2002 (10) TMI 11 - HC - Income Tax

Scope of entertainment expenditure - Expenditure on presents at the time of Diwali - While defining the scope of entertainment expenditure by the Explanation 2 to sub-section (2A) of section 37, the Legislature has widened the meaning and scope of the words entertainment expenditure and now entertainment expenditure includes expenditure on providing food or beverages or in any other manner whatsoever to any person. Even if gifts and presents are based on contract or custom or usage of trade, that can be treated as entertainment expenditure for the purpose of sub-section (2A) of section 37 Thus Tribunal has committed an error in holding that the expenditure on presents at the time of Diwali is not in the nature of expenditure on entertainment

Summary

Issues:
1. Whether the Tribunal was justified in deleting the addition of expenditure on gifts and presents, considering them as not entertainment expenditure.
2. Whether the Tribunal was justified in deleting the addition of expenditure despite it being potentially disallowable under rule 6B of the Income-tax Rules, 1962.

Analysis:
1. The Tribunal had referred questions regarding the deletion of additions on account of gifts and presents, treated as entertainment expenditure by the Assessing Officer. The Assessing Officer disallowed these expenses under Explanation 2 to sub-section (2A) of section 37, amounting to Rs. 1,94,775 and Rs. 1,89,867 for two assessment years. The Commissioner of Income-tax (Appeals) upheld the disallowance based on precedents. However, the Tribunal, following its earlier order, deleted the additions, leading to the current dispute.

2. The Tribunal's decision was challenged based on the interpretation of Explanation 2 to sub-section (2A) of section 37, which defines entertainment expenditure. The Department argued that gifts and presents fall under hospitality and should be disallowed, citing a recent court decision. The assessee contended that gifts during Diwali did not attract the provision. The court analyzed the legislative intent behind the Explanation, emphasizing that even gifts and presents could be considered entertainment expenditure, as seen in previous court decisions.

3. The court referred to cases like CIT v. Green Roadways and Modern Threads (India) Ltd., where providing food or beverages to customers was considered entertainment expenditure. It disagreed with the Calcutta High Court's view and upheld the broader interpretation of entertainment expenditure. The court emphasized that while the expenses might be for business purposes, the legislative intent to restrict such expenses should be respected, leading to a decision in favor of the Department.

4. Ultimately, the court ruled in favor of the Department, denying the deletion of the additions on gifts and presents as entertainment expenditure. As the decision on the first question covered both assessment years and amounts, the second question was not answered. The Tribunal's decision was deemed erroneous, and the reference was disposed of accordingly.