RENUSAGAR POWER CO. LTD. VS COMMISSIONER OF INCOME-TAX (NO. L), 2000 PTD-ALLAHABAD-HIGH-COURT-INDIA 2269 (1997)

Income-tax---

----Business expenditure---Disallowance---Entertainment expenditure for assessment year 1974-75---No finding regarding nature of expenditure-- Matter remanded---Indian Income Tax Act, 1961, S.37.

The decision in Brij Raman Dass & Sons v. CIT (1976) 104 ITR 541 (All.) has been overruled by the Supreme Court in CIT v. Patel Brothers & Co. Ltd. (1995) 215 ITR 165. The Supreme Court has held that the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity would not be "entertainment expenditure" and such an expenditure would be permissible deduction under section 37(2A) of the Income Tax Act, 1961, as it stood prior to April 1, 1976, when Explanation 2 was brought on the statute book by retrospective amendment made in the year 1983:

Held, that from a perusal of the order of the Tribunal it was apparent that there was no discussion about the nature of entertainment on which the amount in dispute was incurred by the assessee for the assessment year 1974-75. There was no discussion either in the assessment order or in the order passed by the Commissioner of Income-tax (Appeals). In the absence of a finding about the nature of entertainment expenses, it was difficult to decide whether the guest house expenses, general charges and entertainment expenses were deductible.

Brij Raman Dass & Sons v. CIT (1976) 104 ITR 541 (All.) and CIT v. Patel Brothers & Co. Ltd. (1995) 215 ITR 165 (SC) ref.

JUDGMENT

At the instance of the assessee, the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred under section 256(1) of the Income Tax Act, 1961, the following question of law for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the disallowance of Rs.5,975, Rs.9,750 and Rs.4,506, being the guest house expenses, general charges and entertainment expenses, respectively?"

The dispute pertains to the assessment year 1974-75. At the outset we may mention that out of the three amounts mentioned in the question, the amount of Rs.9,750 had not been dealt with by the Tribunal in its order passed in the appeal given rise to this reference. Accordingly, we will refrain from dealing with that amount inasmuch as that part of the question does not arise out of the order of the Tribunal.

Now coming to the other two amounts it appears that the assessee had claimed an amount of Rs.10,975 .as guest house expenses and Rs.4,506 as entertainment expenditure. Both the amounts were disallowed and added back to the income of the assessee by the Income-tax Officer with the remarks "being in the nature of entertainment expenses to be disallowed". When the matter came up for consideration in appeal before the Commissioner of Income-tax (Appeals), he sustained the addition of Rs.4,506 by saying that he was completely fettered by a decision of this Court in the case of Grij Raman bas & Sons v. CIT (1976) 104 ITR 541. As regards the other amount of Rs.10,975 the addition was sustained to the extent of Rs.5,975 only by an estimate on the view that an amount to the extent of Rs.5,000 must have been incurred in relation to the employees of the company and consultants who may be occupying the guest house occasionally and, as such, the expenditure to that extent was permissible under the head "Staff welfare expenditure". The assessee carried the matter further to the Income-tax Appellate Tribunal where the appellate order was affirmed on the finding that the decision of this Court in Brij Raman Dass (1976) 104 ITR 541 was binding on the Tribunal though a contrary decision of another High Court was available on which the reliance was placed by the assessee.

We have heard learned counsel for the parties.

The decision in Brij Raman Dass (1976) 104 ITR 541 (All.), has been overruled by the Supreme Court in CIT v. Patel Brothers & Co. Ltd. (1995) 215 ITR 165. The Supreme Court has held that the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity would not be "entertainment, expenditure" and such an expenditure would be permissible deduction under section 37(2A) of the Income Tax Act, 1961, as it stood prior to April 1, 1976, when Explana tion 2 was brought on the statute book by retrospective amendment made in the year 1983 of subsection (2A) of section 37 of the Income-tax Act.

From a perusal of the order of the Tribunal it is apparent that there is no discussion about the nature of entertainment on which the amount in dispute is incurred by the assessee. For that matter, there is no discussion either in the assessment order or in the order passed by the Commissioner of Income-tax (Appeals). In the absence of a finding about the nature of entertainment expenses, it is difficult to decide the question referred to this Court one way or the other. The legal position has been settled by the Supreme Court in the case of Patel Brother (1995) 215 ITR 165. Whether the entertainment expenses- were incurred to meet the bare necessity or an ordinary hospitality and, therefore, such expenses were excluded from the expression "entertainment" as held by the Supreme Court, would only be decided when a proper finding of fact has been recorded by a competent authority entitled to go into this question.

In these circumstances, the question referred to this Court is returned back to the Tribunal who shall decide the question arising in the case afresh in the light of the observations made in this judgment and the law laid down by the Supreme Court and in accordance with law. It is ordered accordingly.

M.B.A./4106/FCOrder accordingly.