Karnataka High Court
Mysodet (Pvt.) Ltd. vs Commissioner Of Income-Tax on 29 January, 1986
Equivalent citations: [1987]163ITR848(KAR), [1987]163ITR848(KARN)
JUDGMENT Puttaswamy, J.
1. In this reference made under section 256 of Income-tax Act, 1961 (hereinafter referred to as "the Act"), the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore ("Tribunal"), at the instance of the assessee, has referred the following question of law for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the expenditure amounting to Rs. 25,119 has been rightly disallowed under section 37(2B) of the Income-tax Act, 1961, as being in the nature of entertainment expenditure ?"
2. In order to appreciate the question referred to us, it is necessary to notice the facts as found by the Tribunal.
3. The assessee, a private limited company incorporated under the Companies Act, is, inter alia, engaged in the business of undertaking "Fumigation and Disinfection". For the assessment year 1975-76 relevant to the accounting year ending on March 31, 1975, the assessee before the Income-tax Officer, Company Circle I, Bangalore, inter alia, claimed a sum of Rs. 25,119 as "Business Promotion Expenses" allowable under section 37(1) of the Act. But, the Income-tax Officer in completing the assessment on December 19, 1977 (annexure-B), disallowed the same, holding that it was in the nature of entertainment expenditure and was not allowable under section 37(2B) of the Act. Aggrieved by the same, the assessee filed an appeal before the Appellate Assistant Commissioner of Income-tax, Bangalore Range III, Bangalore, who, by his order made on April 28, 1977 (annexure-C), dismissed the same. Aggrieved by the said orders of the Appellate Assistant Commissioner and the Income-tax Officer, the assessee filed a second appeal before the Tribunal, which by its order made on August 31, 1978 (annexure-D), dismissed the same following an earlier decision rendered by it on the very same question of the very same assessee for the year 1974-75. Hence, this reference.
4. Sri. G. Sarangan, learned counsel appearing for the assessee, strenuously contends that the Tribunal in holding that the expenditure incurred by the assessee was entertainment expenditure and was not business promotion expenditure, had not applied the correct legal principles. In support of his contention, Sri Sarangan strongly relies on a Division Bench ruling of this court in CIT v. Corporation Bank Ltd. [1979] 117 ITR 271 and the Division Bench rulings of the High Courts of Gujarat, Andhra Pradesh and Madhya Pradesh in CIT v. Patel Brothers & Co. Ltd. , Addl. CIT v. Maddi Venkataratnam & Co. Ltd. and CIT v. Lakhmichand Muchhal [1982] 134 ITR 234 (MP), respectively, and a Full Bench ruling of the Punjab and Haryana High Court in CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336.
5. Sri K. Srinivasan, learned senior standing counsel for the Income-tax Department, appearing for the Revenue, contends that the Tribunal had correctly applied the legal principles and recorded a correct finding on the nature of the expenditure incurred by the assessee. In support of his contention, Sri Srinivasan relies on a Division Bench ruling of the High Court of Bombay in ACC-Vickers Babcock Ltd. v. CIT [1976] 103 ITR 321 and a Full Bench ruling of the Kerala High Court in CIT v. Veeriah Reddiar [1977] 106 ITR 610.
6. As noticed earlier, the Tribunal had examined the very same question in relation to the very same assessee on similar facts in its order made on August 17, 1976 in ITA Nos. 654 and 655 (Bang)/75-76. In that order, the Tribunal after critically examining the relevant provision of the Act and the ruling of the Gujarat High Court in Patel Brothers' case [1977] 106 ITR 424, which had found favour with the High Courts of Andhra Pradesh, Bombay and Madhya Pradesh, held thus :
"The difficulty in using such a test is at once apparent when we look into the details of this very case. Quite a lot of the expenditure was incurred in connection with the Russian Trade Representatives and they were provided accomodation in posh hotels and were provided with meals, etc., in top class hotels. Similarly, the same thing would apply in the case of Polish guests also who were provided boarding and lodging facilities in Hotel Ashoka. It is difficult to say that if boarding and lodging is provided in Hotel Ashoka, it is entertainment expenditure and if similar boarding and lodging is provided in a lesser grade hotel it is not so. In our opinion, it would not be correct to apply a test of this nature. We have held in a number of cases that expenditure within the meaning of section 37(2B) must involve an element of hospitality. That element is always there when one provides even to his business guests boarding and lodging in a hotel whether it is in Hotel Ashoka or a more moderate hotel. In this view of the matter, we would hold that in the analysis of the expenditure, which we have given above, hotel bills and 'other expenses' which are mostly described as 'entertainment' in the entries themselves are expenditure in the nature of entertainment expenditure. Expenditure on 'compliments' are mainly on account of gifts to the Trade Representatives and others and cannot come, in our opinion, in the category of entertainment expenditure. As a matter of fact, there is a separate provision prohibiting such gifts under the U.K. Law as seen from the judgment of the Gujarat High Court to which we have referred. It is not the Department's case that these compliments or gifts were not given out of business expediency, since they are disallowed as entertainment. In any case, we see no justification to hold that any extra commercial consideration was involved. The sudden jump in profits speaks for itself. Although they may be gifts, they cannot be called expenditure on entertainment and since there is no separate provision for disallowing such gifts as in the U.K. Law we hold that such expenditure cannot be disallowed under section 37(2B)."
7. We are of the view that this finding recorded by the Tribunal for the previous years of the very same assessee when the law was the same as for the very assessment year in question is clearly correct. We are of the view that the fact that the Tribunal in its earlier order could not refer to various other decisions now relied on by Sri Sarangan does not make any difference to hold otherwise. From this, it follows that the question referred to us has to be answered in the affirmative.
8. In the light of our above discussion, we answer the question referred to us in the affirmative against the assessee and in favour of the Revenue. But, in the circumstances of the case, we direct the parties to bear their own costs.