1996 Supreme(P&H) 1333

PUNJAB & HARYANA HIGH COURT
Ashok Bhan and N.K.Agrawal JJ.
Commissioner Of Income-tax
Versus
Indo Asian Switch-gears (P.) Ltd.
Income tax Reference No. 47 of 1983,48 of 1983,
Decided On : AUGUST 30, 1996

1. Entertainment expenditure is an expression of wide import. However, in the context of disallowance of entertainment expenditure as a business expenditure by virtue of Sub-section (2A) of Section 37 of the Income-tax Act, 1961, the word entertainment must be construed strictly and not expansively. 2. The expenditure which qualifies for weighted deduction is that which is incurred on the activities exercised outside India for the development of the export market for Indian goods on long-term basis. 3. The provision of Sub-clause (viii) of Clause (b) of Section 35B(1) of the Income-tax Act, 1961 is very wide in amplitude and, therefore, it must be given full effect if an assessee claims deduction of an expenditure under that sub-clause.

Headnote:

INCOME TAX - Weighted deduction - Expenditure incurred on food and light refreshment served to trainees and engineers - Whether entertainment expenditure - Section 37(2A) of the Income-tax Act, 1961 - Scope and applicability - Disallowance of miscellaneous expenses and commission paid to agents - Whether eligible for weighted deduction - Section 35B of the Income-tax Act, 1961 - Interpretation - Disallowance of penalty paid to Punjab State Electricity Board - Whether allowable as deduction - Section 37(1) of the Income-tax Act, 1961 - Applicability - Extinguishment of sales tax liability - Whether includible in assessee's income - Section 41(1) of the Income-tax Act, 1961 - Interpretation.

Fact of the Case:

The assessee, a manufacturer of electric switch-gears, claimed weighted deduction under Section 35B of the Income-tax Act, 1961 (the Act) on miscellaneous expenses including salary and establishment expenses, and commission paid to agents. The Assessing Officer disallowed the deduction on the ground that the expenses were not covered under any of the nine sub-clauses of Clause (b) of Section 35B(1) of the Act. The Tribunal allowed deduction of 20% of the miscellaneous expenses and the entire commission paid to the agents. The Revenue challenged the Tribunal's order on the ground that the expenses were not eligible for weighted deduction under Section 35B of the Act. The assessee also challenged the disallowance of penalty paid to the Punjab State Electricity Board for delay in delivery of goods and the inclusion of extinguished sales tax liability in its income.

Finding of the Court:

1. Expenditure on food and light refreshment served to trainees and engineers attending seminars and conferences organized by the assessee was not in the nature of entertainment expenditure but was incurred for business necessity and expediency. Such expenditures were not covered by Section 37(2A) of the Act and were, therefore, allowable as deduction under Section 37(1) of the Act. 2. Miscellaneous expenses including salary and establishment expenses, and commission paid to agents were eligible for weighted deduction under Section 35B of the Act. The Tribunal's order allowing deduction of 20% of the miscellaneous expenses and the entire commission paid to the agents was upheld. 3. Penalty paid to the Punjab State Electricity Board for delay in delivery of goods was allowable as deduction under Section 37(1) of the Act as it was not paid for any violation or infraction of the law but was paid due to breach of an agreement. 4. Extinguishment of sales tax liability was not includible in the assessee's income under Section 41(1) of the Act as there was neither receipt of refund money nor any order of refund or adjustment in the assessee's favor.

Issues: 1. Whether the expenditure incurred on food and light refreshment served to trainees and engineers attending seminars and conferences organized by the assessee was in the nature of entertainment expenditure and, therefore, not allowable as deduction under Section 37(1) of the Act. 2. Whether the miscellaneous expenses including salary and establishment expenses, and commission paid to agents were eligible for weighted deduction under Section 35B of the Act. 3. Whether the penalty paid to the Punjab State Electricity Board for delay in delivery of goods was allowable as deduction under Section 37(1) of the Act. 4. Whether the extinguishment of sales tax liability was includible in the assessee's income under Section 41(1) of the Act.

Ratio Decidendi: 1. The term "entertainment" in the context of Section 37(2A) and (2B) of the Act must be construed strictly and not expansively. Ordinarily, entertainment connotes something which may be beneficial for mental or physical well-being but is not essential or indispensable for human existence. A bare necessity, like an ordinary meal, is essential or indispensable and, therefore, is not entertainment. Where such a bare necessity is offered, it is hospitality not entertainment. Unless the definition of entertainment includes hospitality, the ordinary meaning of entertainment cannot include hospitality. For this reason, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity, would not be entertainment expenditure without the aid of the enlarged meaning given to the words by Explanation 2 inserted with effect from April 1, 1976. The definition in Explanation 2 is not the ordinary meaning of the words entertainment expenditure, but the enlarged meaning given for the purposes of the Act with effect from April 1, 1976. The object of Sub-section (2A) is to disallow any lavish expenditure in the form of business expenditure. 2. The expenditure which qualifies for weighted deduction is that which is incurred on the activities exercised outside India for the development of the export market for Indian goods on long-term basis. This provision is not intended to cover expenditure which the taxpayer incurs on activities inside India for his export business except where these are incidental to the activities outside India. The weighted deduction is admissible with reference to the qualifying expenditure only. Expenditure of a capital nature and personal expenses do not qualify for such a deduction. The expenditure to be allowed as deduction under Section 35B is an amount equal to one and one-third times the amount of the qualifying expenditure so incurred. The expenditure must be incurred wholly and exclusively for the purposes of the business and on certain specified items in relation to the export business. Eligibility of an expenditure is, therefore, to be tested with reference to Sub-clauses (i) to (ix) of Clause (b) of Section 35B(1) of the Act. 3. The assessee had incurred expenditures on sea freight and marine insurance which were claimed as eligible for deductions under Sub-clause (viii) of Clause (b) of Section 35B(1) of the Act. The Revenue contended that both the expenditures were incurred by the assessee in India solely in connection with the activities mentioned in Sub-clause (iii) and, therefore, it was not admissible as deduction. The Court held that the provision of Sub-clause (viii) is very wide in amplitude and, therefore, it must be given full effect if an assessee claims deduction of an expenditure under that sub-clause. Sea carriage and marine insurance are, in the Court's view, such services which are rendered outside India and are also in connection with the execution of the contract entered into with the foreign buyers. Since both the conditions of Sub-clause (viii) stand satisfied, there is no reason to hold that expenditures on sea freight and marine insurance would not be covered under Sub-clause (viii). 4. The assessee had also claimed weighted deduction on the amount of commission paid to agents for services rendered outside India. The Revenue contended that the commission was paid in India and, therefore, it was not eligible for deduction. The Court held that the payment of commission is directly relatable to the export development and thus eligible for weighted deduction.

Final Decision: 1. The questions relating to the disallowance of expenditure on food and light refreshment served to trainees and engineers attending seminars and conferences organized by the assessee were answered in the negative and in favor of the assessee. 2. The questions relating to the disallowance of miscellaneous expenses and commission paid to agents were answered in the affirmative and against the Revenue. 3. The question relating to the disallowance of penalty paid to the Punjab State Electricity Board was answered in the affirmative and against the Revenue. 4. The question relating to the inclusion of extinguished sales tax liability in the assessee's income was answered in the affirmative and against the Revenue.