Delhi High Court
Commissioner Of Income Tax vs Escorts Tractors (P) Ltd. on 5 May, 2005
Author: M B Lokur
Bench: S Kumar, M B Lokur
JUDGMENT
Madan B. Lokur, J.
1. The question that has been referred for our opinion is as follows:-
Whether on the facts and in the circumstances of the case, the expenditure incurred by the assessed by showing hospitality to its guests or customers as a part of business courtesy is to be disallowed as entertainment expenditure under Section 37(2A) of the Income Tax Act, 1961.
2. Briefly the facts are that the assessed is a limited company carrying on the business of manufacture of tractors and tractor equipments. One of the items of expenditure incurred by the assessed was on hospitality to its customers and guests. Out of total amount of Rs. 51,990/- claimed by the assessed, the Income Tax Officer allowed only a sum of Rs. 1,603/- while the rest was disallowed on the ground that the expenditure amounts to entertainment expenditure.
3. The view of the Income Tax Officer found favor with the Commissioner of Income Tax (Appeals) but the Income Tax Appellate Tribunal (the Tribunal) found that a portion of the amount partakes the character of entertainment in its strict sense, but most of the expenditure is related to boarding and lodging of the assessed's guest. It was held by the Tribunal that the expenditure was necessary for the assessed being a reputed concern to maintain its goodwill. Consequently, such expenditure could not be treated as entertainment expenditure. The Tribunal was also of the view that it was normal courtesy for any business house to show hospitality to its guests or customers. If abnormal expenditure is made on a lavish scale then it may be disallowed. From the details furnished by the assessed, it was held that a few of the items could fall under the category of entertainment expenditure. Accordingly, a sum of Rs. 10,000/- was disallowed out of the total amount claimed.
4. We find, on a consideration of the facts of the case, that the issue is no longer res integra. In Commissioner of Income Tax v. Patel Brothers and Company Ltd. and Ors. (1995) 215 ITR 165 the Supreme Court construed the meaning of the word "enterta inment" as appearing in Section 37(2A) of the Act. It was held that "entertainment" must be construed strictly and not expansively. The Supreme Court was also of the view that the object of Section 37(2A) is to disallow any lavish expenditure in the form of business expenditure and that was even the view of the Central Board of Direct Taxes as expressed in Circular No. 372 dated 8th December, 1993. However, the object of the provision was also to allow deduction of essential business expenditure incurred due to commercial exigency and according to trade usage, excluding lavish expenditure. The view expressed by the Supreme Court appears to have been foreshadowed by the Tribunal in the present case. It is for this reason that the Tribunal disallowed expenditure of Rs. 10,000/- on the ground that it was lavish expenditure and therefore entertainment expenditure. The rest of the expenditure was found by the Tribunal, as a matter of fact, to be expenditure essential for the business of the assessed including maintaining its goodwill.
6. Under the circumstances, following the decision of the Supreme Court in Commissioner of Income Tax v. Patel Brothers and Company Ltd. and Ors. (1995) 215 ITR 165 we answer the question referred to us in the negative, that is, in favor of the assessed and against the revenue.
