Commissioner of Income Tax vs Shalimar Industries (P.) Ltd.

Suhas Chandra Sen, J.—The Tribunal has forwarded the following two questions of law to this Court u/s 256(1) of the income tax Act, 1961 (''the Act''): " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Dewali Bohni, gifts and presents, Baksis paid by the assessee-company were not expenditure in the nature of entertainment expenditure within the meaning of section 37(2A) of the income tax Act and in that view in deleting the disallowance made by the income tax Officer.

Whether, on the facts and in the circumstances of the case and having regard to the fact that since the acquisition of the shares of Singapur Jute & Accessories (P.) Ltd. in 1968 the aforesaid shares were shown in the assessee''s balance sheet as its investment, the Tribunal was justified in law in holding that the loss of the aforesaid shares in 1977 should be treated as revenue loss instead of capital loss as held by the income tax Officer?"

This reference relates to the assessment years 1977-78 and 1978-79 for which the corresponding accounting period ended on 31-12-1976 and 31-12-1977, respectively.

For the assessment year 1977-78, the assessee claimed sales promotion expenses amounting to Rs. 79,427 as under:

Rs.

(i) Entertainment expenses

27,542

(ii) Dewali Bohni

21,554

(iii) Gift and presentation

1,015

(iv) Cost of Whisky

21,870

(v) Baksis

3,837

The ITO rejected the assessee''s claim. On appeal, the Commissioner disallowed the assessee''s claim in respect of entertainment expenses amounting to Rs. 27,542, Dewali Bohni of Rs. 21,554, Gift and presentation as also Baksis expenses. Other expenses were ultimately allowed by the Commissioner and such allowance was affirmed by the Tribunal.

The question before us is whether the gift presents and Baksis given on the occasion of Dewali could be treated as entertainment expenditure. Mr. S.K. Mitra, the learned Advocate appearing for the revenue, has drawn our attention to Explanation 2 of section 37 of the Act, which has been introduced with effect from 1-4-1976 by the Finance Act, 1983, and has contended that the amplitude of this Explanation is very wide and the expenditure involved in the present case comes within the mischief of Explanation 2 of section 37. We are unable to uphold this contention. Explanation 2 has put at rest the controversy that has arisen as to whether the usual hospitality extended by businessmen to his customers will come within the ambit of the expression entertainment expenditure. Explanation 2 of section 37 is in the following terms:

" 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."

Explanation 2 of section 37 had made it clear that expenditure on provision of hospitality of every kind by the assessee to any person will come within the ambit of the definition of entertainment expenditure, whether such expenditure was incurred by reason of any express or implied contract or custom or usage of trade. It has also provided that such expenditure will not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.

In the instant case, the assessee has not incurred any expenditure in its office premises. No entertainment has been provided by the assessee to any guest or any other person. What happened in this case is that the assessee has given customary Dewali gifts to various persons in the shape of Dewali Bohni, Baksis, Gift and presentation at the time of Dewali and claimed the expenses as entertainment expenditure. The word - ''entertainment'', according to Concise Oxford Dictionary, Sixth Edition, means ''hospitality, amusement (much to my entertainment), diversions or amusements for guests, etc., public performance or show''. The dictionary meaning of the word hospitality is ''friendly and generous reception of guests or strangers or (fig.) or new ideas, etc''

It will be seen from the type of expenditure made by the assessee that the expenses were not in the nature of hospitality at all. It was more in the nature of a customary gift given at the time of Dewali to foster goodwill and sales promotion. The AAC has accepted this interpretation of the assessee. The order of the AAC has been upheld by the Tribunal.

We do not see any legal infirmity in the findings of the Tribunal. The customary Dewali gift, Dewali Bohni or Dewali Baksis given during Dewali cannot be brought within the ambit of Explanation 2of section 37.

Question No. 2 relates to the nature of losses incurred for sale of shares in 1977. The facts relating to this question have been stated by the AAC in the following words:

"The assessee had received the share in consideration of services rendered under a technical collaboration agreement. The value of these shares Rs. 50,000 was declared as income of the assessee for the calendar year 1968. Subsequently, the Singapore company suffered loss and was struck off the register of Companies in 1977. The loss claimed has been disallowed on the ground that it was a capital loss that there was no evidence that there were no chances of any recovery. The shares in question were received by the assessee on revenue account. The Appellant Company received its remuneration for the services rendered in kind, the shares did not represent any investment made by the assessee-company. As such, the loss is not on capital account. The Singapore company having been struck off the Register of Companies, the chance of recovery has altogether vanished. In the circumstances loss claimed is allowed."

The Tribunal on this point held as follows:

"There was no dispute about the fact that the assessee had received shares of Singapur Jute & Textile Accessories Pvt. Ltd. in consideration of services rendered under a technical collaboration agreement. Therefore, we are of the opinion that the value of the shares so received by the assessee could not be regarded as a capital receipt. It was also not in dispute that the Singapur Company suffered a loss and was struck off the register of the Registrar of Companies in 1977. That being the position, it had to be held that the assessee had no ray of hope of recovery of the value of the shares. Viewed thus, we would hold that the Commissioner of income tax (Appeals) was justified in treating the amount of Rs. 50,000 as revenue loss and thereby deleting the addition of Rs. 50,000 made by the income tax Officer."

We are of the view that the Tribunal has taken a correct view of the matter. The shares were received as consideration for the services rendered under a technical collaboration agreement. Such receipt must be on revenue account. That it was shown in the balance sheet as investment does not mean that the assessee had acquired shares on capital account. The assessee was not a dealer in shares and the shares could not have been shown as stocks-in-trade of the assessee.

The manner in which the shares have been shown in the balance sheet, however, is not conclusive. From the surrounding circumstances and facts, it has to be ascertained whether the shares formed part of the capital of the company. We are of the view that the Tribunal has taken a correct view of the matter. Whether the loss incurred in a transaction is a revenue loss or capital loss is basically a question of fact. The Supreme Court recently in the case of Commissioner of Income Tax Vs. Karam Chand Thapar and Bros. P. Ltd., has held that whether a loss is a trading loss or a capital loss and whether the loss is genuine or bogus are primarily questions to be determined on appreciation of the facts. The findings of the Tribunal on these questions are not liable to be interfered with unless the Tribunal has taken into consideration any relevant material or has failed to take into consideration any relevant material or the conclusion arrived at by the Tribunal is perverse in the sense that no reasonable person on the facts placed before it could have come to this conclusion.

We are of the view that there were sufficient materials on the basis of which the Tribunal has come to a correct conclusion and the Tribunal has not taken into consideration any irrelevant material and all the facts placed before it have been considered by the Tribunal.

The first question, therefore, is answered in the affirmative and in favour of the assessee. The second question is also answered in the affirmative and in favour of the assessee. There will be no order as to costs.

Bhagabati Prasad Banerjee, J.

I agree.