Expenditure incurred by the assessee in supplying hot and soft drinks and tobacco to stewards, their friends and guests would not be in the nature of entertainment expenditure if the sole object in incurring the expenditure was the promotion of the activity of the race club.

AJIT K. SENGUPTA, J.

( 1 ) THIS reference under Section 256 (2) of the Income-tax Act, 1961, at the instance of the assessee, relates to the assessment year 1971-72.

( 2 ) THE facts leading to this reference are shortly stated hereunder : for the year under consideration, the assessee debited a total amount of Rs. 1,66,585 as expenditure on "refreshments" in the account styled as "non-members profit and loss account". The details of the expenditure furnished to the Income-tax Officer by the assessee are as follows : Rs.

(1) Refreshment served to --

(a) Stewards, secretary and others including donors of cups and certain VIPs. 83,518

(b) Permanent and race day officials

19,488

(c) Permanent and race day officials other than officials. 34,300

(2) Morning tea to officials attending to track work in the morning and trainers and jockeys exercising the horses. 13,260

(3) Refreshments served on the occasion of the Turf Invitation Cup Race held on 6th March, 1971 . 7,300

(4) Expenditure on annual party thrown to owners, trained jockeys, book-makers, club-makers, police officers and other persons connected with racing

8,699

TOTAL

1,66,585

 

( 3 ) ON an examination of the break up of the expenses furnished by the assessee of the expenses for Rs. 3,302 incurred on one race day, i. e. , August 8, 1970, the Income-tax Officer found that the bulk of the expenses related to drinks and tobacco, which, in his opinion, did not constitute legitimate business expenditure. He also found that, out of the expenses of Rs. 7,300 incurred on March 6, 1971, on Turf Invitation Cup Race Day Rs. 6,500 represented expenditure on hot drinks and cigarettes, which, in his view, was not legitimate business expenditure. He further found that, out of the expenses of Rs. 8,699 incurred on "annual party", Rs. 4,800 represented cost of drinks and Rs. 3,410 cost of lighting arrangement and decorations. He held that the expenditure on hot drinks, soft drinks and tobacco served to stewards, their friends and others was entertainment expenditure in nature and, therefore, not an allowable deduction. He disallowed under Section 37 (2b) of the Act the entire expenses of Rs. 7,300 incurred on the party hosted on the Turf Invitation Cup Day and Rs. 8,699 incurred on the party hosted on the annual day treating the same as entertainment expenditure. Out of the expenditure of Rs. 83,510 claimed as expenditure on refreshment served to stewards, secretary and other VIPs, the Income-tax Officer disallowed on estimate under Section 37 (2b) Rs. 5,000 on the ground that it represented entertainment expenses on account of lunch, etc. , provided to the guests and friends of stewards, etc. He further disallowed Rs. 69,230 on the ground that it represented expenditure on hot and soft drinks and tobacco served to stewards, their friends and guests. Out of Rs. 19,458 claimed by the assessee as refreshment served to permanent and race day officials, the Income-tax Officer disallowed on estimate Rs. 7,000 on the ground that it represented expenditure on officials of the turf club, unconnected with the business. In this way, he disallowed the deduction claimed by the assessee to the extent of Rs. 97,319 and allowed the same to the extent of Rs. 69,266.

( 4 ) ON appeal, the Appellate Assistant Commissioner held that the disallowance of the expenses made by the Income-tax Officer was not based on accurate estimate. He, therefore, reduced the disallowance to Rs. 70,000.

( 5 ) IN the appeal before the Tribunal, the representative for the assessee urged, as regards the expenditure incurred on hot drinks served to the stewards, their friends and guests, etc. , that most of the stewards are addicted to drink and that in order to get the right type of persons to act as stewards, it was quite necessary for the race club to entertain them with hot drinks on race days. These expenses, it was urged were necessitated by business exigencies and not with the idea of entertaining anybody.

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