Present Appellant, and , Respondent

When the income of a business is assessed for purposes of taxation, section 12 (ab) of the Income Tax Ordinance, as amended by Act No. 13 of 1959, does not debar the proprietor of the business from claiming, as deductible expenses, monies spent by his employees on entertainment in connection with the business.

stated under section 74 of the Income Tax Ordinance.

S. Nadesan, Q. C., with Desmond Fernando, for the assessee-appellant.

A. C. Alles, Solicitor-General, with H. L. de Silva, Crown Counsel, for the respondent.

Cur. adv. vult.

October 12, 1962.
This is a case stated under section 74 of the Income Tax Ordinance (Cap. 242, as amended by Act No. 13 of 1959), in which the opinion of this Court is sought on the question whether the proprietor of a business could claim, as deductible expenses, monies spent by his employees on entertainment in connection with his business in assessing the income of the business for purposes of taxation.

The facts, set out in the case stated, are as follows : The assessee, who is carrying on a partnership business with two others as wholesale dealers in textiles, appealed against the assessment for the years 1958-1959 and 1959-1960, and claimed the sums of Rupees 2,110 and Rupees 2,853 (being moneys spent on the entertainment of customers) as expenses incurred in the production of income during these respective years. Refreshments were purchased for customers both by the partners of the business as well as by the salesmen employed in the business. The money required for the purchase of these refreshments on each occasion was obtained by the partners or by the salesmen, as the occasion demanded, from the cashier and these sums were subsequently debited to the account of the business. The employees were given a free hand in the selection of customers for the purpose of serving refreshments.

There is agreement between the assessor and the assessee on the following matters :

(i) Seventy-five per cent, of the total expenditure for entertainment was incurred by the salesmen and twenty-five per cent, by the partners.

(ii) Twenty-five per cent, of entertainment expenses incurred by the partners were not deductible expenses after the amending Act NO. 13 of 1959.

(iii) The salesmen, who had provided the refreshments, were not executive officers within the meaning of section 2 of the amending Act (No. 13 of 1959).

The opinion of this court is sought in respect of the seventy-five per cent, of the expenses incurred by the salesmen.

Under the Income Tax Ordinance (Cap. 242), before the amending Act No. 13 of 1959 came into force, all expenses incurred in entertainment, on the facts of the instant case, would have been deductible expenses incurred in the production of income (vide section 12 of Cap. 242). The rights of an assessee to claim certain expenses spent on entertainment and travelling, as permissible deductions, were considerably curbed by the Income Tax (Amendment) Act (No. 13 of 1959).

Mr. S. Nadesan Q. C., who appeared for the assessee, urged that the Legislature, by introducing the amending Act (No. 13 of 1959), never intended to interfere with small scale entertainment provided by business men through their employees, such as offering aerated waters, etc., to their prospective customers. It is a well-known fact that owners of textile businesses often serve aerated waters to their prospective customers. Indeed, such a benevolent gesture not only quenches the thirst of the prospective customers but also induces them to buy some articles of clothing as a matter of moral obligation. Mr. Nadesan urged that such a practice would not only be conducive to an increase in income for businessmen but also enables the revenue department to reap a richer harvest by way of taxes. Be that as it may, the intention o