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Commissioner of Income-tax Vs. Green Roadways - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Income-tax Reference No. 28 of 1982
Judge
Reported in(1985)48CTR(Raj)318; [1985]154ITR639(Raj)
ActsIncome Tax Act, 1961 - Sections 37(1) and 37(2A)
AppellantCommissioner of Income-tax
RespondentGreen Roadways
Appellant Advocate J.P. Joshi, Adv.
Respondent Advocate Vinit Kothari, Adv.
Excerpt:
.....the staff, including the drivers of motor vehicles and that the expenditure incurred in this respect was customary in the trade and cannot be said to be of the nature of entertainment......by the assessee on providing tea, coffee, soft drinks, etc., to the customers was not in the nature of entertainment expenditure within the meaning of section 37(2a) of the i.t. act ?'2. the assessee, green roadways, udaipur, claimed sums of rs. 62,222, rs. 28,673 and rs. 17,162, during the assessment years 1976-77, 1977-78 and 1978-79, respectively, as expenditure incurred by the assessee in providing tea, coffee, cold drinks, etc., to the customers. the aforesaid expenditure was claimed by the assessee to be a permissible deduction on the ground that it was obligatory in the trade of transport to provide such facilities to the customers in the interest of business promotion. according to the assessee, the expenses were incurred for the stability, procurement and promotion of.....
Judgment:

Dwarka Prasad, J.

1. The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, has referred the following question of law to this court for its opinion :

'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that sums of Rs. 62,222, Rs. 28,673 and Rs. 17,162 for the assessment years 1976-77, 1977-78 and 1978-79, respectively, incurred by the assessee on providing tea, coffee, soft drinks, etc., to the customers was not in the nature of entertainment expenditure within the meaning of Section 37(2A) of the I.T. Act ?'

2. The assessee, Green Roadways, Udaipur, claimed sums of Rs. 62,222, Rs. 28,673 and Rs. 17,162, during the assessment years 1976-77, 1977-78 and 1978-79, respectively, as expenditure incurred by the assessee in providing tea, coffee, cold drinks, etc., to the customers. The aforesaid expenditure was claimed by the assessee to be a permissible deduction on the ground that it was obligatory in the trade of transport to provide such facilities to the customers in the interest of business promotion. According to the assessee, the expenses were incurred for the stability, procurement and promotion of business and for maintaining the relations with the customers and as such it was claimed that they were not in the nature of entertainment expenses and that they should be allowed as revenue expenditure.

3. The ITO disallowed the claim of the assessee during all the three years holding that the amount represented the expenditure incurred by the assessee in providing tea, coffee, cold drinks and parties, etc., to the customers and guests was of the nature of entertainment expenditure and was not deductible. On appeal, the AAC of Income-tax agreed with the view taken by the ITO and held that the expenditure in question was incurred on the entertainment of customers and other persons and as such the same could not be allowed as revenue expenditure. On further appeal, the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, by its order dated March 11, 1981, agreed with the view taken by the ITO that the. aforesaid expenditure was incurred in providing tea, coffee, cold drinks and parties to the customers and guests, but the Tribunal held that since the said expenditure was not lavish in nature and it is customary in the nature of the trade, the same could not be held to have been spent by way of entertainment and was allowable expenditure, being incurred by the assessee in the interest of business. The Commissioner of Income-tax filed an application for making a reference under Section 256(1) of the I.T. Act, 1961, as in his view the expenditure allowed by the Tribunal was of the nature of entertainment expenditure, which was not allowable in view of the provisions of Section 37(2A) of the I.T. Act, 1961. On the application of the Commissioner, the Tribunal has referred the aforesaid question to this court for its opinion.

4. Now, the question which requires to be determined in this reference is as to whether the expenditure incurred by an assessee in providing tea, coffee, soft drinks, etc., and giving parties to the customers and guests is of the nature of expenditure falling within the expression 'laid out or expended wholly and exclusively for the purposes of the business of the assessee', occurring in Section 37(1) of the I.T. Act, 1961. After the insertion of Explanation (2) in Sub-section (2A) of Section 37, the legal position on this question has been set out clearly by Parliament and it is no longer open to doubt that providing hospitality in the nature of supplying tea, coffee, soft drinks, etc., to the customers would fall within the term 'entertainment expenditure', occurring in Section 37(2A), and which is not excludible under the provisions of Section 37(1) of the Act.

5. Section 37(1) allows an assessee, while computing his income chargeable under the head 'Profits and gains of business', a deduction of expenditure laid out and expended wholly and exclusively for the purpose of the business, not being in the nature of capital expenditure or personal expenses of the assessee. Section 10 of the Act No. 19 of 1970, inserted Sub-section (2B) in Section 37 with effect from April 1, 1970, which made it explicitly clear that the expenditure in the nature of 'entertainment expenditure' incurred by any assessee after February 28, 1970, shall not be allowed as revenue expenditure incurred by him wholly and exclusively for the purpose of the business. Subsequently, by Section 9 of Act No. 66 of 1976, Sub-section (2B) of Section 37 was deleted with effect from April 1, 1977. But then by Section 17 of the Finance Act, 1983 (Act No. 11 of 1983) Explanation (2) was added to Sub-section (2A) of Section 37, which runs as under :

'Explanation 2.--For the removal of doubts, it is hereby declared that for the purposes 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 include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.'

6. This Explanation, which has been introduced with retrospective effect from April 1, 1976, leaves no doubt that the provision of hospitality of every kind by the assessee to any person except his employees, by providing food or beverages or in any other minner whatsoever shall be included in the expression 'entertainment expenditure' occurring in Sub-section (2A) of Section 37. Even if the providing of such hospitality of supplying food or beverages to the customers or any other person may be made by reason of any express or implied contract or even on account of custom or usage of trade, the same shall be considered as 'entertainment expenditure' within the meaning of Sub-section (2A) of Section 37 and would not be excludable under Section 37(1) of the Act from the income of the assessee, under the head 'Profits and gains of business'. It may be observed that the Explanation which has been inserted by the Finance Act of 1983 is couched in very wide language and includes within the expression 'entertainment expenditure' hospitality of 'every kind' and to 'any person'. The only exception which has been made in this respect is the expenditure incurred by the assessee on providing food or beverages to his employees in his office, factory, or other place of their work. Thus it has been made clear that from April 1, 1976, provision of any hospitality to customers or guests would not be allowed as permissible deduction from the income of the assessee under Section 37(1) of the Act, although providing similar hospitality to the employees of the assessee in the office, factory or other place of work would be excludible. 'Hospitality', according to the Webster's Third New International Dictionary, means 'giving a generous and cordial reception and entertainment to guests and strangers'. In this manner, apart from the employees, if hospitality is provided by the assessee to any other person, including guests or customers, by providing tea, coffee, soft drinks, etc., the same would fall within the category of 'entertainment expenditure' referred to in Section 37(2A) and no deduction can be allowed on this account from the income of the assessee.

7. Learned counsel for the assessee then submitted that the deduction of expenditure claimed by the assessee for business promotion included expenses incurred by him in providing tea, coffee, soft drinks, etc., not only to the customers and guests, but also to the employees of the assessee and that a submission in this respect was made on behalf of the assessee before the Appellate Tribunal. It was urged that the assessee is a transporter and by custom or usage of trade, he is required to incur expenditure on providing tea, coffee, cold drinks, etc., to its constituents, i.e., the customers as well as to the staff, including the drivers of motor vehicles and that the expenditure incurred in this respect was customary in the trade and cannot be said to be of the nature of entertainment. After the insertion of Explanation (2) in Section 37(2A) of the Act, there could be no doubt that even if it may be customary in the trade to offer hospitality by way ofproviding tea, coffee, cold drinks, etc., to the customers, yet the expenditure incurred by the assessee in respect thereof cannot be excluded while computing the income of the assessor. But, as pointed out by us above, the expenditure incurred by the assessor in providing food, beverages to the employees or members of the staff, including drivers, would be a permissible deduction under Section 37(1) read with the Explanation (2) to Section 37(2A). However, the question referred to us by the Tribunal relates to the expenditure incurred by the assessee on providing tea, coffee and soft drinks, etc., only to the customers and not to the employees. We have no doubt in holding that the aforesaid expenditure incurred by the assessee is of the nature of 'entertainment expenditure' within the meaning of Section 37(2A) of the Act and after the coming into force of Explanation (2), there could not be two opinions in this matter. Accordingly, we answer the question in the negative, in favour of the Revenue and against the assessee. The parties are left to bear their own costs.


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