Kerala High Court
Commissioner Of Income-Tax vs Alleppey Co. Ltd. on 22 September, 1993
Equivalent citations: [1994]207ITR598(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.S. Paripoornan, J.
1. These are connected cases. At the instance of the Revenue, the Income-tax Appellate Tribunal, Cochin Bench, has referred the following two questions of law for the decision of this court, in the above references :
"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in holding that the premium paid to the Export Credit Guarantee Corporation is eligible for weighted deduction under Section 35B ?
2. Whether the Income-tax Appellate Tribunal is justified in holding that the expenses incurred in presenting curios to foreign buyers and the expenditure incurred in providing lodging to them is not entertainment expenditure for the purpose of Section 37(2) of the Income-tax Act, 1961 ?"
2. The respondent is the same assessee in all the four cases. It is a limited-company. It is engaged in the business of manufacture of coir mats and mattings. We are concerned with the assessment years 1977-78 and 1978-79. In the course of the accounting year, the assessee had exported a large portion of their production. In respect of the expenses connected with export, the assessee had claimed weighted deduction under Section 35B of the Income-tax Act. One of the items on which such weighted deduction claimed was the premia paid to the Export Credit Guarantee Corporation. In the accounting year relevant to the assessment year 1977-78, the assessee-company had paid premia of Rs. 7,204. An amount of Rs. 11,078 was also paid through the bank. For the assessment year 1978-79, the amount paid was Rs. 34,344. The Income-tax Officer did not allow the claim for both the years. In appeal, the Commissioner of Income-tax (Appeals) took the view that ECGC premium was paid in part for guaranteeing the export credit given by the assessee to the various purchasers. The payment was not exclusively for obtaining information regarding the creditworthiness of the buyers. He held that 50 per cent. of the amount should be treated as eligible for deduction under Section 35B of the Act. The assessee as well as the Revenue appealed against the order passed by the Commissioner of Income-tax (Appeals). The Appellate Tribunal relied on the decision of the Special Bench in G and Co. v. ITO [1983] 3 ITD 566 and allowed the assessee's claim as one falling under Sub-clause (ii) of Section 35B(1)(b) of the Act. The assessee was held entitled to 100 per cent. deduction. It is this aspect which forms a common question for both the assessment years, formulated as question No. 1 by the Appellate Tribunal.
3. An additional aspect was involved for the assessment year 1978-79 and that forms the subject-matter of question No. 2 formulated by the Appellate Tribunal. In the course of the export business, foreigners representing buyers came to Kerala. During the accounting period relevant to the assessment year 1978-79, the assessee had given certain presents to those persons. A sum of Rs. 2,693 represented the cost of curios presented to the foreign guests. The assessee had also incurred a sum of Rs. 8,782 towards the lodging expenses of the buyers. The Income-tax Officer disallowed both the above items of expenditure holding that they are in the nature of entertainment expenditure. In appeal, the Commissioner of Income-tax (Appeals) held that as per the ratio of the decision of the Kerala High Court in CIT v. Veeriah Reddiar [1977] 106 ITR 610 [FB], the above two expenses should be held to be in the nature of entertainment expenditure. He rejected the assessee's claim for weighted deduction holding that such expenditure does not come under any of the clauses of Section 35B of the Act. The assessee filed an appeal before the Appellate Tribunal. Certain other allowances were allowed to the assessee by the Commissioner of Income-tax (Appeals) against which the Revenue had filed an appeal. In the appeals, in so far as it concerned the expenses incurred in presenting curios to the foreign buyers and the expenses incurred for providing lodging facilities to them, the Appellate Tribunal held that such expenditure cannot be treated as entertainment expenditure. The claim for deduction under Section 37 of the Income-tax Act on the above two items was allowed. It is thereafter, at the instance of the Revenue, that the Income-tax Appellate Tribunal has referred the above two questions of law, which arose out of its common appellate order dated September 2, 1983, in disposing of the four appeals for the two years 1977-78 and 1978-79.
4. We heard counsel for the Revenue, standing counsel for the Government of India (Taxes), Mr. P.K.R. Menon, as also counsel for the respondent/ assessee, Mr. P.R. Raman.
5. Counsel for the Revenue contended that, ordinarily, the exporters obtained information about the creditworthiness of the particular foreign buyers through their foreign agents and in this case the charges paid by the assessee to the Export Credit Guarantee Corporation to obtain information about the creditworthiness of the foreign buyer is an additional expenditure which was not authorised. Such services are usually rendered by the foreign agents for which necessary commission is paid. It was unnecessary and uncalled for to have availed of the services of the Export Credit Guarantee Corporation to obtain information about the creditworthiness of particular foreign buyers, their reputation, etc. Counsel referred to the decision of this court in CIT v. Kerala Nut Food Co. [1991] 192 ITR 585 to contend that the payment made to the Export Credit Guarantee Corporation should not have been allowed as eligible for weighted deduction under Section 35B of the Income-tax Act.
6. Regarding the curios presented to the foreign buyers and the expenses incurred for providing lodging facilities to them, the submission of the Revenue was that the expenditure on the above two accounts is in the nature of entertainment expenditure and in the light of the Full Bench decision of this court in CIT v. Veeriah Reddiar [1977] 106 ITR 610, the said expenditure should not have been allowed.
7. On the other hand, counsel for the assessee contended that the assessee-company availed of the services of the Export Credit Guarantee Corporation to obtain relevant information about the creditworthiness of the particular foreign buyers, their reputation, etc., before actually receiving the price thereof. The expenditure was incurred for obtaining information regarding the foreign market. The information was necessary to know the trustworthiness, business connection, solvency, capacity etc., to enter into the deal and so the premium paid to the Export Credit Guarantee Corporation is eligible for weighted deduction under Section 35B of the Act. Regarding the presentation of curios to the foreign buyers and the expenses incurred for providing lodging facilities to them, counsel for the assessee submitted that it cannot be considered to be entertainment expenditure and pressed into service the decision of the Madras High Court in CIT v. Prasad Process (P.) Ltd. [1983] 141 ITR 9, the decisions of the Andhra Pradesh High Court in Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514 and CIT v. Navabharat Enterprises (P.) Ltd. (No. 2) [1988] 170 ITR 332. It was submitted that in the decision in Maddi Venkataratnam and Co. Ltd.'s case [1979] 119 ITR 514, the Andhra Pradesh High Court was expressly dealing with lodging expenses and held that the expenses incurred in that connection will not be entertainment expenditure for the purpose of Section 37(2) of the Income-tax Act. Counsel for the assessee submitted that the Appellate Tribunal has allowed the deduction properly and no error of law has been committed by the Appellate Tribunal in affording the above relief to the assessee.
8. The points in controversy are two-fold. They are : (1) Whether the premium paid to the Export Credit Guarantee Corporation is eligible for weighted deduction under Section 35B of the Act, and (2) Whether the expenditure incurred by the assessee in presenting curios to the foreign buyers and expenses incurred for providing lodging facilities to them is an entertainment expenditure for the purpose of Section 37(2) of the Act and so not allowable.
9. The above aspects were considered by the Income-tax Appellate Tribunal in paragraphs 4 and 13 of the common order dated September 2, 1983. They are as follows :
"4. The next item to be considered is the expenditure incurred in paying the premium to the Export Credit Guarantee Corporation. The assessee has paid Rs. 7,204 for the assessment year 1977-78 and Rs. 34,344 for the assessment year 1978-79. The claim was rejected by the Income-tax Officer, but the Commissioner of Income-tax (Appeals) had accepted that half of this expenditure is eligible for deduction. So this issue figures both in the departmental appeals as well as the assessee's appeals. The point at issue has been considered by another Special Bench (Bombay Bench 'C') in Income-tax Appeals Nos. 3247/(Bom) of 1976 and 68/(Bom) of 1977-78 dated June 23, 1978. This is reported in selected orders of ITAT Volume I, page 142. According to the findings of the Special Bench, the assessee is entitled to 100 per cent. deduction in respect of this expenditure and following with respect the reasons given therein, we will accept the assessee's appeals on this point and reject the department's grounds.
13. For the assessment year 1978-79, the assessee had incurred an expenditure of Rs. 58,619, which had been treated as entertainment expenditure. The claim under Section 37 has to be rejected in respect of this expenditure also. An expenditure of Rs. 2,693 has been incurred by the assessee in making presents to the foreign guests. We find that this expenditure cannot be treated as entertainment and, therefore, it should be fully allowed as a deduction. Again an expenditure of Rs. 8,782 has been incurred in providing lodging facilities for the foreign buyers. This also cannot be treated as entertainment expenditure. So, the assessee is entitled to an allowance of this amount also."
10. On hearing the rival pleas urged before us, we are of the opinion that the premium paid by the assessee to the Export Credit Guarantee Corporation is eligible for weighted deduction under Section 35B of the Income-tax Act. It is seen that the services of the Corporation are taken by the assessee for obtaining information about the creditworthiness of the particular foreign buyers, their reputation and the outer limit up to which goods could be supplied to them before actually receiving the price thereof. For such services, payments were made. It is an expenditure incurred for obtaining information regarding the foreign markets. The Appellate Tribunal has adopted the reasons given by the Special Bench ([1983] 3 ITD 566) that "information regarding a market" is to be understood as information not only about the demand and supply position and the rate prevalent there but also about the buyers available there, their trustworthiness, business connections, solvency, capacity, etc., and so the assessee's claim on this aspect must be upheld as falling within Sub-clause (ii) of Section 35B(1)(b) of the Income-tax Act.
11. We see no error in the reasoning and conclusion of the Appellate Tribunal aforesaid bearing in mind the language of Section 35B(1)(a) and (b)(ii) of the Income-tax Act, 1961, which is to the following effect :
"35B. (1)(a) Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th day of February, 1968, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in Clause (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year : . . .
(b) The expenditure referred to in Clause (a) is that incurred wholly and exclusively on-- ...
(ii) obtaining information regarding markets outside India for such goods, services or facilities."
12. The Revenue has no case that the assessee did not pay the charges to the Export Credit Guarantee Corporation nor was, the information obtained from the said Corporation. The only plea was that such information was usually obtained through a foreign agent. It may be so in some cases. In this case, since factually the assessee has obtained the pertinent information about the creditworthiness of particular foreign buyers, their reputation, etc., through the Export Credit Guarantee Corporation, the premium paid to them is certainly eligible for weighted deduction under Sub-clause (ii) of Section 35B(1)(b) of the Income-tax Act. It cannot be said to be a payment made twice over for the same purpose. There is no such plea by the Revenue at any point of time. The decision relied on by the Revenue in Kerala Nut Food Co.'s case [1991] 192 ITR 585 (Ker) has no relevance to the facts of this case.
13. We, therefore, answer question No. 1 in the affirmative, in favour of the assessee and against the Revenue.
14. Counsel for the Revenue very much relied on the following passage from the Full Bench decision of this court in CIT v. Veeriah Reddiar [1977] 106 ITR 610 at page 617, to contend that the expenses incurred for presenting curios to foreign buyers and the expenses incurred for providing lodging facilities to them is an entertainment expenditure :
"...We are clearly of opinion that in interpreting the expression 'entertainment expenditure' occurring in Sub-sections (2A) and (2B) of Section 37 of the Act, the word 'entertainment' should be taken to mean hospitality of any kind extended by the assessee directly in connection with his business or profession."
15. In Veeriah Reddiar's case [1977] 106 ITR 610 (Ker) [FB], the assessee claimed deduction of expenses incurred in connection with the supply of cigarettes, coffee, meals, etc., to their customers. The question was whether the expenditure so incurred will be "entertainment expenditure" within the meaning of Section 37(2A) of the Act. The Full Bench held that the supply of cigarettes, coffee or meals to its customers by an assessee/ businessman will be extending to them "hospitality" in connection with "the business" and so "entertainment expenditure" coming under Section 37(2A) of the Income-tax Act. A Bench decision of the Bombay High Court in ACC-Vickers Babcock Ltd. v. CIT [1976] 103 ITR 321 at page 338 states that the expenditure laid out or incurred for meeting the hotel bills for lodging and boarding of guests in hotels and by way of meeting catering charges of guests is clearly in the nature of entertainment expenditure coming under Sub-section (2) of Section 37 of the Income-tax Act. On the other hand, a Bench decision of the Andhra Pradesh High Court in Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514 has held that the expenditure incurred for providing boarding and lodging facilities to foreign customers visiting in connection with business will not amount to "entertainment expenditure" under Section 37(2) of the Income-tax Act. According to the Revenue, the broad observations of the Full Bench decision of this court in CIT v. Veeriah Reddiar [1977] 106 ITR 610, at p. 617, as also the decision of the Bombay High Court in ACC-Vickers Babcock Ltd. v. CIT [1976] 103 ITR 321, at p. 358, should govern the issue and the expenses incurred for presenting curios to the foreign buyers and for providing lodging facilities to them is entertainment expenditure for the purpose of Section 37(2) of the Act.
16. On the other hand, counsel for the assessee pressed for acceptance the decision of the Andhra Pradesh High Court in Maddi Venkataratnam and Co.'s case [1979] 119 ITR 514 which is in point and submitted that the ratio of the Full Bench in Veeriah Reddiar's case [1977] 106 ITR 610 (Ker) should be confined to the expenses incurred in connection with the supply of cigarettes, coffee and meals to their customers and not to other items or other expenses.
17. In evaluating the above rival pleas, we have to bear in mind Section 37(2A) and also the newly inserted Explanation 2 to Section 37(2A) by the Finance Act of 1983 with retrospective effect from April 1, 1976 (by way of amendment). Explanation 2 aforesaid which had retrospective effect from April 1, 1976, is in the following terms :
"Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of this sub-section and Sub-section (2B), as it stood before the 1st day of April, 1977, 'entertainment expenditure' includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work."
18. The Notes on Clauses of the Finance Act, 1983, explains the object of the amendment to the following effect (see [1983] 140 ITR (St.) 124):
"Sub-clause (a)(ii) seeks to add a new Explanation to clarify that 'entertainment expenditure' includes expenditure on hospitality of every kind whether provided under any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided to the employees in their place of work.
This amendment will take effect retrospectively from April 1, 1976."
["Current Central Legislation, Part I, April, 1983, page 90.]."
19. The above Explanation will apply in relation to the assessment year 1976-77 and subsequent years.
20. We are inclined to take the view that, by inserting an inclusive definition as Explanation 2 to the words "entertainment expenditure", the Legislature has in effect accepted the statement of the law laid down by the Full Bench of this court in Veeriah Reddiar's case [1977] 106 ITR 610, at p. 617. In that view, any expenditure incurred for extending hospitality of any kind whatsoever will be taken in by Explanation 2 to Section 37(2A) of the Income-tax Act. The expenses cannot be confined to supply of cigarettes, coffee, meals, etc., but will take within its fold any kind of hospitality extended to the customers. In this perspective, we are of the view that the expenses incurred for presenting curios to foreign buyers and expenses incurred for providing lodging facilities to them will be "entertainment expenditure" for the purpose of Section 37(2) of the Income-tax Act, 1961. The Appellate Tribunal has failed to advert to or discuss the scope and effect of Section 37(2), 37(2A) along with Explanation 2, though the amendment to the Finance Act, 1983, which had retrospective effect from April 1, 1976, had come into force when the Appellate Tribunal decided the appeals on September 2, 1983. The order of the Appellate Tribunal on this aspect is of a very general nature and without reference to the relevant provisions of the statute, and in particular, Explanation 2 to Section 37(2A), which was introduced by the Finance Act, 1983, with retrospective effect from April 1, 1976. Non-advertence to the above statutory provision had led to the error committed by the Appellate Tribunal in holding that in making presents to the foreign guests or providing lodging facilities to them, the assessee cannot be said to have incurred any "entertainment expenditure". The conclusion of the Appellate Tribunal is a clear error in law. The decisions in ACC-Vickers Babcock Ltd. v. CIT [1976] 103 ITR 321 (Bom) and Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514 (AP) were rendered before the amendment and so inapplicable to the instant situation.
21. We, therefore, hold that the expenses incurred for presenting curios to the foreign buyers and for providing lodging facilities to them is "entertainment expenditure" for the purpose of Section 37(2) of the Income-tax Act, 1961. We answer question No. 2 in the negative, against the assessee and in favour of the Revenue.
22. The references are disposed of as above.
23. A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.