High Court Of Madras
CIT vs. United India Insurance Co. Ltd.
Asst. Year 1976-77
Abdul Hadi & N. V. Balasubramanian, JJ.
Tax Case No. 142 of 1984
2nd January, 1997
S.V. Subramanian, for the Revenue : P.P.S. Janarthana Raja, for the Assessee
N.V. BALASUBRAMANIAN, J. :
At the instance of the CIT, Tamil Nadu-II, Madras, the Tribunal has stated a case and referred the following question of law under s. 256(1) of the IT Act, 1961 (hereinafter referred to as “the Act”) :
“Whether, on the facts and in the circumstances of the case and having regard to the provisions of s. 37(2A) of the IT Act, 1961, the Tribunal was right in holding that the sum of Rs. 3,01,945 not being the entertainment expenditure is an admissible deduction ?”
The assessee in the course of assessment proceedings for the asst. yr. 1976-77 claimed a sum of Rs. 3,01,946 as a business expenditure, and the same was disallowed on the ground that it was an entertainment expenditure. On appeal preferred by the assessee before the CIT(A), the CIT(A) noticed the fact that the assessee-company had 150 branches, four regional offices and one head office, apart from its foreign branches. The CIT(A) also found that considering the size of the assesseeâs business, the expenditure of Rs. 3,01,945 could not be said to be excessive. He followed a decision of this Court in CIT vs. Karuppuswamy Nadar and Sons (1979) 120 ITR 140 (Mad) : TC 17R.1327 and held that the expenditure is an admissible expenditure under s. 37 of the IT Act.
The Department preferred an appeal before the Tribunal and the Tribunal following the decision of this Court in Karuppuswamyâs case (supra), dismissed the appeal holding that the expenditure claimed is an allowable business expenditure and in this view, it dismissed the appeal.
Aggrieved by the order of the Tribunal, the Department has sought for the Tribunal to state a case to this Court and the Tribunal has referred the question of law stated above.
At the time of hearing this tax case, Mr. S.V. Subramanian, learned senior counsel brought to our notice Expln. 2 to s. 37(2A) of the IT Act which defines the expression, “entertainment expenditure” which was introduced by the Finance Act, 1983, with effect from April, 1976, and the expression entertainment expenditure is defined to include expenditure on hospitality 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 include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.
Learned counsel also brought to our notice a decision of the Supreme Court in CIT vs. Patel Bros. & Co. Ltd. (1995) 126 CTR (SC) 132 : (1995) 215 ITR 165 (SC) : TC 17PS.43, wherein the Supreme Court has upheld the view of this Court in Karuppuswamyâs case (supra) in so far as four assessment years prior to amendment of law were concerned and held that after the amendment, the expenditure has to be allowed only in terms of Expln. 2 to s. 37(2A) of the Act. He also brought to our notice a decision of this Court in English Electric Company of India Ltd. vs. CIT (1996) 134 CTR (Mad) 551 : (1996) 218 ITR 478 (Mad) : TC 54R.538, wherein this Court has held that the allowance of the entertainment expenditure is subject to the ceiling prescribed under the Act. Mr. S.V. Subramanian, learned senior counsel, contended that on the basis of the above Expln. 2 and the decisions cited supra, the case referred has to be answered in favour of the Department.
Mr. P.P.S. Janarthana Raja, learned counsel appearing for the assessee, submitted that at the time when the Tribunal decided this matter, the Tribunal did not have the benefit of Expln. 2 to s. 37(2A) of the Act. It is contended that the Tribunal has not applied its mind to the question how much of the expenditure was related to the provision of hospitality to customers and how much of it related to the employees of the assessee. He submitted that in the decision of this Court reported in English Electric Co. of India Ltd. vs. CIT (supra), the Tribunal itself considered the matter in the light of Expln. 2 to s. 37(2A) of the Act, but the assessee has not pleaded before the Tribunal the factual materials for allowing the same and, hence, this Court held the entire expenditure was disallowable. He, therefore, submitted that the Tribunal should be directed to examine the question of allowability of expenditure in the light of Expln. 2 to s. 37(2A) of the Act.
We have carefully considered the contentions urged by learned senior counsel appearing for the Department and also learned counsel for the assessee. There is no dispute that part of the expenditure in so far as it relates to the provision of hospitality to customers would be entertainment expenditure within the meaning of s. 37(2A) of the Act. The introduction of Expln. 2 made retrospectively w.e.f. 1st April, 1976, gives a clear indication that the legislature had introduced the Explanation with a view to curb certain categories of avoidable or ostentatious expenditure by the assessee carrying on business or profession. The object of sub-s. (2A) is to disallow any lavish expenditure in the form of business expenditure. Hence, the view of the CIT(A) that the expenditure cannot be regarded as lavish expenditure or the view of the Tribunal that it should be allowed on the basis of Karuppuswamyâs case (supra) cannot be correct, after Expln. 2 to s. 37(2A) of the Act. But, in so far as the expenditure incurred towards employees in the office premises or factory or place of work is concerned, even on the basis of Expln. 2 to s. 37(2A) of the Act, that part of the expenditure cannot be regarded as entertainment expenditure. The Tribunal did not have the benefit of Expln. 2 to s. 37(2A) of the Act, when it decided the appeal. Even the CIT(A) has not applied his mind to the question on whom the expenditure has been incurred. In the decision reported in English Electric Co. of India Ltd. vs. CIT (supra), when the Tribunal decided the case, Expln. 2 was available; however, the assessee did not place any factual materials to show that any expenditure has been incurred towards the benefit of the employees in the office. But here, there is no finding on whom the expenditure was incurred. Hence, we are of the view that the Tribunal should consider the question as to how much the assessee has spent towards the employees in the office, factory or other places of work and that portion would be allowable as business expenditure on the ground that it is staff welfare expenditure. But, in so far as the expenditure incurred by way of provision of hospitality to any person, it may be a customer or any other person or an employee outside the business premises, it is not allowable on the ground it is an entertainment expenditure which is disallowable under s. 37(2A) of the Act.
9. In this view of the matter, we answer the question in the negative and in favour of the Department with a direction to the Tribunal to consider the question in the light of the observations made above.
[Citation : 233 ITR 779]