Delhi Cloth And General Mills Co. ... vs Commissioner Of Income-Tax
1994 Latest Caselaw 102 Del

JUDGMENT

D.K. Jain, J.

1. These are two cross-references by the assessed and the Revenue in respect of the assessment year 1971-72. Since a common statement of case has been drawn up by the Income-tax Appellate Tribunal, these are being disposed of together. The questions referred at the instance of the assessed (Income-tax Reference No. 284 of 1982) are as under :

"1. Whether in computing the capital employed in respect of a new industrial undertaking for the purpose of section 80J, the debts owned by the assessed relating to the undertaking should be deducted ?

2. Whether in computing the capital employed in respect of a new industrial undertaking for the purpose of section 80J, the written down value of assets should be taken and not the original cost ?"

2. The questions referred at the instance of the Revenue (Income-tax Reference No. 285 of 1982) are as follows :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire expenditure of Rs. 2,44,316 was incurred wholly and exclusively for the purpose of the assessed's business and no part of this expenditure was to be disallowed as being in the nature of entertainment expenditure ?"

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that borrowed money formed part of the employed for purposes of computing deduction allowable under section 80J ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing that the average capital for purposes of section 80J should be computed on the basis of the decision of the Calcutta High Court in Century Enka Ltd. v. ITO ?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that expenditure of Rs. 92,777 incurred in connection with the foreign tour of Dr. Bharat Ram is an allowable expense ?"

3. As regards the two questions referred at the instance of the assessed and questions Nos. 2 and 3 referred at the instance of the Revenue, learned counsel for the assessed fairly stated that in view of the decision of the Supreme Court in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308, wherein rule 19A of the Income-tax Rules, 1962, has been held to be valid in its entirety, these questions require to be answered in favor of the Revenue. The questions are answered accordingly.

4. In relation to question No. 1 in the Revenue's reference, the facts found by the Tribunal are that during the previous years ended on June 30, 1970, the assessed, a public limited company held an inaugural function for its fertilizer plant at Kota (Rajasthan), which was set up with Japanese collaboration. The plant had come into operation in the preceding year ended on June 30, 1969, and was in production during the relevant previous year. The inauguration took place at the hands of the Prime Minister of India and the function was attended by Union Ministers, Chief Ministers, other high dignitaries and representatives of the foreign collaborators. The details of the expenditure incurred at the function are as under :

Rs.

"Advertisement in newspaper                   2, 13,479
Transport, air/rail/road                         75,463
Boarding and lodging                              6,601
Catering                                       1,14,831
Decoration                                       93,899
Shehnai, dance show, etc.                         9,287
Miscellaneous                                    70,138
                                            ----------------
                                               5,83,698."
                                            ---------------- 
 

5. The entire expenditure was claimed by the assessed was revenue expenditure on the plea that the purpose of the inaugural function was to advertise and to bring to the notice of the public at large that the company had successfully commissioned a large scale plant for the manufacture of fertilizers, which was a matter of pride not only for the company but also for India and Japan. In other words, the claim of the assessed was that the expenditure was on advertisement and publicity. While framing the assessment for the relevant assessment year, the Income-tax Officer went into the details of these expenses and held that except for the expenses incurred for advertisement in newspapers (Rs. 2,13,479) and on gifts to employees, amounting to Rs. 25,903, claimed under the head "Miscellaneous expenses", the entire expenditure was in the nature of entertainment. He accordingly disallowed the balance claim amounting to Rs. 3,44,316 and added the same to the total income of the assessed. The assessed did not get any relief in its appeal to the Appellate Assistant Commissioner. In carried the matter further in appeal to the Tribunal. The Tribunal, relying on the decisions of the Gujarat High Court in the case of CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424 and the Andhra Pradesh High Court in Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514, held that no part of the expenditure incurred on the occasion of inauguration could be considered to be entertainment expenditure. The entire addition of Rs. 3,44,316 was thus deleted. It is thereafter that the aforesaid question has been referred to this court under section 256(1) of the Income-tax Act, 1961 (briefly, "the Act").

6. Mr. Rajendra, learned counsel for the Revenue, contended that the expression "the nature of entertainment" appearing in sub-section (2B) of section 37 of the Act is of wide amplitude to mean and include any and every kind of expenditure which has an element of hospitality. In support, he relied on three Full Bench decisions in CIT v. Veeriah Reddiar [1977] 106 ITR 610 (Ker); CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336 (P & H) and Phool Chand Gajanand v. CIT [1989] 177 ITR 265 (All) and the decisions of the Rajasthan, Patna, Madhya Pradesh and Karnataka High Courts in Sunil Synchem Ltd. v. CIT [1994] 205 ITR 298 (Raj); Chandmull Rajgarhia v. CIT [1987] 167 ITR 433 (Patna); Central Paints Ltd. v. CIT [1984] 146 ITR 212 (MP) and Mysodet (Pvt.) Ltd. v. CIT [1987] 163 ITR 848 (Kar), respectively, wherein the said Full Bench decision have been followed. He further submitted that with the insertion of Explanation 2 in section 37 of the Act by the Finance Act, 1983, all doubts regarding the scope of the expression "entertainment expenditure" stand removed and expenditure on provision of hospitality of every kind, whether by provision of food or beverages or any other manner whatsoever, would be included within the meaning of the expression "entertainment expenditure". He urged that Explanation 2 being clarificatory in nature, has retrospective effect and, therefore, would be applicable for the relevant assessment year as well.

7. On the other hand, Mr. O. P. Vaish, learned counsel for the assessed, while deriving support from three decision of this court in CIT v. Supreme Motors (P.) Ltd. [1984] 147 ITR 48; Santlal Kashmirilal v. CIT [1986] 157 ITR 422 and Modi Spinning and Weaving Mills Co. Ltd. v. CIT [1993] 200 ITR 544, and a decision of the Calcutta High Court in CIT v. Hindusthan Aluminium Corporation Ltd. [1989] 176 ITR 206, has submitted that no part of the expenditure incurred on the inaugural function could be regarded as entertainment expenditure as contemplated by section 37 of the Act.

8. For the purpose of the present reference, we feel it is not necessary to go into the history of the relevant provisions relating to the entertainment expenditure. Suffice it to say that the steps initiated in the direction of gradually controlling these expenses by prescribing ceiling limits on the entertainment expenditure reached their crescendo in the year 1970, when by the Finance Act, 1970, sub-section (2B), was inserted in section 37 of the Act prohibiting deduction of entertainment expenditure altogether, if incurred within Indian after February 28, 1970. This provision took effect from April 1, 1970, and applied to assessments for and from the assessment year 1970-71. As noted above, we are concerned with the assessment year 1971-72, for which the accounting period ended on June 30, 1970. Sub-section (2B) (omitted with effect from April 1, 1977), reads as follows :

"(2B) Notwithstanding anything contained in this section, no allowance shall be made in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessed after the 28th day of February, 1970."

9. From the language of sub-section (2B), it is clear that an expenditure in the nature of entertainment expenditure, if incurred in Indian from February 28, 1970, to March 31, 1977, is to be disallowed altogether in computing the profits and gains of business or profession. However, the material question which falls for consideration is as to what constitutes entertainment and whether every act of hospitality amounts to an expenditure in the nature of entertainment within the meaning of section 37(2B) of the Act, as pleaded on behalf of the Revenue.

10. Before considering the main question posed above, we may at this stage itself deal with the contention of learned counsel for the Revenue to the effect that though Explanation 2 has been inserted by the Finance Act, 1983, with retrospective effect from April 1, 1976, the same being clarificatory in nature is applicable in the instant case also because, in our view, the issue is no longer res integra. Explanation 2 to section 37(2A) of the Act provides that, 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 April 1, 1977, entertainment expenditure includes expenditure on provision of hospitality of every kind by the assessed 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 customs or usage of trade, but does not include expenditure on food or beverages provided by the assessed to his employees in office, factory or other places of their work. In Santlal Kashmirilal's case [1986] 157 ITR 422 (Delhi), dealing with the assessment years 1972-73 and 1973-74, this court held that the amendment in the form of Explanation 2 was made retrospective from April 1, 1976, and, therefore, the expenditure in the said assessment years did not come within the mischief of the said Explanation Even the Central Board of Direct Taxes, in its circular dated December 8, 1983, published in [1984] 146 ITR (St.) 31 has also clarified that the said Explanation will apply in relation to the assessment year 1976-77 and subsequent years. In the instant case, the expenditure in question having been incurred prior to April 1, 1976, the said Explanation shall not be applicable. The argument of learned counsel for the Revenue is, therefore, devoid of any merit and is accordingly rejected.

11. Coming to the main question, the terms "entertainment" or "entertainment expenditure" have not been defined in the Act but these terms have been considered and interpreted by the courts in the context of section 37(2A) and 37(2B) of the Act. In CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424, the Gujarat High Court had the occasion to consider the question of allowability of an expenditure under sections 37(2A) and 37(2B) of the Act. The court considered the meaning of the expressions "entertainment" and "hospitality" and came to the conclusion that every act of entertainment included hospitality but every hospitality did not constitute entertainment. The court drew a fine distinction in the terms "hospitality" and "entertainment" and held that if the act of being hospitable consists of providing meals and drinks to : (i) employees as a term of service or engagement; and (ii) friends and strangers as term and condition of contract or custom or usage of trade or by way of ordinary courtesy, it is not entertainment and such expenditure may be allowable and the bar of sub-section (2B) would not apply. On the contrary, if the provision of food, drinks of any amusement to a client, customer or constituent is on a lavish and extravagant scale or is of wasteful nature, it would fall within the ambit of section 37(2B) of the Act and could not be allowed as business expenditure. We are in respectful agreement with the view expressed by the Gujarat High Court in the said judgment. In fact support is lent to this view by the Legislature itself when we refer to the language of Explanation 2, wherein it is clarified that from April 1, 1976, expenditure on provision of hospitality of every kind to any person is to be treated as "entertainment expenditure", which, as a necessary corollary, would mean that this type of expenditure before April 1, 1976, could be treated as a permissible deduction. similar view has been expressed by this court in Santlal Kashmirilal's case [1986] 157 ITR 422, and Modi Spg. and Wvg. Mills Co. Ltd.'s case [1993] 200 ITR 544 (Delhi). With respect, we are unable to subscribe to the view expressed in the full Bench decisions of the Kerala, Punjab and Haryana and Allahabad High Courts as also by the other High Courts holding that the expression "in the nature of entertainment expenditure" has a wide amplitude and its user in sub-section (2B) is a pointer to the intention of the Legislature to cast the net sufficiently wide so as to bring within its fold all types of hospitality, even though it is modest or frugal.

12. In our view, there is little difference between the expression "entertainment expenditure" and "expenditure in the nature of entertainment", on which expression too much stress appears to have been laid in these decisions, and the scope of the latter expression cannot be said to be wider as compared to the former. The view expressed in the Full Bench decision does not seem to be in consonance with the legislative intent reflected in subsequent clarification in the form of Explanation 2, inserted in the section by the Finance Act, 1983, because if the scope of the latter expression was intended to be wider than the expression "entertainment expenditure", the Legislature would not have used that expression in the said Explanation instead of the latter.

13. The next question for determination is as to what particular item of expenditure can be said to amount to an expenditure in the nature of entertainment. Here again we agree with the observations of the Gujarat High Court in Patel Brothers' case [1977] 106 ITR 424 to the effect that it is difficult to lay down a hard and fast strait-jacket formula so as to answer various contingencies arising from time to time as to what expenses could be classified as entertainment expenses in the context of the provisions of the Act in vogue at the relevant time. In our opinion, the answer to the question will depend on the facts of each case as many factors like the purpose or the occasion, their nature and quantum and the persons on whom such expenses are incurred will have to be taken into account, which may vary from case to case. Broadly speaking, we feel, that an expenditure which is not on a lavish extravagant scale or of wasteful nature or merely for the purpose of amusement but is in the nature of a bare necessity or by way of an ordinary courtesy will not amount to entertainment.

14. In the instant case, the expenses aggregating to Rs. 3,44,316, which were disallowed by the Assessing Officer were incurred by the assessed on providing transport by air, rail or road, boarding and lodging, catering, decoration, shehnai, dance show, etc., and on miscellaneous items. The Tribunal has found as a fact that some of the guests who had come from abroad or from outside places had to be provided with hotel accommodation at Delhi for facilitating their visit to the inauguration ceremony, which was to be held at Kota. The city of Kota did not have adequate boarding and lodging facilities and it was for that reason that the assessed had to provide boarding and lodging facilities and also lunch and dinner to the guests who had arrived there from within the country and from abroad. These expenses in the present context, in our view, were necessary to ensure that the function, to be attended by the Prime Minister of the country, was a success. As regards the expenses incurred on decoration and shehnai, we feel that these are basically traditional and also having regard to the fact that high dignitaries were to attend the function, these expenses could not be classified either as wasteful or for the purpose of amusement. In so far as the miscellaneous expenses are concerned, out of the total expenditure of Rs. 25,903 incurred by the assessed under the said head, an expense of Rs. 1,469 was incurred for providing alcoholic drinks. In our opinion, this expense was clearly in the nature of entertainment and we are not inclined to accept the contention of learned counsel for the assessed that for the foreigners alcoholic drunk was also a necessity. Similarly, we feel that the expenses incurred on the dance show would also be classifiable in the category of entertainment. However, keeping in view the quantum of the said two expenses, which is relatively very small, we do not propose to upset the view taken by the Tribunal on the facts of the instant case though in principle we disagree with the view expressed. We, therefore, endorse the view taken by the Tribunal that the expenditure incurred by the assessed on the inaugural function was not in the nature of entertainment expenditure and was incurred wholly and exclusively for the purpose of the assessed's business and is allowable as revenue expenditure.

15. As regards question No. 4, learned counsel for the Revenue fairly concedes that in view of the decision of this court in the case of the assessed itself, reported as Delhi Cloth and General Mills Co. Ltd. v. CIT [1986] 158 ITR 64, wherein it has been held that expenses incurred by an assessed for attending a business conference by its employee would be deductible as business expenditure, the question requires to be answered in the affirmative and in favor of the assessed. We may note that the Revenue's special leave petition to appeal against the said judgment has also been dismissed (see [1992] 193 ITR (St.) 5). The question is accordingly answered.

16. In the result, the two references are answered as follows :

Income-tax Reference No. 284 of 1982 (assessed' reference) :

17. Both the questions are answered in the negative, in favor of the Revenue.

18. Income-tax Reference No. 285 of 1982 (Revenue's reference) :

Questions Nos. 1 and 4 are answered in the affirmative, in favor of the assessed and questions Nos. 2 and 3 are answered in the negative, in favor of the Revenue.

19. There will be no order as to costs.