Commissioner of Income Tax vs Oriental Fire and General Insurance Co. Ltd.

R.C. Lahoti, J.—This is a common reference u/s 256(1) of the Income Tax Act, 1961, referable to assessment years 1976-77 and 1977-78 made at the instance of the Revenue seeking the opinion of the High Court on the following question of law :

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in confirming the order of the Commissioner of Income Tax (Appeals) deleting and disallowing of Rs. 1,05,604 on account of entertainment expenses incurred outside India ?"

After hearing learned senior standing counsel we are of the opinion that the question suffers from an inadvertent/typing error. It does not bring out the real controversy and also it does not fit in the factual matrix of the case. The question is, Therefore, recast as under :

"Whether, in the facts and circumstances of the case, the Tribunal was correct in law in confirming the order of the Commissioner of income tax-(Appeals) reducing the deletion of entertainment expenditure u/s 37(2A) by Rs. 1,05,604 on the reasoning that the said entertainment expenditure was incurred outside India and was, Therefore, entitled to deduction u/s 35B of the Income Tax Act ?"

The relevant facts may briefly be stated. The assessed is a subsidiary of General Insurance Corporation of India and is engaged in the business of general insurance. An amount of Rs. 8,99,429 was claimed as a deduction on account of entertainment expenses and entertainment allowances. The assessed was held entitled to a deduction of Rs. 30,000. The balance amount of Rs. 8,69,429 was disallowed.

The matter went up in appeal to the Commissioner of Income Tax (Appeals). Before the Commissioner of Income Tax (Appeals) it was projected that though the disallowance may be upheld by reference to Section 37(2A) but out of the said amount, an amount of Rs. 1,05,604 was incurred by way of entertainment expenditure outside India which deserves to be considered for weighted deduction u/s 35B of the Act (as it stood at the relevant time). The plea prevailed with the Commissioner of Income Tax (Appeals). He observed :

"Therefore, the disallowance is upheld subject to a deduction of Rs. 1,05,604 being entertainment expenditure incurred outside India which in my view falls for consideration u/s 35B."

There were also other issues involved. The assessed and the Inspecting Assistant Commissioner both went in appeal to the Income Tax Appellate Tribunal. So far as the view taken by the Commissioner of Income Tax (Appeals) by reference to Sections 37(2A) and 35B of the Act is concerned, it was upheld by the Income Tax Appellate Tribunal. Consequently, the direction of the Commissioner of Income Tax (Appeals) requiring the Inspecting Assistant Commissioner to modify the assessment in accordance with the directions given by the Commissioner of Income Tax (Appeals) was also upheld.

Entertainment expenditure incurred on the employees of the assessed even if it was incurred outside India, is not entitled to weighted deduction u/s 35B of the Act. Reference may be had to the law laid down by the Supreme Court in its two recent decisions, namely, Commissioner of Income Tax, Delhi Vs. Stepwell Industries Ltd. and etc. etc., and Commissioner of Income Tax (CNTL), Ludhiana Vs. Hero Cycles Pvt. Ltd., Ludhiana, .

In the case of Commissioner of Income Tax (CNTL), Ludhiana Vs. Hero Cycles Pvt. Ltd., Ludhiana, , their Lordships have clearly laid down that the benefit of Section 35B shall not be available while computing the profits and gains of insurance business.

For the foregoing reasons, the question is answered in the negative, i.e., in favor of the Revenue and against the assessee.

Before parting, we may place on record that though the reference is for two years and hence registered at two numbers the subject-matter of the question is referable to the assessment year 1977-78 only. We do not find any question referred or framed for the assessment year 1976-77. We leave it at that and direct that one copy each of this order shall be placed on the records of ITR''s Nos. 144 of 1985 and 145 of 1985. Both the cases be treated as disposed of.