COMMISSIONER OF INCOME TAX VS HIRA LAL & SONS
2002 P T D 1710
[242 I T R 407]
[Delhi High Court (India)]
Before Arun Kumar and Manmohan Sarin, JJ
COMMISSIONER OF INCOME‑TAX
versus
HIRA LAL & SONS
Income‑tax References Nos.5 and 6 of 1982, decided on 22/12/1999.
Income‑tax‑‑
‑‑‑‑Business expenditure‑‑‑Disallowance‑‑‑Entertainment expenditure‑‑ Law applicable‑‑‑ Expenditure incurred in India for stay of foreign customers in hotel‑‑‑Not lavish or entertainment expenses‑‑‑Hospitality necessary and expedient for business purposes‑‑‑Eligible for deduction as business expenditure for assessment year 1975‑76‑‑‑Indian Income Tax Act, 1961, S.37.
The object of subsection (2‑A) of section 37 of the Income Tax Act, 1961, is to disallow any lavish expenditure in the form of business expenditure. This is obvious from the several amendments made in the provision from time to time. It is so understood even in the circular issued by the Board. The object of the provision clearly is to allow deduction of the essential business expenditure incurred due to commercial expediency and according to the trade usage excluding lavish expenditure.
Section 37(2B) was inserted by the Finance Act, 1970, providing for disallowance of entertainment expenses incurred in India in computing the profits and gains of profession. The entertainment expenditure incurred outside India continued to be admissible for deduction as per limits of sections 37(2‑A). The Finance Act, 1976, omitted the provisions with effect from April 1977. Thus, the said section 37(2‑B) remained in operation for the assessment years 1970‑71 to 1976‑77. As a result of the omission of section 37(2‑B) from the assessment year 1977‑78 entertainment expenditure incurred in India is also admissible for deduction subject to limits in section 37(2‑A).
For the assessment year 1975‑76 the' assessee claimed a deduction in respect of expenditure incurred on foreign customers. The Income‑tax Officer disallowed in on the ground that it was entertainment expenses under section 37(2‑B). The Tribunal held that it was allowable as business expenditure. On a reference:
Held, that in the peculiar facts of the present case, where the expenditure of which deduction was‑ claimed, was incurred, prior to April 1, 1976, on the living expenses of the foreign customs of an exporter of brassware, it would be offering of hospitality necessary and expedient for the purposes of business and was not entertainment expenses. The nature of an exporter's business where foreign customers visit India for the purpose of business and are staying in a hotel where meetings are also held is expenditure which his customary and usual in the nature of the said business and trade. The Tribunal had duly considered these factors and permitted the deduction of the same. The Tribunal was right and the amount was deductible.
CIT v. Patel Bros. & Co. Ltd. (1977) 106 ITR 424 (Guj.) and CIT v. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC) ref.
Sanjeev Khanna for the Commissioner.
Nemo for the Assessee.
JUDGMENT
MANMOHAN SARIN, J.‑‑‑In these income‑tax references the following question of law has been referred to this Court for its opinion:
"Whether, on the facts and in the circumstances of this case, the Income‑tax Appellate Tribunal is correct in law in allowing deduction of the expenditure of Rs.31,864 incurred by the assessee on the foreign customers in view of the expressprovision contained in section 37(2‑B) of the Income Tax Act, 1961?
The above question had arisen in the following facts:
(i) The assessee, an exporter of brassware goods, for the assessment year 1975‑76 claimed a deduction of Rs.31,864 on account of expenses incurred on foreign customers. The Income-tax Officer disallowed this expenditure holding the same to be in the nature of entertainment expenses. Aggrieved, the assessee had filed an appeal to the Commissioner of Income‑tax. The Commissioner of Income‑tax, after examining the details of the expenditure, held that the expense, incurred by the assessee could not be termed as petty expense of the type contemplated by the Gujarat High Court in the case of CIT v. Patel Bros. & Co. Ltd. (1977) 106 ITR 424. He held that out of the total expenditure of Rs.31,864 about Rs.430 included expenditure on alcohol and about Rs. 24,092 was the expenditure at Hotel Oberoi. He held that only a sum of Rs. 1,864 was expenditure which could be considered to be customary expenditure on providing tea, etc. He, therefore, allowed the expenditure of the sum .of Rs.1,864 and confirmed the disallowance of Rs.30,000 under section 37(2‑B).
(ii) The Income‑tax Appellate Tribunal, after examining the matter and considering the nature of expenditure incurred, observed that the expenditure had been incurred on foreign customers who came to India. The Commissioner of Income‑tax had disallowed Rs.30,000 being expenditure incurred on five star hotels, which also included alcohol. The Tribunal observed that the expenditure was incurred on foreign customers and even if some alcohol was served to them alongwith the meals, it would not be transformed into lavish entertainment or wasteful expenditure. The foreign customer staying at the hotel were given meals wholly for the purposes of business. The Tribunal, accordingly, held that the expenses incurred were not in the nature of entertainment expenditure or lavish entertainment and was allowable business expenditure.
It is in these facts that the question noted above has been referred to this Court for its opinion.
As for the legal position, we may note that section 37(2‑B) was inserted by the Finance Act, 1970, providing for disallowance of entertainment expenses incurred in India in, computing the profits and gains of business or profession. The entertainment expenditure incurred outside India continued to be admissible for deductions as per limits of section 37(2‑A): The Finance ‑Act, 1976, omitted the provision with effect from April, 1977. Thus, the said section 37(2‑B) remained in operation for the assessment years 1970‑71 to 1976‑77. As a result of the omission of section 37(2‑B) from the assessment year 1977‑78, entertainment expenditure incurred in India is also admissible for deduction subject to limits in section 37(2‑A).
The apex Court in the case of CIT v. Patel Bros. & Co. Ltd. (1995) 215 ITR 165, considered the meaning of "entertainment expenditure" prior to April 1, 1976, under the Income‑tax Act. The apex Court also considered the nature of Explanation 2 to section 37(2‑A) of the Income Tax Act, 1961. The Court in the said case was considering the deduction of expenditure incurred in providing ordinary meals arid refreshment to outstation customers according to the customary hospitality and trade usage, satisfying the general test of commercial expediency. These related to a period prior to 1976, as in the instant case. The apex Court observed as under (page 172):
"Generally, 'entertainment expenditure' is an expression of wide import. However, in the context of disallowance of 'entertainment expenditure' as a business expenditure by virtue of subsection (2‑A) of section 37, the word 'entertainment' must be construed strictly and not expansively. Ordinarily, `entertainment' connotes something which may be beneficial for mental or physical well being but is not essential or indispensable for human existence. A bare necessity, like an ordinary meal, is essential or indispensable and, therefore, is not `entertainment'. If such a bare necessity is offered by another, it is hospitality but not entertainment. Unless the definition of 'entertainment' includes hospitality, the ordinary meaning of `entertainment' cannot include hospitality. For this reason, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity, is not 'entertainment expenditure' without the aid of the enlarged meaning given to the words by Explanation 2 inserted with effect from April 1, 1976. The definition in Explanation 2 is not the ordinary meaning of the words 'entertainment expenditure', but the enlarged meaning given for the purpose of the Act with effect from April 1, 1976.
The object of subsection (2‑A) is to disallow any lavish expenditure in the form of business expenditure. This is obvious from the several amendments made in the‑provision from time to time. It is so understood even in the circular issued by the Board. The object of the provision clearly is to allow deduction of the essential business expenditure incurred due to commercial expediency and according to the trade usage excluding the lavish expenditure. The dispute in the present case relates only to the amount which has been held to be essential business expenditure of this kind incurred in providing ordinary meals as bare necessity. In the view taken by us, such expense did not come within the meaning of `entertainment expenditure' prior to April 1, 1976, when Explanation 2 was brought in by a retrospective amendment made in 1983 of subsection (2‑A) of section 37. The finding of fact in all cases, therefore, satisfies this test to allow deduction of the expenditure incurred by each assessee and claimed under this head for the period prior to April 1, 1976 ....
It means that the expenditure incurred by the assessees in providing ordinary meals to outstation customers according to establish business practice, was a permissible deduction is spite of subsection (2‑A) of section 37, to which the assessees were entitled in the computation of their total income for the purpose of payment of tax under the Income Tax Act, 1961, during the relevant period prior to April 1, 1976."
Learned counsel for the petitioner relying on CIT v. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC), submits that the expenditure incurred in, five star hotels, including some of it on alcohol was entertainment expense and could not be allowed as deduction.' He submitted that the same could not be regarded as hospitality. ,
Having noticed the legal position, we are of the view that in the peculiar facts of the present case, where the expenditure of which deduction is claimed was incurred, prior to April 1, 1976, on the living expenses of the foreign customers of an exporter of brassware. It would come within offering hospitality necessary and expedient for the purposes of business and cannot within entertainment expenses. The nature of an exporter's business where foreign customers visit India for the purposes of business and are staying in a hotel where meetings are also held, is expenditure which is customary and usual in the nature of the said business and trade. The Tribunal has duly considered these factors and permitted the deduction of the s tine. In our view, the Tribunal cannot be faulted and has rightly allowed the deduction, especially considering that it would be usual, rather necessary, for an exporter to provide hospitality and living accommodation to its customers. The expenses incurred by the assessee would not be hit by section 37(2‑B) as entertainment expenses and would be expenses incurred for ‑the purposes of business.
The question referred by the Tribunal, in these peculiar facts, is answered in the affirmative.
M.B.A./704/FCReference answered.