Rajesh Bindal, J.:— This is an appeal filed by the Revenue raising the following substantial questions of law, arising out of order dated May 26, 2004 passed by the Income-tax Appellate Tribunal, Chandigarh Bench “A”, (for short “the Tribunal”), for the assessment year 1994-95:
“(i) Whether on the facts and circumstances of the case, the hon'ble Income-tax Appellate Tribunal was justified in deleting the disallowance of Rs. 90,883 made on account of disallowance out of festival expenses incurred by the assessee?
(ii) Whether on the facts and circumstances of the case, the hon'ble Income-tax Appellate Tribunal was justified in law in deleting the disallowance of Rs. 55,24,250 made on account of interest on interest-free advances given to sister concern for non-business purposes?
(iii) Whether on the facts and circumstances of the case, the hon'ble Income-tax Appellate Tribunal was justified in law in deleting the additions relating to disallowance of Rs. 1,28,16,194 claimed by the assessee on account of sales tax exemption granted by the State Government ?”
2. The assessee is engaged in the business of manufacture of fertilizer and paper. While filing the return, the assessee claimed a sum of Rs. 4,67,097 on account of festival expenses, out of which Rs. 90,883 are on account of purchase of silver jewellery and Titan watches. The claim of the assessee that such expenditure was incurred with a view to generate goodwill and to facilitate the conduct of business, therefore, were incurred as a matter of commercial expediency. The claim made by the assessee was rejected by the Assessing Officer on the ground that no proof was adduced to the effect that the items were distributed for the purpose of business. However, the same was ordered to be treated as entertainment expenditure to be dealt with under section 37(2A) of the Income-tax Act, 1961 (for short, “the Act”). Aggrieved against the order of assessment, the assessee preferred appeal before the Commissioner of Income-tax (Appeals) (for short, “the CIT (Appeals)”) who following his earlier order for the assessment year 1992-93, wherein the expenditure on purchase of silver jewellery and Titan watches was held to be entertainment expenditure, upheld the disallowance made by the Assessing Officer.
3. In further appeal before the Tribunal, the assessee succeeded, where the Tribunal following its earlier order passed for the assessment year 1991-92, accepted the plea of the assessee. Though, neither much details nor the copies of the orders passed for the assessment year 1991-92 were placed on record. However, on the asking of the court copies thereof were made available. The relevant findings in the order passed by the Tribunal in I.T.A No. 225.Chandigarh/95, decided on July 25, 2001 for the assessment year 1991-92 are as under:
“5.1 We have considered the rival submissions. The Assessing Officer while examining the accounts found that the assessee had spent an amount of Rs. 2,51,964 on account of shawls/wrist watches, etc., claimed to be given to the staff members and other representatives of the bulk buyers of the company's products on the occasion of Diwali. The Assessing Officer held that these are not distributed in the ordinary course of business and are not wholly and exclusively for the purpose of business. He accordingly made the disallowance of Rs. 2,51,964 and the learned Commissioner of Income-tax (Appeals) confirmed his action. There is no finding by the Assessing Officer that the expenditure incurred for wrist watches/shawls was an expenditure of personal nature. The only basis for making disallowance appears to be that the assessee has not disclosed the names of the persons to whom wrist watches/shawls were given. Disclosure of names might cause embarrassment to some of the recipients and in a given case the name given out by the assessee might not be correct which may lead to harassment in individual cases. However, this alone would not preclude the assessee to claim deduction under section 37(1). Giving of costly gifts may not be desirable but nonetheless it is a business expenditure so far as the assessee is concerned and keeping in view the turnover of the assessee the amount spent on giving gifts at the time of Diwali in the form of wrist watches/shawls cannot be called excessive or unreasonable.”
4. The core question is “as to whether the expenses incurred on purchase of gifts for distribution on occasion of festival would amount to entertainment or not” to be dealt with under section 37(2) of the Act or the same is “in the nature of expenditure made for the purpose of business”. The term “entertainment expenditure” has been provided for in the Explanation to section 37(2) of the Act which for the relevant assessment year reads as under:
“37. (2) Notwithstanding anything contained in sub-section (1), any expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year commencing on or after the 1st day of April, 1992, shall be allowed as follows:—
(a) where the amount of such expenditure does not exceed ten thousand rupees, the whole of such amount;
(b) in any other case, ten thousand rupees as increased by a sum equal to fifty per cent, of such expenditure in excess of ten thousand rupees.
Explanation.—For the purposes of this sub-section, ‘entertainment expenditure’ includes—
(i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person;
(ii) the amount of any expenditure in the nature of entertainment expenditure [not being expenditure incurred out of an allowance of the nature referred to in clause (i)] incurred for the purposes of the business or profession of the assessee by any employee or other person;
(iii) 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.”
5. A perusal thereof shows that the word “entertainment” has been defined in section 37(2) of the Act which provides certain limits for grant of deduction on the expenditure, which are in the nature of entertainment expenditure. The Explanation thereto provides that the entertainment expenditure shall include the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person; the amount of any expenditure in the nature of entertainment expenditure incurred by any employee or other person and the expenditure on provision of hospitality of every kind by the assessee to any person whether by way of provision of food, beverages or in any manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade.
6. The term “entertainment” has been defined in Webster's Encyclopedic Unabridged Dictionary edition of 1989 as:
“1. the act of entertaining; agreeable occupation for the mind; diversion; amusement; solving the daily crossword puzzle is an entertainment for many.
2. Something affording diversion or amusement, esp. an exhibition or performance of some kind; the High light of the ball was an elaborate entertainment;
3. hospitable provision for the wants of guests.
The word ‘entertaining’ is defined as:
“affording entertainment; amusing; diverting”
The word ‘hospitality’ has been defined as:
“1. the friendly reception and treatment of guests or strangers; 2. the quality or disposition of receiving and treating guests and strangers in a warm, friendly and generous way.”
7. As is evident from the facts of the present case, the expenditure of the kind claimed by the assessee as a deduction, has not been incurred in its premises. The expenses have not been incurred on a hospitality provided by the assessee to any guest or any other person. All that has been claimed is that certain gifts have been distributed on festival which are for the business expediency. We cannot lose sight of the fact that certain festivals in this area like Diwali are celebrated with much fanfare and not only in the business circles but even in friend circles, gifts and sweets are distributed. This cannot in any way may be held to be an expenses in the nature of hospitality.
8. A similar view has been expressed by the Calcutta High Court in CIT v. Shalimar Industries P. Ltd., [1995] 78 Taxman 521 (Cal).
9. The contrary view has been expressed by the Rajasthan High Court in Modern Threads (India) Ltd. v. CIT, [2002] 258 ITR 511 and in CIT v. Instrumentation Ltd., [2002] 258 ITR 513 (Raj), wherein it was held that the expenditure on distribution of gift articles constituted entertainment expenditure. Respectfully, we do not subscribe to the view expressed by the Rajasthan High Court in Modern Thread's case, [2002] 258 ITR 511 and Instrumentation Ltd.'s cases, [2002] 258 ITR 513 and endorse the view taken by the Calcutta High Court in Shalimar Industries' case, [1995] 78 Taxman 521 and hold that the expenditure of distribution of gifts on festival cannot be termed to be entertainment. However, it would be a question of fact to be pleaded and substantiated before the Assessing Officer that the kind of expenditure incurred on distribution of gifts was justified keeping in view the nature of business, turnover and other related factors. We have examined the facts of the present case and keeping in view the nature of business, scale thereof, the amount of expenditure claimed on account of purchase of articles for distribution as gifts on festivals, cannot be held to be excessive or not being for business purposes.
10. Accordingly, the first question raised by the Revenue is decided against the Revenue and in favour of the assessee and the appeal on that count is dismissed.
11. As far as questions Nos. (ii) and (iii) are concerned, vide our judgment in I.T.A No. 110 of 2005—CIT v. Abhishek Industries Ltd., [2006] 286 ITR 1, decided on August 4, 2006, where identical issues were involved, the same were decided against the assessee and in favour of the Revenue.
12. Regarding question No. (ii), during the course of assessment, it was found that the assessee had advanced substantial amount to its sister concern for non-business purposes on which no interest was charged. On a show-cause notice having been issued, the same was replied to by the assessee stating as under:
“Regarding your honour's proposal to disallow interest in respect of funds given interest-free to these parties, it is submitted that these amounts were given out of the assessee-company's C/C account in which sale proceeds as well as subsidy receipts, etc., are also deposited in the C/C a/c. In view of these facts, the funds given interest-free should be presumed to have been given out of profits of the company.”
13. During the year in question, the assessee incurred total interest liability of Rs. 6,48,91,971 on the outstanding loans of Rs. 34,96,41,741. The Assessing Officer calculated the interest on the interest-free advance given to its sister concerns for non-business purposes and accordingly, disallowed interest of Rs. 55,24,250 on that. Details of interest-free advances made to various sister concerns form part of the assessment order as annexure thereto, which shows that in the case of sister concerns namely, M/s. Gan-pati International Ltd. the debit closing balance was Rs. 17,89,868.68, in the case of Pashupati Enterprises Pvt. Ltd. the closing debit balance was Rs. 1,19,83,188, in the case of Varinder Agro Packs Ltd. the debit closing balance was Rs. 88,55,000, and in the case of Pashupati Enterprises Ltd. the closing debit balance was Rs. 42,29,750. As we have already held in Abhishek Industries' case, [2006] 286 ITR 1 (P & H) when the assessee itself was incurring liability to interest on the amount raised as loan, there was no justification for advancing interest-free loans to sister concerns for the purpose of business. Accordingly, following the judgment of this court in Abhishek Industries' case, [2006] 286 ITR 1 the claim of interest on the amount of interest-free loan advanced to sister concerns for non-business purpose, as calculated in the assessment order, to the extent of Rs. 55,24,250 is disallowed and appeal to that extent is allowed and the order of the Tribunal is set aside.
14. Regarding question No. (iii) is concerned, at the time of filing of return the assessee claimed that a sum of Rs. 1,28,16,694 received by it as sales tax subsidy was a kind of revenue receipt. However, later on a revised return was filed, claiming the same to be a capital receipt which was disallowed by the Assessing Officer. Finally the Tribunal accepted the plea of the assessee and declared the same to be a capital receipt. We have examined the nature of the receipt in the case of Abhiskek Industries, [2006] 286 ITR 1 (P & H) where the same type of sales tax subsidy was involved and held that to be revenue in nature. Following the judgment, we hold that the sales tax subsidy of Rs. 1,28,16,694 received by the assessee be treated as revenue receipt and dealt with accordingly and not capital in nature. Accordingly, question No. (iii) is decided in favour of the Revenue and against the assessee and the appeal of the Revenue to that extent is allowed and the order of the Tribunal is set aside.
15. The appeal is disposed of in the manner indicated above.