claimed Rs. 7,359 as a deduction, which was disallowed by the Income Tax Officer (ITO) on the grounds that it was in the nature of entertainment expenditure. The Appellate Assistant Commissioner (AAC) upheld the disallowance, considering the expenditure on provision of tea and cool drinks to customers as entertainment expenditure, following a decision of the Allahabad High Court. However, the Appellate Tribunal, referring to a decision of the Gujarat High Court, deleted the addition, leading to the reference question before the High Court.The controversy revolved around the interpretation of the expression 'entertainment expenditure' under sections 37(2), 37(2A), and 37(2B) of the Income-tax Act, 1961. Different High Courts had varying views on whether hospitality expenses, such as providing tea and cool drinks to customers, constituted entertainment expenditure. Some courts held that only lavish or extravagant hospitality amounts to entertainment, while others included all expenses related to customer entertainment. The High Court noted the conflicting judicial opinions on this issue and referred to various decisions highlighting the debate.The High Court refrained from giving a final opinion on the exact scope of entertainment expenditure, emphasizing that the question largely depended on the degree and factual circumstances of each case. In this case, the assessee's turnover and profits were substantial, making the claimed amount of Rs. 7,359 relatively insignificant. The Court observed that even if the expenditure was for providing tea and cool drinks to customers, it could not be categorized as entertainment expenditure considering the overall business scale. The Court also highlighted that disallowing petty claims should not be stretched excessively, as mentioned in a previous decision of the Punjab High Court.Ultimately, the High Court upheld the Tribunal's decision that the expenditure was not in the nature of entertainment expenditure, based on the facts of the case. The Court answered the reference question in favor of the assessee, concluding that the claimed deduction was justified. Since there was no representation from the assessee, no order was issued regarding costs.