1994 Supreme(Del) 638

High Court Of Delhi
COMMISSIONER OF INCOME TAX - Appellant
Versus
RAJASTHAN MERCANTILE COMPANY LIMITED - Respondent
Decided On : 09/21/1994

Explanation 2 to Section 37(2a) of the Income-tax Act, 1961, which was inserted with effect from 1st April 1976, is a declaratory provision and is not retrospective in operation.

Headnote:

INCOME TAX - Entertainment expenditure - Explanation 2 to Section 37(2a) of the Income-tax Act, 1961 - Whether Explanation 2 to Section 37(2a) of the Income-tax Act, 1961, which was inserted with effect from 1st April 1976, can be read as if it was there all along - Held, no.

Fact of the Case:

The assessee in ITR Nos. 243 and 244 of 1977 is a limited company, carrying on its business in cloth and paper. A part of its claim for deduction as business expenditure incurred in connection with the messing expenses was allowed, following earlier decisions in the assessee's case. The expenditure was incurred for providing food, etc. to the customers and the representatives of the company, as could be gathered from the order of the Appellate Assistant Commissioner (which was affirmed by the Appellate Tribunal ). Following questions which are identical for the two assessment years, have been referred for the opinion of this Court: 1. Whether on the facts and in the circumstances of the case. the Tribunal was correct in law in upholding the Appellate Assistant Commissioner's order and allowing the expenses of Rs. 25. 443/- for the assessment year 1972-73 as mess expenses? 2. Was not the amount of Rs. 25,443/-claimed by the assessee as mess expenses for the assessment year 1972-73 in fact entertainment expenditure and as such disallowable under Section 37 (213) of the Income-tax Act, 1961? IN ITR No. 246/77, the assessee owns several hotels and has to attract foreign and Indian tourists for its business, apart from the customers who would organise various kinds of parties or functions in its premises. In this connection, it claimed allowance in respect of expenses incurred in connection with providing food etc. to its prospective customers as business expenditure. A part of the claim was allowed, negativing the revenue's contention that the expenditure in question is entertainment expenditure. It was held that the expenditure incurred was in the nature of "business promotion, publicity or advertisement than as entertainment". The question referred reads: "whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure of Rs. 35,118/- incurred by the assessee on serving food etc. to its prospective customers this year was not "entertainment expenditure" within the meaning of section 37 (2b) of the Income-tax Act, 1961?" IN IT Rs 249 and 250 of 1977, the question referred is as follows: "whether on the facts and in the circumstances of the case, the Tribunal was right in holding that Beoparies expenses to the tune of Rs. 19,822/- was an allowable item of deduction as the same was not hit by the provisions of Section 37 (2b) of the Act?" THOUGH there are two references, the year of assessment is the same. Before the Appellate Tribunal, there were two appeals - one by the Revenue and another by the assessee. The relevant facts, accepted as correct by the Appellate Tribunal are: ( 7 ) "the claim of the assessee is that during the season of the fruits, customers come to it in Delhi and they stay there. While staying in Delhi, they are given food by the assessee. The food is provided to the customers as a matter of custom. Also, it is claimed that itpromotes the business of the assessee. If the customers, during the season of the fruits, are not made comfortable in Delhi by the assessee, then the business of the assessee would be jeopardised as the customers would be in Search of another agent, who may provide them better boarding and lodging facilities. " The question referred in ITR 283 of 1977 is as follows: "whether on the facts and in the circumstances of the case, the Appellate Tribunal was legally correct in upholding the, order of the Appellate Assistant Commissioner in allowing Rs. 9,950/- on account of beopari expenses incurred by the assessee by not treating the same as entertainment expenses?" The assessee is a commission agent in fruits who was required to extend the ordinary courtesies of providing tea, biscuits, cold drinks and food to the customers. A part of the allowance claimed by the assessee has been upheld as business expenditure. IN ITR No. 291/77, the question to be answered is: "whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was correct in law in upholding the deletion of the disallowance of entertainment expense of Rs. 10, 296/-" The assessee being a commission agent had to spend for providing food to Beoparies coming from outstations for business. The expenditure was allowed as business expenditure, as the expenses were customary and did not involve any entertainment. IN ITR. No. 285 of 1977, the question referred reads: "whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in holding that the expenditure amounting to Rs. 11,412/- (Rs. 8,568/- in Fish Market and Rs. 2,844/- in Egg Market) incurred on food expenses for theconstituents was in the nature of entertainment expenses and thus disallowing them under section 37 (2b) of the Act?".

Finding of the Court:

Explanation 2 to Section 37(2a) of the Income-tax Act, 1961, which was inserted with effect from 1st April 1976, cannot be read as if it was there all along.

Issues: Whether Explanation 2 to Section 37(2a) of the Income-tax Act, 1961, which was inserted with effect from 1st April 1976, can be read as if it was there all along.

Ratio Decidendi: Explanation 2 to Section 37(2a) of the Income-tax Act, 1961, which was inserted with effect from 1st April 1976, is a declaratory provision and is not retrospective in operation. Therefore, it cannot be read as if it was there all along.

Final Decision: The question referred in ITR 285/77 (wherein the reference is at the instance of the assessee), is answered in the negative and against the Revenue. IN other references, the questions are answered in the affirmative and against the Revenue.