TMI Blog2006 (5) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... al Bench. Accordingly, it was decided by the Hon'ble President, I.T.A.T. to dispose of all the grounds by this Special Bench. 3. Briefly stated facts of the case are as under:- Assessee an individual is a legal practitioner derives income from legal profession and other sources. The return was filed declaring an income of Rs. 26,34,450. During the course of assessment it was found by the Assessing Officer that the assessee claimed expenses on account of development of clientele relationship amounting to Rs. 1,28,561. On perusal of the details, filed by the assessee, it was found by the Assessing Officer that most of the expenditure was incurred on account of payment to clubs, visa card etc. According to the Assessing Officer the said payment is nothing but an "entertainment expenses" shown under different heads of expenses on account of entertaining his clients, therefore, the Assessing Officer treated the said expenses as "entertainment expenses" and out of such expenses Rs. 1,28,561 he, disallowed Rs.59,280 as under:- (i) Entertainment expenses as claimed by the assessee: Rs. 1,28,561 (ii)Less: Deduction under section 37(2A) Rs. 69,281 Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .59,280 in flagrant violation of law and by bending rules, should and ought to be deleted in the interest of Justice." 5.1 The Ld. counsel for the assessee submits that the assesses embarked upon to explore and exploit the emerging opportunities consequent to opening up of the Indian Economy and to keep pace with the rapid changes that have been taking place in the Global Economy, resulting in Paradigm Shift in Global Business Strategy ventured to enlarge the ambit of his clientele to include the prospective Foreign Investors interested in availing the emerging business opportunity in India launched Customer Awareness Programmes for enlightening the Corporate about the Legal Aspects of Emerging Opportunity, necessitating implementation of the Customer Relationship Management (CRM) Techniques. Accordingly, the assessee set up Stratways Private Limited Head q Quarter at Kolkata and Stratways Limited Head Quarter in London. He further submits that the assessee's vision, mission and passion triggered his dedication to enlighten through continuous and consistent Customer Relationship Management (CRM) Programmes not only for the prospective Foreign Investors but also to Multi-national ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd tranquil mindset of the clients and the customers for enhancing receptivity and deeper concentration essential for effective synchronization of body, mind and intellect to make the right choice and at the same time to provide the clients and the customers vital signals that, they are availing the services of a prosperous, enlightened, aristocrat competent dignified professional as well as an eminent personality commensurate to the professional fees charged by the assessee to help them to see the value of their money. He further submits that the assessee held meetings and the conferences with his clients and customers in the said clubs because of the very vital fact that they provided an exclusive ambiance at a much lesser cost compared to the comparable facilities, which are seldom available in the market. He further submits that the assessee has exercised considerable business prudence to hold those conferences at those exclusive clubs through intelligent blending of national pride with professional acumen on grounds of commercial expediency, wholly and exclusively for furtherance of the assessee's professional income. As such, the expenditure incurred by the assessee should an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007 Rs. 1,77,89,481.22 -------------------------------------------------------- 5.3 At this stage the Ld. counsel for the assessee has also placed on record the following graphics: 5.4. In the light of the above table the Ld. counsel for the assessee submits that the expenditure incurred by the assessee for conducting the Customer Education Programme to facilitate client's enlightenment about the various provisions of Indian Statutes and the emerging opportunities of business and commerce, because of India having the highest English Speaking population in the World, which attracted substantial Foreign Direct Investments in the country and triggered off accelerated growth of mergers and acquisitions to facilitate buoyancy in the Indian Economy at an appropriate ambiance to suit the Customer convenience is totally allowable as business expenditure. 5.5. The Ld. counsel for the assessee further that the Tribunal in the assessee's own case in ITA No. 1323/Cal./2000 dated 31-7-2002 for the assessment year 1995-96 while holding that in principle these expenses should have been allowed as long as they were not personal in nature and were duly supported by evidence about t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her submits that the decision relied on by the ld. counsel for the assessee are prior to the amendment made by the Finance Act, 1992 with effect from 1-4-1993, therefore, the same are not applicable in the assessee's case. He, therefore, submits that the disallowance of Rs.59,280 made by the Assessing Officer and sustained by the Ld. CIT(A) be upheld. 5.7 We have carefully considered the rival submissions of the parties and perused the material available on record. We find that the assessee has incurred a sum of Rs. 1,28,561.49 under the head 'Development of Client Relation Expenses' and claimed the same as business expenditure under section 37(1) of the Income-tax Act, the details of which are as under: ---------------------------------------------------------- Date Period Name of the club Amount (Rs.) ---------------------------------------------------------- 1-5-1995 March-95 Bengal Club 7,354.00 1-5-1995 February-95 Calcutta Club 150.00 1-5-1995 February-95 Tollygunge Club 200.00 8-5-1995 March-95 Tollygunge Club 200.00 10-5-1995 March-95 Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Misc. Bill Bengal Club 16,364.00 18-3-1996 August-95 Calcutta Club 156.00 18-3-1996 December-95 Calcutta Club 150.00 18-3-1996 January-96 Tollygunge Club 400.00 20-3-1996 January-96 Calcutta Club 170.00 25-3-1996 Bill No. 6017765 Taj Bengal 1,828.00 31-3-1996 Payment by Taj Bengal 700.00 ANZ VISA Card dated --------------- on 21-3-96 1,28,561.49 ---------------------------------------------------------- 5.8 In order to appreciate the contentions, the provisions of section 37(1) and 37(2) of the Act, as applicable at the relevant time, have to be referred to, therefore, the said section is extracted hereunder for easy reference:- "37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case ruled that generally, "entertainment expenditure" is an expression of wide import. However, in the context of disallowance of entertainment expenditure as a business expenditure by virtue of section 37(2A), the word 'entertainment' must be construed strictly and not expansively. Ordinarily "entertainment" connotes something which may be beneficial for mental or" physical well being but is not essential or indispensable for human existence. A bare necessity, like an ordinary meal is essential or indispensable and, therefore, is not "entertainment". If such a bare necessity is offered by another, it is hospitality but not entertainment. Unless the definition of "entertainment" includes hospitality, the ordinary meaning of "entertainment" cannot include hospitality. For this reason, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity is not entertainment expenditure without the aid of enlarged meaning given to those words by the said Explanation (2). The definition in the said Explanation (2) is not ordinary meaning of the words "entertainment expenditure" but the enlarged meaning given for the purpose of the Act with effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Satyanarayana Rice Mill Contractors Co.'s case it has been held at page 111 as under: ".... that any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in benefit to the assessee's business has to be regarded as an allowable deduction under section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy. It is not as if the payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for' a charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was deductible." 5.14 In Patel Bros. Co. Ltd.'s case the Hon'ble High Court laid down following broad tests to determine the nature of entertainment expenses appearing at page 425 (short notes) as under: "(a) If the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish and extravagant scale, or is of wasteful nature, it is entertainment per se. (b) If the provision of food or drinks to a client, constituent or customer is in the nature of bare necessity, or by wav of ordinary courtesy, or as an express or implied term of the contract of employment spelled out from long-standing practice or custom of trade or business, it will not amount to entertainment. (c) If the provision of food or drinks to a client, customer or constituent is in a liberal and friendly way, it may amount to entertainment having regard to the place, item and cost of such provision. (d) The provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment. In I.T.R. No. 64 of 1974, it was found by the Appellate Tribunal that it was not in dispute that up-country constituents of the assessee came to A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of "entertainment" cannot include hospitality. For this reason, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity, would not be "entertainment expenditure" without the aid of the enlarged meaning given to the words by Explanation 2 inserted with effect from 1-4-976. The definition in Explanation 2 is not the ordinary meaning of the words "entertainment expenditure", but the enlarged meaning given for the purposes of the Act with effect from 1-4-1976. The object of sub-section (2A) is to disallow any lavish expenditure in the form of business expenditure. The object of the provision clearly is to allow deduction of the essential business expenditure incurred due to commercial expediency and according to the trade usage excluding lavish expenditure. Such expense did not come within the meaning of "entertainment expenditure" prior to 1-4-1976, when Explanation 2 was brought in by a retrospective amendment made in 1983 of sub-section (2A) of section 37. The insertion of Explanation 2 made retrospectively but restricted in its application only with effect from 1-4-1976, is itself an indication that its application prior to 1-4-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment of fees to clubs is allowable vide paras 42 and 43 appearing at page 526 as under: "42. The next dispute relates to allowability of fees to clubs. The amount and year of dispute can be noticed as under: (XIV) Club Fees: Assessment year 1991-92; Rs.10,800; Ground No. (2): Department's Appeal. Assessment year 1993-94: Rs. 5,00,000: Ground No. (II): Assessee's appeal 43. The Hon'ble Bombay High Court has considered this issue in Otis Elevator Co. India Ltd. v. CIT [1992] 195 ITR 682 as well as Hon'ble Gujarat High Court has considered this issue in Gujarat State Export Corpn. Ltd. v. CIT [1995] 209 ITR 649, wherein it has been observed that payment of club fees is to be considered for the promotion of the business interest and hence it is an allowable expense. As far as the factual position is concerned we find that in assessment year 1991-92 assessee has made payment of Rs. 10,800 on account of membership fees for the Oberoi Health Club. Similarly in assessment year 1993-94 membership of Wellington Club was taken by the assessee in the name of corporate entity. Therefore, taking into consideration the facts and circumstances coupled with the authoritative prono ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent expenditure Rs. 1,28,561 Less: Amount allowed as club fees other related Expenses as above. Rs. 68,561 ------------- Rs. 60,000 Less: Deduction under section 37(2) Rs. 10,000 Plus 50 per cent of Rs.50,000 Rs. 25,000 Rs. 35,000 ---------- -------------- Rs. 25,000" Accordingly, the disallowance made by the Assessing Officer at Rs.59,280 is reduced to Rs.25,000. The grounds taken by the assessee are, therefore, partly allowed. 6. Ground No.3 reads as under:- "For that the Ld. CIT(Appeals)-XI Kolkata, should have allowed the lease rental for the appellant's Motor Car used wholly and exclusively for the purpose of Appellant's Professional activities and erred in upholding the arbitrary and unlawful disallowances of 20 per cent of the Lease Rental amounting to Rs.42,478, in flagrant violation of law and by bending rules and misinterpretating the facts, due to serious want, of appreciation of the imperatives to apply Judicious mind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the material available on record, we find that there is no dispute that the assessee has taken Motor Car on lease for which lease rental of Rs.2,12,393 was paid. It is also not in dispute that Motor Car upkeep expenses are not included in the lease rent vide finding recorded by the Assessing Officer that the assessee has taken Motor Car on lease for which lease rental of Rs. 2,12,393 was paid and at the time of hearing, it was also clarified by the Ld. counsel for the assessee that the same does not include fuel expenses for the Car used by his mother and wife. We further find that the assessee has himself added back Motor Car upkeep expenses for his personal use. In this view of the matter and in the absence of any contrary material brought on record by the revenue to show that the car lease rental includes motor car upkeep expenses, we are of the view that the disallowance of Rs.42,478 being 20 per cent of Car lease rental of Rs.2,12,393 is not justified and accordingly, the same is directed to be deleted. The ground taken by the assessee is, therefore, allowed. 7. The ground No.4 reads as under:- "For that the Ld. CIT (Appeals)-XI, Kolkata, should have disallowed Rs.2,500 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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