TaxTMI 
TaxTMI 
2006 (5) TMI 120
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....ax Act and the whole appeal be disposed of by this Special Bench. Accordingly, it was decided by the Hon'ble President, I.T.A.T. to dispose of all the grounds by this Special Bench. 3. Briefly stated facts of the case are as under:- Assessee an individual is a legal practitioner derives income from legal profession and other sources. The return was filed declaring an income of Rs. 26,34,450. During the course of assessment it was found by the Assessing Officer that the assessee claimed expenses on account of development of clientele relationship amounting to Rs. 1,28,561. On perusal of the details, filed by the assessee, it was found by the Assessing Officer that most of the expenditure was incurred on account of payment to clubs, visa card etc. According to the Assessing Officer the said payment is nothing but an "entertainment expenses" shown under different heads of expenses on account of entertaining his clients, therefore, the Assessing Officer treated the said expenses as "entertainment expenses" and out of such expenses Rs. 1,28,561 he, disallowed Rs.59,280 as under:- (i) Entertainment expenses as claimed by the assessee: &nb....
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....sioner of Income-tax (Appeals)-XI Kolkata, should have allowed the appellant's Appeal and erred in rejecting the appellant's contentions arbitrarily and/or incorrectly. 2. For that the Learned Commissioner of Income-tax (Appeals)-XI Kolkata, should have allowed the appellant's claim for Rs. 1,28,561 being the expenses for Customer Relationship Management claimed by the appellant and erred in upholding the arbitrary and unlawful disallowances of Rs.59,280 by the Assessing Officer, wrongly and erroneously branding the expenses as Entertainment Expenses. As such, the unlawful addition of Rs.59,280 in flagrant violation of law and by bending rules, should and ought to be deleted in the interest of Justice." 5.1 The Ld. counsel for the assessee submits that the assesses embarked upon to explore and exploit the emerging opportunities consequent to opening up of the Indian Economy and to keep pace with the rapid changes that have been taking place in the Global Economy, resulting in Paradigm Shift in Global Business Strategy ventured to enlarge the ambit of his clientele to include the prospective Foreign Investors interested in availing the emerging business opportunity in India la....
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....er section 37(1) of the Income-tax Act. He further submits that since the meetings were convened at the exclusive clubs, namely Calcutta Club, Tollygunge Club, Diners Club, Bengal Club and Taj Bengal it has been misconstrued and/or misconceived by the Assessing Officer and as well as by the Ld. CIT(A) that those clubs are meant only for 'amusement'. The Ld. counsel for the assessee while justifying his claim of said expenses as business expenditure submits that in order to facilitate the vital decision making, an exclusive cordial ambiance is essential for creating calm, composed, peaceful and tranquil mindset of the clients and the customers for enhancing receptivity and deeper concentration essential for effective synchronization of body, mind and intellect to make the right choice and at the same time to provide the clients and the customers vital signals that, they are availing the services of a prosperous, enlightened, aristocrat competent dignified professional as well as an eminent personality commensurate to the professional fees charged by the assessee to help them to see the value of their money. He further submits that the assessee held meetings and the conferences with ....
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....2-1993 Rs. 13,87,474.00 Rs. 5,06,233.00 1993-1994 Rs. 18,88,780.00 Rs. 5,60,000.00 1994-1995 Rs. 19,42,135.00 Rs. 5,04,000.00 1995-1996 Rs. 25,70,803.00 Rs. 6,83,223.00 1996-1997 Rs. 35,97,472.00 Rs. 10,81,912.00 1997-1998 Rs. 43,79,682.00 Rs. 11,33,128.00 1998-1999 Rs. 51,48,427.00 Rs. 10,88,879.57 1999-2000 Rs. 72,82,249.00 Rs. 13,99,850.00 2000-2001 Rs. 73,76,713.34 Rs. 19,13,110.00 2001-2002 Rs. 90,65,759.00 Rs. 25,28,568.00 2002-2003&nbs....
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....7] 106 ITR 424 (Guj.). (v) CIT v. Patel Bros. & Co. Ltd. [1995] 215 ITR 165 (SC). (vi) CIT v. Navabharat Enterprises (P.) Ltd. (No. 2) [1988] 170 ITR 332 (AP). He, therefore, submits that the disallowance of Rs. 59,280 made by the and sustained by the Ld. CIT(A) be deleted. 5.6 On the other hand, the Ld. Departmental Representative while relying on the orders of the Assessing Officer and the Ld. CIT(A) fairly admits that there is no doubt that the expenses incurred by the assessee are business expenditure but in view of provisions of section 37(2) of the Income-tax Act the said expenses are in the nature of 'entertainment expenditure'. Accordingly, the Assessing Officer out of 'entertainment expenditure' claimed by the assessee amounting to Rs. 1,28,561 has allowed deduction under section 37(2) amounting to Rs.69,281 and the balance amount of expenditure of Rs.59,280 has been disallowed D and added by the Assessing Officer in the income of the assessee, which the Ld. CIT(A) has very rightly upheld the same. He further submits that in the assessee's own case for the assessment year 1994-95 the Tribunal in ITA No. 1088/C/2001 vide order dated 29-5-2003 upheld the similar ....
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....Bengal Club 7,052.00 17-6-1995 May-95 Bengal Club 1,587.00 17-6-1995 April-95 Tollygunge Club 200.00 17-6-1995 April-95 Calcutta Club 150.00 24-7-1995 June-95 Bengal Club 4,162.00 14-8-1995 May, June-95 Calcutta Club 300.00 14-8-1995 July-95 Bengal Club 3,602.00 14-8-1995 May, June-95 Tollygunge Club 400.00 15-9-1995 August-95 Bengal Club 2,343.00 25-9-1995 July-95 Tollygunge Club 200....
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....p; Bengal Club 5,434.00 11-1-1996 November-95 Tollygunge Club 450.00 11-1-1996 October-95 Calcutta Club 300.00 15-1-1996 Bill No. 6012548 Taj Bengal 1,235.00 31-11996 Payment by Taj Bengal 823.80 ANZ VISA Card dated on 12-1-96 13-2-1996 ANZ A/c. No.22617 3.500.00 14-2-1996 Bill No. ....
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....p; 1,28,561.49 ---------------------------------------------------------- 5.8 In order to appreciate the contentions, the provisions of section 37(1) and 37(2) of the Act, as applicable at the relevant time, have to be referred to, therefore, the said section is extracted hereunder for easy reference:- "37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". (2) Notwithstanding anything contained in sub-section (1), any expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year commencing on or after the 1-4-1992 shall be allowed as follows: (a) where the amount of such expenditure does not exceed ten thousand rupees, the whole of such amount; (b) in any other case, ten thousand rupees as increased by a sum equal to fifty per cent of such expenditure in excess of ten thousand rupe....
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....ntial or indispensable and, therefore, is not "entertainment". If such a bare necessity is offered by another, it is hospitality but not entertainment. Unless the definition of "entertainment" includes hospitality, the ordinary meaning of "entertainment" cannot include hospitality. For this reason, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity is not entertainment expenditure without the aid of enlarged meaning given to those words by the said Explanation (2). The definition in the said Explanation (2) is not ordinary meaning of the words "entertainment expenditure" but the enlarged meaning given for the purpose of the Act with effect from 1-4-1976. This construction flows not merely from the language of the provision but also matches with the object thereof. It means that the expenditure incurred by the assessee in providing ordinary meals to outstation customers according to established business practice, was a permissible deduction under section 37(2A), to which the assessees were entitled in the computation of their total income for the purpose of payment of tax under the 1961 Act during the relevant period prior to 1....
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....er's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for' a charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of the assessee's business." 5.12 In Mysore Kirloskar Ltd.'s case the Hon'ble Karnataka High Court in the light of the principle laid down by the Hon'ble Supreme Court in Sasoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 and in Indian Molases Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC) has held at page 844 as under: "In the light of these principles, we may again revert to the reasons given by the Tribunal for rejecting the claim of the assessee. The first reason given by the Tr....
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....ure of bare necessity, or by wav of ordinary courtesy, or as an express or implied term of the contract of employment spelled out from long-standing practice or custom of trade or business, it will not amount to entertainment. (c) If the provision of food or drinks to a client, customer or constituent is in a liberal and friendly way, it may amount to entertainment having regard to the place, item and cost of such provision. (d) The provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment. In I.T.R. No. 64 of 1974, it was found by the Appellate Tribunal that it was not in dispute that up-country constituents of the assessee came to Ahmedabad for the purpose of the business with the assessee and having regard to the nature and magnitude of the business of the assessee it would be necessary for the assessee to make arrangements for providing meals to such up-country constituents. The Tribunal also found in both references that it was not the department's case that the assessee was throwing lavish parties or arranging banquets for its constituents and the expenses were claimed on that account. Similarly, in I.T.R....
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....t with effect from 1-4-1976. The object of sub-section (2A) is to disallow any lavish expenditure in the form of business expenditure. The object of the provision clearly is to allow deduction of the essential business expenditure incurred due to commercial expediency and according to the trade usage excluding lavish expenditure. Such expense did not come within the meaning of "entertainment expenditure" prior to 1-4-1976, when Explanation 2 was brought in by a retrospective amendment made in 1983 of sub-section (2A) of section 37. The insertion of Explanation 2 made retrospectively but restricted in its application only with effect from 1-4-1976, is itself an indication that its application prior to 1-4-1976, is excluded. If Explanation 2 were merely clarificatory it was unnecessary to restrict its retrospective application. This construction flows not merely from the language of the provision but also matches the object thereof. It means that the expenditure incurred by assessees in providing ordinary meals to outstation customers according to established business practice, was a permissible deduction in spite of sub-section (2A) of section 37, in the computation of total income ....
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....a Ltd. v. CIT [1992] 195 ITR 682 as well as Hon'ble Gujarat High Court has considered this issue in Gujarat State Export Corpn. Ltd. v. CIT [1995] 209 ITR 649, wherein it has been observed that payment of club fees is to be considered for the promotion of the business interest and hence it is an allowable expense. As far as the factual position is concerned we find that in assessment year 1991-92 assessee has made payment of Rs. 10,800 on account of membership fees for the Oberoi Health Club. Similarly in assessment year 1993-94 membership of Wellington Club was taken by the assessee in the name of corporate entity. Therefore, taking into consideration the facts and circumstances coupled with the authoritative pronouncements we allow the assessee's ground of appeal in assessment year 1993-94 and reject the ground of appeal taken by the department in assessment year 1991-92." 5.19 We further find that the Assessing Officer in the assessee's own case for the assessment year 1995-96 while passing setting aside order pursuant to the direction of the Tribunal has allowed the entertainment expenses amounting to Rs. 47,636 vide finding recorded at page 1 of the assessment order dated 2....
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....p; ------------- Rs. 60,000 Less: Deduction under section 37(2) Rs. 10,000 Plus 50 per cent of Rs.50,000 Rs. 25,000 Rs. 35,000 ---------- -------------- Rs. &n....
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....fore, submits that the disallowance of Motor Car upkeep expenses Rs.42,478 sustained by the Ld. CIT(A) be deleted. 6.3. On the other hand, the Ld. Departmental Representative while relying on the orders of the Assessing Officer and the Ld. CIT(A) submits that since the assessee himself has added back Motor Car upkeep expenses for his personal use, therefore, there is no error in the order of the Ld. CIT(A) in sustaining the disallowance of Motor Car upkeep expenses Rs.42,478 being 20 per cent of Car lease on rental Rs.2,12,393. He, therefore, submits that the disallowance sustained by the Ld. CIT(A) be upheld. 6.4 Having carefully considered the rival submissions of the parties and perused the material available on record, we find that there is no dispute that the assessee has taken Motor Car on lease for which lease rental of Rs.2,12,393 was paid. It is also not in dispute that Motor Car upkeep expenses are not included in the lease rent vide finding recorded by the Assessing Officer that the assessee has taken Motor Car on lease for which lease rental of Rs. 2,12,393 was paid and at the time of hearing, it was also clarified by the Ld. counsel for the assessee that the same....