Income Tax Appellate Tribunal - Kolkata
Sudipto Sarkar vs Deputy Commissioner Of Income-Tax, ... on 5 May, 2006
Equivalent citations: [2006]101ITD229(KOL), [2006]287ITR20(KOL), (2006)103TTJ(KOL)297
ORDER
Dinesh K. Agarwal, Judicial Member
1. The Division Bench hearing this case had made a reference to the Hon'ble President, Income-tax Appellate Tribunal under Section 255(3) of the Income-tax Act, 1961 ('the Act') for constitution of a Special Bench, Accordingly, the Hon'ble President, I.T.A.T. was pleased to constitute a Special Bench of three Members to consider the following question:
Whether, the expenses incurred by the assessee in furtherance of his profession to various clubs of Kolkata for entertaining clients and customers on account of hospitality are in the nature of business expenses or in the nature of entertainment expenditure.
2. At the time of hearing both the parties agreed that two minor issues involved in this appeal, not specifically referred to the Special Bench: may also be considered in terms of Section 255(3) of the Income-tax 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: Rs. 1,28,561
(ii) Less : Deduction under Section 37(2A) Rs. 10,000 plus 50 per cent of Rs. 1,18,561: Rs. 69,281 ___________ Rs. 59,280 Besides this, it was also found by the Assessing Officer that the assessee himself added back one part of motor car upkeep expenses for his personal use. On perusal of the details filed it was noticed by the Assessing Officer that the assessee has taken a motor car on lease for which lease rental of Rs. 2,12,393 was paid. As this being a part of the car maintenance expenses, the Assessing Officer disallowed Rs. 42,478 being 20 per cent of car lease rent Rs. 2,12,393 and added to the total income of the assessee. Further, it was found by the Assessing Officer that a sum of Rs. 4,251 was debited in the P & L Account under the head 'Donation and subscription'. Out of this, the Assessing Officer disallowed Rs. 2,500 by observing that "out of this payment of Rs. 750 and Rs. 1,001 were made to India International Centre and Khaitan Co. Recreation Club respectively. The balance amount was paid to the Bar Library Club and Counsels' Club Association. Therefore, allowing the last two expenses, the remaining two expenditure is disallowed being donation and in absence of Section 80G". Accordingly, the assessment was completed vide order dated 17.9.1998 passed under Section 143(3) at an income of Rs. 27,59,290. The assessee preferred first appeal before the Ld. CIT(A). The Ld. CIT(A) following the earlier appellate order dated 12.4.2000 confirmed the disallowance of entertainment expenses and also upheld the disallowance of car upkeep, donation and subscription expenses.
4. Being aggrieved by the order of the Ld. CIT(A) the assessee is in appeal before us.
5. Ground Nos. 1 and 2 read as under:
1. For that the Learned Commissioner 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 assessee 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 launched Customer Awareness Programmers for enlightening the Corporate about the Legal Aspects of Emerging Opportunity, necessitating implementation of the Customer Relationship Management (CRM) Techniques. Accordingly, the assessee set up Stratways Private Limited Head Quarter at Kolkata and Stratways Limited Head Quarter in London. He further submits that the assessee's vision, mission and passion triggered his dedication to enlighten through continuous and consistent Customer Relationship Management (CRM) Programmes not only for the prospective Foreign Investors but also to Multi-national Companies operating in India about the emerging opportunity for furtherance of their Business and Commerce. Since the assessee is a professional specialized in Corporate laws and laws related to the Intellectual Properties etc., embraced on grounds of commercial expediency, took steps for furtherance of his professional activities with vision, mission and passion to empowers and embolden his prospective customer/clients through dissemination of knowledge and information, so that, the significant challenges, organizations face today are not only problem solving but also problem seeing. He further submits that the assessee undertook the challenging task of enlightening the prospective clients, through imparting customer education in an ambiance commensurate with the dignity and respectability of the prospective client to enlighten the clients on how can companies solve their problems which they cannot yet see. Accordingly the assessee conducted series of interaction programmes to impart to his existing as well as prospective clients globally, at different places, to facilitate the prospective customer convenience and for this the assessee has incurred expenditure amounting to Rs. 1,28,561 debited to P & L Account under the head 'Development of Customer Relation' during the financial year 1995-96 relevant to the assessment year 1996-97. He further submits that the Assessing Officer treated the said expenditure as entertainment expenses and in terms of provisions contained in Section 37(2) disallowed Rs. 59,280 which the Ld. CIT(A) has also upheld. The Ld. Counsel for the assessee while highly objecting the sustenance of disallowance of such expenses submits that such expenditure incurred by the assessee should and ought to be considered as business expenditure allowable under 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 his clients and customers in the said clubs because of the very vital fact that they provided an exclusive ambiance at a much lesser cost compared to the comparable facilities, which are seldom available in the market. He further submits that the assessee has exercised considerable business prudence to hold those conferences at those exclusive clubs through intelligent blending of national pride with professional acumen on grounds of commercial expediency, wholly and exclusively for furtherance of the assessee's professional income. As such, the expenditure incurred by the assessee should and ought to be considered as business expenditure to be allowable under Section 37 of the Income-tax Act. The Ld. Counsel for the assessee at this stage refers page 7 of his written submission to show the name of his fifteen foreign major clients, besides the major Indian Multi-national and domestic companies which are as under:
(i) Honda Motor Company;
(ii) Philippe Magnaire, French Company;
(iii) Elix Group plc;
(iv) Capital One Financial Corporation;
(v) Perfetti Van Melle, an Italian Company;
(vi) Hitachi;
(vii) Citizen, Japanese Company;
(viii) SAF Yast, a French Company;
(ix) Roger Shashoua & Ors.;
(x) White Industries, Australia;
(xi) 'AES' - USA;
(xii) 'Chatterjee Petrochemical', Mauritius;
(xiii) Pearson - PLC;
(xiv) Mitsubishi;
(xv) Unilever.
5.2. He further submits that although God has created every human being different with variable levels of minds and intellect, yet God has indeed been extremely fair, in providing everybody absolutely equal 24 hours a day and had the assessee been squandering the period of stay at the hotels and/or at the clubs for entertainment and fun making, instead of high level of intellectual discourse with the clients, even in the widest stretch of imagination the under-noted accelerated growth of professional income could not have been achieved:
Assessment year Professional fees Tax paid
receipts
1991-1992 Rs. 13,17,640.00 Rs. 4,54,355.00
1992-1993 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 Rs. 1,11,13,554.90 Rs. 30,19,134.00
2003-2004 Rs. 1,01,77,897.32 Rs. 28,69,679.00
2004-2005 Rs. 1,35,56,225.00 Rs. 33,87,834.00
2005-2006 Rs. 1,74,33,890.00 Rs. 47,98,622.00
2006-2007 Rs. 1,77,89,481.22
5.3 At this stage the Ld. Counsel for the assessee has also placed on record the following graphics:
5.4. In the light of the above table the Ld. Counsel for the assessee submits that the expenditure incurred by the assessee for conducting the Customer Education Programme to facilitate client's enlightenment about the various provisions of Indian Statutes and the emerging opportunities of business and commerce, because of India having the highest English Speaking population in the World, which attracted substantial Foreign Direct Investments in the country and triggered off accelerated growth of mergers and acquisitions to facilitate buoyancy in the Indian Economy at an appropriate ambiance to suit the Customer convenience is totally allowable as business expenditure.
5.5. The Ld. Counsel for the assessee further that the Tribunal in the assessee's own case in ITA No. 1323/Cal./2000 dated 31.7.2002 for the assessment year 1995-96 while holding that in principle these expenses should have been allowed as long as they were not personal in nature and were duly supported by evidence about the factum of expenses having been incurred, set aside the issue to the file of the Assessing Officer with certain directions. He further submits that in setting aside proceeding the Assessing Officer has allowed such expenses and for the proposition that payments to clubs are allowable, the reliance was placed on the decision in Sterlite Industries (India) Ltd. v. Addl. CIT/Jt. CIT [2006] 6 SOT 497 (Mum.). The reliance was also placed on the following decisions:
(i) Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT .
(ii) Mysore Kirloskar Ltd. v. CIT .
(iii) CIT v. Madras Refineries Ltd. .
(iv) CIT v. Patel Bros. & Co. Ltd. .
(v) CIT v. Patel Bros. & Co. Ltd. .
(vi) CIT v. Navabharat Enterprises (P.) Ltd. (No. 2) .
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. 59,280has been disallowed 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 disallowance of expenses. He further submits that for the assessment year 1995-96 the Assessing Officer in setting aside proceeding vide order dated 25.9.2003 passed under Section 254 while accepting that out of Rs. 89,024 a sum of Rs. 47,636 were incurred to entertain a group of guest for setting up a professional firm, sustained the disallowance of balance amount of such expenses. He also placed on record the copy of the said order passed by the Assessing Officer. He further submits that the decision relied on by the ld. counsel for the assessee are prior to the amendment made by the Finance Act, 1992 with effect from 1.4.1993, therefore, the same are not applicable in the assessee's case. He, therefore, submits that the disallowance of Rs. 59,280 made by the Assessing Officer and sustained by the Ld. CIT(A) be upheld.
5.7 We have carefully considered the rival submissions of the parties and perused the material available on record. We find that the assessee has incurred a sum of Rs. 1,28,561.49 under the head 'Development of Client Relation Expenses' and claimed the same as business expenditure under Section 37(1) of the Income-tax Act, the details of which are as under:
Date Period Name of the club Amount
(Rs.)
1.5.1995 March-95 Bengal Club 7,354.00
1.5.1995 February-95 Calcutta Club 150.00
1.5.1995 February-95 Tollygunge Club 200.00
8.5.1995 March-95 Tollygunge Club 200.00
10.5.1995 March-95 Calcutta Club 180.00
17.6.1995 April-95 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 200.00
28.9.1995 July-95 Calcutta Club 150.00
30.9.1995 Payment by ANZ Calcutta Club 430.50
VISA Card dated
on 7.9.95
20.10.1995 Bill No. 6009169 Taj Bengal 7,909.00
28.10.1995 August-95 Tollygunge Club 200.00
28.10.1995 August-95 Calcutta Club 150.00
28.10.1995 Misc. Bill Bengal Club 20,816.00
28.10.1995 Septembcr-95 Bengal Club 3,356.00
31.10.1995 Payment on ANZ Bengal Club 2,325.91
VISA Card dated
on 10.10.95
28.11.1995 October-95 Bengal Club 189.00
28.11.1995 September-95 Calcutta Club 591.00
28.11.1995 Tollygunge Club 400.00
31.12.1995 Payment by ANZ Tollygunge Club 1,128.48
VISA Card dated
on 4.12.95
2.1.1996 Diners Club 4,732.40
11.1.1996 November-95 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
31.1.1996 Payment by ANZ Taj Bengal 823.80
VISA Card dated
on 12.1.96
13.2.1996 ANZA/c. No.22617 3.500.00
14.2.1996 Bill No.6015220 Taj Bengal 3,678.40
dated on 20.1.96
16.2.1996 December-95 Bengal Club 8,038.00
16.2.1996 January-96 Bengal Club 3,716.00
29.2.1996 Payment by ANZ Bengal Club 2,554.00
VISA Card dated
on 3.2.96
15.3.1996 February-96 Bengal Club 8,606.00
18.3.1996 Misc. Bill Bengal Club 16,364.00
18.3.1996 August-95 Calcutta Club 156.00
18.3.1996 December-95 Calcutta Club 150.00
18.3.1996 January-96 Tollygunge Club 400.00
20.3.1996 January-96 Calcutta Club 170.00
25.3.1996 Bill No. 6017765 Taj Bengal 1,828.00
31.3.1996 Payment by ANZ Taj Bengal 700.00
VISA Card dated ____________
on 21.3.96 1,28,561.49
____________
5.8 In order to appreciate the contentions, the provisions of Sections 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 rupees.
Explanation - For the purposes of this sub-section, "entertainment expenditure" includes-
(i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person.
(ii) the amount of any expenditure in the nature of entertainment expenditure [not being expenditure incurred out of an allowance of the nature referred to in Clause (i)] incurred for the purposes of the business or profession of the assessee by any employee or other person;
(iii) 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 place of their work.
5.9 It is clear from Section 37(2) that in case of company assessees as well as non-company assessees, the allowability of 'entertainment expenditure' as defined in the Explanation to Section 37(2), whether incurred within India or outside India, has to be determined as per provision of Section 37(2) as substituted by Finance Act, 1992 with effect from 1.4.1993 and subsequently amended by the Finance Act, 1994 with retrospective effect from 1.4.1993. Such Section 37(2) overrode the provisions of Section 37(1) of the Income-tax Act. It is pertinent to mention here that the word 'Entertainment' has not been defined in the Act. There was a sharp difference in the judicial opinion on the point as to what does and what does not amount to entertainment expenditure within the meaning of these provisions. Setting at the rest the controversy. Their Lordships of Hon'ble Supreme Court in Patel Bros. & Co. Ltd.'s case (supra), affirming Patel Bros. & Co. Ltd.'s case (supra) ruled that generally, "entertainment expenditure" is an expression of wide import. However, in the context of disallowance of entertainment expenditure as a business expenditure by virtue of Section 37(2A), the word 'entertainment' must be construed strictly and not expansively. Ordinarily "entertainment" connotes something which may be beneficial for mental or physical well being but is not essential or indispensable for human existence. A bare necessity, like an ordinary meal is essential 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 1.4.1976.
5.10 However, Sub-section (2) of Section 37 was substituted by the Finance Act, 1992 with effect from 1.4.1993 and later on amended by the Finance Act, 1994 with retrospective effect from 1.4.1993. Sub-section (2) of Section 37 begins with anon obstinate clause, namely, "Notwithstanding anything contained in Sub-section (1)". Therefore, whatever the amount of business entertainment expenses may be, they are subject to the stringent rule and limits provided in Sub-section (2) thereof. Sub-section (2) and the Explanation have been substituted for Sub-sections (2) and (2A) along with the two Explanations. The new Explanation provides that 'entertainment expenditure' includes-
(i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person;
(it) the amount of any expenditure in the nature of entertainment expenditure [not being expenditure incurred out of an allowance of the nature referred to in Clause (i)] incurred for the purposes of the business or profession of the assessee by any employee or other persons;
(iii) 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 place of their work.
The Finance Act, 1992 has substituted Sub-section (2) for Sub-sections (2) and (2A) with effect from 1.4.1993 provides a quantum of disallowance. The new provision provides that deduction on account of entertainment expenditure shall be limited to the amount of ten thousand rupees plus fifty per cent of the amount exceeding ten thousand rupees.
5.11 In Sri Venkata Satyanarayana Rice Mill Contractors Co.'s case (supra) it has been held at page 111 as under:
...that any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in benefit to the assessee's business has to be regarded as an allowable deduction under Section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister'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 (supra) 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 and in Indian Molases Co. (P.) Ltd. v. CIT 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 Tribunal is that Section 80G is a special provision and if it applies to the assessee's case, then Section 37, which is a general provision, stands excluded. This reason appears to be not sound. We have stated that Section 80G and Section 37 are not mutually exclusive. If the sum claimed by way of deduction even if it is a donation, could be considered as an expenditure falling under Section 37, the assessee could claim it as an allowance in its entirety. The second reason given by the Tribunal is equally untenable. The establishment of the school was primarily to provide facilities for the education of the children of the employees and ex-employees of the assessee. Any expenditure incurred in connect on therewith could be claimed as deduction. Merely because some children other than those of the employees and ex-employees are also admitted to the school, the expenditure incurred in connection with the activities of the school cannot be disallowed under Section 37(1).
Both the reasons given by the Tribunal, therefore, cannot be sustained. But we cannot answer the question without a finding recorded by the Tribunal as to whether the donation in question can be considered, as an "expenditure" in the sense which we have explained.
We, therefore, decline to answer question No. 3 and direct the Tribunal to dispose of the appeal in accordance with law and in the light of the observations made.
5.13 In Madras Refineries Ltd.'s case (supra), it has been held at page 170 (short notes) as under:
Held, that the amount spent for bringing drinking water as also for establishing or improving the school meant for the residents of the locality in which the business was situated could not be regarded as being wholly outside the ambit of the business concerns of the assessee, especially where the undertaking owned by the assessee was one which was to some extent a polluting industry. The expenditure was deductible.
5.14 In Patel Bros. & Co. Ltd.'s case (supra) the Hon'ble High Court laid down following broad tests to determine the nature of entertainment expenses appearing at page 425 (short notes) as under:
(a) If the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish and extravagant scale, or is of wasteful nature, it is entertainment per se.
(b) If the provision of food or drinks to a client, constituent or customer is in the nature of bare necessity, or by way 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. No. 151 of 1974, the Tribunal agreed with the Appellate Assistant Commissioner who had found that it was customary for the assessee and a very long-established tradition that farmers who came to deliver their goods, i.e., cotton, groundnuts, rice, pulses, were given meals from the kitchen run by the assessee and if the assessee failed to give this normal courtesy, it apprehended that the farmers might offer their produce to other competitors in the field of the assessee and the assessee would lose the goods. The Appellate Assistant Commissioner had also found that the expenditure was for serving ordinary meals to the employees as well as to the farmer customers and they were not such which entertained or amused the guests since the assessee served meals as a bare necessity of the business.
Therefore, in each of the two references, the expenditure in question was not in the nature of entertainment expenditure in law and the expenditure in question could not be limited to the sum of Rs. 5,000 under Section 37(2A) of the Act for each of the years in question.
5.15 In Patel Bros. & Co. Ltd.'s case (supra), it has been held at page 165 (short notes) as under:
Generally, entertainment expenditure is an expression of wide import. However, in the context of disallowance of entertainment expenditure as a business expenditure by virtue of Sub-section (2A) of Section 37 of the Income-tax Act, 1961, the word "entertainment" must be construed strictly and not expansively. Ordinarily "entertainment" connotes something which may be beneficial for mental or physical well-being but is not essential or indispensable for human existence. A bare necessity, like an ordinary meal, is essential or indispensable and, therefore, is not entertainment. Where such a bare necessity is offered, it is hospitality 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, would not be "entertainment expenditure" without the aid of the enlarged meaning given to the words by Explanation 2 inserted with effect from 1.4.976. The definition in Explanation 2 is not the ordinary meaning of the words "entertainment expenditure", but the enlarged meaning given for the purposes of the Act 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 for the purpose of payment of tax under the Income-tax Act, 1961, during the relevant period prior to 1.4.1976.
5.16 In Navabharat Enterprises (P.) Ltd. (No. 2)'s case (supra), it has been held at page 334 (short notes) as under:
Held, (i) that the amount of Rs. 893 paid to various clubs by the assessee for the purpose of entertaining foreign guests and the amount of Rs. 22,722 spent on provision of coffee, tea and snacks to customers was not in the nature of entertainment expenditure within the meaning of Section 37(2B). The amounts were deductible;
(ii) ** ** **
(iii) that the question whether the amounts of Rs. 17,056 spent on dinners to foreign delegates, Rs. 2,668 spent on providing lunch and dinners to customers and Rs. 1,79,155 spent on food and lodging of foreign customers and maintenance of guest houses for foreign customers was not allowable expenditure under the Act, could not be answered as no attempt was made by the Tribunal to find out whether the expenditure incurred was reasonable.
[The Tribunal directed to examine evidence afresh and find out whether the entertainment expenditure on foreign customers was lavish or extravagant and what would be the reasonable expenditure and accord allowance according to law].
5.17 Since all the aforesaid decisions relied on by the Ld. Counsel for the assessee arc prior to the substitution of Sub-section (2) of Section 37 of the Income-tax Act by the Finance Act, 1992 with effect from 1.4.1993 and later on amended by the Finance Act, 1994 with retrospective effect from 1.4.1993, therefore, in view of the non obstante clause provided in Sub-section (2) of Section 37, the decisions relied on by the Ld. Counsel for the assessee are not applicable to the assessee's case which is relevant for the assessment year 1996-97.
5.18 However, in Sterlite Industries (India) Ltd.'s case (supra) relied on by the Ld. Counsel for the assessee it has been held that the payment of fees to clubs is allowable vide paras 42 and 43 appearing at page 526 as under:
42. The next dispute relates to allowability of fees to clubs. The amount and year of dispute can be noticed as under:
(XIV) Club Fees:
Assessment year 1991-92; Rs. 10,800; Ground No. (2): Department's Appeal.
Assessment year 1993-94: Rs. 5,00,000: Ground No. (II) : Assessee's appeal.
43. The Hon'ble Bombay High Court has considered this issue in Otis Elevator Co. India Ltd. v. CIT as well as Hon'ble Gujarat High Court has considered this issue in Gujarat State Export Corporation 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 vede finding recorded at page 1 of the assessment order dated 25.9.2003 which reads as under:
In pursuance of order dated 31.7.2002 of the Hon'ble ITAT, E-Bench vide ITA No. 1323/Cal./2000 total income of the assessee is recomputed.
In course of hearing Sri Sibendu Basu A/R of the assessee appeared and furnished copy of ledger a/c. of the expenses incurred for setting up professional firm abroad of Rs. 89,024, hospitality expenses of Rs. 49,849, foreign travel expenses of Rs. 45,807 and donation & subscription of Rs. 5,617. On verification of Rs. 89,024 it was found that there was no other expenses except fooding expenses in different hotels and clubs. Monthly subscription of the clubs have also been debited in the a/c. The amount of bill shows that the number of persons may not be more than 3 to 4 except one bill paid on 10.12.1994 to Bengal Club amounting to Rs. 47,636. The assessee, however, did not explain how these expenses are related with his business. From the size of the bill as well as interval of inoccurrance the expenses appears to be personal in nature, the expenses incurred on 10.12.1994, bill of which "guest charge" might have been incurred to entertain a group of guest. This expense of Rs. 47,636 is, therefore, accepted as expenses for setting up a professional firm.
5.20 From the details of entertainment expenses as aforementioned and keeping in view the ratio of the aforesaid decision of the Tribunal and also the consistency, we are of the view that out of total entertainment expenditure of Rs. 1,28,561, Rs. 68,561 is allowable expenses incurred by the assessee on payment of club fees and other related expenses as allowed by the Assessing Officer in assessment year 1995-96 (supra) and the balance amount of expenses of Rs. 60,000 is considered in the nature of "entertainment expenditure" allowable as per provision of Section 37(2) of the Income-tax Act as under:
Amount of total entertainment expenditure Rs. 1,28,561 Less : Amount allowed as club fees & other related Expenses as above. Rs. 68,561 _____________ 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. 25,000 ____________ Accordingly, the disallowance made by the Assessing Officer at Rs. 59,280 is reduced to Rs. 25,000. The grounds taken by the assessee are, therefore, partly allowed.
6. Ground No.3 reads as under:
For that the Ld. CIT (Appeals)-XI Kolkata, should have allowed the lease rental for the appellant's Motor Car used wholly and exclusively for the purpose of Appellant's Professional activities and erred in upholding the arbitrary and unlawful disallowances of 20 per cent of the Lease Rental amounting to Rs. 42,478, in flagrant violation of law and by bending rules and misinter-pretating the facts, due to serious want of appreciation of the imperatives to apply Judicious mind. As such, the unlawful addition of Rs. 42,478 should and ought to be deleted in the interest of justice.
6.1 The brief facts of the disallowance of Motor Car upkeep expenses Rs. 42,478 are that it was found by the Assessing Officer that the assessee has taken Motor Car on lease for which lease rental of Rs. 2,12,393 was paid. The assessee himself has added back one part of Motor Car upkeep expenses for his personal use, therefore, for the same reason the Assessing Officer disallowed Rs.42,478 being 20 per cent of Car lease rental Rs. 2,12,393 and added the same in the income of the assessee. On appeal the Ld. CIT(A) held that "lease rental paid by the assessee includes the fuel expenses for the cars used by his mother and his wife. Segregation of these expenses are not possible and therefore, the disallowance of 20 per cent of the expenses claimed appears to be justified and the same is confirmed".
6.2 The Ld. Counsel for the assessee submits that the Motor Car was used wholly and exclusively for the purpose of assessee's professional activities, therefore, the Ld. CIT(A) has erred in upholding the arbitrary and unlawful disallowance of 20 per cent of lease rental amounting to Rs. 42,478 in view of the following facts:
(i) The car is stationed at Kolkata, whereas the assessee rarely stays, mostly to attend his major professional assignments. Records would reveal that the assessee's major appearance are in Supreme Court of India and various High Courts in India besides his professional activities in overseas countries.
(ii) Besides this Car, there were two Motor Cars in the name of his mother and wife, who is the Professor of English in Jadavpur University.
He, therefore, 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 does not include fuel expenses for the Car used by his mother and wife.
We further find that the assessee has himself added back Motor Car upkeep expenses for his personal use. In this view of the matter and in the absence of any contrary material brought on record by the revenue to show that the car lease rental includes motor car upkeep expenses, we are of the view that the disallowance of Rs. 42,478 being 20 per cent of Car lease rental of Rs. 2,12,393 is not justified and accordingly, the same is directed to be deleted. The ground taken by the assessee is, therefore, allowed.
7. The ground No.4 reads as under:
For that the Ld. CIT (Appeals)-XI, Kolkata, should have disallowed Rs. 2,500 being the Donation paid for furtherance of Appellant's Professional activities in terms of the provisions contained in Section 37 of the Income-tax Act, 1961 and erred in upholding the arbitrary and unlawful disallowances made by the Assessing Officer, wrongly in flagrant violation of statutory provisions, which should and ought to be deleted in the interest of Justice.
7.1 The brief facts of the sustenance of disallowance of donation and subscription of Rs. 2,500 are that it was observed by the Assessing Officer that "out of this payment of Rs. 750 and Rs. 1,001 were made to India International Centre and Khaitan Co. Recreation Club respectively. The balance amount was paid to the Bar Library Club and Counsels' Club Association. Therefore, allowing the last two expenses, the remaining two expenditure is disallowed being donation and in absence of Section 80G". On appeal, the Ld. CIT(A) also confirmed the same.
7.2 At the time of hearing the Ld. Counsel for the assessee submits that a sum of Rs. 1,500 was paid on 30.8.1995 to Counsel Clerks' Association and Rs. 1,000 was paid on 14.9.1995 to Khaitan Co. Recreation Club for furtherance of assessee's professional activities in terms of provisions contained in Section 37 of the Income-tax Act. He further submits that the Ld. CIT(A) has erred in upholding the said disallowance in violation of statutory provisions which should and ought to be deleted in the interest of justice. The reliance was placed on the decisions in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. (supra), Mysore Kirloskar Ltd.'s case (supra) and Madras Refineries Ltd.'s case (supra).
7.3 On the other hand, the Ld. Departmental Representative relied on the order of the Assessing Officer and the Ld. CIT(A).
7.4 We have carefully considered the rival submissions of the parties and perused the material available on record. We find that the Ld. Departmental Representative has not controverted the plea of the Ld. Counsel for the assessee that the amount of Rs. 1,500 and Rs. 1,000- was paid by the assessee to Counsel Clerks' Association and Khaitan Co. Recreation Club. It was claimed by the assessee that the same was paid for furtherance of assessee's professional activities in terms of the provisions contained in Section 37 of the Income-tax Act. We further find that it is not the case of the revenue that the amount paid by the assessee is not for professional activities. This being so and keeping in view the ratio of decisions relied on by the Ld. Counsel for the assessee as mentioned in paras 5.11, 5.12 and 5.13 of this order, we are of the view that the expenses claimed by the assessee amounting to Rs. 2,500 are allowable as revenue expenditure. This view also finds support from the decision in CIT v. National Engineering Industries Ltd. wherein it has been held at page 1004 that "The expenditure incurred merely for the purpose of keeping the workers happy and maintaining industrial peace and cordial relation with the employees is by now an accepted expenditure of the carrying on of a business." Accordingly, the disallowance of Rs. 2,500 made by the Assessing Officer and sustained by the Ld. CIT(A) is directed to be deleted. The ground taken by the assessee is, therefore, allowed.
8. In the result, the appeal stands partly allowed.