(a) Income-tax---

----Business expenditure---Entertainment expenditure---Expenditure in the nature of entertainment expenditure incurred within India on provision of hospitality whether by way-of provision of food or beverages or in any other manner---Not allowable deduction---Expenditure incurred on food or beverages provided by assessee to employees in office, factory or place of work---Allowable deduction---Expenditure incurred on refreshments, etc.-- Tribunal holding that expenditure not to be disallowed under S.37(2b)-- Amount required to 'be allowed as expenditure on providing food, etc., to its employees to be separately worked out---Rest of amount included in the definition of entertainment expenditure to be disallowed---Indian Income Tax Act, 1961, S.37(2A), Expln.2.

Income- Tax---

----Capital or revenue expenditure---Trade mark---Payments made for use of trade mark---Revenue expenditure---Indian Income Tax Act, 1961, S.37.

In the relevant previous year relating to the assessment year 1977-78, the assessee claimed deduction of Rs.9,675 as expenditure incurred on refreshments etc. The Income-tax Officer disallowed the claim for deduction. On appeal, the Commissioner of Income-tax (Appeals) allowed the claim for deduction. On further appeal, the Tribunal affirmed the order of the Commissioner of Income-tax (Appeals). On a reference:

Held, that in view of Explanation 2 inserted in section 37(2A) of the Income Tax Act, 1961, with effect from April 1, 1976, an enlarged meaning is given to the words "entertainment expenditure" for the purposes of the Act, with effect from April 1, 1976. Therefore, no allowance could be made in respect of expenditure in the nature of entertainment expenditure incurred within India by an assessee at the relevant time 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. However, expenditure incurred on food or beverages provided by the assessee to its employees in the office, factory or other place of their work, was excluded and, therefore, it could be allowed. In this view of the matter, the amount which was required to be allowed in so far as the expenditure on providing food, etc., to its employees was concerned, would have to be separately worked out from the total -amount of deduction Rs.9,675 and the rest of the amount which was included in the definition of entertainment expenditure by way of Explanation 2 would have to be disallowed. Therefore, the Tribunal was not right in holding that the expenditure incurred by the assessee for entertainment should not be disallowed under section 37(2B) of the Act without considering the impact of Explanation 2 and the ratio of the decision of the Supreme Court in CIT v. Patel Brothers & Co. Ltd. (1995) 215 ITR 165.

CIT v. Patel Brothers & Co. Ltd. (1995) 215 ITR 165 (SC) and Saraspur Mills Ltd. v. CIT (1997) 226 ITR 533 (Guj.) fol.

The assessee claimed deduction in respect for use of the trade mark "Tebilized". claim for deduction. On appeal-, the Commissioner of held that on reading the agreement, the trade mark was owned by M and that it had rendered services to the assessee in this connection and deleted the disallowance. The Tribunal affirmed the order of the Commissioner, of Income-tax (Appeals). On a reference:

Held, that the Tribunal was right in law in holding that the assessee was entitled to deduction in respect of the service fees paid for the trade mark.

. CIT v. Ashoka Mills Ltd. (1996) 218 ITR 526 (Guj.),fol.

B.B. Nayak with Manish R. Bhatt for the Commissioner

Manish J. Shah for the Assessee.

JUDGMENT

R. K. ABICHANDANI, J.---The Income-tax Appellate Tribunal, Ahmedabad, has referred the following two questions for the opinion of this Court under section 256(1) of the Income Tax Act, 1961:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in coming to the conclusion that the expenditure incurred by the assessee for the entertainment should not disallowed under section 37(2B) of the Income Tax Act, 1961?

(2) Whether, on the facts and in the circumstances of the Tribunal was right in law in coming to the conclusion that assessee was entitled to deduction in respect of service fees paid for trade mark 'Tebilized'?"

The matter relates to the assessment year 1977-78. In the relevant previous year, the assessee claimed deduction of Rs.9,675 as expenditure incurred on refreshment, etc., which was disallowed by the Income-tax Officer. The Commissioner of Income-tax (Appeals), however, allowed the same, which decision came to be confirmed by the Tribunal. The relevant previous year was 1976-77. Explanation 2 was inserted in section 37(2A) retrospectively with effect from April 1, 1976, and it read as under:

"Explanation 2.---For the removal of doubts, it is hereby declared that for the purposes of this subsection and subsection (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."

As per the aforesaid Explanation 2 an enlarged meaning is given to the words "entertainment expenditure" for the purposes of the Act, with effect from April 1, 1976- Therefore, no .4dlowance could be made in respect of expenditure in the nature of entertainment expenditure incurred within India by an assessee at the relevant time 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 manner whatsoever. However, expenditure incurred on food or beverages provided by the assessee to its employees in the office, factory or other place of their work, was excluded and, therefore, it could be allowed. In this view of the matter, the amount which is required to be allowed in so far as the expenditure on providing food, etc., tows employees is concerned will have to be separately worked out from the total amount of deduction at Rs. 9,675 and the rest of the amount which is included in the definition of entertainment expenditure by way of Explanation 2 will have to be disallowed. In a similar context, this Court in Saraspur Mills v. CIT (1997) 226 ITR 533, after referring to the decision of the Supreme Court in' CIT v. Patel Brothers and Co. Ltd. (1995) 215 ITR 165, observed that so far as the entertainment expenditure is incurred for persons other than employees, the assessee was not entitled to deduction thereof. The matter was referred back to the Tribunal for deciding the same in 'accordance with law. We, accordingly, hold that the Tribunal was not right in concluding that the expenditure incurred by the assessee for entertainment should not be disallowed under section 37(2B) of the Act without considering the impact of Explanation 2 and the ratio of the decision of the Supreme Court in CIT v. Patel Brothers (1995) 215 In 165. Question No. l is answered accordingly. The Tribunal may now consider and decide this point in light of the above.

As regards question No.2, deduction was claimed in respect of payments made by the assessee to Mettur Beardsell Limited for use of the trade-mark "Tebilized". The Income-tax Officer disallowed the claim. The Commissioner of Income-tax (Appeals) held that on reading the agreement it appeared that the trade-mark was owned by Mettur Beardsell Limited and that it had also rendered services to the assessee in this connection. It was held that unless the contrary was proved, the arrangement was required to be regarded as the "real state of affairs". The disallowance was, therefore, deleted by the Tribunal following its earlier decision,. dated June 20, 1981, in the case of Ashoka Mills Ltd.

It appears that in a similar case CIT v. Askoka Mills Ltd. (1996) 218 ITR 526 this Court held that the assessee was carrying on business of manufacturing cloth and the process employed under the trade-name "Tebilized" conferred an anti-crease property on the cloth and the agreement was entered' into with "MB" for .the purpose of enabling it to carry on its business more efficiently and more profitably while leaving the fixed capital untouched. It was held that the agreement permitting the assessee to make use of the particular process and the user of the trade-mark "Tebilized" did not create any asset, nor did they confer any right of a permanent nature in favour of the assessee, but the agreement merely enabled the assessee to confer on the product the advantages of better quality and marketability. It was held that the payment of royalty was, therefore, clearly in the course of the profit-earning process and not for acquisition of an asset or right of a permanent character and, therefore, deductible as revenue expenditure.

In view of the above decision taken by this Court in a similar context, we hold that the Tribunal was right in coming to the conclusion that the assessee was entitled to deduction in respect of the sums paid for using the trade mark "Tebilized". Question No.2 is, therefore, answered in the affirmative, in favour of the assessee and against the Revenue.

The reference stands disposed of .accordingly with no order as to costs

M.B.A./27/FCOrder accordingly