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1987 Supreme(Pat) 81
PATNA HIGH COURT
Uday Sinha and B.N.Agrawal JJ.
Chandmull Rajgarhia
Versus
Commissioner Of Income Tax
Taxation Case No. 68 of 1977 ; 70 of 1977 ;
Decided On : MARCH 21, 1987
The expression "expenditure in the nature of entertainment expenditure" in Sec.37(2A) and (2B) of the Income-tax Act has a wide meaning and encompasses all types of expenditure without any exception.
Headnote:
INCOME TAX - Expenditure in the nature of entertainment expenditure - Whether expenses incurred on foreign guests and visitors allowable as deduction under Sec.37(1) of the Income-tax Act notwithstanding the provision in Sub-section (2A) and Sub-section (2B) of that section - Salary and interest paid to partners - Whether correctly added while computing the income of the assessee firm by applying the provision of Sec. 40(b) of the Income-tax Act.
Fact of the Case:
The assessee, a mica business, incurred expenses on entertaining foreign guests and visitors. The Income-tax Officer disallowed the expenses claimed by the assessee as entertainment expenditure under Sec.37(2A) and (2B) of the Income-tax Act. The assessee also claimed deduction of salary and interest paid to two of its partners, which was disallowed by the Income-tax Officer and upheld by the Appellate Assistant Commissioner and the Tribunal.
Finding of the Court:
The court held that the expenses incurred by the assessee on entertaining foreign guests and visitors would come within the expression "expenditure in the nature of entertainment expenditure" within the meaning of Sec.37(2A) and (2B) of the Act and the assessee is not entitled to claim the same as expenditure under Sec.37(1) of the Act. The court also held that the Tribunal was justified in disallowing the claim of the assessee for deduction of salary and interest paid to two of its partners.
Issues: 1. Whether, on the facts and in the circumstances of the case, the expenses incurred on the foreign guests and visitors were allowable as deduction under Sec.37(1) of the Income-tax Act notwithstanding the provision in Sub-section (2A) and Sub-section (2B) of that section? 2. Whether, on the facts and in the circumstances of the case, the salary and interest paid to Sri Ramratan Lal Rajgarhia and Sri Maniklal Rajgarhia have been correctly added while computing the income of the assessee firm by applying the provision of Sec. 40(b) of the Income-tax Act in the assessment of the firm for the assessment years 1970-71 and 1971-72? 3. Whether, on the facts and in the circumstances of the case, interest paid to Sri Ramratan Lal Rajgarhia and Sri Maniklal Rajgarhia has been correctly added while computing the income of the assessee firm by applying the provision of Sec. 40(b) of the Income-tax Act in the assessment of the firm for the assessment year 1972-73?
Ratio Decidendi: The court interpreted the expression "expenditure in the nature of entertainment expenditure" in Sec.37(2A) and (2B) of the Income-tax Act as having a wide meaning, encompassing all types of expenditure without any exception. The court held that the assessee's expenses on entertaining foreign guests and visitors fell within this definition and were therefore not deductible under Sec.37(1). The court also held that the Tribunal was justified in disallowing the assessee's claim for deduction of salary and interest paid to two of its partners, as this was in accordance with the provisions of Sec. 40(b) of the Income-tax Act.
Final Decision: The court answered all three questions referred to it in favor of the Revenue and against the assessee. The references were disposed of with costs.
B.N.Agrawal, J.
1. In these references under Sec.256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") which relate to assessment years 1970-71 to 1972-73, the Income-tax Appellate Tribunal, Patna Bench, has referred to this court the following questions for its opinion :
"1. Whether, on the facts and in the circumstances of the case, the expenses incurred on the foreign guests and visitors were allowable as deduction under Sec.37(1) of the Income-tax Act notwithstanding the provision in Sub-section (2A) and Sub-section (2B) of that section ?
2. Whether, on the facts and in the circumstances of the case, the salary and interest paid to Sri Ramratan Lal Rajgarhia and Sri Maniklal Rajgarhia have been correctly added while computing the income of the assessee firm by applying the provision of Sec. 40(b) of the Income-tax Act in the assessment of the firm for the assessment years 1970-71 and 1971-72?
3. Whether, on the facts and in the circumstances of the case, interest paid to Sri Ramratan Lal Rajgarhia and Sri Maniklal Rajgarhia has been correctly added while computing the income of the assessee firm by applying the provision of Sec. 40(b) of the Income-tax Act in the assessment of the firm for the assessment year 1972-73 ? "
2. The relevant facts for answering question No. 1, in short, are that the assessee has a mica business during the course of which it has to receive several foreign guests and visitors. In the assessment year 1970-71, the assessee spent Rs. 42,625 as expenditure in entertaining the foreign guests and visitors. The Income-tax Officer allowed the expenditure to the extent of Rs. 5,000 out of the aforesaid expenditure claimed by the assessee and disallowed the balance sum of Rs. 37,625. The assessee took the matter in appeal and the Appellate Assistant Commissioner remanded the matter to the Income-tax Officer as the details of expenditure were not furnished by the assessee and the assessee was not entitled to claim any expenditure incurred on this count after February 28, 1970. In the assessment years 1971-72 and 1972-73, the assessee claimed Rs. 22,380 and Rs. 21,742 respectively on the aforesaid two counts which claims were disallowed by the Income-tax Officer in their entirety as after February 28, 1970, no entertainment expenditure could be allowed and the disallowance was affirmed by the Appellate Assistant Commissioner. Thereafter the assessee preferred three separate appeals before the Tribunal against the orders passed by the Appellate Assistant Commissioner but the Tribunal has rejected all the three appeals. Hence, these references to this court.
3. Learned counsel appearing for the assessee contended that the expenditure incurred by the assessee on foreign guests and visitors cannot be said to be expenditure in the nature of entertainment expenditure within the meaning of Sec.37(2A) and 37(2B) of the Act as the expenditure incurred was not on a lavish and extravagant scale and, therefore, the Income-tax Officer was bound to allow the entire expenditure claimed by the assessee on this count under Section 37(1) of the Act. In support of his contention, learned counsel has placed reliance upon the cases in CIT V/s. Paid Brothers & Co. Ltd. [1977] 106 ITR 424 (Guj), CIT V/s. Corporation Bank Ltd. [1979] 117 ITR 271 (Kar), CIT V/s. Karuppuswamy Nadar & Sons [1979] 120 ITR 140 (Mad), CIT V/s. Lakhmichand Muchhal [1982] 134 ITR 234 (MP) and Addl. CIT V/s. Maddi Venkataratnam & Co. Ltd. [1979] 119 ITR 514 (AP).
4. Learned counsel for the Revenue, on the other hand, contended that each and every expenditure incurred in entertaining foreign guests and visitors is expenditure in the nature of entertainment expenditure within the meaning of Sec.37(2A) and (2B) of the Act irrespective of the fact whether the expenditure incurred was on a lavish and extravagant scale or not. In support of his contention, learned counsel placed reliance upon the cases in CIT V/s. Veeriah Reddiar [1977
