Commissioner of Income Tax vs BAZPUR CO-OPERATIVE SUGAR FACTORY

Prakash Krishna, J.

At the instance of the revenue the following question of law has been referred to this court for its opinion u/s 256(1) of the Income Tax Act, 1961 :

"Whether on the facts and circumstances of the case, the learned Tribunal was legally correct in holding that incurring expenses on boarding and lodging facilities given to auditors and government and semi-government servants visiting the factory did not amount to entertainment and that it should be deemed a necessary expenditure u/s 37(1) of the Income Tax Act, 1961 ?"

The dispute relates to the assessment year 1976-77. During the assessment proceedings, the assessing officer disallowed certain expenditures which according to him were in the nature of entertain expenditures, vide order dated 15-11-1979. The said order was confirmed in appeal by the Commissioner (Appeals). The Commissioner (Appeals) has held that the disallowance of entertainment expenses to the extent of Rs. 20,555 is fully justified. The matter went in further appeal before the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal). The Tribunal deleted the disallowance of the expenses incurred towards auditors'' boarding and lodging. At the instance of the revenue the above question has been referred to this court for its opinion. The question itself suggests that the said expenditures/expenses were incurred by the assessee for boarding and lodging facilities given to the auditors and semi-government servants visiting the assessee factory. Section 37(1) of the Income Tax Act had been amended in the mean time. Explanation 2 to section 37 of the Act was inserted by Finance Act of 1983 retrospectively with effect from 1-4-1976. The material part of section 37 is quoted below :

"General.(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 business or profession''.

(2) Notwithstanding anything contained in sub-section (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as hereunder :

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(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), no allowance shall be made in respect of so much of the expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year which expires after the 30-9-1967, as is in excess of the aggregate amount computed as hereunder :

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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 1-4-1977, 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.

(2B) Notwithstanding anything contained in this section, no allowance shall be made in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessee after the 28-2-1970".

From a reading of the aforesaid Explanation it is clear that if the expenditure is incurred by the assessee by way of provision of food or beverages, whether or not such provision is made by the reason of any express or implied contract or custom beverage of trade to any other person who is not an employee or officer of the Company, the same shall form part of entertainment expenditure.

The Supreme Court in the case of CIT v. Patel Bros. & Co. Ltd. : [1995]215ITR165(SC) , has observed that this amendment takes effect retrospectively from 1-4-1976 and will accordingly apply in relation to the assessment year 1976-77. In view of the addition of the Explanation 2 to section 37 and as interpreted by the Supreme Court in the above case, we hold that the expenses incurred by the assessee on the boarding and lodging facilities given to auditors and other government and semi-government servants visiting the assessee factory form part of the entertainment expenditure. The judgment and order of the Tribunal is illegal and we answer the aforesaid question in the negative, that is, in favour of the revenue and against the assessee by holding that the expenses in question amount to entertainment expenditure in view of the Explanation.