COMMISSIONER OF INCOME-TAX VS SUNDARAM CLAYTON LTD.
1998 P T D 3455
[226 I T R 81]
[Madras High Court (India)]
Before K.A. Thantkkachalam and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
versus
SUNDARAM CLAYTON LTD.
Tax Cases Nos. 1091 and 1092 of 1984 (References Nos.948 and 949. of 1984). decided on 22/07/1996.
(a) Income-tax---
----Business expenditure---Disallowance---Entertainment expenditure---Tips paid in hotels by employees of assessee while on tour ---Deductible-- Expenses on photographs of manufactured goods for advertisement and during visit of foreign dignitaries---Deductible---Guest house, mess expenses and expenses on cigarettes---Expenditure on customers---Is entertainment expenditure---Subject to disallowance---Indian Income Tax Act, 1961, S.37(2-A).
(b) Income-tax---
Export markets development allowance---Weighted deduction---Company in which public are substantially merited---Private company deemed public company under S.43-A of Companies Act---Not a company in which public are substantially interested---Not entitled to weighted deduction at higher rate---Indian Income Tax Act, 1961, Ss.2(18)(b) & 35-B---Indian Companies Act, 1956, S.43-A.
For the assessment years 1975-76 and 1979-80, the Tribunal confirmed orders passed by the Commissioner of Income-tax (Appeals) following the Tribunal's orders in the assessee's case for earlier years, holding that by virtue of section 43-A of the Companies Act, 1956, the assessee-company was not a private company, that the articles of association of the assessee-company provided for free transferability of shares and that only 43.39 percent. of the voting power was held by three companies of the group, that, therefore, the assessee-company was a company in which the public were substantially interested, and directing the grant of weighted deduction at the higher rate of 1-1/2 times the expenditure under section 35-B of the Income Tax Act, 1961. On a reference:
Held, that the assessee could not be treated as a company in which the public were substantially interested within the meaning of section 2(18)(b) of the Act, and was, therefore. not entitled to weighted deduction of 1-1/2 times the expenditure, but only at 1-1/3rd times the expenditure.
CIT v. Lucas TVS Ltd. (1995) 214 ITR 700 (Mad.) fol.
For the assessment year 1979-80, the Tribunal allowed deduction of a sum of Rs.2,09,269 which had been disallowed under section 37(2-A) of the Income Tax Act, 1961, by the Income-tax Officer. The expenditure was incurred on guest house and mess account, cigarettes for customers incidental expenses (tips, etc.) and photographs, and the assessee's claim was that it was incurred in connection with the visit of dignitaries, business customers and delegates. On a reference:
Held, (i) that when the assessee's sales executives toured various stations and stayed in hotels, tips were paid to the waiters in the hotels. Therefore, it was not an expenditure incurred on any foreign customers, but in relation to the assessee's own employees. The photographs were taken when the foreign dignitaries visited the assessee-company. Photographs were also taken of the manufactured goods of the company for the purpose of advertisement in various media. Therefore, this item of expenditure would also not fall under the category of entertainment expenditure. These two items of expenditure were allowable as deduction; .
(ii) that, however, the two items, guest house and mess account and cigarettes for customers. definitely fell under the category of entertainment expenditure. If the expenditure was incurred not on the staff of the assessee company, but on the customers, it had to be treated as entertainment expenditure and could be allowed only in accordance with section 37(2-A) of the Act.
CIT v. Patel Brothers & Co. Ltd. (1995) 215 ITR 165 (SC) rel.
CIT v. Khem Chand Bahadur Chand (1981) 131 ITR 336 (P&H); CIT v. Simpson & Co. (1980) 122 ITR 283 (Mad.) and CIT v. Karuppuswamy Nadar & Sons (1979) 120 ITR 140 (Mad.) ref.
C.V. Rajan for the Commissioner.
P.P.S. Janarthana Raja for the Assessee.
JUDGMENT
K A. THANIKKACHALAM, J.---At the instance of the Department, the Tribunal has referred the following questions for the opinion of this Court under section 256(1) of the Income 71ax Act, 1961, fog the assessment years 1975-76 and 1979-80:
Assessment year 1975-76:
"(i) Whether, on the facts and in the circumstances of the case, and having regard to the provisions of section 2(18)(b) of the Income Tax Act, 1961, the Appellate Tribunal was right in holding that the assessee should be treated as a company in which the public are substantially interested?
(ii) Whether, the Appellate Tribunal's view that since the assessee is a public company under section 43-A of the Companies Act, 1956, the assessee should be treated as a company in which the public are substantially interested under section 2(18)(b) of the Income Tax Act, 1961, is sustainable in law?
(iii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the weighted deduction under section 35-B should be allowed at 1-1/2 times and not at 1-1/3rd times as allowed by the Income-tax Officer?"
Assessment year 1979-80:
(i) Whether, on the facts and in the circumstances of the case, and having regard to the provisions of section 2(18)(b) of the Income Tax Act, 1961, the Appellate Tribunal was right in holding that the assessee should be treated as a company in which the public are substantially interested?
(ii) Whether the Appellate Tribunal's view that since the assessee is a public company under section 43-A of the Companies Act, 1956, the assessee should be treated as a company in which the public are substantially interested under section 2(18)(b) of the Income. Tax Act, 1961, is sustainable in law?
(iii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that weighted deduction under section 35-B should be allowed at 1-1/2 times o1' the expenditure and not 1-1/3rd times as allowed by the Income-tax Officer?
(iv)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the entertainment expenditure of Rs.2,09,269 disallowed under section 37(2-A) of the Act?"
The assessee is a company incorporated on October 5, 1962, and carries on business in the manufacture of air compressor equipment for automobile vehicles. For the assessment years 1975-76 and 1979-80, the accounting years ended on May 31, 1974, and May 31, 1978, respectively. The assessee claimed its status as a company in which the public are substantially interested for the reason that it satisfied all the conditions mentioned in section 2(18)(b)(B) of the Income-tax Act. The Income-tax Officer held that the first condition to be satisfied was that the company was not a private company as defined in section 3(l)(iii) of the Companies Act, 1956, and the essential ingredients being present in the articles of association, the assessee-company was a private company. According to the Income-tax Officer, when once the prior condition under section 2(18)(b) of the Act was not satisfied, it was needless to look into the question whether all the other conditions mentioned in section 2(18)(b)(B) of the Act were satisfied at all. Therefore, the Income-tax Officer has adopted the status of the assessee as a company in which the public were not substantially interested and consequently allowed weighted deduction under section 35-B only at one and one-third times the expenditure as against 1-1/2 times claimed by the assessee for these years. These questions came up for consideration in both the assessment years.
Another point which is relevant for the assessment year 1979-80 only relates to the disallowance of entertainment expenditure of Rs.2,09,269. Out of, general charges claimed Rs.3,59,395, a sum of Rs.2,09,268 consisted of expenses incurred in connection with the visit of dignitaries, business customers and delegates, but the assessee had not treated it as entertainment expenditure. After considering the break-up details and the nature of expenditure, the Income-tax Officer was of the opinion that the expenditure did not represent customary hospitality. Following the decision in CIT v. Khem Chand Bahadur Chand (1981) 131 ITR 336 (P & H), the Income-tax Officer treated the expenditure as part of entertainment expenditure in terms of section 37(2-A) of the Act.
On appeal, the Commissioner of Income-tax (Appeals), following the decision of the Tribunal in the cases of the same assessee in I.T.A. Nos.947 to 950/Mds. of 1980 dated April 22, 1982, for the earlier years holding that the assessee-company was not a private company in view of the provisions contained in section 43-A of the Companies Act and the articles of association providing for free transferability of shares, and on his findings, only 43.39 per cent. of the voting power was held by three companies of the Sundaram group, held that the assessee-company was one in which the public were substantially interested. Consequently, he directed the Inspecting Assistant Commissioner make necessary changes by treating the assessee as a company in which the public are substantially interested. He has also deleted the disallowance of Rs.2,09,269 holding that it is not an entertainment expenditure.
On appeal by the Revenue, the Tribunal upheld the orders of the Commissioner of Income-tax (Appeals) as his decision was in accordance with the decisions of the Tribunal in the assessee's own case for the assessment years 1970-71, 1973-74, 1976-77 and 1977-78 and also in accordance with the decisions of the Madras High Court in the cases of CIT v Simpson & Co. (1980) 122 ITR 283 and in CIT v. Karuppuswamy Nadar & Sons (1979) 120 ITR 140.
So far as the first three questions are concerned, they relate to the assessment years 1975-76 and 1979-80. The point for consideration is whether the assessee is a public company under section 43-A of the Companies Act, 1956, and the assessee should be treated as a company in which the public are substantially interested under section 2(18)(b) of the income Tax Act 1961, and, therefore, the assessee is entitled to weighted deduction under section 35-B to the extent of 1-1/2 times or 1-1/3rd times. In view of the fact that under section 43-A of the Companies Act and the articles of association providing for free transferability of shares and 43.39 per cent. voting power was held by three companies of the Sundaram group, he held that the assessee-company was one in which the public were substantially interested and, therefore, the assessee is entitled to weighted deduction at 1-1/2 times. But, on the other hand, in CIT v. Lucas TVS Ltd. (1995) 214 ITR 700, this Court held that the assessee-company was one in which the public are not substantially interested and, therefore, the assessee-company is entitled to 1-1/3rd per cent. in the matter of granting weighted deduction under section 35-B of the Act. In view of the foregoing reasons, the Tribunal was not correct in holding that the assessee is a company in which the public are substantially interested and, therefore, the assessee is entitled to weighted deduction under section 35-B of the Act at the rate of 1-1/2 per cent. In that view of the matter, we answer the first three questions preferred in the assessment year 1979-80 and all the questions relating to the assessment year 1975-76 in the negative and in favour of the Department.
So far as the fourth question is concerned, it relates to the assessment year 1979-80. The point for consideration is whether the entertainment expenditure of Rs.2,09,269 is allowable as deduction under section 37(2-A) of the Income Tax Act, 1961.
The Income-tax Officer disallowed a sum of Rs.2,09,269 under the Provisions of section 37(2-A) of the Act. The details of the expenditure areas under:
Rs.
| Guest and mess account | 1,79,670 |
| Cigarettes for customers | 6,060 |
| Incidental expenses (tips, etc.) | 16,580 |
| Photos | 6,959 |
| Total | 2 09,269 |
The entire expenditure, according to the assessee, was connected with the visit of dignitaries, business customers and delegates. The Assessing Officer held that the above items of expenditure would not fall under the category of customary hospitality like tea or coffee expenses given to the customers. He relied on the decision in CIT v. Khem Chand Bahadur Chand (1981) 131 ITR 336 (P&H), for holding that the expenditure is lavish. Further, according to the Assessing Officer, the incidental expenses described as tips, etc., are actually expenditure of sales executive who had toured various stations and stayed in hotels. The expenditure on photos are those that have been incurred on taking photos of visiting dignitaries as also the products manufactured by the company for the purposes of advertisement m various media. Therefore, in his opinion these two items of expenditure would not take the character of entertainment expenditure, but would be allowable as expenditure wholly incurred for the purpose of business. The guest and mess account comprises the value of coupons issued to customers to enable them to participate in tea and tiffin provided by the industrial canteen run by the assessee-company. The cigarettes are also supplied to the customers who are in the habit of smoking. These expenses, therefore, are not strictly in the nature of advertisement expenditure and would qualify as deduction in view of the decision of the Madras High Court in the case of CIT v. Karuppuswamy Nadar & Sons ((979) 120 ITR 140. In the result, the` entire expenditure of Rs.2,09.269 disallowed by the Inspecting Assistant Commissioner was allowed as deduction by the Commissioner of Income tax. On appeal the Appellate Tribunal confirmed the order passed by the Commissioner of Income-tax.
Before us, learned counsel appearing for the assessee submitted that the incidental expenditure like tips, etc., and the photos will not come under the category of entertainment expenditure, because these expenditures were incurred for sales promotion According to learned counsel, tips were given to the waiters and it was not incurred on the foreign customers and on dignitaries. In so far as photos are concerned, photos are taken of the goods manufactured by the company for advertisement. The photos are also taken when the foreign dignitaries were visiting the assessee-company, and therefore, it would also not fall under the category of entertainment expenditure. We have also heard learned standing counsel appearing for the Department He contended that these two items of expenditure are also entertainment expenditure not incurred for the staff of the assessee-company, but incurred for the foreign customers. Therefore, according to learned standing counsel, these amounts are also included as entertainment expenditure and, therefore, they should be disallowed.
It remains to be seen that when the assessee's sales executive toured various stations and stayed in hotels, the tips were paid to the waiters in the hotel. Therefore, it is not an expenditure incurred on any foreign customers, but the expenditure is involved in relation to their own employees. The photographs were taken when the foreign dignitaries visited the company. Photograph is also taken of the manufactured goods of the company for the purpose of advertisement in various media. Therefore, this item of expenditure would also not fall under the category of entertainment expenditure. Therefore, we are agreeable with the Tribunal in allowing these two expenditures, namely incidental expenditure like tips, etc., of Rs.16,580 and the expenditure for photographs amounting to Rs.6,959 that they are not entertainment expenditure and, therefore, they are allowed under section 37(1) of the Act since they are incurred wholly and exclusively for the purpose of business. In so far as the other two items like guest house and mess account and cigarettes for customers are concerned, they definitely fall under the category of entertainment expenditure is incurred not on the staff of the assessee-company, but on the customers, it will have to be treated as entertainment expenditure and it is allowed as per section 37(2-A) of the Act. This is the view taken by the Supreme Court in CIT v. Patel Brothers & Co. Ltd. (1995) 215 ITH 165. Accordingly, the order passed by the Tribunal is partly correct in allowing the expenditure of Rs.16,580 and Rs.6,959 only and the Tribunal's order is not correct in allowing Rs.1,79,670 and Rs.6,060. Accordingly, we answer the question referred to us in the affirmative and against the Department, in so far as allowing of Rs.16,580 and Rs.6,959 in so far as allowing of Rs.1,79,670 and Rs.6,060 are concerned, we answer the question in the negative and in favour of the Department. No costs.
M.B.A./1837/FOrder accordingly.