Income Tax Appellate Tribunal - Delhi
Tyagi Anand And Co. (P.) Ltd. vs Income-Tax Officer on 28 January, 1987
Equivalent citations: [1987]21ITD1(DELHI)
ORDER
S.K. Chander, Accountant Member
1. These appeals are at the instance of the assessee. They relate to the assessment years 1980-81 and 1981-82. The common and the only issue involved in these appeals is : whether, on the facts and in the circumstances of the case, the expenditure incurred by the assessee on cost of tickets issued free falls within the ambit of Section 37(2A) of the Income-tax Act, 1961 ('the Act').
2. We have heard the parties. The assessee is a private limited company and, inter alia, carries on the business of exhibition of films. The assessee's books of account for this business are maintained on mercantile system of accounting. The previous year followed is the year ending 30th September. For the assessment years under appeal, the return of income was filed on 16-6-1980 and 27-6-1980 respectively. This return in each year was accompanied with the statements of accounts as on 30-9-1979 and 30-9-1980 respectively.
3. During the course of process of assessment, the ITO noticed that the assessee had debited to the profit and loss account for these two years an amount of Rs. 5,966.77 and Rs. 5,234.34 under the head 'Entertainment'. The ITO, therefore, considered this expenditure and invoking the provisions of Section 37(2A) disallowed Rs. 966 for the assessment year 1980-81 and Rs. 234 for the assessment year 1981-82. This he did because according to him Rs. 5,000 were admissible to the assessee under the head 'Entertainment' within the ambit of Section 37(2A), The assessments were made for these two years on 26-11-1981 and 19-7-1982. These assessments were challenged in appeal before the learned Commissioner (Appeals).
4. The Commissioner (Appeals) insofar as the issue before us is concerned, observed that the assessee was not entitled to succeed before him because of the insertion of Explanation 2 to Section 37(2A). According to the learned Commissioner, alter the insertion of the Explanation by the Finance Act, 1983 retrospectively from 1-4-1976, every kind of expenditure for the purpose of entertainment had to be disallowed. The assessee, therefore, failed before him. Hence the present appeals.
5. In nutshell, the arguments, put forth on behalf of the assessee, by its learned counsel were that the expenditure by the assessee amounting to Rs. 5,966 and Rs. 5,234, though shown under the head 'Entertainment' yet does not on the facts of the case partake the character of entertainment expenditure because the assessee has issued tickets to the press without specifying the particular individual of any particular paper to view the file for proper appreciation and tickets issued to policemen were for crediting goodwill which help the assessee to run the business smoothly. It was emphasized by the learned counsel that for running the type of business that the assessee was carrying on smoothly and profitably, it was expedient and wholly necessary. The expenditure though registered under the head 'Entertainment' was not of the nature of entertainment expenditure. It was, therefore, wholly admissible under Section 37(1) and not covered by the provisions of Section 37(2A). Reliance was placed upon the judgment of the Hon'ble Delhi High Court in the case of CIT v. Supreme Motors (P.) Ltd. [1984] 147 ITR 48.
6. The learned counsel for the assessee further emphasized that considering the quantum of expenditure and the number of films exhibited in each of the assessment years under appeal, it could not be said that the expenditure was lavish or uncalled for. He submitted that if the films exhibited in the assessment years 1980-81 and 1981-82 were considered with reference to the expenditure claimed, the expenditure per film would come to Rs. 15 and Rs. 3 respectively. It was, therefore, not the case of expenditure covered by Section 37(2B) and the authorities below erred in invoking this provision and disallowing part of this expenditure in excess of Rs. 5,000 in each year. On the other hand, the revenue supported the orders of the authorities below and emphasized that in view of the ratio of the Delhi High Court in the case of Siddho Mai & Sons v. ITO [1980] 122 ITR 839, arid the provisions of Explanation 2 to Section 37(2A), there is no case made out by the assessee for an interference in the order of the learned Commissioner (Appeals).
7. We have given very careful consideration to the rival submissions. We find that there has been conflict of judicial opinion as to the meaning and scope of the expression 'entertainment expenditure' used in Section 37(2A). One of the views taken by the Courts is that entertainment expenditure includes any expenditure incurred in connection with the business on the entertainment of customer in respect of provisions for petty refreshments like tea, cold drinks, cigarette, pan, etc. The other view propounded by the judicial authorities is that only that expenditure which is lavish or on extravagant scale can be considered as entertainment expenditure and expenditure incurred by an assessee in the ordinary course of business under obligation due to custom or usage of trade cannot be termed as 'entertainment expenditure' and disallowed as such.
8. It appears it was with this background of conflict of judicial opinion surrounding these provisions contained in Section 37(2A) that the legislature in its legislative wisdom inserted Explanation 2 to the provisions of Section 3Y(2A) by the Finance Act, 1983, with retrospective effect from 1-4-19Y6. This Explanation provides that for the removal of doubts, it is hereby declared that for the purpose of this sub-section and Sub-section (2B), as it stood before 1-4-1977, 'entertainment expenditure' includes expenditure on provisions of hospitality of every kind by the assesses to any person, whether by way of provisions of food or beverages or any other manner whatsoever and whether or not such provision is made by reason of any express or employed contract or custom or usage of trade, but does not include expended true on food or beverages provided by the assessee to his employees in office, factories or other places of their work. It is, thus, clear that the explanation is clarificatory in nature and retrospective in operation. Nevertheless we have to see whether the provisions of Section 37(2A) read with Explanation 2, on the facts and circumstances of the case can be invoked to consider the disputed expenditure in each year before us.
9. We have mentioned supra that the business of the assessee is in the exhibition of cinematograph films. The assessee is, therefore, in the line of business where people working in the press and performing the duties of maintenance of law and order in public places play an important role in smooth functioning of its business. The free tickets issued by the assessee to the members of the press represented by a particular newspaper or journal would, therefore, not be to invite a particular individual for entertainment in seeing the film but to provide an opportunity to that particular paper or journal to critically appreciate the film exhibited because a word in favour or against the film in the press may make material difference. Therefore, in. our considered opinion the cost on free tickets issued to members of the press cannot be considered as entertainment expenditure even within the extended manner given to it by the insertion of Explanation 2 to Section 3V(2A). Now the expenditure incurred by the assessee, taking into consideration the gross film collections, amounting to Rs. 24,07,150 and Rs. 28,06,546 respectively for the assessment years 1980-81 and 1981-82 can be said to be paltry. There is no finding or allegation by the authorities below that the expenditure claimed was extravagant or incurred on any item other than cost of free tickets.
10. The Hon'ble Delhi High Court in the case of Supreme Motors (P.) Ltd. (supra), has observed that, "considering the claim of the assessee against the background of its, turnover and profits, we are of the opinion that such a small amount incurred by the assessee, even assuming that it is for the supply of tea and cold drinks to customers, cannot be described as expenditure in the nature of entertainment expenditure." We, therefore, find that in the case of the assessee where there is no expenditure of the type of tea or beverages, the mere cost of free tickets to the press and law enforcing agencies on a meagre scale which does not exceed in any case Rs. 15 per film cannot be considered as entertainment expenditure falling within the ambit of Section 37(2A) read with Explanation 2 ibid. The judgment relied upon by the revenue from the Hon'ble Delhi High Court in the case of Siddho Mai & Sons (supra) is not on the point at issue before us and as such, irrelevant.
11. On the entirety of the facts and circumstances of the case, therefore, in our considered opinion provisions of Section 37(2A) are not applicable to the expenditure claimed by the assessee under the head 'Entertainment'. It is now well-settled that the nomenclature given to an expenditure in the books of the assessee does not per se determine its character for admissibility under the Act and all the surrounding circumstances have to be considered to determine its admissibility. When we do so, as we have, in fact, done, we find the expenditure allowable in its entirety in each year. We, therefore, delete the additions sustained by the learned Commissioner in each year and allow the appeals of the assessee. Appeals allowed.
S.S. Mehra, Judicial Member
1. I have the pleasure of having gone through the detailed order of 7th instant prepared by my learned brother, however, regret my inability to agree with the conclusion arrived at therein. The facts have been incorporated in paragraph 3 of my learned brother's order. The facts are not in dispute either. Nonetheless briefly stated the assessee is a private limited company by status arid engaged in the business of the exhibition of cinematograph films. The assessee during the relevant accounting periods appears to have issued free passes to various categories of persons such as press and others. The assessee in these circumstances, on account of such free passes, debited in its books of account amounts of Us. 5,966 and Rs. 5,234 on account of entertainment. The learned ITO allowed Rs. 5,000 each year and disallowed the balance, i.e., Rs. 966 for the assessment year 1980-81 and Rs. 234 for the subsequent assessment year under Section 37(2A).
2. The learned Commissioner (Appeals) agreeing with the reasons for disallowance confirmed the learned ITO's actions. The revenue came in further appeals before us against the confirmation of the disallowances.
3. During the hearing before us we perused the relevant account in this respect maintained by the assessee. It was noticed that in the said accounts the expenditure is shown under the head 'Entertainment'. The claim before the learned ITO was also made under this head itself. The assessee's case appears to be that no doubt the expenditure was debited under the head 'Entertainment account' and so were the claims made before the learned ITO but the expenditure should not be treated as of entertainment in nature and be in fact allowed under Section 37(1). According to the assessee the issuing of free passes for cinema could not or did not constitute entertainment. In my view it is too much to infer the issuance of free cinema passes did not constitute an expenditure on account of entertainment. To confine the entertainment only to serving food and brewery it is something giving a very limited interpretation and scope to the term. The eatables and brewery may be food for belly but music and songs are definitely food for soul. Thus, in my view it is not correct to suggest that the expenditure was not incurred for entertainment. In this view of the matter the provision of Section 37(2A) was aptly attracted. The disallowance and its confirmation were legally correct. The assessee's appeals in these circumstances lack merit and are dismissed accordingly.
4. In the result, the appeals are dismissed.
S.K. Chander, Accountant Member
1. The Members constituting Delhi Bench 'A' heard the above appeals and have differed in opinion on the points stated below :
Whether, on the facts and in the circumstances of the case, the provisions of Section 37(2A) read with Explanation 2 of the Income-tax Act, 1961 are applicable to the amounts of Rs. 5,966 and Rs. 5,234 respectively incurred toy the assessee for the assessment years 1980-81 and 1981-82 on the cost of free tickets issued to the press and others ?
The case is, therefore, referred to the Hon'ble President of the Tribunal under Section 255(4) of the Act for necessary action that the Hon'ble President may deem fit.
G. Krishnamurthy, Sr. Vice President
1. The learned members of the Tribunal, who heard these appeals, could not agree upon the following point :
Whether, on the facts and in the circumstances of the case, the provisions of Section 37(2A) read with Explanation 2 of the Income-tax Act, 1961 are applicable to the amounts of Rs. 5,966 and Rs. 5,234 respectively incurred by the assessee for the assessment years 1980-81 and 1981-82 on the cost of free tickets issued to the press and others ?
The President of the Tribunal has, therefore, nominated me under Section 255(4) to express my opinion on this question.
2. In order to appreciate the difference of opinion, it is very necessary to notice the facts. The assessee is a private limited company carrying on, inter alia, the business of exhibition of films. In the profit and loss account that accompanied the return of income filed for these two years, there were debits of amounts of Rs. 5,966 and Rs. 5,234 respectively under the head 'Entertainment' but representing the cost of free tickets issued mostly to press people. The ITO considered this expenditure to be in the nature of entertainment expenditure and invoking the provisions of Section 3Y(2A) allowed Rs. 5,000 in each of the years and disallowed the excess which came to Rs. 966 and Rs. 234 in the assessment years 1980-81 and 1981-82 respectively. The appeals before the Commissioner (Appeals) on this issue was unsuccessful. The learned Commissioner (Appeals) was of the opinion that after the insertion of the Explanation by the Finance Act, 1983 with retrospective effect from 1-4-1976, every kind of expenditure for the purpose of entertainment had to be disallowed and this expenditure fell within that ratio.
3. Thereafter there were appeals to the Tribunal contesting the approval of these disallowances by the Commissioner (Appeals). It was contended before the Tribunal on behalf of the assessee that the expenditure though shown under the head 'Entertainment' yet it did not partake the character of entertainment because the assessee had to issue these free tickets to the press without specifying the particular individual of any particular paper to view the film for proper appreciation and some tickets were also Issued to the policemen with a view to ensure their goodwill to maintain law and order, which is often a problem in cinema halls, so that the assessee could run its business smoothly. It should not, therefore, go by the nomenclature of the head of the account but by the nature of the expenditure. It was thus submitted that the expenditure was allowable under Section 37(1) and the expenditure was not covered by the provisions of Section 37(2A). Reliance was placed upon the decision of the Delhi High Court in the case of Supreme Motors (P.) Ltd. (supra). On the other hand, the contention on behalf of the department was that in view of the ratio of the decision of the Delhi High Court in the case of Siddho Mai & Sons (supra) the expenditure was clearly disallowable and no case was made out by the assessee for the allowance of the expenditure.
4. The learned Accountant Member after analysing the purpose for which the tickets were issued free of cost held that the free tickets issued by the assessee to the members of the press was not to invite any particular individual for entertainment to see the film but it was a general opportunity provided to the press to come and witness the film so that its critical appreciation would influence the mind of the viewing public and, therefore, the cost of those free tickets could not be considered as entertainment expenditure even within the extended meaning given to it in Section 37(2A). The learned Accountant Member also took into consideration the quantum of collections realised by the assessee which were of the order of Rs. 24 lakhs for the assessment year 1980-81 and Rs. 28 lakhs for the assessment year 1981-82 and then held that the expenditure incurred by the assessee in the issue of free tickets was very paltry. The learned Accountant Member held that the decision of the Delhi High Court in the case of Supreme Motors (P.) Ltd. (supra) apply to the facts of the case but not the decision of the Delhi High Court in the case of Siddho Mai & Sons (supra). But the learned Judicial Member has taken a contrary view. According to him to infer that the issuance of free tickets did not constitute entertainment expenditure would be placing a limited interpretation and restricting the scope of the term 'entertainment expenditure' and the scope of entertainment was not only confined to serving food and brewery but it covers expenditure in connection with providing for songs, which is definitely a food for soul as much as eatables and brewery are food for belly.
5. On the facts of this case, I am inclined to agree with the view expressed by the learned Accountant Member, As rightly pointed out by the learned Accountant Member the mere nomenclature of an account does not determine the admissibility or the expenditure under the Act. It is only a matter of accounting convenience but not determinative of the character of the expenditure, e.g., if travelling expenditure is debited under the head 'Stationery' or vice versa : neither the travelling would become stationery nor stationery would become travelling. It is therefore, necessary to go by the nature of the expenditure incurred and not by the head under which it was debited in the books. There was no difference of opinion between my learned brothers as to the basic facts, namely, that these free tickets were issued not to any particular individual but to an organisation as a whole. The free tickets issued to the press inviting them to come and see the movie and to give their opinion cannot, in the circumstances of the case, be termed as expenditure within the meaning of Section 37(2A). There is no entertainment involved in issuing free tickets while there may be entertainment involved when after the issue of free tickets they were served with eatables or drinks. Just like any other person witnessing the cinema, the press people also would come and witness the cinema and give their opinion in the press. While giving their opinion in the press, they are not at all influenced by the issuance of free tickets. They are free to express their opinion independently and objectively. When such is the case, the purpose of entertainment cannot be said to have been achieved because by entertainment the assessee must secure some benefit. In this case there cannot be any benefit unless the inherent strength of the film itself brings in the viewers. Similarly issuance of free tickets to the police departmental officials cannot be also said to be any entertainment because it is a matter of common knowledge, how important it is to maintain law and order in cinema halls and how it is absolutely essential to secure the goodwill of the police people. This is not to suggest that if free tickets would not be issued, the police people will not come and perform their duties. But yet the issuance of free tickets does act as an incentive and further inducement and would convey to the audience such an impression that the police people were around and that would itself serve a warning to the mischief mongers to prevent them from taking law and order into their hands. I am not shown any provision under which the police departmental officials can enter the cinema halls at any time they please even when there was no disturbances unless free access is provided to them. Here also, therefore, there is no particular entertainment involving by issuing free tickets. This is, therefore, an expenditure incurred by the assessee out of commercial expediency and it cannot be termed as 'entertainment expenditure'. It is also to be noted that Section 37(2A) by Explanation 2 enlarged the meaning of the expression 'entertainment expenditure' by providing that it includes expenditure on provisions of hospitality of every kind by the assessee to any person, whether by way of provisions of food or beverages or 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. It is to be borne in mind that what was sought to be included in the term 'entertainment expenditure' was provisions of hospitality of every kind, either by way of provision of food or beverages or any other manner. In the context of this case, it cannot be said that the issuance of free tickets to the press and to the police is a kind of provision of hospitality. I am, therefore, inclined to agree with the view taken by the learned Accountant Member and hold that the issue of free tickets to the press and to the police departmental officials, as in this case, did not amount to entertainment expenditure within the meaning of Section 37(2A).
6. The matter can be looked at from another angle. The value of each ticket sold includes entertainment tax payable to the Government collected by the exhibitor. By the issue of these free tickebs, the assessee is forgoing the collection of entertainment tax and paying it to the Government. It can be said that only to this extent the assessee incurred a loss meaning thereby incurred of actual expenditure. This amount was certainly below the required amount of Rs. 5,000 - stipulated in the Act. Since exemption is granted up to Rs. 5,000, no disallowance on the ground that the issue of free tickets amounted to entertainment expenditure, can be justified if at all it is held that the issue of free tickets amounted to entertainment expenditure. So looked at from any angle the matter has to be decided in favour of the assessee.
7. Now the matter will go before the original Bench, which heard the appeals originally, to decide the appeals according to majority opinion.