Madhya Pradesh High Court
Commissioner, Income-Tax vs Ashok Kumar Manibhai Patel And Co. on 18 September, 2007
Equivalent citations: (2008)214CTR(MP)344
Author: Dipak Misra
Bench: Dipak Misra, S.C. Sinho
ORDER Dipak Misra, J.
1. This Court in ITR No. 104/96, dated 4-8-1997 directed the Income-tax Appellate Tribunal, Jabalpur [for short `the Tribunal'] to submit the statement of case in respect of the following questions:
(i) Whether on the facts and in the circumstances of the case the Tribunal was justified in law to cancel the order Under Section 263 dated 173-1989 ?
(ii) Whether on the basis of available materials on records it was legally possible for Tribunal to conclude that the expenditure to the extent of Rs. 1,45,239/-out of the total expenditure of Rs. 1,60,239/-claimed as deduction towards messing was incurred by assessee exclusively for providing food and beverabe to its employees ? (iii) Whether the Tribunal was justified in law to hold that in the fact and circumstances of the case, the Commissioner ignored the provisions of explanation 2 to Section 37(2A) of Income-tax Act ?
2. The facts which are essential to be stated are that the assessee is a partnership firm and derived income from manufacture and sale of 'bidis' for the assessment year 1984-85. The assessee claimed expenditure of Rs. 1,60,239/-towards messing. The Assessing Officer disallowed the claim of Rs. 10,000/-vide order dated 8-71986 and allowed the messing expenses to Rs. 1,50,239/-.
3. After the assessment officer passed the order the Commissioner of Income-tax, Jabalpur was of the view that the messing expenditure was in the nature of entertainment expenditure and as per the provision contained in Section 37(2A) of the Act deduction of Rs. 5,000/-was admissible. He invoked the jurisdiction under Section 263 of the Act and came to hold that the permissible deduction should stand restricted to Rs. 5,000/- and the rest of the sum should be allowed. Being of this view, he set aside the order of assessment and directed the Assessing Officer to reframe the assessment.
4. Being dissatisfied with and grieved by the order of the Commissioner passed under Section 263 of the Act the assessee preferred an appeal before the Tribunal. The Tribunal came to hold that the expenditure was incurred for providing the messing facility to the workers by the assessee and as per the language of Section 37(2A) of the Act and such expenditure would not be regarded as entertainment. The Tribunal set aside the order of the Commissioner and upheld the order of the Assessing Officer.
5. Thereafter an application under Section 256(2) of the Act was filed before this Court and the aforesaid questions were framed and statement of the case was called for.
6. We have heard Mr. Rohit Arya, learned Senior Counsel along with Mr. Sanjay Lal for the Revenue and Mr. A.K. Shrivastava, learned Counsel for the assessee-respondent.
7. It is submitted by Mr. Arya, learned senior counsel appearing for the Revenue that the order of the Commissioner in exercise of jurisdiction under Section 263 of the Act cannot be found fault with inasmuch as the order of the Assessing Officer was illegal and prejudicial to the interest of the Revenue.
8. Mr. Shrivastava, learned Counsel for the assessee submitted that if the language of Section 37(2A) is read in proper perspective it is absolutely vivid that the facilities to the workers in the manner it has been provided would never come under the concept of entertainment. It is urged by him that the Tribunal has recorded a finding of fact and once there is a finding of fact and it is in accord with the statutory provision no fault can be found with it. Additionally, it is propounded by him that the tax impact is hardly at Rs. 40,000/-and, therefore, this Court need not entertain the reference in view of the circulars issued by the Central Board of Direct Taxes.
9. To appreciate the rival submissions raised at the Bar, it is apposite to refer to Section 37(2A) as is stood at the relevant point of time. The provision which is relevant for the present purpose reads as under:
37. General.-(1) Any expenditure (not being expenditure of the nature prescribed 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), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as hereunder:
*(2A) Notwithstanding anything contained in sub-section or Sub-section (2), no allowance shall be made in respect of so much of the expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year which expires after the 30th day of September, 1967, as in excess of the aggregate amount computed as hereunder:
Explanation 1.- ...
*Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of this sub-section and Sub-section (2B), as is 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 the office, factory or other place of their work.
10. A Division Bench of this Court in Commissioner of Income-tax v. Lalubhai B. Patel & Co. [1983] 139 ITR 831 has expressed the view that the expenses incurred for providing tea, coffee, pan, cool drinks, etc., to customers, being ordinary courtesies shown to customers by business houses, do not amount to expenditure in the nature of entertainment expenditure within the meaning of Section 37(2A) or Section 37(2B) of the Income-tax Act, 1961.
11. In Commissioner of Income-tax v. Patel Brothers and Co. Ltd. and Ors. their Lordships referred to Section 37 and the Explanation 2 which we have reproduced above, and thereafter expressed the view as under:
The object of Sub-section (2A) is to disallow any lavish expenditure in the form of business expenditure. This is obvious from the several amendments made in the provision from time to time. It is so understood even in the circular issued by the Board. 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 the lavish expenditure. The dispute in the present cases relates only to the amount which has been held to be essential business expenditure of this kind incurred in providing ordinary meals as bare necessity. In the view taken by us, such expenses did not come within the meaning of "entertainment expenditure" prior to April 1, 1976, when Explanation 2 was brought in by a retrospective amendment made in 1983 of subsection (2A) of Section 37. The finding of fact in all cases, therefore, satisfies this test to allow deduction of the expenditure incurred by each assessee and claimed under this head for the period prior to April 1, 1976. Sub-section (2A) was inserted with effect from October 1, 1967, by the Taxation Laws (Amendment) Act, 1967 and Explanation 2 inserted therein by the Finance Act, 1983, retrospectively, with effect from April 1, 1976, while Sub-section (2B) was inserted with effect from April 1, 1970 by the Finance Act, 1970. As earlier stated, these cases relate to the period prior to April 1, 1976, from which date Explanation 2 to Sub-section (2A) was inserted retrospectively. We have, therefore, to construe Sub-section (2A) as it existed without Explanation 2. The meaning of Explanation 2 is quite clear and it has enlarged the meaning to widen the tax net.
Learned Counsel for the Revenue contended that Explanation 2 is clarificatory and, therefore, even without Explanation 2, the provision must be understood and construed in the same manner. It appears to us that insertion of Explanation 2 made retrospectively, but restricted in its application only with effect from April 1, 1976, is itself an indication that merely clarificatory of the ordinary meaning, as contended by learned Counsel for the Revenue, it was unnecessary to restrict its retrospective application in this manner only from April 1, 1976. the construction we have made of Sub-section (2A) of Section 37 as it existed during the relevant assessment period cannot, therefore, be affected by Explanation 2 to Sub-section (2A) which was inapplicable during the relevant period.
In our opinion, the construction we have made of the provision as it existed during the relevant period flows not merely from the language of the provision but also matches with the object thereof. It means that the expenditure incurred by the 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, to which the assessees were entitled in the computation of their income for the purpose of payment of tax under the Income-tax Act, 1961, during the relevant period prior to April 1, 1976.
12. That apart, at this juncture, we may hasten to add the Explanation also clearly postulates that benefits given to the workmen would not be included as entertainment expenditure.
13. Quite apart from the above, we may also note that this Court in the case of Commissioner of Wealth-tax, Gwalior v. Dr. Ajad Kumar Jain (HUF), Sagar [W.P. No. 162/98] while taking note of the tax impact and placing reliance on the decision rendered in Commissioner, Income-tax v. Pithwa Engg. Works (Bombay) has opined thus:
11. The factual scenario can be perceived from another aspect. Submission of Mr. A.K. Shrivastava, learned Counsel for the respondent is that the tax impact is Rs. 52,565/-and, therefore, as er the circular of the Central Board of Direct Taxes the reference need not be adverted to. A Division Bench of the High Court of Bombay in the case of Commissioner of Income-tax v. Pithwa Engg. Works, in paragraph 6 expressed the view as under:
This Court can very well take judicial notice of the fact tht by passage of time money value has gone down, the cost of litigation expenses has gone up, the assesses on the file of the Departments have been increased consequently, the burden on the Department has also increased to a tremendous extent. The corridors of the superior courts are chocked with huge pendency of cases. In this view of the matte, the Board has rightly taken a decision not to file references if the tax effect less than Rs. 2 lakhs. The same policy for old matters need to be adopted by the Department. In our view, the Board's circular dated March 27, 2000 is very much applicable even to the old references which are still undecided. The Department is not justified in proceeding with the old references wherein the tax impact is minimal. Thus, there is no justification to proceed with decades old references having negligible tax effect.
14. Judged from both angles we would answer the reference in the negative in favour of the assessee and against the Revenue.