TMI Blog1991 (3) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act disallowed the balance of Rs. 1,70,433, which was confirmed by the Appellate Asstt. Commissioner. This is being objected to by the appellant before us. 2. Shri G. Narayanaswamy, the learned Chartered Accountant for the appellant placed before us a copy of the order of the Appellate Tribunal, Madras Bench-C in the case of Madras Loom House (P.) Ltd. v. ITO in IT Appeal No. 420 (Mad.) of 1986 dated 15-2-1991 and submitted that in the light of this decision of the Appellate Tribunal, the assessee is entitled to succeed in respect of its claim for deduction of the hotel expenses incurred by it towards the foreign customers who had come to transact business with the appellant in India. He also furnished before us complete details of the names of the foreign customers, their country of origin, date of their a rrival and departure from Madras and the hotel bill amounts paid by the appellant in respect of these foreign customers, as well as the export value of the goods sold to those customers. The learned Chartered Accountant submitted that according to the order of the Tribunal referred to above, only 1/10th of the hotel bill amounts should be disallowed for the entertainment pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 2 to section 37(2A) of the Act, defining ,entertainment expenditure' and pointed out that this Explanation inserted by the Finance Act of 1983 had retrospective effect from 1-4-1976. He particularly laid emphasis on the following words in the Explanation, namely "entertainment expenditure" includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provisions of food or beverages or in any other manner whatsoever" and submitted that even hotel bills, which included the stay expenditure, such as room rent, would also be hit by this Explanation and that, therefore, the departmental authorities were justified in disallowing the assessee's claim. He further relied on the decision of the Patna High Court in the case of Chandmull Rajgarhia v. CIT [1987] 167 ITR 433 as well as the latest decision of the Punjab Haryana High Court in Atlas Cycle Industries Ltd. v. CIT [1990] 181 ITR 18. Relying on these decisions, Shri Natarajan argued that the disallowance made by the departmental authorities should be upheld. [Emphasis supplied] 4. Shri G. Narayanaswamy, the learned Chartered Accountant for the assessee in his reply submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing all these relevant facts and circumstances the earlier Bench in the case of the assessee's allied concern had disallowed 10% of the expenditure as for probable element of entertainment involved in this expenditure and allowed the balance as admissible deduction. 5. We have carefully examined the contentions urged on both sides in the light of the materials placed before us and the authorities relied on by them. 6. No doubt, the allowability of the expenditure in question has to be considered in the light of Explanation 2 to section 37(2A), which was inserted by the Finance Act of 1983 with retrospective effect from 1-4-1976. The said Explanation reads as follows :-- " Explanation 2 : For the removal of doubts, it is here by declared that for the purpose of this sub-section and sub-section (2B), as it stood before the 1st day of April, 1977, entertainment expenditure includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand the principle behind the earlier decision of this Court in CIT v. Karuppuswamy Nadar Sons [1979] 120 ITR 140." In our view, Explanation 2 to section 37(2A) has to be understood in the light of the tests laid down by their Lordships of the Madras High Court in the above decision. We are unable to agree with the learned departmental representative that the expenditure incurred by the appellant in the present case on the living expenses of its foreign customers as permitted by the Reserve Bank of India would fall within the mischief of this Explanation, as the expenditure included the expenses not only for providing food and beverages, but also room rent for the stay of foreign customers. It is this fact that has been taken note of by our learned Brothers when they examined this issue in the case of Madras Loom House (P.) Ltd. decided by the Appellate Tribunal, Madras Bench-C dated 15th February, 1991. In para 8 of the said order, the learned Members held as follows :-- " It is no doubt true, as canvassed by the learned counsel of the assessee that these expenses have been incurred to meet the living cost of foreign buyers. However, it was admitted on behalf of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion because of the conflicting interests of the two departments of the Government of India." 7. Respectfully following the test laid down by their Lordships of the Madras High Court in the case of K.P. V. Shaik Mohamed Rowther Co. and the decision of our learned Brothers of Appellate Tribunal, Madras Bench-C in the order quoted above, we hold that the assessee is entitled to the deduction claimed by it in respect of the hotel bills paid by it for the foreign customers who came to transact business with it in India. Following the order of the Tribunal in the case of Madras Loom House (P.) Ltd. we direct the Income-tax Officer to disallow Rs. 14,408 representing 1/10th of the hotel bill expenses as for any probable entertainment element involved and allow the balance of Rs. 1,29,677 as expenditure laid out wholly and exclusively for the purpose of the business of the assessee-firm. We accordingly direct the assessing officer to allow Rs. 1,29,677 as admissible expenditure under section 37(1) of the Act and amend the assessment of the appellant-firm and its partners accordingly. 8. As the assessee's learned Chartered Accountant did not press the ground relating to the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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