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1985 Supreme(Mad) 132
High Court of Judicature at Madras
THE HONOURABLE CHIEF JUSTICE MR. M. N. CHANDURKAR & THE HONOURABLE MR. JUSTICE G RAMANUJAM
Commissioner of Income Tax - Appellant
Versus
Carborandum Universal Limited - Respondent
Case No : No
Decided On : 06 March 1985
The High Court has the discretion to reject an application for reference if it is not satisfied with the correctness of the decision of the Tribunal.
Headnote:
INCOME TAX - Reference to High Court - Discretion of High Court - Question of law - Whether High Court can reject application for reference when decision of Tribunal is in accordance with settled law of High Court - Whether High Court can reject application for reference when correctness of decision of High Court is being tested in Supreme Court - Whether Tribunal must state a case when question of law is fairly arguable and answer is not self-evident - Whether Tribunal must state a case when Supreme Court has granted leave to appeal against decision of High Court - Whether Tribunal must state a case when there is conflict of opinion between High Courts - Whether Tribunal must state a case when expenditure incurred on customary hospitality is claimed as deduction - Whether Tribunal can make rough and ready estimate of expenditure incurred on customary hospitality in absence of evidence due to lapse of time.
Fact of the Case:
The assessee claimed expenditure incurred on providing customary hospitality to customers as business expenditure. The ITO disallowed the claim, and the AAC deleted the disallowance. The Tribunal set aside the AAC's order and remanded the appeals to the AAC to enable the assessee to produce evidence in support of its claims. The assessee could not produce any evidence, and the AAC confirmed the addition. The Tribunal allowed 50% of the expenditure claimed by the assessee. The Revenue sought a reference to the High Court on the questions of whether the Tribunal was justified in deleting 50% of the entertainment expenditure and whether the Tribunal's finding that 50% of the entertainment expenditure was spent on customary hospitality and should be allowed was based on valid materials and a reasonable view to take on the facts of the case. The Tribunal declined to make the reference, holding that the question with regard to the deductibility of expenses incurred on customary hospitality was already concluded by the decision of the High Court in Karuppuswamy Nadar & Sons.
Finding of the Court:
The High Court held that it was not satisfied with the correctness of the decision of the Tribunal, and therefore rejected the application for reference. The High Court held that the question of law raised in question No. 1 was concluded by a decision of the High Court against the Revenue, and that the Tribunal was bound to follow the decision of the High Court. The High Court also held that the question of law raised in question No. 2 was not a substantial question of law, and that the Tribunal's finding was based on a rough and ready estimate of the expenditure incurred on customary hospitality in the absence of evidence due to lapse of time.
Issues: 1. Whether the High Court can reject an application for reference when the decision of the Tribunal is in accordance with the settled law of the High Court? 2. Whether the High Court can reject an application for reference when the correctness of the decision of the High Court is being tested in the Supreme Court? 3. Whether the Tribunal must state a case when the question of law is fairly arguable and the answer is not self-evident? 4. Whether the Tribunal must state a case when the Supreme Court has granted leave to appeal against the decision of the High Court? 5. Whether the Tribunal must state a case when there is a conflict of opinion between High Courts? 6. Whether the Tribunal must state a case when expenditure incurred on customary hospitality is claimed as a deduction? 7. Whether the Tribunal can make a rough and ready estimate of expenditure incurred on customary hospitality in the absence of evidence due to lapse of time?
Ratio Decidendi: 1. The High Court has the discretion to reject an application for reference if it is not satisfied with the correctness of the decision of the Tribunal. 2. The High Court can reject an application for reference when the correctness of the decision of the High Court is being tested in the Supreme Court, if the Tribunal's decision is in accordance with the settled law of the High Court. 3. The Tribunal must state a case when the question of law is fairly arguable and the answer is not self-evident. 4. The Tribunal must state a case when the Supreme Court has granted leave to appeal against the decision of the High Court, if the Tribunal's decision is not in accordance with the settled law of the High Court. 5. The Tribunal must state a case when there is a conflict of opinion between High Courts. 6. The Tribunal must state a case when expenditure incurred on customary hospitality is claimed as a deduction, if the Tribunal's decision is not in accordance with the settled law of the High Court. 7. The Tribunal can make a rough and ready estimate of expenditure incurred on customary hospitality in the absence of evidence due to lapse of time, if the Tribunal's decision is in accordance with the settled law of the High Court.
Final Decision: The High Court rejected the Revenue's applications for reference.
CHANDURKAR C.J.
In view of the very extensive arguments which have been advanced before us by Mr. Jayaraman, learned counsel appearing on behalf of the Revenue, it becomes necessary to deal with these cases in a little detail. The assessee had claimed in the assessment proceedings for the assessment years 1974-75 and 1975-76, expenditure of Rs. 41, 621 and Rs. 50, 690, respectively, as business expenditure incurred in providing customary hospitality to the customers. The ITO declined to treat these amounts as business expenditure and added them back while computing the taxable income of the assessee. The assessee then filed appeals before the AAC who deleted the disallowance finding that the expenditure related to coffee, tea and other expenses on customers and holding that strictly speaking, such expenditure cannot be called entertainment expenditure though it was so styled by the assessee. The matter was taken up in appeal for both the years by the Department. The Tribunal set aside the order of the AAC because the assessee could not furnish the necessary particulars before the Tribunal and remanded the appeals to the AAC to enable the assessee to produce evidence in support of its claims. However, when the matter went back to the appellate authority, the appellate authority confirmed the addition on the ground that the assessee had not produced any evidence regarding the expenditure The assessee took up the matter to the Tribunal. Before the Tribunal, the assessee had stated that no evidence of the actual expenditure incurred would be possible to be produced because eight years had already elapsed and the relevant papers necessary were not to be found. Relying on the decision of this court in CIT v. Karuppuswamy Nadar & Sons, deduction of the entire amount was claimed. The Tribunal, having regard to the view which was originally taken by the appellate authority that the expenditure related to the provision of coffee and tea to the customers which was in the nature of customary hospitality, allowed only 50 per cent. of the amount claimed by the assessee in the two years in questionThe Revenue, not being satisfied with the view taken by the Tribunal, called upon the Tribunal to refer the following two questions to this court under s. 256(1) of the I.T. Act, 1961
1. Whether, on the facts and in the circumstances of the case, and having regard to the provisions of section 37(2B) of the Income-tax Act, 1961, the Appellate Tribunal was justified in deleting 50% of the total entertainment expenditure claimed?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's finding that 50% of the entertainment expenditure was spent on customary hospitality and should be allowed is based on valid materials and a reasonable view to take on the facts of the case ?
"The Tribunal declined to make the reference holding that the question with regard to the deductibility of expenses incurred on customary hospitality was already concluded by the decision of this court in Karuppuswamy Nadar and Sons' case. With regard to allowing only 50 per cent. of expenditure and disallowing the remaining 50 per cent., the Tribunal took the view that this decision rested on facts and probabilities and there was, therefore, no basis for a reference with regard to the inference drawn by the Tribunal as to the quantum of expenditure. The Revenue has now filed these applications under s. 256(2) of the I.T. Act seeking a direction to the Tribunal to submit a statement of the case referring the two questions reproduced earlier for the opinion of this court
Now, it is not in dispute that as far as this court is concerned, the difference between expenditure incurred on customary hospitality and expenditure incurred on entertainment has been clearly set out in the decision in the case of Karuppuswamy Nadar and Sons. That decision also holds that an expenditure incurred by an assessee on supply of coffee, tea, etc., to the customers
