Rajasthan High Court - Jaipur
Commissioner Of Income-Tax vs Yadav Transport Service on 24 September, 1985
JUDGMENT Dwarka Prasad, J.
1. These three applications arise in similar circumstances and raise common questions as they relate to the assessments of the same assessee, M/s. Yadav Transport Service, Nasirabad, and as such they are disposed of by a common order.
2. The assessee, M/s. Yadav Transport Service, is a transporter and in the course of assessments of the assessee in respect of the assessment years 1976-77, 1977-78 and 1978-79, the assessee claimed allowance of expenditure incurred on account of entertainment, office and other miscellaneous expenses in the head office and various branches. The Income-tax Officer disallowed part of the expenditure incurred by the assessee on account of entertainment expenses, office expenses and miscellaneous expenses. On appeal, the Commissioner of Income-tax (Appeals), Rajasthan, Jaipur, sustained the disallowance of entertainment expenses, office and miscellaneous expenses to a certain extent and reduced the amount disallowed by the Income-tax Officer. Before the Income-tax Appellate Tribunal, the appeals relating to the aforesaid three assessment years were heard together and the only objection raised on behalf of the Revenue was that entertainment expenses should be wholly disallowed, because of the provisions contained in Section 37(2A) and Section 37(2B) of the Income-tax Act, 1961. The Appellate Tribunal did not accept the contention of the Department and held that the expression "entertainment expenditure" should be construed in a liberal manner and as such the claims of the assessee relating to entertainment expenditure allowed by the Commissioner of Income-tax were upheld by the Tribunal by its order dated May 12, 1981.
3. The Appellate Tribunal dismissed the application of the Commissioner of Income-tax under Section 256(1) of the Act on the ground that no referable question of law arose out of the order of the Tribunal dated May 12, 1981, on the ground that the Supreme Court has upheld the finding of the Tribunal that the expenditure of the nature of providing tea, coffee and other customary hospitality on a moderate scale would constitute "expenditure in the nature of entertainment expenditure" in the case of Commissioner of Income-tax v. Allied Publishers Private Ltd. Hence these applications under Section 256(2) of the Act have been moved by the Commissioner of Income-tax, Jaipur, praying that the Income-tax Appellate Tribunal be directed to state the case and refer the following question of law arising out of its order dated May 12, 1981, to this court for its opinion :
" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the CIT (Appeals) reducing the disallowance of entertainment expenses, office expenses and miscellaneous expenses from Rs. 35,834 to Rs. 21,000 (for assessment year 1976-77), from Rs. 35,242 to Rs. 20,000 (for assessment year 1977-78) and from Rs. 34,858 to Rs. 19,000 (for assessment year 1978-79) by construing the expression ' entertainment expenditure occurring in Section 37(2A) and 37(2B) of the Income-tax Act in a liberal manner ? "
4. It may be pointed out that after the Income-tax Appellate Tribunal rejected the application of the Department under Section 256 of the Act refusing to make a reference to this court, the provisions of Section 37 of the Act have been amended by the Finance Act, 1983, with retrospective effect from April 1, 1976. Explanation 2 has been added to Sub-section (2A) of Section 37 and it reads as under:
" Explanation 2.--For the removal of doubts, it is hereby declared that for the purposes of this sub-section and Sub-section (2B), as it stood before the 1st day of April, 1977, 'entertainment expenditure' includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other places of their work. "
5. Sub-section (2B) of Section 37, which was inserted by the Finance Act of 1970 with effect from April 1, 1970, was deleted with effect from April 1, 1977, and a new Sub-section (2B) was introduced by the Taxation Laws (Amendment) Act, 1978, with effect from April 1, 1979, but the newly inserted Sub-section (2B) is not relevant for the purpose of the case in hand, as it does not relate to entertainment expenditure. It may be observed that so far as office and miscellaneous expenses are concerned, no argument was advanced before the Appellate Tribunal and as such the mention of office and miscellaneous expenses, a question which is sought to be referred, is not permissible, as the question was neither raised before nor argued nor considered by the Income-tax Appellate Tribunal. The only question which was raised and decided by the Income-tax Appellate Tribunal related to allowing of expenditure of the nature of entertainment expenditure. After the addition of Explanation 2 to Sub-section (2A) of Section 37 of the Act, it is absolutely clear that every kind of hospitality extended by the assessee to any person except his employees by providing food or beverages or in any other manner whatsoever would be includible in the expression "entertainment expenditure" occurring in Sub-section (2A) of Section 37 of the Act. Thus, if the assessee supplied drinks, food or other hospitality to the customers by reason of any express or implied contract or even on account of custom or usage of trade, the same would constitute "entertainment expenditure" within the meaning of Subsection (2A) of Section 37 and would not be excludible under Section 37(1) of the Act from the profits of the assessee under the head "Profits and gains of business or profession ".
6. This court had occasion to consider this aspect of the matter in CIT v. Green Roadways [1985] 154 ITR 639. In view of the retrospective insertion of Explanation 2 with effect from April 1, 1976, the question would naturally arise as to whether the expenditure incurred by the assessee in the nature of entertainment expenditure in providing tea, coffee or other customary hospitality to its customers would fall within the provisions of Section 37 of the Act and would be excludible from the income of the assessee under the head "Profits and gains or business or profession". We are, therefore, of opinion that a question of law does arise so far as it relates to the question of allowing entertainment expenditure incurred by the assessee in all the three years under consideration.
7. However, we would like to re-frame the question so as to clarify the matter and bring out clearly the dispute which requires consideration by this court.
8. We, therefore, direct the Income-tax Appellate Tribunal, Jaipur, to state the case and refer the following question of law arising out of its order dated May 12, 1981, to this court:
" Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in allowing expenditure incurred by the assessee in providing tea, coffee and other customary hospitality to its customers ? "
9. It would be open to the Income-tax Appellate Tribunal to make a consolidated reference in respect of all the three years under consideration, if it so likes. The parties are left to bear their own costs.