Phaltan Sugar Works Ltd vs Commissioner of Income Tax

D.R. Dhanuka J.

By this reference u/s 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal, at the instance of the assessee, has referred the following questions of law, which are numbered for the sake of convenience, to this court for opinion :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the entertainment expenditure of Rs. 34,141, incurred outside India, was not an allowable revenue deduction in its entirety in computing the total income of the company and in restricting the same to the limits specified in sub-section (2A) of section 37 of the Income Tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no appeal lies against levy of interest u/s 215 of the Income Tax Act, 1961 ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that reimbursement of medical expenses was part of salary and not perquisites for the purposes of disallowance u/s 40A(5) of the Income Tax Act ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest on loans borrowed for advancing it to its subsidiary company was allowable u/s 36(1)(iii) of the Income Tax Act ?"

It is agreed between counsel for the parties that question No. 2 is covered by the decision of this court in Caltex Oil Refining (India) Ltd. Vs. Commissioner of Income Tax, , in favour of the assessee. In view of this statement, we answer question No. 2 in the affirmative (sic) and in favour of the assessee.

It is agreed between counsel that question No. 3 is also covered by the decision of this court in Commissioner of Income Tax, Bombay City-II Vs. Indokem Private Ltd., , in favour of the assessee. In view of this statement, we answer question No. 3 in the affirmative and in favour of the assessee.

It is agreed between counsel that question No. 4 is covered by the decision of this court in the assessee''s own case, Income Tax Reference No. 117 of 1980 decided on August 27, 1993 Phaltan Sugar Works Ltd. Vs. Commissioner of Wealth-tax., , in favour of the Revenue. In view of the above statement, we answer question No. 4 in the negative and in favour of the Revenue.

Learned counsel for the assessee concentrated in respect of the controversy covered by question No. 1. During the assessment year, the assessee incurred an expenditure of Rs. 34,141 being in the nature of entertainment expenditure outside India. The question before the court is as to whether the allowability of the said expenditure is subject to ceiling prescribed by section 37(2A) of the Act. For the purpose of deciding this question, it is necessary to notice the relevant provisions of the Act as they stood at the relevant time.

Section 37(2A) of the Act provides that 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 30th day of September, 1967, as is in excess of the amount computed thereunder. By the said section, the Legislature prescribed a ceiling for allowance of expenditure in the nature of entertainment expenditure and such ceiling included entertainment expenditure incurred in India as well as outside India. Section 37(1) of the Act does not make any distinction in respect of business expenditure incurred by the assessee within or outside India. Section 37(2A) of the Act makes no distinction between entertainment expenditure incurred in India or outside India. Sometime in the year 1970, sub-section (2B) was inserted in the Act. Section 37(2B) of the Act reads as under :

"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 20th day of February, 1970."

In view of the insertion of sub-section (2B) in the Act, no allowance can be allowed in respect of "entertainment expenditure" incurred in India if such an expenditure is incurred after the 28th day of February, 1970. Sub-section (2B) of the Act operates notwithstanding anything contained in other parts of section 37 of the Act. Section 37(2A) continues to operate even after the insertion of sub-section (2B) in the Act. After the insertion of sub-section (2B) in the said section, sub-section (2A) operates only in respect of entertainment expenditure incurred outside India. It is not possible to accept the submission of learned counsel for the assessee that section 37(2A) of the Act became inoperative for all purposes after section 37(2B) of the Act was inserted in the Act and entertainment expenditure incurred outside India can be allowed without reference to ceiling imposed by section 37(2A) of the Act. There is no merit in this submission.

Section 37(2A) of the Act operates notwithstanding anything contained in sub-section (1) of section 37 of the Act. If an assessee claims the benefit of section 37(1), such allowance can be made only subject to section 37(2A) of the Act.

We agree with the reasoning and conclusion of the Tribunal on this aspect.

In view of the above discussion, we answer question No. 1 in the affirmative, i.e., in favour of the Revenue and against the assessee.