TMI Blog1982 (12) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... that the said amounts constituted entertainment expenditure not allowable in terms of section 37(2A) of the Act ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not an industrial company for the assessment year 1969-70 within the meaning of section 2(6)(c) of the Finance Act, 1969, and as such not entitled to the benefit of lower rate of tax ? " The assessee is a private limited company engaged in the export of tobacco and other commodities with its head office at Hyderabad and branches at Guntur, Cochin, Delhi and Calcutta. For the assessment years 1968-69 and 1969-70, the assessee claimed deduction of Rs. 1,34,578 and Rs. 2,06,227 respectively, on account of business promotion expenses. The amount of Rs. 1,34,578 claimed in 1968-69 comprised of three items, viz. : Rs. (1) Entertainment expenditure 24,806 (2) Guest-house maintenance expenditure 24,793 (3) Business promotion expenses 87,081 Promotion expenses claimed for the assessment year 1969-70 represented the expenditure on maintenance of guest house, expenditure on ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses cannot be allowed for the reason that the assessee has not maintained the register as required by r. 6C(3) of the I.T. Rules. (2) For the assessment year 1968-69, out of a total amount of Rs. 87,081 claimed by the assessee as business promotion expenses, only an amount of Rs. 12,477 can be allowed, viz., (a) Rs. 2,100 paid towards market survey expenses; (b) Rs. 2,377 spent on conveyance ; and (c) Rs. 8,000 on air tickets. The rest was treated as entertainment expenditure. So far as the claim of "entertainment expenses" in a sum of Rs. 24,806 for this year was concerned, the Tribunal affirmed the order of the AAC. In other words, the Tribunal held that only Rs. 18,806 was allowable as business expenditure and the balance of Rs. 6,000 had to be disallowed as entertainment expenditure. (3) For the assessment year 1969-70, the Tribunal affirmed the AAC's finding, viz., that only an amount of Rs. 36,947 is allowable as business expenditure and the balance is to be disallowed as entertainment expenditure. (For this year, the assessee made no distinction between " entertainment expenditure " and " business promotion expenditure "a distinction put forward for the previous asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem Chand Bahadur Chand [1981] 131 ITR 336, is that all expenditure incurred on account of hospitality, whether frugal or lavish, must be understood as falling within the ambit of the expression " in the nature of entertainment expenditure ". The court emphasised the words " in the nature of " in the above expression and held, on that basis, that not only entertainment expenditure stricto sensu but all expenditure in the nature of entertainment expenditure also fell within the said expression. The court observed further that by holding that hospitality which is not lavish may be expended without any limits would virtually frustrate the object of the Legislature in enacting sub-ss. (2) and (2A) of s. 37, viz., curbing excessive business entertainment at the cost of the public exchequer. Beyond the prescribed limits, of course, business expenditure is left to the discretion of the businessmen themselves but, they are told, not at the cost of public exchequer. It was accordingly held that the expenditure incurred on supply of food and drinks to customers of the assessee, for which purpose the assessee was itself running a regular kitchen, constitutes expenditure " in the nature of ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs' case [1977] 106 ITR 424, that the amount claimed by the assessee was expenditure incurred on the guests. This court observed that it was nobody's case that the guest houses were run on a lavish scale looking particularly to the needs of customers from abroad and held that because the said amount was spent on putting up and providing reasonable facilities for the accommodation of foreign guests and for their food and drink, etc., within reasonable limits, the expenditure so incurred had to be allowed. We must, however, observe that the expenditure incurred by an assessee on the maintenance of guest house is covered by sub-s. (3) of s. 37 which does not fall for our consideration. We are concerned only with the meaning of the expression expenses incurred " in the nature of entertainment expenditure " occurring in sub-ss. (2) and (2A) only and the decision of this court in Maddi Venkataratnam's case [1979] 119 ITR 514, is relevant only in so far as it approves the principles enunciated by the Gujarat High Court in Patel Brothers' case [1977] 106 ITR 424. In view of the fact that a Bench of this court has already taken a view agreeing with the view taken by the Gujarat High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to re-determine the amounts in the light of the above principles. Now, coming to the third question referred, the contention of the assessee is that it is an industrial company as defined in cl. (c) of subs. (6) of s. 2 of the Finance Act, 1969, being Act No. XIV of 1969. The definition of " industrial company " reads as follows: " (c) 'Industrial company' means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. Explanation.-For the purposes of this clause, a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making any deduction under Chapter VI-A of the Income-tax Act) is not less than fifty-one per cent. of such total income." The assessee's case before the Tribunal appears to be that it was engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining is not less than fifty-one per cent. of the total income of the assessee, company cannot be an industrial company. We do not think so. According to the main limb of the definition, " industrial company " is a company which is mainly engaged in a specified activity, while the Explanation says that the company shall be deemed to be mainly engaged in specified activity if the income attributable to the specified activity is not less than fifty per cent. of its total income computed in accordance with the Explanation. Two views are urged before us. Mr. Suryanarayana Murthy, learned standing counsel for the Department, submits that in every case the test prescribed by the Explanation has to be satisfied and that unless it is so satisfied, an assessee would not be called an " industrial company ". The other view urged by Mr. Parvatha Rao is based upon a circular of the Central Board of Direct Taxes which is found printed in para. 507 of Taxman's Direct Taxes Circulars, Vol. 1, at p. 851. The circular referred to is Circular No. 103 (F. No. 166/1/73-II (Al) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he generation of electricity, which is, ex facie and from any point of view, untrue and untenable. We, are, therefore, of the opinion that the company which is mainly engaged in the specified activity shall be deemed to be an industrial company notwithstanding the fact that its income from such activity is less than fifty-one per cent. of its total income, and that the Explanation applies only where the company is not mainly engaged in the specified activity but still the income attributable to the specified activity is fifty-one per cent. or more of its total income. Another aspect which needs to be clarified in view of the controversy raised before us is the meaning of the word " attributable ", occurring in the Explanation to sub-s. (6) of s. 2 of the Finance Act, 1969. As pointed out by the Allahabad High Court in Addl. CIT v. Abbas Wazir (P.) Ltd. [1979] 116 ITR 811, the words " attributable to " are wider in scope than the words " derived from ". In that case it was held that the assessee who has engaged in the manufacture and sale of carpets and who derived certain amount of income by sale of import licences which were granted to it on the basis of its export performance, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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