COMMISSIONER OF INCOME TAX Vs. MOHAN MEAKIN BREWERIES LIMITED
LAWS(HPH)-1991-1-1
HIGH COURT OF HIMACHAL PRADESH
Decided on January 14,1991

COMMISSIONER OF INCOME-TAX Appellant
VERSUS
MOHAN MEAKIN BREWERIES LTD. Respondents

JUDGEMENT

Devinder Gupta, J. - (1.) THE Income-tax Appellate Tribunal, Chandigarh Bench, has referred the following two questions of law to this court under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") : "1. Whether the Tribunal was right in law in holding that the expenses amounting to Rs. 49,750 under the heads 'Hotel bills', Travelling and taxi expenses' and 'Presentation items' for the assessee's guests, suppliers and customers fell outside the purview of the provisions of Section 37(2B) of the Income-tax Act, 1961 ? 2. Whether the Tribunal has rightly held that Rs. 25,250 as expenditure incurred on eating facilities by the assessee to its customers did not constitute entertainment expenditure within the meaning of Section 37(2B) ?"
(2.) THE facts necessary, in brief, are that the assessee who is carrying on the business of manufacture and sale of beer, Indian-made foreign liquor, malt, breakfast food and soft-drinks, etc., and has a number of branches at various places, filed its return for the assessment year 1972-73 on August 9, 1972, declaring an income of Rs. 2,11,30,600. Assessment under Section 143(3) of the Act was done on January 25, 1974, on an income of Rs. 2,17,39,290. THE assessee debited an amount of Rs. 2,58,387 as expenditure under the head "Entertainment" in its various branches and claimed that an amount of Rs. 1,29,193 was allowable as business expenditure and that the balance of Rs. 1,29,193 not allowable, in view of Sub-section (2B) of Section 37 of the Act, being in the nature of entertainment expenditure. THE Income-tax Officer disallowed the entire claim of Rs. 2,58,387 on the ground that the expenses in question were either on the guest houses maintained by the assessee or on food and refreshment to its customers, suppliers and others coming to it in connection with the business activities. THE matter was taken up in appeal by the assessee, to the Appellate Assistant Commissioner who held that, out of the assessee's claim of Rs. 1,29,193 (half of the amount of Rs. 2,58,387), a sum of Rs. 75,000 represented expenses for the purpose of business and, accordingly, allowed a sum of Rs. 75,000 out of the said expenses. THE assessee accepted the decision in appeal but the Revenue came up in further appeal before the Tribunal which upheld the decision of the Appellate Assistant Commissioner by dismissing its appeal and holding that the amount of Rs. 75,000 constituted business expenses. It took the view that the expenses amounting to Rs. 49,750 under the head "Hotel expenses, travelling and taxi expenses and presentation items for the company's guests, suppliers and customers" fell outside the purview of the provisions of Sub-section (2B) of Section 37 and for the balance amount of Rs. 25,250, it held that the same was not hit by the provisions of the said sub-section as the expenses represented eating facilities provided by the assessee to its customers and the expenses such as these did not constitute entertainment expenses within the meaning of the provisions of Sub-section (2B) of Section 37 of the Act. THE Tribunal, while upholding the allowance of Rs. 25,250, placed reliance upon a decision of the Gujarat High Court in CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424 (Guj). The Commissioner of Income-tax sought a reference to this court and the Tribunal has referred the two questions reproduced above. Learned counsel appearing for the Revenue contended that having regard to the phraseology used in Sub-section (2A) and Sub-section (2B) of Section 37 of the Act and the wide amplitude of the words "expenditure in the nature of entertainment expenditure", the expenses in question are liable to be disallowed and, in support of this contention, reliance was placed by him on a decision of the Full Bench of the Kerala High Court in CIT v. Veeriah Reddiar [1977] 106 ITR 610, which followed the decision of the Allahabad High Court in Brij Raman Dass and Sons v. CIT [1976] 104 ITR 541, and also placed reliance upon CIT v. Gheru Lal Bal Chand [1978] 111 ITR 134 (P and H), CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336 (P and H) [FB], Mysodet (P.) Ltd. v. CIT [1987] 163 ITR 848 (Kar), Chandmull Rajgarhia v. CIT [1987] 167 ITR 433 (Pat) and Phool Chand Gajanand v. CIT [1989] 177 ITR 265 (All), which have followed the decision of the Full Bench of the Kerala High Court in Reddiar's case [1977] 106 ITR 610. Learned counsel for the assessee contended that the expenditure incurred by the assessee is not liable to be disallowed under Sub-section (2A) or Sub-section (2B) of Section 37 of the Act as the expenditure was not on a lavish or an extravagant scale but was in the nature of a bare necessity and by way of ordinary courtesy and, in support of this contention, placed reliance upon a decision of the Gujarat High Court in Patel Brothers' case [1977] 106 ITR 424 and upon CIT v. Shah Nanji Nagsi [1979] 116 ITR 292 (Bom), CIT v. Corporation Bank Ltd. [1979] 117 ITR 271 (Kar), Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514 (AP), CIT v. Karuppuswamy Nadar and Sons [1979] 120 ITR 140 (Mad), CIT v. Lakhmichand Muchhal [1982] 134 ITR 234 (MP) and Devi Chand Bastimal v. CIT [1985] 156 ITR 166 (Raj), which have followed the decision of the Gujarat High Court in Patel Brothers' case [1977] 106 ITR 424.
(3.) THE question which falls for consideration before us is as to whether the amount in question spent by the assessee would come within the expression "expenditure in the nature of entertainment expenditure" occurring in Sub-section (2A) and Sub-section (2B) of Section 37 of the Act. To examine and answer the question, it would be necessary for us to go into the legislative history of Section 37 of the Act and the object underlying the introduction of Sub-section (2B) of Section 37 of the Act. Any amount spent by an assessee for the entertainment of its business constituents and customers was an allowable expenditure under the head "Profits or gains" of any business, profession or vocation carried on by an assessee by virtue of Section 10(2)(xv) of Indian Income-tax Act, 1922, on the ground that such hospitality and entertainment is extended wholly for the purposes of promotion of the business of the assessee. With a view to curb the tendency on the part of companies and their directors and executives to entertain on a lavish scale at the expense of the company and thereafter claim the same as entertainment expenses, a proviso was inserted in the year 1961 in Section 10(2)(xv) which provided that no expenditure in the nature of entertainment expenditure shall be allowed in the case of an assessee, other than a company, and, in the case of companies, it provided a deduction on a slab basis and a ceiling was put on such expenditure depending on the profits and gains of the business. This amendment was sought to be inserted in the Act by the Finance Bill of 1961 which became an Act on and with effect from April 1, 1962. The second step was taken in the year 1967 by the Taxation Laws (Amendment) Act, 1967, which came into force on and with effect from October 1, 1967, when Sub-section (2A) was introduced in Section 37 of the Act whereby, in the case of assessees other than companies also, a ceiling on such expenditure was fixed. By the Finance Act, 1968, an Explanation (which is now Explanation 7) was added to Sub-section (2A) with effect from April 1, 1968, so as to expand the scope of the restrictions with a view to cover and include the expenses incurred by an assessee granting entertainment allowance to its employees or other persons and also the expenditure incurred by an employee or other persons for the purposes of the assessee's business otherwise than out of an allowance paid by the assessee. The next step in this direction was taken by the Finance Act of 1970, by inserting Sub-section (2B) in Section 37, which prohibited deduction of any "expenditure in the nature of entertainment expenditure" incurred within India by any assessee after February 28, 1970. Sub-section (2B) of Section 37, reads as under (see [1970] 76 ITR (St.) 128) : "(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 assessee after the 28th day of February, 1970." ;


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