| SooperKanoon Citation | sooperkanoon.com/64573 |
| Court | Income Tax Appellate Tribunal ITAT Madras |
| Decided On | Mar-22-1991 |
| Judge | D Meenakshisundaram, G Veerabhadrappa |
| Reported in | (1991)38ITD153(Mad.) |
| Appellant | Madras Loom House |
| Respondent | income-tax Officer |
- Rs. 31,348 Total: - Rs. 1,75,433 The Income-tax Officer had treated these expenses as entertainment expenditure and after allowing a sum of Rs. 5,000 under Section 37(2) of the Income-tax Act disallowed the balance of Rs. 1,70,433, which was confirmed by the Appellate Asstt. Commissioner. This is being objected to by the appellant before us.
2. Shri G. Narayanaswamy, the learned Chartered Accountant for the appellant placed before us a copy of the order of the Appellate Tribunal, Madras Bench-C in the case of Madras Loom House (P.) Ltd. v.ITO in IT Appeal No. 420 (Mad.) of 1986 dated 15-2-1991 and submitted that in the light of this decision of the Appellate Tribunal, the assessee is entitled to succeed in respect of its claim for deduction of the hotel expenses incurred by it towards the foreign customers who had come to transact business with the appellant in India. He also furnished before us complete details of the names of the foreign customers, their country of origin, date of their arrival and departure from Madras and the hotel bill amounts paid by the appellant in respect of these foreign customers, as well as the export value of the goods sold to those customers. The learned Chartered Accountant submitted that according to the order of the Tribunal referred to above, only 1/10th of the hotel bill amounts should be disallowed for the entertainment part of the expenses and the balance would be admissible as business expenditure. On this basis, the learned Chartered Accountant submitted that the amount that could be disallowed as entertainment would be Rs. 14,408 representing 10% of the hotel expenses of foreign customers amounting to Rs. 1,44,085 and that the balance of Rs. 1,29,677 would be an admissible deduction. Shri G.Narayanaswamy also placed before us a copy of the general permission received from the Reserve Bank of India, Exchange Control Department, Madras-1, dated 17-4-1984 permitting the assessee to incur expenses "for meeting the local living and internal travel expenses of foreign nationals visiting India as your guests on non-repatriation basis subject to report".
He further submitted that it is under this permission granted by the Reserve Bank, the assessee could incur this expenditure which represented the barest minimum of the living and stay expenses of the foreign customers who came to transact business with the assessee. He informed us that the Exchange Control Department grants permit for a period of two to three months at a time and renews it at the end of each quarter or so. The learned Chartered Accountant argued that the assessee did not incur any expenditure on the internal travel of its customers, but only on the hotel stay of its customers in India at Madras, as could be seen from the hotel bills, details of which appear in the statement furnished by him. He also submitted that the assessee has been awarded a Certificate of Merit for outstanding export performance in the category of Cotton Handloom Fabrics in the year 1982 by the Directorate of Handlooms and Textiles, Madras, as could be seen from the certificate dated 22-8-1984. The learned Chartered Accountant also further submitted that apart from this main claim, he is not pressing the contentions relating to the disallowance of the balance of Rs. 31,348 which has been disallowed by the departmental authorities as entertainment expenditure.
3. Shri G. Natarajan, the learned departmental representative relied on the decision of the Karnataka High Court in the case of Mysodet (P.) Ltd.v. CIT [1987] 167 ITR 848 and argued that the assessee's case was similar on facts to the said decision of the Karnataka High Court and that, therefore, the assessee was not eligible for deduction of this amount. He also relied on Explanation 2 to Section 37(2A) of the Act, defining 'entertainment expenditure' and pointed out that this Explanation inserted by the Finance Act of 1983 had retrospective effect from 1-4-1976. He particularly laid emphasis on the following words in the Explanation, namely "entertainment expenditure" includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provisions of food or beverages or in any other manner whatsoever"and submitted that even hotel bills, which included the stay expenditure, such as room rent, would also be hit by this Explanation and that, therefore, the departmental authorities were justified in disallowing the assessee's claim. He further relied on the decision of the Patna High Court in the case of Chandmull Rajgarhiav.CIT [1987] 167 ITR 433 as well as the latest decision of the Punjab & Haryana High Court in Atlas Cycle Industries Ltd. v. CIT [1990] 181 ITR 18. Relying on these decisions, Shri Natarajan argued that the disallowance made by the departmental authorities should be upheld.[Emphasis supplied] 4. Shri G. Narayanaswamy, the learned Chartered Accountant for the assessee in his reply submitted that the decisions relied on by the learned departmental representative arc not applicable to the facts of the present case, as it was not clear from the facts set out in the decision of the Karnataka High Court in Mysodet (P.) Ltd.'s case (supra) whether the trade representatives have visited the assessee for transacting any business whereas in the case of the appellant, the expenses were incurred as part of business expenditure out of commercial expediency to invite its foreign customers to come to India to see for themselves the various varieties of handloom fabrics available for purchase by them and select the varieties directly by themselves. He therefore argued that this decision of the Karnataka High Court would be of no avail to the department. He further relied on the decision of the Gujarat High Court in the case of CIT v. Patel Bros. and Co. Ltd. [1977] 106 ITR 424 which was similar on facts to the assessee's case, though it was a case of providing customary hospitalities to farmers who brought their agricultural products, i.e., cotton, groundnut, rice, pulses, etc., for sale to the assessees. He next relied on the decision of the Andhra Pradesh High Court in the case of Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514 at 518 which was also similar on facts to the case of the present assessee. He particularly invited our attention to the observations of their Lordships at pages 518 and 519 where two departments of the Government of India were taking contradictory and conflicting stands.
Finally, the learned Chartered Accountant relied on the decision of the Madras High Court in CIT v. K.P.V. Shaik Mohamed Rowther and Co. [1984] 145 ITR 37, wherein the principle for allowing such expenditure has been laid down by the Madras High Court. The learned counsel submitted that introduction of Explanation 2 to Section 37(2A) relied on by the learned departmental representative would not make any difference, as it was confined to hospitality in the form of food and beverages and like nature on a lavish scale, as was the case in the case of K.P.V.Shaik Mohamed Rowther & Co. (supra) and not to living expenses which were the barest minimum allowed by the Reserve Bank of India under the Foreign Exchange Regulation Act. Therefore, there could be no element of entertainment involved in the expenses claimed by the assessee. He also submitted that it is only after considering all these relevant facts and circumstances the earlier Bench in the case of the assessee's allied concern had disallowed 10% of the expenditure as for probable element of entertainment involved in this expenditure and allowed the balance as admissible deduction.
5. We have carefully examined the contentions urged on both sides in the light of the materials placed before us and the authorities relied on by them.
6. No doubt, the allowability of the expenditure in question has to be considered in the light of Explanation 2 to Section 37(2A), which was inserted by the Finance Act of 1983 with retrospective effect from 1-4-1976. The said Explanation reads as follows:- Explanation 2 : For the removal of doubts, it is hereby declared that for the purpose 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.
The argument on behalf of the revenue is that the decisions relied on by the assessee's learned Chartered Accountant were before the introduction of this Explanation and therefore they would be of no assistance to the assessee. In our view, the decision of the Madras High Court in the case of K.P.V. Shaik Mohamed Rowther & Co. (supra) provides the guidance to apply the tests for allowing such expenditure.
After referring to the bewildering variety of meanings and usages attached to the word "entertainment" in the English language as well as the various decisions started from CIT v. Karuppuswamy Nadar and Sons [1979] 120 ITR 140 of the Madras High Court and ending with the decisions of the Bombay High Court in CIT v. Shah Nanji Nagsi [1979] 116 ITR 292. Their Lordships of the Madras High Court have formulated the following tests at page 47 of the reports:- It seems to us that the true test would be to find out two things : (1) whether the expenditure is incurred wholly and exclusively for the purpose of business and (2) whether the expenditure is of a kind which can properly be regarded as entertainment, whether the nature, the form and the other aspects of the entertainment arc conditioned by the terms of any business contract or otherwise. Where, however, the expenditure on hospitality of a commercial character is a necessary concomitant of the business itself, the expenditure cannot be regarded as entertainment expenditure but must be treated only as an element of cost, tending to swell the cost of goods and services produced or purchased by the assessee in the course of his business for being subsequently turned over at a profit, if possible. To take an illustrative example, in a case where an assessee runs a hotel and meets his customers in his office which is attached to the hotel and offers them food and drink while engaged in business discussion, the expenditure therein involved can hardly be regarded as being in the nature of entertainment expenditure, since it is expenditure incurred in the very carrying on or the carrying out of the hotel business and not as a distinct exercise in commercial hospitality either for attracting or for maintaining the custom and the clientele. It is only in the sense expressed last, that we understand the principle behind the earlier decision of this Court in CIT v. Karuppuswamy Nadar and Sons [1979] 120 ITR 140.
In our view, Explanation 2 to Section 37(2A) has to be understood in the light of the tests laid down by their Lordships of the Madras High Court in the above decision. We are unable to agree with the learned departmental representative that the expenditure incurred by the appellant in the present case on the living expenses of its foreign customers as permitted by the Reserve Bank of India would fall within the mischief of this Explanation, as the expenditure included the expenses not only for providing food and beverages, but also room rent for the stay of foreign customers. It is this fact that has been taken note of by our learned Brothers when they examined this issue in the case of Madras Loom House (P.) Ltd. (supra) decided by the Appellate Tribunal, Madras Bench-C dated 15th February, 1991. In para 8 of the said order, the learned Members held as follows :- It is no doubt true, as canvassed by the learned counsel of the assessee that these expenses have been incurred to meet the living cost of foreign buyers. However, it was admitted on behalf of the assessee that there would be an entertainment component, however small embedded in these expenses. For example, in the statement filed before us, entertainment expenses amounting to Rs. 9008 are specifically mentioned. It would also be not unreasonable to suppose that part of the other expenses may have an entertainment component.
The learned counsel for the assessee was not in a position to give exact figures and submitted that an estimate could be made of the entertainment component. Taking into consideration the fact that most of the hotel bills would pertain to room rental charges (the cost of rooms being quite high) and the fact that admittedly an entertainment component exists, we would estimate the entertainment part of these living expenses at 1/10th. The assessing officer is directed to compute the entertainment expenses accordingly.
In our view, the aforesaid decision of the Tribunal is based on sound principle and we do not see any reason to depart from the same. The three decisions of the Karnataka, Patna and Punjab & Haryana High Courts relied on by the learned departmental representative turned on their own facts and therefore they are not applicable to the facts of the present case. As rightly pointed out by the learned counsel for the assessee with reference to the decision of the Andhra Pradesh High Court in the case of Maddi Venkataratnam & Co. Ltd. (supra), the stand taken by the two departments of the Government of India are contradictory and conflicting. At pages 518 and 519 of the reports, their Lordships of the Andhra Pradesh High Court have observed as follows:- Before leaving this case, we must observe that it has very often come to our notice that two departments of the Government of India seem to be pursuing contradictory policies. On the one hand, there is a drive by the Government of India for encouraging exports and for encouraging industrial development. To that end all the State Governments are also exerting themselves to the utmost. On the other hand, the attitude taken up by the department of direct taxes discourages any such drive for encouraging exports and industrial development. It is high time that the two departments, one of direct taxes and the other of promotion of export and industries, should work in harmony and lay down policy decisions which would work in harmony with each other. We are constrained to make this observation because of the conflicting interests of the two departments of the Government of India.
7. Respectfully following the test laid down by their Lordships of the Madras High Court in the case of K.P. V. Shaik Mohamed Rowther & Co.
(supra) and the decision of our learned Brothers of Appellate Tribunal, Madras Bench-C in the order quoted above, we hold that the assessee is entitled to the deduction claimed by it in respect of the hotel bills paid by it for the foreign customers who came to transact business with it in India. Following the order of the Tribunal in the case of Madras Loom House (P.) Ltd. (supra) we direct the Income-tax Officer to disallow Rs. 14,408 representing 1/10th of the hotel bill expenses as for any probable entertainment element involved and allow the balance of Rs. 1,29,677 as expenditure laid out wholly and exclusively for the purpose of the business of the assessee-firm. We accordingly direct the assessing officer to allow Rs. 1,29,677 as admissible expenditure under Section 37(1) of the Act and amend the assessment of the appellant-firm and its partners accordingly.
8. As the assessee's learned Chartered Accountant did not press the ground relating to the disallowance of Rs. 31,348, the said ground is rejected and the disallowance is sustained.