Punjab-Haryana High Court
H.M.M. Limited vs Commissioner Of Income-Tax on 24 July, 1997
Equivalent citations: [1998]231ITR726(P&H)
Author: Ashok Bhan
Bench: Ashok Bhan
JUDGMENT N.K. Agrawal, J.
1. The following questions of law have been referred at the instance of the assessee by the Income-tax Appellate Tribunal (for short, "the Tribunal") under Section 256(1) of the Income-tax Act, 1961 (for short, "the Act") :
"1. Whether the Income-tax Appellate Tribunal has been right in law in holding that the assessee was not entitled to deduction of surtax payable by it in pursuance of the Companies (Profits) Surtax Act, 1964, in arriving at the taxable income ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal rightly upheld the disallowance of the expenditure of Rs. 20,000 in respect of conference expenses ?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that no weighted deduction under Section 35B is available in respect of freight and other miscellaneous expenses amounting to Rs. 1,17,569 ?"
2. The assessee-company, H. M. M. Limited, Nabha, was engaged in the manufacture and sale of milk products. The assessee filed a return of income declaring income for the assessment year 1976-77 (accounting period ending on March 31, 1976) at Rs. 2,93,60,200.
Question No. 1.--The assessee claimed deduction of the amount paid as surtax. The Assessing Officer, following his order for the preceding assessment year, held that surtax was not an admissible deduction under the Act. The Appellate Assistant Commissioner as well as the Tribunal rejected the assessee's appeal, taking the view that the amount of surtax payable by the assessee under the Companies (Profits) Surtax Act, 1964, was not allowable as a deduction.
A Division Bench of this court examined a similar question about the deductibility of surtax in Highway Cycle Industries Ltd. v. CIT [1989] 178 ITR 601 (P & H). This court took the view that surtax was not deductible under the Act.
Since the matter has been settled after examination, the question is answered in the affirmative, i.e., against the assessee and in favour of the Department.
Question No. 3--The assessee claimed weighted deduction under Section 35B of the Act on the amount equivalent to 50 per cent, of the expenditure, amounting to Rs. 1,38,619. The Assessing Officer noticed that this expenditure included freight expenses of Rs. 1,11,476 and miscellaneous expenses of Rs. 3,231 and Rs. 2,862. The Assessing Officer declined to allow weighted deduction in respect of the freight charges on the ground that these had been specifically excluded from Sub-clause (iii) of Clause (b) of Section 35B(1). Apart from such specific exclusion, all expenses incurred in India were also outside the purview of Sub-clause (iii).
3. In appeal by the assessee, the Appellate Assistant Commissioner as well as the Tribunal rejected the plea of the assessee.
4. It would be relevant to read Sub-clauses (iii) and (viii) of Section 35B(1)(b). These Sub-clauses read as under :
"(b) the expenditure referred to in Clause (a) is that incurred wholly and exclusively on-- . . .
(iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit where such expenditure is incurred before the 1st day of April, 1978 ; . . .
(viii) performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities ; . . ."
5. It would be, thus, apparent that Sub-clause (iii) permitted weighted deduction on expenditure incurred outside India wholly and exclusively on distribution, supply or provision of goods, services or facilities. It specifically excluded expenditure incurred outside India or in India on the carriage of goods to their destination outside India or on the insurance of such goods while in transit. Clause (viii) relates to expenditure incurred wholly and exclusively on the performance of services outside India in the execution of a contract for the supply of goods, services or facilities outside India.
6. The freight charges paid by the assessee are, thus, not qualified for the purposes of weighted deduction under Sub-clause (iii). These expenditures were also not covered under Sub-clause (viii) as these were not incurred on the performance of services outside India in the execution of a contract for the supply of goods outside India. These were expenditures on services performed in India.
7. Shri R. P. Sawhney, learned senior counsel for the Revenue, has argued that internal freight charges are neither admissible under Sub-clause (iii) nor under Sub-clause (viii) in the light of the decision of this court in CIT v. Roadmaster Industries of India Pvt. Ltd. [1993] 202 ITR 968. This view was followed by this court in CIT v. Indo Asian Switch-Gears (P.) Ltd. [1996] 222 ITR 772.
8. There is nothing on record to show that the expenditure incurred by the assessee related to the sea freight charges in the execution of a contract for the supply of goods. Therefore, Sub-clause (viii) of Section 35B(1)(b) is also not attracted.
Question No. 3 is answered in the affirmative, i.e., against the assessee and in favour of the Department.
Question No. 2-- During the assessment proceedings, the Assessing Officer noticed that the assessee had incurred expenditure on dinner at Rs. 27,297, on liquor (wine and whisky) at Rs. 6,141 and on snacks at Rs. 10,832. The entire expenditure of Rs. 44,270 had been incurred during a conference held by the assessee-company at Goa from March 21, 1976, to March 25, 1976. Out of the expenditure on dinner, a sum of Rs. 4,594 was spent on one dinner arranged for 132 persons on March 22, 1976, and another sum of Rs. 10,536 was paid for a dinner hosted on March 25, 1976, which was attended by 125 guests. The Assessing Officer took the view that such a heavy expenditure in five days was not a normal business expenditure but was a lavish one, partaking of the character of entertainment.
9. The assessee took the plea that no daily allowance was paid to the employees who had attended the conference and, therefore, the expenditure should be allowed. The Assessing Officer, however, did not agree with the assessee and disallowed the expenditure amounting to Rs. 44,270 under Section 37(2A) read with Section 37(2B) of the Act.
10. The assessee went in appeal before the Appellate Assistant Commissioner of Income-tax with the plea that an expenditure of Rs. 33,438 was incurred on holding the annual sales conference at Goa and was incidental to its business. Similarly, expenditure of Rs. 10,832 was incurred at other places. The Appellate Assistant Commissioner, keeping in view similar disallowance made in the preceding assessment year (1975-76), reduced the disallowance to Rs. 20,000. The remaining expenditure was allowed.
11. The assessee went in further appeal before the Tribunal against disallowance of Rs. 20,000 and the Revenue also filed an appeal, feeling aggrieved by the part relief granted by the Appellate Assistant Commissioner of Income-tax. The Tribunal referred to the disallowance of Rs.10,000 made in the preceding assessment year and, after considering the nature of the expenditure, upheld the disallowance at Rs. 20,000.
12. Shri A. K. Mittal, learned counsel for the assessee, has argued that holding of a "sales promotion conference" was a part of the business activity and, therefore, could not be treated to be in the nature of entertainment. At a place like Goa, serving of liquor was necessary as the guests and employees expected such a hospitality. It is argued by Shri Mittal that every act of entertainment included hospitality also but every hospitality would not mean entertainment. Hospitality shown on account of obligation in business arising out of an express or implied contract or a longstanding trade custom did not amount to entertainment. Custom could not be treated to be entertainment. Holding of the conference was necessary for the purposes of the assessee's business.
13. Shri Mittal has placed reliance on a decision of the Gujarat High Court in CIT v. Paid Brothers and Company Ltd. [1977] 106 ITR 424, in support of the plea that expenditure incurred by the assessee in providing meals to its workers as well as to the workers of its associate firm, was not in the nature of expenditure on entertainment. It was pleaded by the assessee in that case that it was customary out of commercial expediency to provide meals to the farmer customers. The assessee had claimed kitchen expenses for the assessment years 1969-70 to 1971-72. Part of the expenditure was disallowed by the Income-tax Officer on the ground that the expenses incurred on account of providing meals to the farmer customers were in the nature of entertainment. It was held that the expenditure was allowable, being not in the nature of entertainment expenses.
14. Reliance has also been placed by Shri Mittal, learned counsel for the assessee, on a decision of the Karnataka High Court in Addl. CIT v. Bangalore Turf Club Ltd. [1980] 126 ITR 430. That was a case where the assessee-company, which conducted horse-races, had incurred expenditure under the head "Expenditure towards the supply of refreshments, lunch, liquors, etc., in the business meetings of the stewards and of the members of the managing committee as also of the general body". It was held that, since no sitting fees were provided to the members or office bearers attending the meetings, the expenses incurred were in the nature of administrative or business expenditure and would have no taint of expenditure in the nature of entertainment. Therefore, expenditures for the assessment years 1968-69, 1969-70 and 1970-71 were held to be allowable on the ground that- these were incurred as of necessity and constituted part of the expenses for the holding of the business meetings.
15. Shri Mittal has also argued that this court in CIT v. Indo Asian Switch-Gears (P.) Ltd. [1996] 222 ITR 772, has also examined a question relating to expenditure incurred in providing food and light refreshments to trainees and engineers in the assessment years 1975-76, 1976-77 and 1977-78. The assessee had arranged seminars and conferences, wherein trainees and engineers participated. It was held by this court that the expenditure was allowable and was not in the nature of entertainment expenses under Section 37(2A) of the Act.
16. Shri R.P. Sawhney, learned senior counsel for the Department, has, at the outset, argued that Explanation 2 was inserted by Act 11 of 1983 in Sub-section (2A) of Section 37 of the Act with retrospective effect from April 1, 1976. After the insertion of that Explanation, the scope and ambit of "entertainment expenditure" stood enlarged. It also included expenditure on provision of hospitality of every kind by the assessee to any person. Therefore, after April 1, 1976, no expenditure incurred on the provision of hospitality of any kind to any person could be allowed in view of Explanation 2. Prior to April 1, 1976, the term "entertainment expenditure" might have been given a limited meaning and expenditure on hospitality may be excluded therefrom but, after April 1, 1976, even the expenditure on hospitality is not permissible inasmuch as it has been made a part of the entertainment expenditure.
17. Shri Sawhney has argued that the Supreme Court in CIT v. Patel Brothers and Company Ltd. [1995] 215 ITR 165, has examined the decision of the Gujarat High Court in Patel Brothers and Company's case [1977] 106 ITR 424, and has observed that the wide observations and the elaborate guidelines, given in the Gujarat High Court's decision, were in excess of the broad tests. Though the decision of the Gujarat High Court was affirmed, the wide observations, made therein, were not approved. The Supreme Court referred, with approval, to the following observations of the Delhi High Court in CIT v. Rajasthan Mercantile Company Limited [1995] 211 ITR 400, 416 :
"The declaration and the clarification involved in Explanation 2, are only for the purposes of assessments with effect from April 1, 1976. This provision widens the concept of 'entertainment expenditure' by including in its scope such of the expenditure which are otherwise traditionally understood as routine business expenditure incurred in connection with "business hospitality'. Therefore, the widened meaning cannot be extended to past periods when the amended Explanation 2 was not in operation."
18. The argument of Shri A. K. Mittal, learned counsel for the assessee, that expenditure incurred on the .conference should be allowed in full, is, therefore, not acceptable in the light of the amendment made in Section 37(2A) of the Act with effect from April 1, 1976. The view taken by this court in Indo Asian Switch-Gears (P.) Ltd.'s case [1996] 222 ITR 772 (P & H) would not permit the assessee in the present case to claim expenditure without looking to the peculiar facts in Indo Asian Switch-Gears (P.) Ltd.'s case [1996] 222 ITR 772 (P & H). It was noticed in Indo Asian Switch-Gears (P.) Ltd.'s case [1996] 222 ITR 772 (P & H) that expenditure had been incurred on providing food and light refreshments to the trainees and engineers. The facts of each case had bearing on the question of allow ability of expenditure. It may be noticed that, in Explanation 2 also, there is a provision for allowing expenditure on food or beverages provided by the assessee to its employees in office, factory or other places of work. It will, therefore, be necessary to examine the expenditure in each case so as to ascertain if such expenditure could be allowed within the ambit of the exception contained in the said Explanation. If the expenditure incurred on hospitality also included expenditure on food or beverages provided to the employees, the entire expenditure on hospitality shall not be disallowed. In this light, the decision of this court in Indo Asian Switch-Gears (P.) Ltd.'s case [1996] 222 ITR 772, does not entitle the assessee in the present case before us to claim deduction of the entire expenditure inasmuch as the facts in Indo Asian Switch-Gears (P.) Ltd.'s case [1996] 222 ITR 772 (P & H) are distinguishable.
19. As has been seen earlier, total expenditure incurred by the assessee on the conference held at Goa amounted to Rs. 44,270. Out of the aforesaid expenditure, a sum of Rs. 20,000 only was disallowed. It would thus appear that the entire expenditure has not been treated to be in the nature of "entertainment expenditure". Explanation 2 under Sub-section (2A) of Section 37 of the Act permits disallowance of the expenditure on hospitality but carves out an exception in respect of expenditure incurred on food or beverages provided to the employees. Therefore, the disallowance of Rs. 20,000 has to be upheld in view of Explanation 2.
20. Question No. 2 is answered in the affirmative, i.e., against the assessee and in favour of the Department.