High Court Of Rajasthan : Jaipur Bench
CIT vs. Mangalam Cement Ltd.
Sections 37(2A)
Asst. Year 1989-90, 1990-91
Y.R. Meena & Shashi Kant Sharma, JJ.
IT Ref. No. 10 of 1999
17th October, 2002
Counsel Appeared
J.K. Singhi & Anuroop Singhi, for the Revenue : Sanjay Jhanwar & P.K. Kasliwal, for the Assessee
JUDGMENT
BY THE COURT :
On an application under s. 256(1) of the IT Act, the Tribunal has referred the following questions for our opinion : RA No. 92/Jp/1998 “
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 1,94,775 by holding that giving gifts and presents does not amount to hospitality and cannot be considered for disallowance as entertainment expenditure ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 1,94,775 by holding that it is not entertainment expenditure despite the fact that in that event the expenditure would have to be treated as that on ‘Advertisement’ and ‘Publicity’ and hence disallowable under r. 6B of the IT Rules, 1962 ?”
RA No. 93/Jp/1998 “
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 1,35,472 by holding that giving of gifts and presents does not amount to hospitality and cannot be considered for disallowance as entertainment expenditure ?, and (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of Rs. 1,85,472 by holding that it is not entertainment expenditure despite the fact that in that event the expenditure would have to be treated as that on ‘Advertisement’ and ‘Publicity’ and hence disallowable under r. 6B of the IT Rules, 1962 ?”
The assessee-company derives income from sales of cement. The relevant assessment years are 1989-90 and 1990-91. During the asst. yr. 1989-90, the assessee has shown the production of 4,86,260 MT and sales at 4,91,936 MT and in asst. yr. 1990-91, the assessee has cement production to the tune of 3,71,658 M.T. and sale was 3,66,705 M.T.
During the course of assessment proceedings, the AO noticed that assessee has claimed entertainment expenses. Invoking the provisions of Expln. 2 to sub-s. (2A) of s. 37, the AO disallowed Rs. 1,94,775 on account of expenditure on gifts and presents and Rs. 1,89,867 disallowed invoking the same provision in the asst. yr. 1990-91.
The AO further noticed that assessee has claimed the expenses on gifts and presents, such as fruits, sweets, dry fruits. The AO was of the view that these expenses are in the nature of entertainment expenses and after insertion of Expln. 2 to sub-s. (2A) of s. 37, part of such expenses are not allowable and he made the aforesaid additions in both the years.
In appeal before the CIT(A), the CIT(A) following the decision of this Court in case of CIT vs. Green Roadways (1985) 48 CTR (Raj) 318 : (1985) 154 ITR 639 (Raj) and CIT vs. Yadav Transport Service (1987) 66 CTR (Raj) 236 : (1987) 167 ITR 474 (Raj), confirmed the view taken by the AO. In appeal before the Tribunal, the Tribunal following its earlier order deleted the additions so made.
4. Heard learned counsel for the parties.
5. Mr. Singhi, learned counsel for the Department has submitted that when the words used in the Explanation “entertainment expenditure” includes “hospitality of any kind”, such as presents and gifts in this case and the ITO has rightly disallowed the expenses incurred on distribution of presents and gifts to various persons. He placed reliance on the latest decision of this Court in case of Modern Threads (India) Ltd. vs. CIT (DB IT Ref. No. 2/93) decided on 6th March, 2002 [reported at (2002) 177 CTR (Raj) 77—Ed.].
6. Mr. Jhanwar, learned counsel for the assessee, has submitted that case of presentation of gifts at the time of Diwali does not attract the provisions of sub-s. (2A) of s. 37. He placed reliance on the decision of Calcutta High Court in case of CIT vs. Shalimar Industries (P) Ltd. (1994) 78 Taxman 521 (Cal).
7. Expln. 2 to sub-s. (2A) of s. 37 reads as under : “Explanation 2 : For the removal of doubts, it is hereby declared that for the purposes of this subsection and sub-s. (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 include expenditure on food or beverages provided by the assessee to his employees in office, factory or to other place of their work.”
8. While defining the scope of entertainment expenditure by the aforesaid Expln. 2, the legislature has widened the meaning and scope of words “entertainment expenditure” and now the entertainment expenditure includes the expenditure on providing of food or beverages or in any other manner whatsoever to any person. Even if gifts and presents are based on contract or customs or usage of trade, that be treated as entertainment expenditure for the purpose of sub-s. (2A) of s. 37 of the Act.
9. In case of CIT vs. Green Roadways (supra), this Court has considered the aforesaid Expln. 2 to sub-s. (2A) of s. 37, whether providing tea, coffee, soft drinks, etc. to customers is entertainment expenditure. The Court answered the question in favour of the Revenue holding that it is entertainment expenditure within the meaning of ss. 37(2A) of the Act. The same view has been taken by this Court in case of Modern Threads (India) Ltd. vs. CIT (supra).
10. Considering the facts of this case and Expln. 2 to sub-s. (2A) of s. 37, we do not agree with the view taken by the Calcutta High Court in CIT vs. Shalimar Industries (P) Ltd. (supra), rather we prefer to follow our own view taken by this Court in CIT vs. Green Roadways (supra) and Modern Threads (India) Ltd. (supra). The expenses may be for the purpose of business, but the intention of legislature to restrict such type of expenses should not be ignored. We should give the meaning to a word used in the provision in the light of intent of legislature and in confirmity with the object of the Act. The Tribunal has committed error in holding that expenditure on presents at the time of Diwali is not in the nature of expenditure on entertainment.
11. In the result, we answer question No. 1 in both the years in negative i.e., in favour of the Department and against the assessee. When we have decided question No. 1 in favour of the Department, there is no need to answer the 2nd question, as amount is same and expenditure is also same. Therefore, we decline to answer question No. 2 in both the years.
The reference so made stands disposed of accordingly.
[Citation : 266 ITR 446]
