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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: INDO ASIAN SWITCH-GEARS (P.) LTD
Court Name: Punjab and Haryana High Court Judge(s): Ashok Bhan, N. K. Agarwal Title: COMMISSIONER OF INCOME-TAX vs INDO ASIAN SWITCH-GEARS (P.) LTD Case No.: Income-tax References Nos. 47 and 48 of 1983 Date of Judgment:1996-08-30 Reported As: 1998 PTD 2916 Result: Question answered
JUDGMENT
JUDGMENT N.K. AGRAWAL, J.---This order will dispose of Income-tax References Nos.47 and 48 of 1983 and Income-tax References Nos.96 to 99 of 1982, as common questions of law and facts are involved therein. The questions of law referred to this Court for opinion by the assessee as well as the Commissioner of Income-tax for the assessm ent years 1975-76, 1976-77 and 1977-78 are as under: Questions of law referred at the instance of the assessee: For the assessm ent year 1975-76: "(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the additional grounds taken for the first time before the Tribunal, in respect of claiming the value of entitlements to import against the export as capital receipt immune from taxation, cannot be admitted? (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the provisions of section 144-B of the Income-tax Act, 1961 introduced with effect from January 1, 1976, have rightly been applied and the assessment made was not barred by limitation? (3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the expenditure of Rs,10,000 and Rs,6,000 incurred on food and light refreshment served to the trainees and engineers under the heads ' Dealers conference expenses' and ' sales promotion expenses', respectively, can be termed as entertainment within the meaning of section 37(2-A) of the Income Tax Act?
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(4) Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the claims of the appellant-company are not eligible for weighted deduction under section 35-B in respect of the following expenses: (i) Freight on export 2,91,003 (ii) Handling charges on export consignment 20,974 (iii) Interest on export promotion 77,186 (iv)Expenses on packing goods and card board cases for export consignment.2,66,755."
For the assessm ent year 1976-77: "(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding 'that the additional grounds taken for the first time before the Tribunal, in respect of claiming the value of entitlements to import against the export as capital receipt immune from taxation cannot be admitted? (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the expenditure of Rs,12,000 incurred on food and light refreshment served to the trainees and engineers under the head 'Sales promotion expenses' can be termed as entertainment within the meaning of section 37(2-A) of the Income Tax Act? (3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the claims of the appellant-company are not eligible for weighted deduction under section 35-B in respect of the following expenses: (Rs.) (i) Interest on export promotion 55,543 (ii) Gift to foreign buyers 586 (iii) Packing expenses for export consignment 33,053 (iv) Card board boxes for export consignment 77,013 (v)Sea freight on consignment including handling charges Rs.21,1802,75,214 (vi) Insurance on export consignments 11,110 (vii) Expenses on certificate of origin 445. For the assessm ent year 1977-78: "(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the additional grounds taken for the first time before the Tribunal, in respect of claiming the value of entitlements to import against the export as capital receipt immune from taxation, cannot be admitted? (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the expenditure of Rs,8,000 incurred on food and light refreshment served to the trainees and engineers under the head 'Sales promotion expenses' can be termed as entertainment within the meaning of section 37(2-A) of the Income Tax Act, 1961? (3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the claims of the appellant-company are not eligible for weighted deduction under section 35-B in respect of the following expenses: (Rs.) (i) Handling charges for export consignment 42,162 (ii) Expenses on certificate of origin 565 (iii) Bank guarantee charges 7,187 (iv) Bank charges for export 51,853 (v) Freight under CIF and C & F Contract 3,76,310
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(vi) Interest paid for export 1,42,467 (vii) Cost of packing expenses 2,79,606." Questions of law referred at the instance of the Commissioner of Income-tax: For the assessm ent year 1975-76: Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing weighted deduction on miscellaneous expenses of Rs,3,76,715 which included salary and other establishment expenses? (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing weighted deduction of Rs,26,007 being commission paid to Project and Equipment Corporation of India Ltd., New Delhi?" For the assessm ent year 1976-77: "(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing weighted deduction on miscellaneous expenses of Rs,2,86,978 which included salary and other establishment expenses? (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing weighted deduction of Rs,187,043 being commission paid to Larsen and Toubro Ltd. And Gemini International (P.) Ltd.?" For the assessm ent year 1977-78: "(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that penalty of Rs,4,950 paid to the Punjab State Electricity Board for delay in delivery of goods was allowable as deduction in view of the decision of the Punjab and Haryana High Court in Cinerama's v. CIT (1977) 110 ITR 762? (2) Whether, on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was right in law in holding that the sum of Rs,36,699 on account of extinguishment of sales tax liability for the assessm ent years 1970-71 to 1973-74 was not a trading receipt and not includible in the assessee's income?" Learned counsel for the assessm ent has not pressed the questions of law, Nos.1 and 2 for the assessm ent year 1975-76 and question No,1 for the assessment year 1976-77, and also for the assessm ent year 1977-78---all referred to this Court for opinion at the instance of the assessee. Therefore, these questions are returned unanswered. Expenditure disallowed under section 37(2-A) of the Income Tax Act, 1961 (for short, "the Act"): Question No,3 for the assessm ent year 1975-76 and question No,2 in the next two assessment years pertain to expenditures incurred by the assessee on food and light refreshment served to the trainees and engineers and claimed as deduction under the expenditure head "Sales promotion expenses". In the assessm ent year 1975-76, the assessee had claimed an expenditure of Rs,22,514 under the head "Dealers' conference expenses" and Rs,16,718 under the head "Sales promotion expenses". The Assessing Officer made a disallowance of Rs,20,000 out of the expenditure shown under the first head and Rs,12,500 under the second head. Disallowances under both the heads of expenditure were ultimately reduced to Rs,10,000 and Rs,6,000 respectively, by the Income-tax Appellate Tribunal (for short, "the Tribunal"). In the assessm ent for .The assessm ent year 1976-77, expenditure under the head "Sales Promotion expenses" had been shown by the assessee at Rs,37,041. Disallowance in this year was made by the Assessing Officer at Rs,15,000 but it came to be reduced to Rs,12,000 by the Tribunal. In the assessm ent year 1977-78, expenditure under the head "Sales promotion expenses" had been shown at Rs,59,687 out of which, the expenditure of Rs,15,000 was disallowed by the Assessing Officer but ultimately this disallowance was reduced to Rs,8,000 by the Tribunal. The question for determination in all the three years relates to the nature of expenditure. The assessee-company manufactured electric switch-gears. The plea of the assessee was that
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seminars and conferences were arranged by the company from time to time, wherein trainees and engineers working with the purchasing dealers were invited so that the items manufactured by the assessee-company could be made known and explained to them. Therefore, the main purpose for organizing the conferences was advertisement and publicity and whatever expenditure had been incurred in providing food and light refreshment to the invitees, was not at all in the nature of entertainment expenditure within the meaning of section 37(2-A) of the Act. It was necessary for the assessee-company to hold dealers' conferences so that the electric switch-gears manufactured by the company was made more popular and the engineers could also be imparted training about the use of electric switch-gears. The object and purpose for which seminars and conferences had been organized should be looked into and simply because food and light refreshment had been served to the trainees and engineers, that should not make it an expenditure on entertainment. The question whether the expenditure incurred on food and refreshment was in the nature of entertainment expenditure had been examined by various High Courts. A similar question came up for examination before the Karnataka High Court in Addl. CIT v. Bangalore Turf Club Ltd. (1980) 126 ITR 430. That was a case where the assessee company conducted, as its business, horse races. Certain expenditure had been incurred under the head Refreshments". Deduction had been claimed of the entire expenditure but was disallowed by the Assessing Officer on the ground that the entire expenditure was in the nature of entertainment expenditure. The assessee went in appeal and succeeded partly. The Assistant Commissioner took the view that the expenditure on liquors or hot drinks and on throwing parties to outsiders was entertainment expenditure and, therefore, subject to limits laid down in section 37(2-A) of the Act. The rest of the expenditure was considered to be not in the nature of entertainment expenditure and was, therefore, treated as deductible under section 37(1) of the Act on the ground that it was incurred for the purposes of the business. The matter did not rest there and reached the Tribunal which held that expenditure incurred towards refreshment and lunch served at the business meetings did not partake of the character of entertainment expenditure. The High Court, after examining a catena of judicial decisions, held that an expenditure shall constitute an expenditure in the nature of entertainment if it was expended for entertaining persons, whether they are customers or guests, either by way of providing foods, drinks, refreshment or in providing any type of pleasure or amusement. Expenses incurred during the official business meetings of the managing committee and of office-bearers were incurred as of necessity and constituted part of expenses incurred for the purposes of business. The High Court endorsed the view taken by the Tribunal that an expenditure incurred albeit for the purposes of serving food, refreshments drinks, etc., at the business meetings would be in the nature of administrative or business expenditure and would have no taint of expenditure in the nature of entertainment. The Bombay High Court had also an occasion to examine a question about entertainment expenditure in CIT v. Kirloskar Oil Engines Ltd. (1986) 157 ITR 762, wherein the assessee-company was engaged in the business of manufacture and export of oil engines. It had arranged a seminar of the foreign and local distributors with a view to boosting sales, particularly in the foreign market. Since the assessee's guest house was small, accommodation was arranged in hotels and clubs. The assessee claimed the expenditure as business expenditure but that was declined by the Assessing Officer treating the same as entertainment expenditure. The assessee's contention was, however, accepted in appeal on the ground that it was a customary practice to make arrangement for the stay of the distributors and also to give them presentation articles when they visited the assessee's factory. It was held by the High Court that the seminar had been arranged in connection with the assessee's business and, therefore, the expenditure incurred for travel, boarding and lodging of the distributors attending the seminar and the expenditure involved in
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giving the presentation articles were expenditures incurred in connection with the assessee's business. The Calcutta High Court has also examined a similar question about sales promotion expenses in two cases. In CIT v. The Statesman Ltd. (1992) 198 ITR 582, it has been observed that "sales promotion" necessarily involved an element of advertisement and publicity. A manufacturer of a product may intend to further the popularity or sales by publishing and advertising or by several other modes, but the cost incurred to sell the product will not come within the purview of "sales promotion". The expressing "sales promotion" cannot include the selling expenses incurred in the ordinary course of business. It only restricts such expenses as are of like nature as advertisement and publicity. The same High Court in CIT v. Santosh Agencies (1994) 210 ITR 78, reiterated the same view and held that "sales promotion expenses" connote activity akin to advertisement or publicity. A special discount allowed to the dealers as well as expenditure to meet the dealers' foreign tour expenses were held to be the selling expenses of the assessee incurred in the ordinary course of business and not part of expenditure which could be disallowed under section 37(3-A) or section 37(3-B) of the Act. The Kerala High Court had also an occasion to examine an expenditure incurred in connection with the inauguration ceremony on commissioning of a new project. In CIT v. Aluminum Industries Ltd. (1995) 214 ITR 541, it was held that the expenditure incurred on the inauguration ceremony was in the nature of revenue expenditure. The assessee's main plea is that disallowances made in all the three years in question were totally on an incorrect and baseless presumption that the assessee had spent money on entertainment and not because of a business necessity. Learned counsel for the assessee has argued that whatever expenditure was incurred on food and light refreshment served to the trainees and engineers attending the seminars and conferences, was an expenditure for the purposes of business and not for entertainment within the meaning of section 37(2-A) of the Act. The Revenue's plea is based on the proposition that provisions of subsections (2) and (2-A) of the Act do not permit an expenditure if it has been incurred on food and refreshment. All hospitality, whether lavish or frugal, comes within the ambit of the phrase "in the nature of entertainment expenditure". The Full Bench of this Court in CIT v. Khem Chand Bahadur Chand (1981) 131 ITR 336, examined the scope of section 37(2-A) of the Act and observed that any lavish hospitality expended for business purposes would amount to "entertainment expenditure". Under subsection (1) of section 37 of the Act, an expenditure wholly and exclusively incurred for the purposes of the business, including entertainment at a lavish, modest or even a frugal level, would come within the wide language thereof. The term "entertainment" has also been examined by the Gujarat High Court in CIT v. Patel Brothers & Co Ltd. (1977) 106 ITR 424, it was observed that the term "entertainment" in the context of section 37(2-A) and (2-B) of the Act on a 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, inter alia, a formal or elegant meal, a banquet and being hospitable in providing for the wants of a guest in a liberal and generous manner. If the provision of food or drinks to a client, constituent or customer is in the nature of bare necessity, or by way of ordinary courtesy, or as an express or implied term of the contract of employment spelled out from the long-standing practice or custom of trade or business, it will not amount to entertainment. If the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish and extravagant scale, or is of wasteful nature, it is entertainment per se. The provision of food or drinks may amount to entertainment having regard to the place, item and cost of such provision. The provision of amusement to a client. Customer or constituent by way of hospitality or otherwise will always be entertainment.
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Assessment year 1975-76: Rs. 2,91,003.Shri R.P. Sawhney, Senior Advocate, standing counsel for the Revenue, has explained that Explanation 2 to section 37(2-A) of the Act prohibits any expenditure on hospitality of every kind to any person whether by way of provision of food or beverages or in any manner whatsoever. This prohibition came into force with effect from April 1, 1977, and therefore, the disallowance made for the assessm ent year 1977-78 was definitely sustainable under the said Explanation. The Supreme Court in CIT v. Patel Brothers & Co. Ltd. (1995) 215 ITR 165, while examining a disallowance made under section 37(2-A) of the Act, has observed as under (headnote): "Generally, entertainment expenditure is an expression of wide import. However, in the context of disallowance of entertainment expenditure as a business expenditure by virtue of subsection (2-A) of section 37 of the Income Tax Act, 1961, the word 'entertainment' must be construed strictly and not expansively. Ordinarily, 'entertainment' connotes something which may be beneficial for mental or physical well-being but is not essential or indispensable for human existence. A bare necessity, like an ordinary meal, is essential or indispensable and, therefore, is not entertainment. Where such a bare necessity is offered, it is hospitality not entertainment. Unless the definition of entertainment includes hospitality, the ordinary meaning of ' entertainment' cannot include hospitality. For this reason, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity, would not be 'entertainment expenditure' without the aid of the enlarged meaning given to the words by Explanation 2 inserted with effect from April 1, 1976. The definition in Explanation 2 is not the ordinary meaning of the ' words ' entertainment expenditure', but the enlarged meaning given for the purposes of the Act with effect from April 1, 1976. The object of subsection (2-A) is to disallow any lavish expenditure in the form of business expenditure." It is clear from the nature of expenditure in all the three assessment years in the present case that food and light refreshment had been served to the trainees and engineers attending the dealers' conference organized by the assessee. These expenditures cannot, therefore, be treated to be in the nature of entertainment but on account of business necessity and expediency. The assessee had shown these expenditures under two heads, namely, "Dealers' conference expenditure" and "Sales promotion expenditure" in the assessment year 1975-76 and under the second head, as aforesaid, in the next two years. Obviously, such expenditures do not fall within the ambit of section 37(2-A) of the Act. The nature and purpose of expenditure distinctly establish that expenditure on food and light refreshment was for the advancement of business and for advertisement and publicity of the goods manufactured by the assessee. Question No,3 in the assessment year 1975- 76 and question No,2 in the next two assessment years are answered in the negative and in favour of the assessee. Disallowance made under section 35;B of the Act: The questions of law have been referred on the weighted deduction claimed by the assessee at the instance of the assessee as well as the Commissioner of Income-tax. We shall first take up the question of law referred to this Court for opinion at the instance of the assessee. Question No,4 in the assessm ent year 1975-76 and question No,3 in the next two assessment years have come up for opinion at the instance of the assessee. Learned counsel for the assessee has at the outset stated that he would only argue on the admissibility of deduction in regard to the sea freight paid on export of consignments and insurance charges paid on such consignments. Initially, deductions had been claimed by the assessee under various heads and the questions referred to this Court for opinion also relate to expenses under various heads. Since learned counsel for the assessee has not opted to argue various deductions except deduction of freight and insurance charges, we would confine our opinion to that alone. The assessee had claimed freight and insurance charges as under:
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Freight charges on export consignments Assessment year 1976-77: Freight and handling charges (Rs.2,54,034 and Rs.21,180)Rs. 2,75,214 Insurance Rs. 1 1,110 Assessment year 1977-78: Freight under CIF and C & F contractRs. 3,76,310
The Assessing Officer disallowed weighted deduction in regard to freight and insurance charges on the ground that these expenditures were not covered under sub-clause (iii) of clause (b) of section 35-B(1) of the Act. The Assessing Officer took the view that expenses in India or outside India in connection with the distribution, supply or provision of goods, services or facilities were not allowable as deductions if these were incurred on the carriage of goods to their destination outside India and on the insurance of such goods while in transit. The question about the deductibility went up to the Tribunal but the assessee did not succeed. The expenditure which qualifies for weighted deduction is that which is incurred on the activities exercised outside India for the development of the export market for Indian goods on long-term basis. This provision is not intended to cover expenditure which the taxpayer incurs on activities inside India for his export business except where these are incidental to the activities outside India. The weighted deduction is admissible with reference to the qualifying expenditure only. Expenditure of a capital nature and personal expenses do not qualify for such a deduction. The expenditure to be allowed as deduction under section 35-B is an amount equal to one and one-third times the amount of the qualifying expenditure so incurred. The expenditure must be incurred wholly and exclusively for the purposes of the business and on certain specified items in relation to the export business. Eligibility of an expenditure is, therefore, to be tested with reference to sub-clauses (i) to (ix) of clause (b) of section 35-B(1) of the Act. The relevant sub-clauses for the purposes of deduction of freight and insurance charges are sub-clauses(iii) and (viii) which read as under: "(iii)distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit, where such expenditure is incurred before the 1st day of April, 1978;... (viii)Performance of services -outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities." The assessee's plea is that freight and insurance charges had been incurred on the performance of services outside India in connection with, and incidental to, the execution of the contract entered into by the assessee with foreign buyers for the supply outside India of the goods. It is stated that sub-clause (iii) which prohibited deduction of expenditure incurred on the carriage of goods and on their insurance would not be a bar if, on an independent reading, the deduction is found to be allowable under…
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