TaxTMI 
TaxTMI 
1982 (12) TMI 36
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....(1) of the Income-tax Act, 19461, holding that the said amounts constituted entertainment expenditure not allowable in terms of section 37(2A) of the Act ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not an industrial company for the assessment year 1969-70 within the meaning of section 2(6)(c) of the Finance Act, 1969, and as such not entitled to the benefit of lower rate of tax ? " The assessee is a private limited company engaged in the export of tobacco and other commodities with its head office at Hyderabad and branches at Guntur, Cochin, Delhi and Calcutta. For the assessment years 1968-69 and 1969-70, the assessee claimed deduction of Rs. 1,34,578 and Rs. 2,06,227 respectively, on account of business promotion expenses. The amount of Rs. 1,34,578 claimed in 1968-69 comprised of three items, viz. : Rs. (1) Entertainment exp....
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.... Rs. 1,69,280, which was treated as entertainment expenditure. Against the orders of the AAC, three appeals were preferred before the Income-tax Appellate Tribunal-two appeals for the two assessment years by the assessee and one by the Department with respect to the assessment year 1969-70. It would be appropriate to notice the findings of the Tribunal: (1) The expenditure on maintenance of guest houses cannot be allowed for the reason that the assessee has not maintained the register as required by r. 6C(3) of the I.T. Rules. (2) For the assessment year 1968-69, out of a total amount of Rs. 87,081 claimed by the assessee as business promotion expenses, only an amount of Rs. 12,477 can be allowed, viz., (a) Rs. 2,100 paid towards market survey expenses; (b) Rs. 2,377 spent on conveyance ; and (c) Rs. 8,000 on air tickets. The rest was treated as entertainment expenditure. So far as the claim of "entertainment expenses" in a sum of Rs. 24,806 for this year was concerned, the Tribunal affirmed the order of the AAC. In other words, the Tribunal held that only Rs. 18,806 was allowable as business expenditure and the balance of Rs. 6,000 had to be disallowed as entertainment....
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....ssessee. The next aspect which is common to both the assessment years is, what is the meaning of the expression " in the nature of entertainment expenditure " occurring in sub-s. (2A) of s. 37. It is brought to our notice that there is a divergence of opinion among the High Courts upon the meaning and content of this expression. One view taken by the Full Bench of the Punjab and Haryana High Court in CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336, is that all expenditure incurred on account of hospitality, whether frugal or lavish, must be understood as falling within the ambit of the expression " in the nature of entertainment expenditure ". The court emphasised the words " in the nature of " in the above expression and held, on that basis, that not only entertainment expenditure stricto sensu but all expenditure in the nature of entertainment expenditure also fell within the said expression. The court observed further that by holding that hospitality which is not lavish may be expended without any limits would virtually frustrate the object of the Legislature in enacting sub-ss. (2) and (2A) of s. 37, viz., curbing excessive business entertainment at the cost of the public....
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.... of tobacco maintained two guest houses for the purpose of arranging lodging facilities to the customers coming from foreign countries. Certain amounts were claimed as business expenditure on account of providing food and lodging facilities to foreign customers which was partly disallowed by the Department. On a reference, this court held, applying the four principles evolved by the Gujarat High Court in Patel Brothers' case [1977] 106 ITR 424, that the amount claimed by the assessee was expenditure incurred on the guests. This court observed that it was nobody's case that the guest houses were run on a lavish scale looking particularly to the needs of customers from abroad and held that because the said amount was spent on putting up and providing reasonable facilities for the accommodation of foreign guests and for their food and drink, etc., within reasonable limits, the expenditure so incurred had to be allowed. We must, however, observe that the expenditure incurred by an assessee on the maintenance of guest house is covered by sub-s. (3) of s. 37 which does not fall for our consideration. We are concerned only with the meaning of the expression expenses incurred " in the natu....
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....xpenses have also to be scrutinised from the standpoint of the above legal principles to determine what part thereof has to be allowed as business expenditure and what part disallowed or dealt with, as the case may be, under s. 37 of the Act. Accordingly, so far as the second question is concerned, we refuse to answer it in the terms in which it is couched except to clarify the legal position and leave it to the Tribunal to re-determine the amounts in the light of the above principles. Now, coming to the third question referred, the contention of the assessee is that it is an industrial company as defined in cl. (c) of subs. (6) of s. 2 of the Finance Act, 1969, being Act No. XIV of 1969. The definition of " industrial company " reads as follows: " (c) 'Industrial company' means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. Explanation.-For the purposes of this clause, a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in t....
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....y of the assessee-company. This is a question which can be decided only on the basis of the facts placed before the authorities. We must, however, express our opinion OR the construction and application of the Explanation in the said definition because the Tribunal seems to be under the impression that unless the income attributable to the " specified activity " (in short for " for the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining is not less than fifty-one per cent. of the total income of the assessee, company cannot be an industrial company. We do not think so. According to the main limb of the definition, " industrial company " is a company which is mainly engaged in a specified activity, while the Explanation says that the company shall be deemed to be mainly engaged in specified activity if the income attributable to the specified activity is not less than fifty per cent. of its total income computed in accordance with the Explanation. Two views are urged before us. Mr. Suryanarayana Murthy, learned standing counsel for the Department, submits that in ev....
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....ich is not one of the specified activities. The investment in trading activities is, say, 50 lakhs of rupees. Suppose in a given assessment year, its income from generation of electricity is 'nil' while its income from trading activities is one lakh of rupees. According to the Department's contention, it would not be an industrial company. In other words, according to the Department, it would not be a company mainly engaged in the generation of electricity, which is, ex facie and from any point of view, untrue and untenable. We, are, therefore, of the opinion that the company which is mainly engaged in the specified activity shall be deemed to be an industrial company notwithstanding the fact that its income from such activity is less than fifty-one per cent. of its total income, and that the Explanation applies only where the company is not mainly engaged in the specified activity but still the income attributable to the specified activity is fifty-one per cent. or more of its total income. Another aspect which needs to be clarified in view of the controversy raised before us is the meaning of the word " attributable ", occurring in the Explanation to sub-s. (6) of s. 2 of the ....