1. This is an appeal by the assessee against the order of the Commissioner (Appeals) confirming the ITO's order rectifying the assessment. In the rectification order, the ITO had disallowed certain expenditure incurred by the assessee on the ground that these expenses have to be considered as entertainment expenditure.
2. The business of the assessee, a private limited company, is representation of manufacturers. In connection with the assessee's business, the foreign customers come to India. The assessee had in connection with their visits incurred expenditure by way of club bills amounting to Rs. 26,914 and bills on liquors amounting to Rs. 20,564.
The total expense incurred was Rs. 47,478. In the original assessment order, the ITO had disallowed only Rs. 2,011. The rest of the expenditure has been allowed as a deduction. This order was passed on 30-9-1983.
3. The provisions regarding entertainment expenditure had undergone an amendment by the inclusion of Explanation 2 by the Finance Act, 1983.
This Explanation stated that entertainment expenditure would include 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. This Explanation has been given retrospective effect from the assessment year 1977-78. This had become part of the statute on 30-8-1983. In other words, it has already come into the statute by the time the ITO passed his order.
4. The ITO after giving an opportunity to the assessee sought to rectify the original assessment. In this order dated 6-3-1984 he stated that while completing the assessment, the disallowance to be made under Section 37(2A) of the Income-tax Act, 1961 ('the Act') in respect of entertainment expenditure was not made. As this is a mistake of law apparent from the record, he disallowed the same under Section 154 of the Act. We may mention here that he had allowed Rs. 5,000 as fixed by the statute and disallowed only Rs. 42,478.
5. The Commissioner (Appeals) was of the opinion that the rectification order was justified. Rectification following a retrospective legislative amendment, he said, was valid in law.
6. Against this order, the assessee has come on further appeal before us. Shri Namboodri, appearing for the assessee, submitted that whether the expenditure incurred could be rectified in view of the retrospective amendment is a highly debatable point and, therefore, the rectification was not valid in law. For this purpose, he relied on the decision of the Supreme Court in the case of S.A.L. Narayan Row v.Ishwarlal Bhagwandas [1965] 57 ITR 149. We are of the opinion that this Supreme Court decision has no relevance on the point at issue before us. In that case, the ITO had originally passed an order which was clearly inconsistent with the terms of the section as it stood at the time of passing of the order. Later, the section was amended retrospectively. On the retrospective amendment, the order already passed by the ITO was according to the provisions of the Act.
Nevertheless, the Commissioner felt that since the order originally passed was inconsistent with the statutory provision as it stood at that time, he passed a revisionary order. The Supreme Court held that since there was a retrospective amendment and the ITO's order became a valid order, there was no scope for passing an order under Section 35 of the Act. The ratio of the Supreme Court's decision actually supports the department in the sense that the retrospective amendment validates an earlier order which was not invalid.
7. Shri Namboodri then submitted that even if there is a retrospective amendment, the question would still remain whether there is a mistake apparent from the records. Relying on the decision of the Calcutta High Court in the case of CIT v. General Electric Co. of India Ltd. [1978] 112 ITR 246, he submitted that when the Amendment Act had come into existence, long after the order sought to be rectified, it cannot be considered as a deemed mistake. We are of the opinion that this decision is also distinguishable on facts. When the ITO had passed his order, the amendment to the statutory provisions had already been made.
The ITO had passed an order in ignorance of the retrospective amendment. Therefore, the Calcutta High Court decision which dealt with a case of rectification of an order passed long before the amendment has no relevance.
8. Shri Namboodri then submitted that the ITO has already applied his mind and had decided the disallowance only to the extent of Rs. 2,011.
He might have made an error in the judgment. Such an error in the judgment cannot be rectified under Section 154. For this purpose, he relied on certain passages occurring in the Chaturvedi & Pithisaria's Income-tax Rulings, Third edn., p. 3130. He also relied on the decision of the Karnataka High Court in the case of I.N. Sundresh (HUF) [1983] 141 ITR 669. We are unable to accept this submission "either. The ITO has, no doubt, disallowed only Rs. 2,011. It is also no doubt true that on the date on which he passed the order, the retrospective amendment has already come into force. Now, even a cursory reading' of the Explanation to Section 37(2A) which has retrospective effect, would show that it is quite comprehensive and all sorts of expenditure would be caught within its net. Yet, the ITO had disallowed only Rs. 2,011.
This shows that he had either acted in ignorance of the provisions or he had totally misunderstood the provisions. We will first cite the case decided by the Punjab and Haryana High Court in the case of CIT v.Ram Nath Prem Kumar [1980] 124 ITR 404. In that case, the ITO had allowed cash payments effected by the assessee to the extent of Rs. 20,224 without applying the provisions of Section 40A(3) of the Act.
Later on, he rectified the assessment and disallowed the amounts as required under Section 40A(3). The High Court held that in view of the provisions in Section 40A(3), the allowance originally made for the expenditure claimed was a mistake and the ITO is authorised in law to recompute the same by disallowing the expenditure. This is an authority to show that if the ITO in ignorance of the provisions, allows certain expenditure, he is entitled to rectify the same. In the case before us, he had instead of disallowing Rs. 42,478, had disallowed only a lesser amount. If this was done out of ignorance, it is clearly rectifiable.
9. It is also possible to hold that it was not out of ignorance but after considering the provisions and applying the same that the ITO came to a finding that only Rs. 2,0 U requires disallowance. Even then, it is capable of being rectified under Section 154. There are a number of authorities for the proposition that where the ITO had misunderstood a provision, the order can be rectified under Section 154. In the case of Alkali & Chemical Corporation of India Ltd. v. CIT [1980] 122 ITR 490 (Cal.), the ITO in the original surtax assessment included as the assessee's capital a sum of Rs. 41 lakhs which represented the face value of bonus shares issued out of general reserves. Subsequently, he rectified the assessment order. The High Court held that what was done originally was to accept the increase in the paid-up share capital by taking into account bonus shares issued by capitalising the reserves and losing sight of the fact that by reason of the issue of the said shares the capital has been altered inasmuch as the reserves were reduced by being diverted to the same extent as the issue of bonus shares. This mistake, according to the High Court, can be rectified under the provisions corresponding to Section 154. A similar decision has again been given by the Calcutta High Court in the case of CIT v.Mcleod & Co. Ltd. [1982] 134 ITR 674. In that case, the ITO had originally allowed deduction under Section 80M of the Act on the gross amount of dividend without setting off the losses under sections 71 and 72 of the Act. Later, he rectified the assessment order. The High Court upheld the rectification. They pointed out that where by misreading a section, a wrong view is taken and a wrong calculation is made, it would certainly come within the purview of Section 154 as a mistake apparent on the face of the records. To the similar effect is the decision of the Allahabad High Court in the case of Addl. CIT v.District Co-operative Bank Ltd. [1979] 119 ITR 142. Thus, it will be seen that where an ITO had misread a provision or ignored a provision, the order is capable of being rectified. The decisions relied on by Shri Namboodri to say that such a rectification is not possible can be easily distinguishable. In the passage cited in the paragraph of the commentators Chaturvedi and Pithisaria, cases were where discretion of an ITO had been included. In the case before us, the statute does not give any discretion to the ITO. Similar is the decision of the Karnataka High Court cited by Shri Namboodri. The question was whether the expenditure on maintenance of car allowed in full in the original assessment could be rectified. The High Court held that such a rectification is not possible. That is because on facts it was quite possible to say that the entire expenditure on the car was for the purpose of business only. The High Court had accepted the contention of the assessee there that the expenditure on vehicle which was incurred exclusively for the maintenance of the car was correctly allowed after full knowledge of such disclosure and, therefore, it cannot be considered as an error apparent from the records. The case, therefore, turned on its own facts 10. Shri Namboodri then submitted that even if it is open for the ITO to consider the statutory provisions, rectification is not possible because the application of Section 37(2A) cannot be retrospective. This argument need not be elaborately considered in view of the well settled provisions in law that a retrospective amendment has to be the basis for a rectification. He then submitted that the Andhra Pradesh High Court in a number of cases had held that the law laid down in Maddi Venkataratnam and Co. still continues to be good law. But we find that these decisions of the Andhra Pradesh High Court relate to the period before amendment. In any case, the question of the impact of the amendment was not before their Lordships.
11. Coming to the merits, he submitted that 'hospitality' occurring in that Explanation has not been defined in the Act and, therefore, one should go by the dictionary meaning. As per the dictionary meaning, it means 'entertainment for strangers'. Now, it is well settled, according to Shri Namboodri, that entertainment includes lavishness. Since there was no question of any lavishness, there is no question of any hospitality or the amount being treated as an entertainment expenditure. We find no merit at all in this submission.
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.
It will be seen from the above that every kind of hospitality will be considered as entertainment. If the assessee were to take the foreign customers to the clubs or to provide them with liquors, it has to be only because of hospitality. It is not the assessee's business of running a hotel for providing goods at a price to them. It is not as if the assessee can bill the customers for the amounts spent on them. The expenditure is not contractual. It has, therefore, to be only hospitality especially when the word 'hospitality' has been given a very wide amplitude in the statute. We have, therefore, no doubt that the expenditure incurred is hospitality and, therefore, entertainment expenditure.
12. Even if this provision is wrong, as Shri V. Raghavendra Rao, the learned departmental representative, has pointed out, the club bills and the supply of liquor shows certain amount of lavishness. Even as per the law as it stood before the amendment, such lavishness will be labelled as entertainment expenditure. For this reason also, we are satisfied that the order passed by the ITO is valid.