1995 (5) TMI 6 - HC - Income Tax

Summary

Issues:
1. Whether the expenditure incurred by the assessee on running the kitchen is in the nature of entertainment expenditure under section 37(2B) of the Income-tax Act, 1961 for the assessment year 1973-74?

Analysis:
For the assessment year 1973-74, the Income-tax Appellate Tribunal referred a question regarding the disallowance of Rs. 10,220 under kitchen expenses by the Appellate Assistant Commissioner. The assessee, a commission agent in pulses, claimed the expenditure as a deduction, stating it was necessary to provide meals for beoparies as a business custom. The Income-tax Officer disallowed the expenditure as entertainment expenditure. However, the Appellate Assistant Commissioner allowed the claim, leading to an appeal by the Department. The Tribunal concluded that the provision of meals to beoparies was a business necessity, not entertainment expenditure, based on previous decisions and its own findings in earlier assessment years.

The question referred to the High Court depended on whether the kitchen expenditure was entertainment expenditure under section 37(2B) of the Act. The court noted a divergence of views among High Courts on entertainment expenditure, leading to a retrospective amendment through Explanation 2 in section 37(2A) of the Act, treating hospitality expenses as entertainment expenses after April 1, 1976. However, this amendment did not apply to the assessment year in question. Referring to previous cases, the court cited CIT v. Supreme Motors Pvt. Ltd. and Santlal Kashmirilal v. CIT, where similar expenses were considered permissible deductions as part of business operations before April 1, 1976.

Based on the precedents and the similarity of facts with previous cases, the High Court agreed with the view that the expenditure on providing meals to beoparies was not entertainment expenditure but a customary business expense. Following the decisions in CIT v. Supreme Motors Pvt. Ltd. and Santlal Kashmirilal v. CIT, the court answered the question in the affirmative, ruling against the Revenue. The reference was disposed of accordingly.