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Commissioner Of Income Tax v. Nadh Shah Kapur
Factual and Procedural Background
The assessee is a dealer of M/s Ashok Leyland Ltd. for Jammu and Kashmir. In September 1969 the assessee received a letter from Shri M.D. Kapoor, Sales Director of M/s Ashok Leyland, Madras, informing the assessee that the "Main Dealers Conference 1969" would be held in Srinagar in October 1969 and requesting that the assessee arrange 8–10 cars for delegates and host a dinner on 14 October 1969. The letter indicated that M/s Ashok Leyland would compensate the assessee in some other way for expenditure incurred.
Pursuant to that request, the assessee spent Rs. 13,135/- on the Ashok Leyland Dealer's Conference (described in the opinion as taxi bills and dinner etc.). In addition the assessee spent either Rs. 4,513/- (one place in the opinion) or Rs. 4,543/- (in the appellate narration) on providing tea etc. to customers and staff. The Income-Tax Officer disallowed total expenditure of Rs. 17,678/- as being entertainment.
On appeal the Appellate Assistant Commissioner allowed Rs. 13,135/- as business expenditure and allowed part of the tea/refreshment expenditure (reported in the opinion as Rs. 1,543/-) as relating to employees, resulting in an aggregate allowance of Rs. 14,678/- (as stated in the opinion). The Tribunal affirmed the Appellate Assistant Commissioner, holding that the Rs. 13,135/- had been incurred out of commercial expediency and was allowable as wholly and exclusively for the purpose of business.
At the instance of the Revenue the Tribunal referred the following question to the High Court: "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenses of Rs. 13,135/- were allowable under Section 37 of the Income-tax Act, 1961?"
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenses of Rs. 13,135/- were allowable under Section 37 of the Income-tax Act, 1961 (i.e., whether those expenses fall within allowable business expenditure or are disallowed as entertainment under section 37(2-A)).
- Relatedly, whether the expenditure incurred by the assessee in providing cars, dinner and related hospitality to delegates at the dealer conference should be characterised as "entertainment expenditure" within the meaning of section 37(2-A), or as necessary business expenditure (commercial expediency / business obligation) and therefore allowable under section 37(1).
Arguments of the Parties
Revenue's Arguments
- The Revenue contended that Section 37(2-A) of the Income-tax Act precludes allowance of so much of expenditure in the nature of entertainment as exceeds the statutory aggregate; therefore the sum of Rs. 13,135/- incurred by the assessee was not allowable under Section 37(1) because it fell within "entertainment expenditure".
- The Revenue argued that the word "entertainment" should be understood to mean hospitality of any kind extended by the assessee directly in connection with business or profession, and thus the expense should be treated as entertainment expenditure.
Assessee's Arguments
- The assessee argued that whether an expense constitutes entertainment depends on the facts and circumstances of each case and that no rigid formula can be applied universally.
- It was submitted that hospitality shown on account of a business obligation (arising under an express or implied contract) or on account of a long-standing custom of a trade, business or profession should not be treated as "entertainment" within the meaning of Section 37(2-A).
- Specifically, the assessee maintained that it was under a business obligation (or compulsion) to arrange cars and lunch/dinner for the delegates as requested by the manufacturer's Sales Director, and therefore the expenses were incurred out of commercial expediency and were wholly and exclusively for business purposes.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax, Gujarat II v. Pate Brothers & Co. Ltd., 1977 106 I.T.R. 424 | The court examined various dictionary meanings of "entertainment" and concluded that while "entertainment" includes hospitable treatment of guests, not every act of hospitality is "entertainment". Hospitality that is an express or implied business obligation or part of long-standing custom of a trade/business/profession does not amount to "entertainment". The decision emphasises a contextual, fact-specific inquiry and adopts a broad dictionary meaning for cases lying between clear categories. | The High Court adopted and relied on the Gujarat High Court's analysis to reject the Revenue's submission that every hospitality in connection with business is necessarily "entertainment". The court applied the precedent's distinction to hold that hospitality arising from business compulsion could be non-entertainment, but that certain components (notably amounts spent on meals/lunch) might nonetheless be voluntary entertainment and therefore disallowable unless quantified otherwise. The matter was remitted to the Tribunal to determine the amount attributable to lunch/entertainment. |
Court's Reasoning and Analysis
The court began by rejecting the Revenue's broad contention that "entertainment" should be equated with any hospitality extended in connection with business or profession. The court accepted the linguistic point that entertainment involves hospitable treatment of guests, but emphasised that the converse — that every hospitality is entertainment — does not follow.
The court relied upon and reproduced the reasoning of the Gujarat High Court in Commissioner of Income-tax, Gujarat II v. Pate Brothers & Co. Ltd., which analysed dictionary meanings and concluded that:
- Acts of hospitality that are rendered as an express or implied condition of service, or that arise from long-standing business/customary obligations, do not amount to "entertainment".
- Where hospitality is performed in a friendly, generous and liberal way on a lavish scale involving wasteful expenditure, it would amount to entertainment.
- There is an intermediate area where the classification must be decided on facts, adopting a broad dictionary meaning for borderline cases.
Applying these principles to the present case, the court accepted the Tribunal's finding that the hospitality (in arranging cars and certain conference-related services) was rendered because the assessee, as a dealer, had no practical choice but to comply with the manufacturer's request — i.e., there was business compulsion or commercial expediency; hence those expenses were not necessarily "entertainment" and could be allowable as business expenditure.
However, the court distinguished the component of the expenditure attributable to meals (lunch etc.). The court observed that such amounts were likely voluntary on the part of the assessee and undertaken to "entertain" delegates rather than arising from a business obligation. The record showed that some amount was incurred for luncheon to the delegates, but the opinion states it is unclear how much of the Rs. 13,135/- was spent solely on lunch.
Because of this factual uncertainty the court could not conclusively determine whether the entire Rs. 13,135/- was allowable. The court therefore remitted the matter to the Tribunal to ascertain the portion (if any) of the Rs. 13,135/- that was spent on lunch/entertainment and to decide the allowance accordingly.
Holding and Implications
Core Ruling: The reference is answered by holding that while a portion of the expenditure (relating to arrangements compelled by business obligation) may be allowable as business expenditure, the amount spent on meals/lunch may constitute entertainment and be disallowable; because the record does not show how much of the Rs. 13,135/- was spent on lunch, the matter is remitted to the Tribunal to determine the precise amount attributable to lunch/entertainment.
Implications:
- The Tribunal's general conclusion that arrangements compelled by business obligation (cars, certain conference services) can amount to allowable business expenditure is supported by the High Court's adoption of the Gujarat High Court's test distinguishing hospitality from entertainment.
- The direct practical consequence is that the Tribunal must now quantify what portion of the Rs. 13,135/- (if any) was spent on meals/lunch (treated as entertainment) and treat that portion as potentially disallowable under section 37(2-A), with the balance being allowable as business expenditure.
- There will be no order as to costs.
- The opinion does not purport to lay down a new, general statutory test beyond applying the precedent cited; it proceeds on a fact-specific application of established linguistic and contextual principles distinguishing hospitality arising from business obligation from voluntary entertainment.
Note: The opinion contains slightly inconsistent figures in places (the text refers both to Rs. 4,513/- and Rs. 4,543/- for the tea/refreshment expenditure). The summary above reproduces the facts and figures as set out in the provided opinion and relies solely on that material.
J.V Gupta, J.:— The assessee firm is a dealer of M/s Ashok Leyland Ltd., for Jammu and Kashmir. In September, 1969, the assessee recsived a letter from Shri M.D Kapoor, Sales Director of M/s Ashok Leyland Madras, to the effect that it had been d??? cided to hold the “Main Dealers Conference 19???9” at Srinagar some time in October, 1969. It was further stated by Shri M.D Kapoor that he would require 8/10 cars for the delegates and that he would appreciate if the assessee could make arrangements for the same. It was further suggested by Shri Kapoor that the assessee should host a dinner for the del gates on 14th October 1969, and that M/s Ashok ???eyland would compensate ths asse???see in some other way for the expenditure incu???d by it. In pursuance of this letter, the assessee spent a sum of Rs. 13,135/- on the Ashok Leyland Dealer's Conf???rence in respect of taxi bills and dinner etc. In addition to this expenditure, the assessee also spent the sum of Rs. 4,513/- on providing tea etc. to its customers and members of the staff. Holding that the expenditure of Rs. 17,678/- was in the nature of entertainments, the Income-Tax Officer disallowed the same while passing order for the assessment year 1971???72 On appeal, the Appellate Assistant Commissioner held that the expenditure of Rs. 13.135/- was allowable, as the same had been incurred for business purposes. As regards the expenditure of Rs. 4,543/- he allowed the same to the extent of Rs. 1,5 43/- on the ground that the same related to the provision of tea and food etc. to the employees. Thus, the total amount allowable by him was Rs. 14,???78/-. In second appeal by the Department, the Tribunal held as under:—
“We have gone through the record and heard the learned representatives of the parties. In our opinion the decision of the Appellate Assistant Commissioner is sound and the same calls for no interference. The facts of the case indicate that the assessee did not voluntarily spend the amount of Rs. 13,135/- on the Ashok Ley land Dealer's Conference Since no dealer could afford to offend the manufacturers the assessee had no choice, but to arrange for the cars and the dinner etc. for the delegates, as desired by Shri M.D Kapoor, Sales Director of M/s Ashok Leyland, Madras. It is also on record that the manufacturers, who were pleased with the assessee provided certain number of chasis to it on old rates even though there had been some increase in the prices. In our opinion the expenses incurred by the assessee were not in the nature of the entertainment expenses and that the same were necessary on the ground of commercial expediency and business considerations. We accordingly, agree with the view taken by the Appellate Assistant Commissioner that the expenses amounting to Rs. 13,135/- were incurred by the assessee wholly and exclusively for the purpose of its business. The same are, therefore, allowable”
2. At the instance of the Revenue, the Tribunal has referred the following question for the opinion of this Court:—
“Whether on the facts and in the circumstance* of the case, the Tribunal was right in law in holding that the expenses of Rs. 13,135/- wer allowable under Section 37 of the Income tax Act, 1961?”
3. It has been argued on behalf of the Revenue that in view of section 37(2-A) of the Income tax Act, 1961, (hereinafter referred to as the Act), the sum of Rs. 13.135/- incurred as b???slness expenses by the assessee on the conference, were not allowable as such under section 37(1) as they fall within the purview of expenditure in the nature of entertainment Section 37(2-A) reads as under:—
“Notwithstanding anything contained in sub section (???) or subsection (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 Septe ???r, 1967, as is in excess of the aggregate amount computed as hereunder:—
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4. According to the learned counsel, the word ‘entertainment’ should be taken to mean hospitality of any kind extended by the assessee directly in connection with his business or profession, and, therefore the expenditure incurred as such by the assessee would clearly fall within the description “entertainment expenditure”. Thus, according to him, the tribunal has fired in holding that the expenses incurred by the assessee were not in the nature of entertainment expenses and the same were necessary on the ground of commercial expendidency and business considerations. On behalf of the assessee, these contentions were sought to be repelled by urging that the question whether in a given case the expenses are in the nature of entertainment expences or not would depend upon the facts and circumstances of each case and no hard and fact straight-jacket formula or test can be laid down so as to answer all the contingencies According to the learned counsel for the assessee, it would depend, inter alia, on the nature and type of business ite??? of entertainment, place of entertainment and tradition and habits of the people of the area where the assessee is carrying on his business. In any case, it was contented that hospitality shown on account of obligation of business arising as a result of an express or implied contract or arising on account of the long standing custom of a trade, business or profession; cannot amount to entertainment and acts done in discharge of such obligations cannot be included and covered in the term ‘entertainment’ in Section 37(2-A) of the Act. It was further submitted that in the present case, the assessee was under business obligation to make proper arrangments for the cars and the lunch etc. for the delegates as des???red by their Sales Director of M/s Ashok Leyland, Madras and, therefore, the expenses incurred by him were not in the nature of entertainment expenses, but the same were necessary on the ground of commercial expediency and business considerations.
5. After hearing the learned counsel for the parties, we are of the opinion that this contention of the department that entertainment should be taken to mean hospitality of any kind extended by the assessee in connection with his butiress or profession, is not correct. No doubt, entertainment is hospitable treatment of guests and every act of entertainment includes hospitality. But that would not warrant the converse position to be correct and every hospitality would not constinute entertainment. We find that the Gujarat High Court in Commissioner of Income-tax, Gujarat II v. Pate Brothers & Co Ltd. . 1977 106 I.T.R 424., has discussed the meaning of the term ‘entertainment’ given in various dictionaries and after reproducing the same has come to the conclusion that:
“It is, therefore, clear to us that the dictionary meaning of the term ‘entertainment’ it to receive and treat with hospitality, which broadly means receiving and entertaining strangets or guests. In a friendly, generous and liberal way. The term ‘entertainment’ in the context of the Income-tax Act, on its true construction and meaning, would include the acts or practice of receiving and entertaining strangers and friends. In a friendly, generous and liberal way These acts may consist of providing for the wants of a guest in a liberal and generous manner. If the Act of entertaining is OH a lavi??? and a grand scale involving wasteful expenditure it would, no doubt, amount to entertainment. On the other hand, if the acts or practice of being hospitable in the sence of providing meals, drinks or other want??? of person entertained, whether they may be employees workmen or officers servants or agents in the service of an assessee, as an express or implied con???ition of service, they would not amount to acts of entertainment. Similarly if the acts or practice of being hospitable in the sense of providing meals, drinks or satisfying any other wants of guests, whether they are friends, strangers or customers, as a part and parcel of express or implied terms and conditions of business, trade or profession’ or on account of long-standing custom in such trade, business or profession, they would not in our opinion, amount to acts of entertainment. It is only in the area lying between these two termini that the difficult question arises, and as regards acts falling in such area we are of the opinion that we should adopt the broad dictionary meaning of the term ‘entertainment’ which we have indicated above. We think that the revenue was right when it was contended on its behalf that entertainment is hospitable treatment of guests and every act of entertainment includes hospitality But, in our opinion, that would sot warrant the converse position to be correct and every hospitality would not constitute entertainment. Hospitality shown on account of obligation of business arising as a result of an express or implied con??? or arising on account of the long standing custom of a trade, business or profession, cannot amount to entertainment, and acts done in discharge of such obligation cannot be included and covered in the term entertainment’ without violence to lauguage”.
6. Thus in the present case, we find that the hospitality shown by the assessee to the delegates of the confrence was on account of business compulsion, particularly, In view of the nature of the business of the assessee, i.e being ???ealer of M/S Ashok Icyland, Madras. The Tribunal is right in observing that since no dealer could afford to offend the manufacturer??? the assessee had no choice, but to arrange the cart etc. for the delegates, as desired by Shri M.D Kapoor, Sales Director o M/s Ashok Leyland, Madras. But the question still temains to be answered is that whether in the present case the amount incurred on meals i.e lunch ete, which is included in the total amount of expenditure, was also spent on account of business compulsion or was it a voluntary one? Taking into consideration the definition of the word “entertainment” and the conclusions given above by the Gujarat High Court, we are of the opinion that the amount spent on meals etc. will be covered by the said definition Such an amount spent was nothing but voluntary on the part of the assessee, in order to entertain the delegates. Under the circumstances, the amount thus spent on meals cannot be said to be under any business obligation or compulsion as such. We do not find that such on amount incurred an lunch etc. was either customary or was on account of any business obligation particularly, keeping in view the nature of business carried on by the assessee. From the order of the Income tax Officer, we find t??? some amount was ineumd for expenses on one linen to the delegates of the conference, but it is not clear how much amount was spent on the lunch alone Thus, the amount which may be found by the Tribural as having been incurred on lunch etc. will be treated an expenditure on entertainment; whereas the balance will be expenditure for ???ss considerations and not for entertainment perposes.
7. In this view of the matter, we are unable to answer the question is the amount of Rs. 13,135/- includes the expenditure on lunch which his been h???d to be entertainment and thus not allowable. We therefore, re???t the case to the Tribunal to proceed to decide the matter in accordance with ???. There will be no order as to costs.
Bhopinder Singh Dhillon, J.:— I agree.
R.S
Reference answered.
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