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2b0591e9e0cb-3 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 3. After the completion of the assessment a notice under Section 274 read with Section 271 of the Act to show cause as to why a penalty for the default committed by the assessee-firm in tiling its return should not be levied, was issued by the Income-tax Officer. In response to the aforesaid penalty notice, the assessee by its letter, dated October 7, 1964, informed the Income-tax Officer that due to the illness of its accountant the return of income could not be filed within time. As the explanation submitted by the assessee was not found to be acceptable by the Income-tax Officer, a specific opportunity for personal appearance to explain the circumstances was afforded to the asses see. The authorised representative of the assessee appeared before the Income-tax Officer and stated that there was nothing more to be added to the original explanation already submitted in writing by the assessee. The explanation of the asses see that its accountant was ill was found to be not convincing, as, if that were the sole reason for not filing the return, it could have applied for extension of time. As it did not request for extension of time within the time required under Section 139(1), the Income-tax Officer was of the view that the assessee's explanation that the accountant was sick was only an after-thought. In any event, the Act had allowed a sufficient margin of time (six months) to enable the assessee to get the statements prepared and file returns of income within the time prescribed by law ; and it is for the assessee to make proper and appropriate arrangements to comply with the statutory provisions of Section 139. The fact that the assessee-firm had the assistance of a chartered accountant also was one of the factors taken into consideration by the Income-tax Officer to arrive at the conclusion that the assessee has without reasonable and sufficient cause failed to file the return of income within the prescribed time and levied a penalty of Rs. | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-4 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | cause failed to file the return of income within the prescribed time and levied a penalty of Rs. 20,222 under Section 271(1)(a) of the Act. On appeal to the Appellate Assistant Commissioner against the order of penalty passed by the Income-tax Officer, it was contended that the failure on the part of the assessee to furnish the return within the time was due to illness of its accountant, that the previous record of the firm was very good, that the Income-tax Officer must be presumed to have granted extension of time when no order had been passed by him on its application dated September 16, 1963, that the Income-tax Officer must be presumed to have condoned the delay in filing the return when he levied penal interest under Clause (iii) of the proviso to Section 139(1) and the rebate in respect of exported goods to which the assessee-firm was entitled should have been taken into account by the Income-tax Officer in computing the penalty. None of the pleas raised by the assessee did find favour with the Appellate Assistant Commissioner. But, however, he was of the view that the assessee should be deemed to be in default only from October 16, 1963, as the Income-tax Officer had not rejected the application of the assessee filed for extension of time till September 16, 1963. He also took into account the reduction in tax demand which was made in the assessment appeal and directed the Income-tax Officer to reduce the penalty accordingly. Both the assessee and the department being aggrieved by the order of the Appellate Assistant Commissioner, preferred appeals to the Income-tax Appellate Tribunal. The finding of the Appellate Assistant Commissioner that the default should be deemed to, have occurred only from October 16, 1963, but not from July 1, 1963, as held by the Income-tax Officer was challenged by the department whereas the assessee | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-5 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 1963, as held by the Income-tax Officer was challenged by the department whereas the assessee questioned the very levy of penalty reiterating its grounds raised before the Appellate Assistant Commissioner. The Income-tax Appellate Tribunal, on a consideration of the entire facts and circumstances, came to the conclusion that the explanation offered by the assessee for the delay in filing its return was not acceptable. It found that the assessee was not prevented by any reasonable or sufficient cause from filing its return within the time permissible under Section 139(1). The contention of the assessee that by the issuance of the notice under Section 139(2) the Income-tax Officer must be deemed to have condoned the delay in filing its return of income under Section 139(1) and that by the omission on the part of the Income-tax Officer in not passing any orders on its application for extension of time by one month, it must be deemed that the extension of time as prayed for was granted did not find favour with the Tribunal. The Appellate Tribunal rejected the assessee's contention that the Income-tax Officer by the levy of penal interest must be deemed to have condoned the delay in filing the return of income. The other findings of the Tribunal not relevant to this reference need not be stated. Hence, this reference at the instance of the assessee. | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-6 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 4. The answers to the questions turn upon the scope of the provisions of Section 271(1)(a) and Sub-sections (1), (2) and (4) of Section 139 read with other material provisions of the Act which we shall presently consider and their application to the facts of the present case. Chapter IV comprising of Sections 139 to 158 deals with the procedure for assessment. Section 139 prescribes the procedures for the filing of a return of total assessable income and the consequences of the failure or omission to file the same within the time allowed thereunder. Unlike the corresponding Section 22 of the Indian Income-tax Act, 1922, Sub-section (1) to Section, 139 does not provide for the issuance of the general or public notice. It expressly requires every person to furnish voluntarily a return of his total income or the income of any other person in respect of which he is assessable under the Act. If the income of any previous year exceeded the maximum amount exigible to tax, the return must be in the prescribed form and verified in the prescribed manner and shall furnish the requisite material particulars relating to income. The assessee under the present Act has a statutory duty and obligation to furnish a voluntary return of his total income on or before the 30th July or 31st December, as the case may be. However, the proviso to Sub-section (1) to Section 139 empowers the Income-tax Officer to extend the date for furnishing the return of income if an application thereof has been made in the prescribed manner by the assessee. The aforesaid power vested in the Income-tax Officer is discretionary. He is, therefore, not bound to exercise his discretion invariably in favour of the assessee as the word used is " may " but not " shall". In cases falling within Clauses (i) and (ii) of the proviso to Sub-section (1) to Section 139, the | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-7 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | and (ii) of the proviso to Sub-section (1) to Section 139, the Income-tax Officer is empowered to extend the time for filing the return without charging any interest; but where the Income-tax Officer extends the time up to any period falling beyond the dates specified in Clauses (i) and (ii) referred to above, interest shall be payable from the 1st day of October or the 1st day of January of the assessment year to the date of the furnishing of the return. The rate of interest payable under this proviso was only 6% prior to October 1, 1967, and, thereafter, it has been enhanced to 9% per annum. In the case of a registered firm or an unregistered firm assessed under Clause (b) of Section 183 interest must be calculated on the basis of the amount of tax which would have been payable if the firm had been assessed in the status of an unregistered firm and, in any other case, on the amount of tax payable on the total income. By virtue of the provision of Sub-section (1A) inserted by Section 8 of the Finance Act, 1963, with retrospective effect from the commencement of the Act, the interest imposed by the Income-tax Officer shall be reduced in accordance with the reduction of the amount of tax as a result of an order under Section 154 or Section 155 or Section 250 or Section 254 or Section 260 or Section 262 or Section 264 of the Act and the excess interest paid, if any, shall be refunded to the assessee. | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-8 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 5. Under Sub-section (2) to Section 139, the Income-tax Officer may before the end of the relevant assessment year serve a notice upon any person whose total income is in his opinion assessable to tax requiring him to furnish within 60 days from the date of service of such notice a return of his total income. The proviso to Sub-section (2) also empowers the Income-tax Officer to extend the date for the furnishing of the return if the same, whether fixed originally or on extension, falls beyond the 30th day of September or the 31st day of December, as the case may be, of the assessment year on payment of interest as per the provisions of Clause (iii) of the proviso to Sub-section (1). Sub-section (4) provides for the furnishing of a return by an assessee who failed to file the same within the time allowed to him under Sub-section (1) or Sub-section (2) but he must do so before the completion of the assessment. In such a case the provisions of Clause (iii) of the proviso to Sub-section (1) empowering the Income-tax Officer to levy interest are attracted. Sub-section (5) provides for the furnishing, of a revised return by the assessee at any time before the assessment is made. Sub-section (8) has invested the Income-tax Officer with a power to reduce or waive the interest payable by any person under any provision of Section 139 in such cases and under such circumstances as may be prescribed therefor. Hence, it admits of no doubt that the Income-tax Officer is competent to waive or reduce the interest payable by any assessee under any provision of Section 139 in proper and appropriate cases. This power has been invested in the Income-tax Officer notwithstanding the provisions of Clause (iii) of the proviso to Sub-section (1). | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-9 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 6. We shall now advert to the intendment and purpose of Clause (iii) of the proviso to Sub-section (1) to sec'tion 139 and its applicability to cases falling under the proviso to Sub-section (2) and Sub-section (4) of Section 139. It is pertinent to notice that the expression used is " interest " but not penal interest. It is chargeable on the basis of the amount of tax which would have been payable by the assessee. The period for which such interest is exigible is from the 1st day of October or the 1st day of January, as the case may be, of the assessment year to the actual date of furnishing the return, It may be noted that the rate of interest payable under the aforesaid provision has been enhanced from 6% to 9% per annum from October 1, 1967. It is pertinent to notice that Section 140A provides for self-assessment whereas Section 141 provides for provisional assessment. Under Section 140A the assessee is obliged statutorily to pay the tax payable on the basis of the return of income furnished by him under Section 139 within 30 days thereafter. The amount of tax paid under self-assessment shall be taken into account when the provisional assessment under Section 141 or regular assessment under Section 144 will be made. Sub-section (3) to Section 140A makes every assessee who fails to pay the tax or any part thereof in accordance with the provisions of Sub-section (1) liable to pay penalty as directed by the Income-tax Officer although it (penalty) shall not exceed 50% of the amount of such tax or part, as the case may be. No doubt, the penalty referred to above shall be levied only after affording a reasonable opportunity of being heard to the assessee. Therefore, interest payable under Clause (iii) of the proviso to Sub-section | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-10 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | the assessee. Therefore, interest payable under Clause (iii) of the proviso to Sub-section (1) to Section 139 is nothing but simple interest or compensation that could accrue or would have accrued to the State, if the assessee had filed his return as required by Section 139 and paid the tax as per the provisions of Section 140A. It is not, therefore, correct to state that the interest so payable is penal in character. Nor does it amount to penalty of any kind levied under the Act. The very intendment and purpose of this provision to levy interest on the amount of tax payable by the assessee is to make the assessees feel their responsibility and statutory obligation to furnish the return of their incomes within the time provided under Section 139 of the Act. To put it differently, the assessees will not gain in any way by their failure in, or postponement of, furnishing the returns of their income with the hope that they can postpone the payment of tax to a later date and have the advantage of utility of such amount of tax during such period as they are made to pay interest on such tax demands. | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-11 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 7. We shall now advert to Section 271 comprised in Chapter XXI dealing with penalties imposable under the Act. Section 271 empowers the Income-tax Officer and the Appellate Assistant Commissioner to impose penalty on such of the assessees if the conditions specified in Clause (a) or Clause (b) or Clause (c) thereof have been satisfied. Under Clause (a) of Sub-section (1) to Section 271 the Income-tax Officer or the Appellate Assistant Commissioner is competent to levy a penalty of a sum equal to 2% of the tax for every month during which the default continued. The aforesaid sum of penalty is in addition to the amount of tax payable by the assessee. However, the penalty so imposable shall not exceed in the aggregate 50% of the tax. In order to attract the provisions of Section 271(1)(a) the Income-tax Officer or the Appellate Assistant Commissioner must be satisfied that the assessee has without reasonable cause failed to furnish his return of income voluntarily within the time prescribed under subsection (1) to Section 139 or by notice given under Sub-section (2) to Section 139 or Section 148. The satisfaction of the Income-tax Officer or the Appellate Assistant Commissioner that the assessee has failed to furnish the return as required by the provisions of the Section must be in the course of the proceedings under the Act. Where any person failed to furnish his return within the time allowed under Sub-section (1) to Section 139 and in the manner required by a notice under Sub-section (2) to Section 139 he is liable to pay penalty under this Act. In other words the provisions of Section 271(1)(a) will be attracted if without reasonable cause a person fails to furnish a return voluntarily or as required by the notice under Section 139(2) if it was not filed within the time allowed and in the manner required by the | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-12 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | if it was not filed within the time allowed and in the manner required by the aforesaid provisions. The return filed must be in the prescribed manner furnishing the requisite particulars. Reasonable cause must be construed as sufficient cause. Clause (b) of Sub-section (1) of Section 271 is attracted when there is a failure without any reasonable cause on the part of any person to comply with a notice under Sub-section (1) of Section 142 or Sub-section (2) of Section 143. Where Clause (b) is attracted the minimum sum of penalty is 10% and the maximum is 50% of the amount of tax sought to be avoided by the assessee. Clause (c) is attracted in a case where the Income-tax Officer or the Appellate Assistant Commissioner is satisfied that any person concealed the particulars of his income or deliberately furnished inaccurate particulars of his income. This being a more serious one, the minimum penalty exigible is 20% and the maximum is one and a half times the amount of tax sought to be avoided. Section 272 provides for the levy of penalty on any person who fails to give notice of discontinuance of his business, whereas Section 273 provides for the levy of penalty for false estimate of or failure to pay advance tax. The penalty imposable under Chapter XXI cannot be made unless the assessee has been given a reasonable opportunity of being heard. Section 275 bars the income-tax authorities from imposing a penalty under Chapter XXI after the expiration of two years from the date of completion of the proceedings in the course of which the proceedings for the imposition of penalty have been commenced. Unlike under the 1922 Act, Section 275 of the present Act provides for the limitation of two years from the date of the completion of the proceedings in the course of which the proceedings for the imposition of penalty have been commenced for passing the order of penalty. Under Section 28 of the old Act, there was no time limit | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-13 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | passing the order of penalty. Under Section 28 of the old Act, there was no time limit to pass the order of penalty, if the Income-tax Officer or the Appellate Assistant Commissioner was satisfied in the course of any proceedings under the Act that the requisite conditions of Clause (a), (b) or (c) thereof have been established. | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-14 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 8. The provisions of Sections 276 to 280 comprised in Chapter XXII provide for prosecutions and offences. The making of a false statement in a declaration under the Act is punishable under Section 277 with rigorous imprisonment for a period of not less than 6 months but which may extend up to two years. The persons who are liable to the imposition of penalty under Section 271 may also at the same time be liable to prosecution for any of the offences specified in Chapter XXII. Under the present Act if the levy of penalty exceeds Rs. 1,000 it is the Inspecting Assistant Commissioner that is empowered to complete the penalty proceedings but not the Income-tax Officer. However we may add that it is the Income-tax Officer who is competent to issue a notice under Section 274(1) as to why penalty should not be levied; and after receipt of the explanation or on a consideration of the facts and circumstances, if the Income-tax Officer prima facie finds that the minimum penalty exigible in any given case is Rs. 1,000 or more the file shall be transferred to the Inspecting Assistant Commissioner who shall deal with the case according to the provisions of the Act and complete it. The penal provisions have been provided to deal with contumacious or fraudulent assessees. The purpose and object of Clause (iii) of the proviso to Sub-section (1) to Section 139 is to provide for levy of interest on the amount of tax payable by the assessee for his failure to furnish the return of his income as provided in Section 139. Such interest can, under no stretch of reasoning, be held to be penalty or penal interest as the same is being charged because the State could or would have earned so much of amount, profit or interest on the amount of tax payable by the assessee if the return was filed as required under Section 139 and tax paid thereon as per the provisions of Section 140A. The purpose, intendment or | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-15 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | tax paid thereon as per the provisions of Section 140A. The purpose, intendment or object of levying interest under Clause (iii) of the proviso to Sub-section (1) of Section 139 is undoubtedly different from the levy of penalty under Section 271(1)(a), (b) or (c). Those provisions were made by the sovereign Parliament to meet with different situations and protect the interests of the revenue and at the same time make the defaulting or fraudulent assessees realise that they will not only not gain any advantage but also make themselves liable for penalty for their default or failure without reasonable cause to file the returns of income within the time prescribed under Section 139 or concealment of their incomes or deliberately furnishing inaccurate particulars of their incomes. | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-16 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 9. In the light of the foregoing discussion we shall now examine the contention of the assessee that the Income-tax Officer must be deemed to have granted extension of time for filing the return when he did not pass any order on its application dated September 16, 1963. As pointed out earlier the application though dated September 16, 1963, was in fact received by the Income-tax Officer only on September 18, 1963. As the application for extension of time was not received by the Income-tax Officer on or before September 16, 1963, within which time the assessee was required as per the notice under Sub-section (2) to Section 139 to file his return, the Income-tax Officer was not bound under the provisions of the Act or any rules made thereunder to pass any order thereon. It is not open to the assessee to file an application beyond the period within which it was required to file its return as per the notice under Section 139, and, thereafter, make no effort to know what happened to its application. The assessee should not assume or presume that any application filed by it for extension of time to file the return of income would automatically be granted. It is the duty of the assessee to file in advance an application for extension of time and obtain the extension on or before the date on which it is required to furnish its return of income. It admits of no doubt that whether to grant or refuse to grant extension of time for filing the return of any person is within the discretion of the Income-tax Officer. This view of ours gains support from the very use of the words " in his discretion " in the proviso to Sub-section (1) to Section 139. This discretion vested in the Income-tax Officer, being a statutory one, must be exercised fairly, reasonably and objectively but not arbitrarily or with malice or caprice. There is no provision in the Act or the rules made thereunder which | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-17 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | malice or caprice. There is no provision in the Act or the rules made thereunder which requires the Income-tax Officer to pass an order on an application filed by an assessee subsequent to the time given to him for filing his return pursuant to a notice under Sub-section (2) to Section 139. The Income-tax Officer has to apply his mind to the facts and circumstances of each case and decide whether it was a fit case to grant extension of time or not. There is no hard and fast rule of universal application. We may add that there is no scope for presuming or assuming that an application filed by an assessee for extension of time must have been granted in its favour when no order has been passed on its application by the Income-tax Officer. There is no scope for such a presumption or deeming provision in a taxing statute. The Income-tax Act is a self-contained code. The provisions of the Act and the Rules made thereunder must specifically provide for such a deeming provision. Otherwise, the assessee cannot claim any advantage or derive benefit when the Income-tax Officer did not pass any order on its application filed beyond the time within which it was required to furnish its return. In any event we are clear in our minds that the assessee herein cannot compel the Income-tax Officer either to pass an order extending the time for furnishing the return or give reasons for refusal of the request. On the application of the aforesaid principles, the contention of the assessee that it must be deemed that the extension of time was granted when the Income-tax Officer did not pass any orders on its application merits rejection. We may add that the assessee did not even file its return on October 16, 1963, as prayed for in its application. The return was filed only on August 3, 1964, and it did not take any interest or steps to know what had happened to its application for extension of time by one month. For all these | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-18 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | steps to know what had happened to its application for extension of time by one month. For all these reasons, our answer, therefore, to question No. 1 must be in the negative and against the assessee. | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-19 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 10. We shall now turn to questions Nos. 2 and 3. The contention of Sri Ramachandra Rao that the Income-tax Officer having levied interest under Clause (iii) of the proviso to Sub-section (1) of Section 139 must be deemed to have condoned the delay in filing the return of income of his client cannot be given effect to for reasons more than one. The Income-tax Officer is no doubt elnpowered to extend the time for furnishing the return of any person on his application in the prescribed manner beyond the dates within which he has to file the same. In cases falling under Clauses (i) and (it) of the said proviso, the officer may extend the time without charging any interest. However, where the case falls under Clause (iii) he shall levy interest as provided therein. The levy of interest, as stated earlier, does not ipso facto make the filing of the return by the assessee within the prescribed time. The Income-tax Officer, in his discretion, is competent to extend the date for furnishing the return up to any period falling beyond the dates mentioned in Clauses (i) and (ii) in which case interest at 6% for the assessment year 1963-64 shall be payable from October 1, 1963, to August 3, 1964. The intendment and purpose of levy of interest under Clause (iii) of the proviso to Section 139(1) is only to collect interest on the amount of tax due and payable by the assessee as per the provisions of the Act. It can by no stretch of reasoning be stated that the Income-tax Officer by the imposition of interest must be deemed to have condoned the delay in filing the return of income. This provision must be construed as a concession shown by the authors of the Act to the assessee to file their returns of income on payment of some interest; but nowhere it is stated either | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-20 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | assessee to file their returns of income on payment of some interest; but nowhere it is stated either in Section 139 or Section 271(1)(a) or any other provision of the Act or the rules made thereunder that there was no failure without reasonable cause on the part of the assessee to file the return as required by Section 139. No provision of the Act or the rules has been brought to our notice by Mr. Ramachandra Rao in support of his contention that the Income-tax Officer, by his levying interest, must be deemed to have condoned the delay in filing the return of income. The taxing provisions have to be construed strictly. Hence, we are unable to agree with the submission of Mr. Ramachandra Rao. The sovereign Parliament is competent to levy interest under Clause (iii) of the proviso to Section 139(1) while extending time for any assessee to furnish his return of income and also penalty for failure without reasonable cause to file the return within the time prescribed under Section 139. There is no prohibition under the Constitution for Parliament to provide for charge of interest, levy of penalty and institution of prosecution for certain commissions or omissions or defaults on the part of the assessees. Where the Act has specifically provided for charge of interest as well as levy of penalty, the courts have to give effect to the same. We may notice in this context the following observations of the learned judge/Grover J., who spoke for the court, in Jain Brothers v. Union of India, wherein the imposition of double taxation was justified : | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-21 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | " It is not disputed that there can be double taxation if the legislature has distinctly enacted it. It is only when there are general words of taxation and they have to be interpreted, they cannot be so interpreted as to tax the subject twice over to the same tax ..... The Constitution does
not contain any prohibition against double taxation even if it be assumed that such a taxation is involved in the case of a firm and its partners after the amendment of Section 23(5) by the Act of 1956. Nor is there any other enactment which interdicts such taxation ...... If any double
taxation is involved the legislature itself has, in express words, sanctioned it. It is not open to any one thereafter to invoke the general principles that the subject cannot be taxed twice over." | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-22 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 11. It is profitable to refer in this context to N. A. Malbary and Brothers v. Commissioner of Income-tax, wherein it has been held that the jurisdiction of the Income-tax Officer to pass a second order of penalty was not lost because he had omitted to recall the earlier order even though both the orders could not be enforced simultaneously.
12. In the light of the foregoing discussion, we express our inability to agree with Mr. Ramachandra Rao, counsel appearing for the assessee, that the Income-tax Officer is not empowered to levy penalty under Section 271(1)(a) when once he has levied interest under the provisions of Clause (iii) of the proviso to Sub-section (1) to Section 139. The decision of a Division Bench | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-23 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | of this court in writ petition No. 1934/68 Kishan Lal Haricharan v. Income-tax Officer, dated March 5, 1970, relied upon by the assessee does not advance its plea as the facts of that case are distinguishable from those of the case on hand. As interest has been added by the Income-tax Officer, the assessee has raised this contention on the assumption that the Income-tax Officer must be deemed to have condoned the delay and extended the time for furnishing the return. The use of the word " or" in Section 271(1)(a) makes it abundantly clear that any one of the ingredients specified therein would attract the penal provisions thereof. In the instant case admittedly the assessee has without reasonable cause failed to furnish the return of its total income on or before June 30, 1963, as required by Sub-section (1) to Section 139. This one circumstance itself is sufficient to attract the provisions of Section 271(1)(a). We are conscious of the fact that the reference relates to the levy of penalty under Section 271(1)(a). We are not flow concerned in this reference with the validity or otherwise of the addition of interest under Clause (iii) of the proviso to Section 139(1) as the assesseee did not challenge the same either before the Appellate Assistant Commissioner or the Tribunal. We have therefore to confine in this reference to the question whether the Income-tax Officer is competent in law to levy the penalty under Section 271(1)(a) on the facts and in the circumstances of the case. As observed earlier the assessee has a statutory duty and obligation to furnish its return of income without any notice by or action on the part of the Income-tax Officer. In the present case no return has been filed by the assessee on or before June 30, 1963, as required by Section | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-24 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | filed by the assessee on or before June 30, 1963, as required by Section 139(1) of the Act. Indisputably, the provisions of Clause (a) of Sub-section (1) to Section 271 are attracted as the aforesaid fact which is not in dispute is itself sufficient to attract the same. This view of ours gains support from the decision of a Division Bench of the Madras High Court in C. V. Govindarajulu Iyer v. Commissioner of Income-tax, [1948] 16 I.T.R. 391 (Mad.). Therein the assessee failed to furnish a return of his total income as required by a general notice issued under Section 22(1) of the Indian Income-tax Act, 1922. No notice under Section 22(2) was issued by the Income-tax Officer within the year of assessment. Pursuant to the notice under Section 34, a return of income was filed by the assessee within the time given by the officer. However, after completing the reassessment, the Income-tax Officer levied penalty under Section 28(1)(a) corresponding to Section 271(1)(a) of the present Act for failure without reasonable cause to furnish a return pursuant to the notice under Section 22(1). The contention advanced on behalf of the assessee that as there was no notice under Section 22(2) and no action was taken by the Income-tax Officer during the year of assessment, the general notice under Section 22(1) and the default committed by him in not filing the return lapsed by the end of the year and hence no penalty could be levied under Section 28(1)(a) in the course of the reassessment proceedings, was rejected by the High Court. It was held therein that the assessment proceedings commenced with the general notice issued under Section 22(1) and where no order of assessment | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-25 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | proceedings commenced with the general notice issued under Section 22(1) and where no order of assessment or an order declaring that no assessment could be made was made the proceedings initiated under Section 34 must be deemed to relate to the proceedings which commenced with the public notice under Section 22(1). The penalty in those circumstances was sustained for the failure of the assessee to file its return as required by the notice under Section 22(1) even though the assessee had furnished his return within the time given by the notice under Section 34. | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-26 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 13. It was held by a Division Bench of this court in K. P. Reddi v. Commissioner of Income-tax, [1968] 68 I.T.R. 638,645. 646 (A.P.) that the provisions of Section 28(1)(a) of the Indian Income-tax Act, 1922, are attracted where no return within the prescribed period has been filed by the assessee and such an assessee is liable for penalty in any proceedings the Income-tax Officer may initiate to assess his income be they on a notice under Section 28(2) or under Section 34. The learned judge, Jaganmohan Reddy C.J. (as he then was), who spoke for the court, observed thus :
" If a return has been filed, not in compliance with a notice under Section 22(1) but after the expiry of the period prescribed in that notice, the mere fact that the return has not been accepted or that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, does not preclude the Income-tax Officer from taking action under Section 28(1)(a), if he so chooses." | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-27 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 14. In the present case it is found as a fact that the assessee did not furnish its return within the time given by the Income-tax Officer in his notice under Section 139(2). That apart, the request of the assessee for extension of time in its application dated September 16, 1963, and received by the Income-tax Officer on September 18, 1963, was only up to October 16, 1963. No return was filed until August 3, 1964. Judged from any angle we are clear in our minds that the provisions of Section 271(1)(a) are attracted in the instant case and the penalty has been rightly levied by the departmental authorities. On a careful examination of the provisions of Section 271(1)(a) read with the material provisions of Section 139, we are of the firm view that the Income-tax Officer was competent to levy a penalty under Section 271(1)(a) although he had levied interest under Clause (iii) of the proviso to Sub-section (1) of Section 139 as the intendment and purpose of both the imposts are different and distinct and they have been provided to meet different situations and contingencies. In our considered judgment both the penalty under Section 271(1)(a) and the interest under Clause (iii) of the proviso to Sub-section (1) of Section 139 are exigible and there is no illegality or unconstitutionality in the same. 'For all the reasons, our answer to question No. 2 is in the negative and to question No. 3 in the affirmative and against the assessee. | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-28 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | 15. We shall now advert to question No. 4. Section 139(4) permits any person to furnish the return of his income for any previous year at any time before the assessment is made but, however, he is made liable to pay interest from the date on which the return ought to have been filed under Section 139(1) to the actual date of the furnishing of the return. The mere fact that a return is permitted to be filed before the assessment is made or a revised return under Sub-section (5) of Section 139 could be filed at any time before the assessment is made, will not absolve such an assessee from the levy of penalty under Clause (a) of Sub-section (1) to Section 271. Section 271(1)(a) is attracted the moment the ingredients of that provision are established. The very provisions of Sub-section (4) will come into play only when no return has been furnished by the assessee within the time permitted under Sub-section (1) or within the time granted to him under Sub-section (2) of Section 139. If no return was fifed as required under Sub-section (1) of Section 139 or within the time permitted by notice under Sub-section (2) to Section 139 or Section 148, penalty can be levied by the Income-tax Officer under Section 271(1)(a). On a reading of the provisions of Section 271(1)(a) and Sub-section (4) of Section 139, we are satisfied that the assessee cannot claim that it is not open to the assessee to contend that there was no default in furnishing the return of its income as required by Sub-section (1) to Section 139 or by notice given under subsection (2) to Section 139. This question has been decided in R.C. No. 71 of 1968, Poorna Biscuit Factory v. Commissioner of | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-29 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | No. 71 of 1968, Poorna Biscuit Factory v. Commissioner of Income-tax (Unreported.) dated February 19, 1971, by a Division Bench of this court of which one of us (myself) was a party. Therein it was observed thus : | https://indiankanoon.org/doc/516144/ |
2b0591e9e0cb-30 | T. Venkata Krishnaiah And Co. vs Commissioner Of Income-Tax on 10 September, 1971 | " The mere fact that the law gives him a further chance to file a return under Section 139(4) does not absolve him from his liability to be penalised under Section 271(1)(a) for the defaults he has already committed. The penalty is for failure without reasonable cause to file the return or for filing it beyond the time allowed under Section 139(1) or 139(2) of the Act. The penal interest is, however, levied as compensation to the Government for the interest that it would have earned had the return been filed in time and the assessment made on the basis of that return,"
16. For all the reasons stated, our answer to question No. 4 is in the affirmative and in favour of the Government.
17. The assessee shall pay the costs of this reference. Advocate's fee, Rs. 300. | https://indiankanoon.org/doc/516144/ |
428b4576e996-0 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | JUDGMENT K. Ramaswamy, J.
1. The Revenue sought reference under section 256(1) of the Income-tax Act, 1961 (43 of 1961), for short, "the Act", of six questions of law as follows :
"(1) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 17,056 spent by the assessee for hosting dinners to foreign delegation members in order to entertain them in an appropriate and befitting manner is not disallowable under section 37(2B) of the Income-tax Act, 1961, though it may be for purposes of business ?
(2) Whether, on the facts and in the circumstances of the case the amount of Rs. 2,668 spent by Delhi branch of the assessee for providing lunch and dinners to customers is not to be treated as entertainment expenditure and disallowed under section 37(2B) of the Income-tax Act 1961 ?
(3) Whether, on the facts and in the circumstances of the case, a sum of Rs. 1,79,155 debited under the head "Business promotion expenses" was not rightly disallowable as expenditure in the nature of entertainment expenditure and also partly as expenditure for maintenance of a guest house, for the stay of foreign guests (and not meant as holiday home for low-paid employees of assessee), under section 37(2B) and under section 37(4) of the Income-tax Act ?
(4) Whether, on the facts and in the circumstances of this case, the expenditure of RS. 893 paid to various clubs by the assessee for the purpose of entertaining foreign guests is not to be disallowed under section 37(2B) of the Act ? | https://indiankanoon.org/doc/743169/ |
428b4576e996-1 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (5) Whether, on the facts and in the circumstances of the case, the amount of Rs. 22,722 debited by the assessee under the head "Entertainment expenditure" spent by it for providing coffee, tea and snacks to customers is not to be treated as expenditure in the nature of entertainment expenditure and disallowed under section 37(2B) of the Act ?
(6) Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,49,965 spent on agmark charges, Rs. 2,14,860 spent on export licences fee and inspection charges, Rs. 1,09,587 paid as premium for export credit guarantee insurance, RS. 11,746 paid as subscription to export promotion council and trade associations, and Rs. 1,732 spent on translation charges are to be treated as items of expenditure eligible for weighted deduction either under sub-clause (ii) or sub-clause (vi) or, sub-clause(vii) of section 35B(l) (b) and the assessee held to be eligible for weighted deduction on these amounts particularly on account of the fact that the services were performed by the payees in India and not outside India ?" | https://indiankanoon.org/doc/743169/ |
428b4576e996-2 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 2. The material facts, relating thereto, are as follows : The assessee, Navabharat Enterprises (Private) Limited, for short "the Company", is having its head office at Hyderabad and branches at Guntur, New Delhi, Bombay, Calcutta and Cochin, and submitted its return for the assessment year 1973-74, ending the accounting year with June 30, 1972, of an income of Rs. 53,04,333 from ready-business and Rs. 8,060 from forward business. The Income-tax Officer found that a sum of Rs. 17,056 was incurred on account of "special dinners arranged for trade delegations from U.S.S.R. and G.D.R." and disallowed it on the ground that it represented entertainment expenditure, disallowable under section 37(2B) of the Act. On appeal by the company, the Appellate Assistant Commissioner held that the expenditure did not partake of the character of business expenditure, so he confirmed the disallowance. On second appeal, the Appellate Tribunal held that trade delegations had come to India from G.D.R. and U.S.S.R., that the company had close business relationship with those countries and that with a view to promote the business interests of the company, it had incurred the expenditure only to entertain the delegates in an "appropriate and befitting manner". Therefore, it is business expenditure allowable under section 37(1) of the Act. | https://indiankanoon.org/doc/743169/ |
428b4576e996-3 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 3. The Income-tax Officer found that a sum of Rs. 2,668 incurred by the Delhi branch was in connection with arranging of lunch and dinner to "trade customers" which represented entertainment expenditure. Therefore, he disallowed the entire sum and the disallowance was confirmed on appeal by the Appellate Assistant Commissioner. On second appeal, the Appellate Tribunal found that there was nothing on record to show that the expenditure was "extravagant or lavish". It was incurred only for providing normal lunch and dinner to various "trade constituents". So, it allowed the entire claim of Rs. 2,668.
4. In respect of the Guntur branch office, the company claimed a sum of Rs. 72,887 towards mess expenditure and Rs. 50,691 mess expenditure at the Madras guest house, totalling Rs. 1,23,578. The Income-tax Officer disallowed the entire claim. On appeal before the Appellate Assistant Commissioner, it was contended that the accommodation maintained is not in the nature of guest house but it is only a transit accommodation for the purpose of accommodating the employees and business associates while, at the above two places (Madras and Guntur) for the purpose of the appellant's business. Therefore, it cannot be said that it is maintained as a matter of hospitality and it should be taken as one maintained wholly and exclusively for the purpose of business and it is not covered by section 37(4). In support thereof, reliance was placed on a decision of the Income-tax Appellate Tribunal, Ahmedabad Bench, in Navasari v. A. D. P. P. Billimoria (ITA No. 48 (Ahd) /75-76 dated 30-1-1976). While acceding to this contention, the Appellate Assistant Commissioner held thus : | https://indiankanoon.org/doc/743169/ |
428b4576e996-4 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | "In this view of the matter, the appellant's contention that the expenditure on guest house has got to be allowed, has to be accepted. But, at the same time, in view of the fact that the entire expenditure cannot be treated as fully representing the elementary amenities, even though they are foreign visitors and in the absence of full details, I feel it would be fair to disallow 1/8th of the expenditure as representing entertainment....." (vide paragraphs 8.6 and 8.7 of the AAC's order in annexure-B in the material papers).
5. On second appeal by the company, the Tribunal proceeded on the footing that the Appellate Assistant Commissioner was of the view that most of the expenditure was incurred wholly and exclusively for the purpose of business and as such it would not be covered under section 37(4) and held thus :
"We find that the Appellate Assistant Commissioner in this case has clearly given a finding that no part of the expenditure could be considered as lavish or extravagant and the assessees had to incur such expenditure only for the provision of boarding and lodging for the business constituents In the background of this finding given by the Appellate Assistant Commissioner, we are of the view that no part of the expenditure claimed by the assessee should be held as disallowable. In any case, there is no evidence brought on record to show that any part of the expenditure incurred by the assessee-company was for the purpose of providing entertainment to the clients of the company."
6. Thus, it held that the Appellate Assistant Commissioner was not justified in disallowing even a part of the claim made by the assessee in that regard. On that basis, the Tribunal allowed the entire amount claimed by the company (vide paragraphs 8 and 8.1 of the order of the Appellate Tribunal, annexure-C). | https://indiankanoon.org/doc/743169/ |
428b4576e996-5 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 7. From the statement of the case, it would appear that the Tribunal proceeded on the footing that the Appellate Assistant Commissioner recorded a categorical finding that the expenditure was not lavish or extravagant, which is not correct as a fact. Without making any independent investigation into the point on the basis of the material on record, he recorded the above-quoted finding. The Appellate Assistant Commissioner categorically found that there is no definite evidence in that regard. Since the statement of the case is to stem from the finding recorded by the Appellate Tribunal in its order, it was so stated. Though normally we have to look to the statement of the case, since the Appellate Tribunal appears to have committed an obvious mistake apparent from the record, we have referred to the Appellate Assistant Commissioner's order (annexure-B) and the Tribunal's order (annexure-C), which are part of the record, only with a view to straighten the record and to bring out the correct position on findings. | https://indiankanoon.org/doc/743169/ |
428b4576e996-6 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 8. The Income-tax Officer disallowed a sum of Rs. 2,16,215 out of Rs. 2,21,515 from "business promotion expenses" on the ground that they are purelv expenses on entertainment and hence they are not allowable. On appeal by the company, the Appellate Assistant Commissioner gave relief of Rs. 1,79,155. The Revenue carried the matter in appeal. The Appellate Tribunal found that the same issue was considered by the Tribunal for the assessment year 1972-73 and, for the reasons mentioned therein, it upheld the order of the Appellate Assistant Commissioner that the expenditure incurred on foreign customers for their food, lodging and other expenses should be allowed. As regards the guest house expenses also, it was held that the guest house was maintained only as a place of lodging mainly for the foreign customers and as such it cannot be held that there was any element of entertainment in the expenditure incurred for the purpose of maintaining such guest house.
9. The Income-tax Officer disallowed the claim of the company for a sum of Rs. 893 being the expenditure incurred on payment made to clubs for entertainment of foreign guests. The Appellate Assistant Commissioner accorded disallowance. On further appeal by the Revenue, the Appellate Tribunal held that the expenditure was incurred only on account of subscriptions to various clubs and it was necessary for the purpose of entertaining foreign guests. So, the expenditure was allowed under section 37(1) of the Act. | https://indiankanoon.org/doc/743169/ |
428b4576e996-7 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 10. The Income-tax Officer disallowed a sum of Rs. 22,722 being the expenditure incurred on account of provision of coffee, tea and snacks to customers as it was considered as entertainment expenditure disallowable under section 37(2B) of the Act. On appeal, the Appellate Assistant Commissioner allowed the entire claim and, on further appeal by the Revenue, the Appellate Tribunal upheld the decision of the Appellate Assistant Commissioner.
11. The company claimed before the Appellate Assistant Commissioner the following items of expenditure under section 35B of the Act as being "export markets development allowance";
RS. P. | https://indiankanoon.org/doc/743169/ |
428b4576e996-8 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (1) Agmark charges 1,40,265.01
(2) Export licence fee and inspection charges 2,14.860.25
(3) Export credit guarantee insurance 1,09,587.08
(4) Salaries of chief buyers for exports 96,670.00
(5) Subscription to export promotion councils 11,746.00
and trade associations
(6) Translation charges 1,737.32
(7) Travelling conveyance and stay expenses of 54,193.93
foreign delegates | https://indiankanoon.org/doc/743169/ |
428b4576e996-9 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 12. The Appellate Assistant Commissioner held that items Nos. 1, 2, 3, 5 and 6 are allowable under sub-clauses (ii), (vi) and (vii) of sub-section (1)(d) of section 35B. As regards items Nos. 4 and 7, it was held that, since the expenditure was not incurred wholly and exclusively for the purpose of export business, it was restricted to 50% of the expenditure and allowed accordingly. On further appeal, at the instance of the Revenue, the Appellate Tribunal confirmed those findings. On those facts, the above questions of law have been referred to this court for advice. | https://indiankanoon.org/doc/743169/ |
428b4576e996-10 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 13. Sri Suryanarayana Murthy, learned standing counsel for the Revenue, has contended that though the company has business connections with U.S.S.R. and G.D.R. and the trade delegates from those countries have visited India in connection with the purchase of tobacco, the expenditure incurred on them by the company is "in the nature of entertainment expenditure". Therefore, by operation of sub-sections (2) and (2B) of section 37 of the Act, the entire amount pertaining to questions Nos. (1),(2), (3) and (5) cannot be allowed as business expenditure under section 37(1) of the Act but is to be circumscribed within the slab prescribed in sub-section (2) of section 37. In support thereof, he placed strong reliance on CIT v. Veeriah Reddiar [FB]. He also further contends that though a Division Bench of this court in. Addl. CIT v. Maddi Venkataratnam & Co. Ltd. [1979] 119 ITR 514, held that the entire expenditure is to be disallowed, it defeats the very object of sub-sections (2), (2A) and (2B) of section 37 and, therefore, the entire amount cannot be allowed. The Appellate Tribunal found that the hosting of lunch or dinner to the foreign delegates was arranged in an appropriate and befitting manner. This finding is "delightfully vague". The terms "appropriate and befitting" jettisons legal setting drawn in section 37(2), (2A) and (2B) affording carte blanche to an assessee to expend any expenditure to woo a client, customer, constituent, at great cost to the exchequer defeating the object of sub-section (2) of section 37 of the Act. Alternatively, it is contended that even if that finding is to be | https://indiankanoon.org/doc/743169/ |
428b4576e996-11 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 37 of the Act. Alternatively, it is contended that even if that finding is to be accepted, it is a matter for remittance to the Tribunal for verification, with reference to the evidence on record, whether the expenditure was incurred extravagantly or lavishly in arranging lunch or dinner to foreign delegates and slash it to a frugal one, as was done between the parties in Nava Bharat Enterprises (P.) Ltd. v. CIT [1983] 143 ITR 804 by this court for the previous assessment year. | https://indiankanoon.org/doc/743169/ |
428b4576e996-12 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 14. Sri Parvatha Rao, learned counsel for the company, has refuted these contentions. He contends that the company has close business relations with the USSR and the GDR; when the delegates from those countries visited India, it is elementary that the company should provide consistent with the dignity of the foreign delegates, lunch or dinner; and, therefore, it is a bare necessity in connection with the business. Unless it is shown that it is extravagant or lavish, as stated by the Appellate Tribunal, the finding is to be accepted and it is in consonance with the law laid down in Maddi Venkataratnam's case . Therefore, they are to be answered in favour of the company. It is further contended that, whether the expenditure expended by the company to arrange lunch or dinner for foreign delegates is extravagant or lavish is a question of fact and it cannot be gone into in a reference under section 256(1) of the Act.
15. Questions Nos. (1), (2), (3) and (5) can be disposed of together. The point that arises for consideration is whether the expenditure incurred by the company is business expenditure laid out or expended wholly and exclusively for the purpose of the business of the company deductible under section 37(1) of the Act, or in the nature of entertainment expenditure, coming within sub-section (2) thereof, and allowable in the manner laid down thereunder on the basis of the slab system. With a view to understand the scope and to appreciate the same, it is necessary to wade through section 37 operative during the assessment year 1973-74. Section 37 reads thus : | https://indiankanoon.org/doc/743169/ |
428b4576e996-13 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | "(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'.
(2) Notwithstanding anything contained in sub-section (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as hereunder : -
(i) on the first Rs. 10,00,000 of the at the rate of 1% or
profits and gains of the business (computed Rs. 5,000, whichever is
before making any allowance under section 33 higher;
or section 33A or in respect of entertainment
expenditure)
(ii) on the next Rs. 40,00,000 of the at the rate of 1/2%;
profits and gains of the business (computed in
the manner aforesaid)
(iii) on the next Rs. 1,20,00,000 of the at the rate of 1/4%;
profits and gains of the business (computed in
the manner aforesaid)
(iv) on the balance of the profits and Nil.
gains of the business (computed in the manner
aforesaid) | https://indiankanoon.org/doc/743169/ |
428b4576e996-14 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (2A) Notwithstanding anything contained in sub-section (1) or sub-section (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 September, 1967, as is in excess of the aggregate amount computed as hereunder : -
(i) on the first Rs. 10,00,000 of the profit at the rate of 1/2% or
and gains of the business or profession Rs. 5,000, whichever is
(computed before making any allowance higher;
under section 33 or section 33A or in respect
of entertaintnent expenditure)
(ii) on the next Rs. 40,00,000 of the at the rate of 1/4%;
profits and gains of the business or profession
(computed in the manner aforesaid)
(iii) on the next Rs. 1,20,00,000 of the at the rate of 1/8%;
profits and gains of the business or profession
(computed in the manner aforesaid)
(iv) on the balance of the profits and Nil :
gains of the business or profession (computed
in the manner aforesaid)
Provided that where the previous year of any assessee falls partly before and partly after the 30th day of September, 1967, the allowance in respect of such expenditure incurred during the previous year shall not exceed -
(a) in the case of a company - | https://indiankanoon.org/doc/743169/ |
428b4576e996-15 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (a) in the case of a company -
(i) in respect of such expenditure incurred before the 1st day of October. 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in sub-section (2), the same proportion as the number of days comprised in the period commencing on the first day of such previous year and ending with the 30th day of September, 1967, bears to the total number of days in the previous year;
(ii) in respect of such expenditure incurred after the 30th day of September, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in this sub-section; the same proportion as the number of days comprised in the period commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to the total number of days in the previous year;
(b) in any other case -
(i) in respect of such expenditure incurred before the 1st day of October, 1967, the amount admissible under sub-section (1);
(ii) in respect of such expenditure incurred after the 30th day of September, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in this sub-section, the same proportion as the number of days comprised in the period commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to the total number of days in the previous year.
Explanation. - For the purposes of this sub-section and sub-section (2B), 'entertainment expenditure' includes - | https://indiankanoon.org/doc/743169/ |
428b4576e996-16 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person after the 29th day of February, 1968;
(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 after the 29th day of February, 1968, for the purposes of the business or profession of the assessee by any employee or other person.
(2B) Notwithstanding anything contained in this section, no allowance shall be made in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessee after the 28th day of February, 1970."
(Other sub-sections are not necessary. Hence omitted.) | https://indiankanoon.org/doc/743169/ |
428b4576e996-17 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 16. The question at issue is whether the amount laid out or expended by the company on the foreign delegates in arranging dinner or lunch at various branches is "in the nature of entertainment expenditure" within the meaning of sub-section (2) of section 37. If the finding is positive by operation of the non obstante clause in sub-section (2), it is to be allowed as per its slab system and takes out from section 37(1). To understand its scope and sweep, it is now well-settled that recourse to the legislative history of sub-sections (1), (2), (2A) and (2B) can be sought so that it could dispel the seeming doubt from judicial dicta and the necessity the Legislature felt to undertake the amendments to section 37 by introducing sub-sections (2), (2A) and (2B) and the march of law thereby made. In CIT v. Shahzada Nand & Sons , their Lordships of the Supreme Court have traced the legislative history to section 34 of the Indian Income-tax Act, 1922, to find the legislative intent. So it is an authority for the proposition that considerations stemming from legislative history are relevant material for the court to get at the legislative intent in using the compendious phrase "in the nature of entertainment expenditure" in sub-sections (2), (2A) and (2B) of section 37. | https://indiankanoon.org/doc/743169/ |
428b4576e996-18 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 17. Chapter IV of the Act deals with the computation of total income under different heads of income. Part A deals with salaries; Part B relates to interest on securities; Part C deals with income from house property; Part D deals with "profits and gains of business or profession ' which is material for the purpose of this case. Section 28 provides for income which shall be chargeable to income-tax under the head "Profits and gains of business or profession". Section 29 prescribes that the taxable income is to be computed in accordance with the provisions contained in sections 30 to 43A of the Act of which section 37 is relevant. As seen, section 37(1), as the marginal note indicates, is the general provision prescribing that any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of "capital expenditure" or "personal expenses" of the assessee laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". But, however, this generality of sub-section (1), is circumscribed by employing the non obstante clause in sub-sections (2), (2A) and (2B), where it specified that "no expenditure in the nature of entertainment expenditure" shall be allowed in the case of a company which exceeds the aggregate amount computed in the manner prescribed in clauses (i) to (iv). Explanation 2 was made to remove the doubts in operating sub-sections (2) and (2A). Therefore, the question is : What is the meaning of the compendious expression " in the nature of entertainment expenditure", couched in sub-sections (2), (2A) and 2(B) of section 37. Preceding the Act, under section 10(2)(xv) of the Indian Income-tax | https://indiankanoon.org/doc/743169/ |
428b4576e996-19 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | the Act, under section 10(2)(xv) of the Indian Income-tax Act, 1922, in computing the income chargeable under the head "Profits or gains of any business or vocation carried on", necessary allowance was being given in respect of any non-capital expenditure incurred solely for the purposes of earning such profits or gains. The Legislature enlarged its scope by the amendment brought to section 10(2)(xv) by the Amendment Act, 1939, introducing a proviso. Thereby, any expenditure, not being in the nature of "capital expenditure or personal expenses" of the assessee laid out or expended wholly and exclusively for the purposes of such business, profession or vocation, was to be allowed. All amounts expended by the assessee for the entertainment of his business constituents, clients or customers were being deducted under this head on the ground that such hospitality or entertainment was extended wholly for the purpose of business promotion or profession or vocation of the assessee. When the Legislature found that this facility is being abused, intended to quench the thirst of the assessee in unduly expending or laying out entertainment expenditure, to further their business prospects and the exchequer to defray it, by gradual and deliberate legislative amendments restricted and curbed their claim for allowance. The initial step was section 6 of the Finance Act of 1961 which came into effect from April 1, 1962, by which the scope of the proviso to section 10(2) (xv) of the 1922 Act was curtailed by imposing a ceiling limit on all business expenditure in the nature of entertainment expenditure which could be allowed to companies. The maximum of such deductions was prescribed on a slab basis depending upon the profits and gains of the business of such company in the relevant accounting year. When the Act was brought on the statute book replacing the predecessor 1922 Act, the same provision was retained intact in sub-section | https://indiankanoon.org/doc/743169/ |
428b4576e996-20 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | the statute book replacing the predecessor 1922 Act, the same provision was retained intact in sub-section (2) of section 37 of the Act. | https://indiankanoon.org/doc/743169/ |
428b4576e996-21 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 18. But when the avoidance was persisted with by assessees other than companies, Parliament further amended through section 4 of the Taxation Laws (Amendment) Act, 1967, introducing sub-section (2A) placing restrictions or ceiling limit on allowance of "entertainment expenditure"; allowance on other categories of assessees other than companies. It was further amplified by the Explanation to sub-sections (2) and (2A) introduced by the Finance Act of 1968 expanding the scope of the restriction imposed by sub-section (2A) so as to take in any expenditure incurred by an assessee in expending entertainment allowance to its employees or other persons from February 29, 1968, and also the amount of any expenditure in the nature of entertainment expenditure incurred by any employee or other person for the purpose of the business or profession of the assessee other than, out of an entertainment allowance paid to him by the assessee. Then, by the Finance Act, 1970, Parliament further introduced sub-section (2B) in section 37 removing the last vestige. While introducing the Finance Bill, the Finance Minister stated on the floor of the House thus :
"Those who enjoy the hospitality of their business friends should now no longer find their sense of gratitude diminished by the thought that a part of the hospitality is really paid for by the exchequer." (vide [1970] 75 ITR (St.) 25, 26). | https://indiankanoon.org/doc/743169/ |
428b4576e996-22 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 19. Section 37(2B) has been already extracted and needs no repetition. Section 37(2B) was omitted by the Finance Act, 1976, with effect from April 1, 1977, and it was again reintroduced by further amendment with effect from April 1, 1979, through the Taxation Laws (Amendment) Act, 1978. The later amendments are not relevant for the purpose of this case. Hence, the need to extract them is obviated.
20. Maxwell on "The Interpretation of Statutes", 12th edition, at page 137, in Chapter 6, under the caption "Construction to prevent evasion or abuse", stated thus :
"'.. the office of the judge is, to make such construction as will suppress the mischief, and advance the remedy, and to suppress all evasions for the continuance of the mischief.' To carry out effectually the object of a statute, it must be so construed as to defeat all attempts to do, or avoid doing, in an indirect or circuitous manner that which it has prohibited or enjoined : quando aliquid prohibetur, prohibetur et omne per quod devenitur ad illud. | https://indiankanoon.org/doc/743169/ |
428b4576e996-23 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | This manner of construction has two aspects. One is that the courts mindful of the mischief rule, will not be astute to narrow the language of a statute so as to allow persons within its purview to escape its net. The other is that the statute may be applied to the substance rather than the mere form of transactions, thus defeating any shifts and contrivances which parties may have devised in the hope of thereby falling outside the Act. When the courts find an attempt at concealment, they will, in the words of Wilmot C.J., 'brush away the cobweb varnish, and shew the transactions in their true light' (Collins v. Blantern [1767] 2 Wils KB 347 at 852)".
21. It was further stated at page 141 in the context of Taxing Act on the "substance rule" thus :
"The language used is not to be either stretched, in favour of the Crown or narrowed in favour or the taxpayer. So where the court has to consider a provision expressly designed to prevent tax evasion which uses unnecessarily wide language to achieve its purpose, that language will be given effect to even though the section is thereby made to apply to cases which it was probably never intended to catch."
22. In Craies on Statute Law, seventh edition, under Chapter 5, "Construction where the meaning is plain", it was stated at page 65 thus :
"Where the language of an Act is clear and explicit, we must give effect to it, whatever may be the consequences, for in that case the words of the statute speak the intention of the Legislature." | https://indiankanoon.org/doc/743169/ |
428b4576e996-24 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 23. In Shahzada Nand's case , while construing the provision of section 34 of the predecessor Income-tax Act, 1922, their Lordships of the Supreme Court, speaking through Subba Rao J. (as he then was), at para. 8 stated that where the words of the section are clear but its scope is sought to be curtailed by construction, the approach suggested by Lord Coke in In re Heydon's case [1584] 3 Co. Rep. 7a, was applied thus (p. 400 of 60 ITR) :
"To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act; to consider, according to Lord Coke : (1) What was the law before the Act was passed; (2) What was the mischief or defect for which the law had not provided; (3) What remedy Parliament has appointed; and (4) The reason of the remedy."
24. The scope of the limitation provided under section 34(1A) of the Amendment Act fell for consideration before the Supreme Court. In that context, the rule of statutory construction of Mischief Rule was applied to a taxing statute.
25. In Poppatlal Shah v,. State of Madras, , Mukherjea J. (as he then was) held at page 276, para. (7), thus :
"It is a settled rule of construction that to ascertain the legislative intent, all the constituent parts of a statute are to be taken together and each word, phrase or sentence is to be considered in the light of the general purpose and object of the Act itself." | https://indiankanoon.org/doc/743169/ |
428b4576e996-25 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 26. In that case, the question was whether the title in the goods has passed under the Madras Sales Tax Act at the time when the transaction was entered into within the State of Madras or when the title in the goods passed to the buyer who is outside the State, on its receipt for assessment to sales tax of the sales effected outside the State. In that context, the preamble, the purpose and the operation of the Act were considered.
27. In CST v. Parson Tools & Plants, , Sarkaria J. has held that (AIR headnote) :
"Where the Legislature clearly declares its intent in the scheme and language of a statute, it is the duty of the court to give full effect to the same without scanning its wisdom or policy, and without engrafting, adding or implying anything which is not congenial to or consistent with such expressed intent of the law-giver; more so if the statute is a taxing statute."
28. The facts in that case were that under the U.P. Sales Tax Act, the limitation has been prescribed for filing a revision before the authorities constituted thereunder. The Full Bench of the Allahabad High Court in CST v. Parson Tools & Plants [1971] 27 STC 73 (All) held that sections 5 and 14 of the Limitation Act would apply to the revisions filed thereunder. While holding that the Limitation Act does not apply, the above law was laid down. | https://indiankanoon.org/doc/743169/ |
428b4576e996-26 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 29. Thus it is settled law that in order to ascertain the intention of the Legislature, the court has to gather from all admissible evidence including legislative history and the language in which the statute is couched, the purpose of the statute, its aim, scope, object and setting of the Act, giving effect to the context of every word, phrase or sentence employed therein by harmonious construction so as, as far as possible, to make a consistent enactment of the whole statute. In that process, the court has to keep in the forefront, what was the state of law before the Act was passed what was the mischief or defect which the law had not prevented, what remedy the Legislature has provided and the reason for the remedy. The construction would be to suppress the mischief and advance the remedy and to suppress all evasions for the continuance of the mischief which the statute intends to prevent. The statute must be applied to the substance rather than to the mere form of the transaction, thereby defeating any mischief of contraventions which the parties may have devised to wriggle out of the Act, if necessary to brush away the cobwebs and consider the transactions in their true light.
30. In the light of the above law, the question is, as stated earlier, whether the expenditure incurred on dinner or lunch provided to the foreign trade delegates by the company is in the nature of entertainment expenditure within the meaning of sub-section (2) or sub-section (2B) of section 37. | https://indiankanoon.org/doc/743169/ |
428b4576e996-27 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 31. In this regard, there is a cleavage in judicial thought on the scope of "entertainment expenditure" one torch-bearer being CIT v. Patel Brothers & Co. Ltd. , followed by this court in Maddi Venkataratnam's case [1979] 119 ITR 514, the connecting link being Divan C.J., being a party to both the judgments; and the contra is CIT v. Veeriah Reddiar [FB], speaking through Balakrishna Eradi J. (as he then was), followed in CIT v. Khem Chand Bahadur Chand [FB]. At the cost of repetition, it may be necessary to recapitulate that section 37(1) gives right to an assessee to an allowance of business expenditure laid out or expended wholly or exclusively for the purposes of the business and profession (the expenditure not being in the nature of capital expenditure or personal expenses of the assessee) in computing the income chargeable to tax under the head "Profits and gains of business or profession". But its width and sweep are sought to be curtailed by sub-sections (2), (2A), (2B) and (4) of section 37, by employing the non obstante lause stating that "no expenditure in the nature of entertainment expenditure shall be allowed exceeding the aggregate amount computed on the basis of the slab system provided thereunder as in the case of a company and individual assessees under sub-sections (2) and (2A) respectively and putting a total prohibition at the relevant assessment year under sub-section (2B) after February 28, 1970, and under sub-section(4), from the same period, allowance of expenditure incurred on the maintenance of a guest house or a guest house maintained as a holiday home for employees. The scope of the non obstante clause was considered by the Supreme Court in South Indian Corporation (P) | https://indiankanoon.org/doc/743169/ |
428b4576e996-28 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | of the non obstante clause was considered by the Supreme Court in South Indian Corporation (P) Ltd. v. Secretary, Board of Revenue, . Subba Rao J. (as he then was), speaking for the Constitution Bench, held at page 215, paragraph 19 (of AIR), thus : | https://indiankanoon.org/doc/743169/ |
428b4576e996-29 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | "... Article 278 opens out with a non obstante clause. The phrasc 'notwithstanding anything in the Constitution ' is equivalent to saying that in spite of the other articles of the Constitution, or that the other articles shall not be an impediment to the operation of article 278. While article 372 is subject to article 278, article 278 operates in its own sphere in spite of article 372. The result is that article 278 overrides article 372; that is to say, notwithstanding the fact that a pre-Constitution taxation law continues in force under article 372, the Union and the State Governments can enter into an agreement in terms of article 278 in respect of Part B State depriving the State law of its efficacy." | https://indiankanoon.org/doc/743169/ |
428b4576e996-30 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 32. The contention raised in that case was that article 277 of the Constitution would save only the levy of tax that was being lawfully levied by a State immediately before the commencement of the Constitution and since the Travancore and Cochin General Sales Tax Act came into force after the Constitution, the levy made thereunder does not satisfy the conditions laid down in article 277. So, the tax under the Act was not saved. While considering the scope of and upholding that contention, it was held that article 277 excludes the operation of article 372 or an agreement in terms of article 278 overrides article 372. A Division Bench of this court in Parasuramaiah v. Lakshmamma, , was also called upon to consider the effect of the non obstante clause in section 10(3)(c) of the Andhra Pradesh Buildings (Lease, Rent and Eviction) Control Act (15 of 1960). The contention therein was that by virtue of the non obstante clause in section 10(3)(c), it must be confined to find whether the land lord owns a residential or non-residential building of his own in the city, town or village concerned and nothing more. While meeting that contention, Gopal Rao Ekbote J. (as he then was), speaking for the Bench, held thus (p. 223) : | https://indiankanoon.org/doc/743169/ |
428b4576e996-31 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | "It must be understood that a non obstante clause is usually used in 'a provision to indicate that that provision should prevail despite anything to the contrary in the provision mentioned in such non obstante clause. In case there is any inconsistency or departure between the non obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non obstante clause which would prevail over the other clause. It does not, however, necessarily mean that there must be repugnancy between the two provisions in all such cases." | https://indiankanoon.org/doc/743169/ |
428b4576e996-32 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 33. It was held that the purpose of the non obstante clause was that the entire clause (a) would not apply to a case falling within the ambit of clause (c). Any other meaning would amount to ignoring the express non obstante clause appearing in clause (c). In sub-section (1) of section 37, any expenditure in the nature of capital expenditure or personal expenses of the assessee or expenditure in the nature described in sections 30 to 36 are not allowable in computing the income chargeable under the head "Profits and gains of business or profession". But the other business expenditure laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowable. But the width of its net again is cut down by the non obstante clause in other provisions-the expenditure in the nature of entertainment expenditure shall not be allowed except at the rates on the basis of the slab prescribed thereunder. Therefore, despite the operation of sub-section (1) of section 37, sub-sections (2), (2A), (2B) and (4) have independent operation and an assessee is not entitled to deduction of the whole entertainment expenditure if it falls under the latter sub-section. The term "in the nature of entertainment expenditure" was not defined under the Act. The question therefore, is, what is the meaning of the general phrase "in the nature of entertainment expenditure". A reading of this compendious clause appears to be couched in wide language spreading its net widely to engulf in its ambit all the "entertainment expenditure" stricto sensu or otherwise so as to bring within its net all the expenditure laid out or expended as entertainment expenditure. The meaning of this phrase was considered in Veeriah Reddiar's case [FB]. Balakrishna Eradi J. (as he then was) has considered it with reference to the standard dictionaries and held at page 617 thus : | https://indiankanoon.org/doc/743169/ |
428b4576e996-33 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | "A reference to the leading dictionaries would show that the word entertainment 'has several different shades of meaning such as, a diversion or amusement : something affording a diversion or amusement esp. a performance : hospitable provision for guests : maintenance in service : reception of and provision for guests : hospitality at table : that which entertains : a performance or show intended to give pleasure : hospitality given or received : the consideration of an idea : reception admission, etc., etc. The exact content of the word has, therefore, to be gathered from the context and setting in which it has been used."
34. It was held that in interpreting the expression "entertainment expenditure" occurring in sub-sections (2A) and (2B) of section 37 of the Act, the word "entertainment" should be taken to mean "hospitality of any kind extended by the assessee directly in connection with his business or profession." In that case, the question was whether the expenditure for supplying cigarettes, coffee or meals to customers and constituents of the assessee would fall within the sweep of sub-sections (2A) and (2B) of section 37. The Full Bench has held against the assessee and in favour of the Revenue.
35. In Khem Chand Bahadur Chand's case [FB], Sandhawalia Chief Justice, at page 347, held thus : | https://indiankanoon.org/doc/743169/ |
428b4576e996-34 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | "In construing the aforesaid provisions (section 37(1), (2), (2A)), what first meets the eye and deserves highlighting is the designed and considered use of the phraseology by Parliament in sub-sections (2) and (2A) aforesaid. The phrase deliberately employed is - 'in the nature of entertainment expenditure'. It is not merely 'entertainment expenditure ' or 'business entertainment simpliciter '. It is a sound canon of construction that the Legislature does not waste its words and every word employed in a statute has to be given a meaning. Undoubtedly, therefore, whilst using the larger and compendious expression 'in the nature of entertainment expenditure', Parliament had an obvious purpose behind it. This expression is much wider in its connotation, inasmuch as it would take within its ambit not merely what may stricto sensu be regarded as entertainment expenditure proper but also all other expenditure of allied nature partaking of some, if not all, of the characteristics of entertainment expenditure. The phrase has indeed a wide amplitude and its use leaves little doubt that the intention of the Legislature in employing it was to cast the net sufficiently wide so as to bring within its field all types of hospitality. Even on behalf of the respondents, it could not be denied that any lavish hospitality expended for business purposes would amount to 'entertainment expenditure'... What, however, calls for pointed notice is the fact that both sub-sections (2) and (2A) of section 37 begin with a non obstante clause, namely, 'Notwithstanding anything contained in sub-section (1) thereof'. Plainly, therefore, it would mean that whatever the amount of business entertainment expenses may be, they are subject to the stringent rule and limits provided in sub-sections (2) and (2A) for companies and other assessees, respectively. Therefore, reading sub-sections (1), (2) and (2A) | https://indiankanoon.org/doc/743169/ |
428b4576e996-35 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | respectively. Therefore, reading sub-sections (1), (2) and (2A) together - and doing so is a wholesome rule of construction - the larger scheme appears to be that the law recognises the incidence of business entertainment expenses but does not allow any sky-high deductions thereof and curbs them within the slab limits provided in clauses (i), (ii), (iii) and (iv) of sub-sections (2) and (2A) of section 37 of the Act. To put it in other words, the statute is alive to the fact that business entertainment expenses may sometimes have to be incurred at inordinately high levels. That by itself would not give the businessmen carte blanche to incur any amount of entertainment expenses and claim a total deduction thereof. The Legislature has followed the golden mean by allowing a reasonable rein and also put a plausible leash thereon in the shape of maximum slabs therefor in sub-sections (2) and (2A). To construe the provision otherwise and to hold that hospitality which is not lavish may be expended without any financial limits would in effect be frustrating the very purpose of the Legislature in enacting sub-sections (2) and (2A) and defeating the larger legislative intent of curbing excessive business entertainment, at the cost of the public exchequer. Beyond the prescribed limits, business entertainment is left to the discretion and the personal cost of businessmen themselves, and is not to be defrayed by public revenue." | https://indiankanoon.org/doc/743169/ |
428b4576e996-36 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 36. However, at page 355, a note of caution was administered by the Full Bench thus :
"...... an overly doctrinaire approach must be avoided. We are inclined to the view that all hospitality extended wholly and exclusively for the purposes of the business is within the net of the phrase 'in the nature of entertainment expenditure'. However, it is elementary that, in the first instance, such an expense must be a hospitality expense and that which, in ordinary parlance, cannot be even termed hospitality cannot by any stretch of imagination be either deemed to be entertainment or in the nature of entertainment. To reiterate, for an expense to come within the ambit of being in the nature of entertainment, it must first partake of all the appellations of being hospitable. If it does not even satisfy the broad concept of being hospitable stricto sensu, then it cannot be elongated into either entertainment expenditure or even in the nature of entertainment expenditure."
37. We find compatibility to respectfully make common journey. In that case, the assessee claimed deduction of kitchen expenses expended towards cigarettes, pan, tea, etc., treating them as expenditure in the nature of entertainment expenditure. Ultimately, the Tribunal took the view that they are not in the nature of entertainment expenses and accepting the stand of the assessee, deleted the amount of Rs. 4,500 under this head. The Full Bench answered the question against the assessee. In the application of the principle, we express our regrets to part our ways. Equally too of Veeriah Reddiar's case [FB]. | https://indiankanoon.org/doc/743169/ |
428b4576e996-37 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 38. As against this view, in Patel Brothers' case , a Division Bench of the Gujarat High Court was called upon to consider the question whether the supply of food, drinks or any amusement to a client, constituent or customer was in the nature of entertainment expenditure in law. The facts therein were that the assessee was a limited company. It provides meals to its workers as well as workers and customers of its associate firm carrying on business, viz., Patel Brothers Oil Mills. Farmers come to the factory to offer goods such as cotton, groundnut, rice and pulses to the assessee. It was customary and out of commercial expediency for the company to provide meals to its farmer customers. Therefore, the company claimed allowance of kitchen expenses for the relevant assessment years from chargeability to tax. The Income-tax Officer disallowed the expenditure. On appeal, the Appellate Assistant Commissioner held that it is not an entertainment expenditure covered by section 37(2) as the expenditure was to provide meals which is a bare necessity having regard to the nature of the business and, therefore, it is not an entertainment or amusement. On second appeal, the Tribunal confirmed it. On reference, the learned judges considered the word "entertainment". They did not consider the scope of the phrase "in the nature of entertainment expenditure". After considering the connotation and meaning of the word "entertainment" with reference to leading dictionaries, they laid down four propositions thus (p. 441 of 106 ITR) :
"(a) If the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish or extravagant scale, or is of wasteful nature, it is entertainment per se. | https://indiankanoon.org/doc/743169/ |
428b4576e996-38 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (b) 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 contract or employment spelled out from longstanding practice or custom of trade or business, it will not amount to entertainment.
(c) If the provision of food or drinks to a client, customer or constituent is in a liberal and friendly way, it may amount, to entertainment having regard to the place, item and cost of such provision.
(d) The provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment."
39. It was held that, having regard to the nature and magnitude of the business of the assessee, it would be necessary for the assessee to make arrangements for providing meals to its up country constituents who visit it. Accordingly, the point was held in favour of the assessee. The Punjab and Haryana High Court in Khem Chand Bahadur. Chand's case [FB] dissented from this view and stated several reasons for their inability to agree with the ratio laid down in Patel Brothers' case . It held that the Achillies' heel of Patel Brothers case missed the purpose, the import and the significance of the deliberate use by Parliament of the compendious phrase "in the nature of entertainment expenditure" and other reasons. In Veeriah Reddiar's case , the Full Bench of the Kerala High court also disagreed with the ratio in Patel Brothers' case . | https://indiankanoon.org/doc/743169/ |
428b4576e996-39 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 40. In Maddi Venkataratnam's case , the assessee is a private limited company. The assessee maintained two guest houses intended for foreign buyers. It claimed entertainment expenses at the guest houses arranged as lodging to the customers coming from foreign countries in connection with the export business of tobacco. The assessee claimed before the Income-tax Officer that the expenses of providing lodging facillties to the foreign customers were in the nature of entertainment expenses in connection with the business of purchasing tobacco Therefore, it was an expenditure necessary for the business and did not constitute entertainment. The Income-tax Officer disallowed part of it On appeal, the Appellate Assistant Commissioner allowed the appeal. On further appeal by the Revenue, the Tribunal confirmed the order of the Appellate Assistant Commissioner. Thus, the reference by the Revenue. The Division Bench did not make any independent consideration except following the ratio in Patel Brothers' case . In Associated Newspapers Group Ltd. v. Fleming (Inspector of Taxes) [1973] AC 628 (HL), the question was whether the expenses laid out for the provision of hospitality by a newspaper publisher to informants and contributors is deductible in computing the profits under section 15 of the Finance Act, 1965, to the newspapers published in the United Kingdom. The word "anything" in section 15(9) was pressed into service to claim deduction. It was disallowed and, on appeal, the House of Lords confirmed it. While considering the same, at page 643, Lord Morris of Borthy-Gest has held thus :
"My Lords, the questions that are raised must find their solution in a fair and reasonable interpretation of the words by which the Legislature has expressed its intention. In particular, must the wording in sub-section (9) be considered."
41. At page 644 it was held : | https://indiankanoon.org/doc/743169/ |
428b4576e996-40 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 41. At page 644 it was held :
"The word 'anything ' in sub-section (9) meant business entertainment so that sub-section (9) related to the deduction of expenses incurred in the provision by any person of business entertainment which it is his trade to provide. I cannot agree. There is no trade or business of giving free hospitality. I see no reason why the word 'anything' should not be given its ordinary and natural meaning."
42. Lord Simon of Glaisdale held at page 646 thus :
"But a mere reading of section 15 of the Act, 1965, against the background of the preceding law, can leave no doubt that it was Parliament's conception that expenditure on business entertainment charged as a deduction against gross trading income was being fiscally abused, or that Parliament in section 15 was seeking to provide a remedy for what it conceived as such abuse.
Nor can there be any doubt about the method which the draftsman chose to adopt in order to provide the remedy. Experience must have taught him that if a fiscal abuse is too precisely remedied, taxpayers with expert advice will find a means of evading the fiscal control. To counter this, the draftsman may spread his net very wide at first, in order to make sure that nothing gets by which should not; and he will then re-examine to ensure that nothing has been caught in the net contrary to fiscal equity, and readjust accordingly. That seems to have been the draftsman's method with section 15." | https://indiankanoon.org/doc/743169/ |
428b4576e996-41 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 43. This case is an authority for the proposition that entertainment expenditure is to be allowed only to an assessee whose business is to provide entertainment. The word "anything" is to be construed in that context. Though entertainment expenditure is necessary for getting news items, it is not to be allowed. The same appears to be the method adopted by Parliament in using appropriate language in section 37(1), (2), (2A) and (2B).
44. In De Vigier v. IRC [1964] I WLR 1073 (HL), Lord Reid, while considering the transaction of loan and repayment of loan, and the meaning of "loan" under section 408 of the Income-tax Act, 1952, held at page 1077 thus :
"I realise that if legislation is to be effective to forestall attempts at evasion, it must often be drafted in terms so wide that it can apply to a variety of quite innocent transactions."
45. Lord Pearce at page 1079 held thus :
"One, therefore, approaches this case with an inclination to limit, if one can properly do so, the application of section 408 to the cases which it was primarily intended to catch, and to exclude cases like the present where its application creates unfairness. But how can one do that without drawing some technical and artificial line which would defeat the whole intention of the section ?
If one excludes the operation of the section simply because this was a nebulous and casual transaction or because the trustees had no power to borrow, then every person wishing to drive through the section whether to secure the forbidden benefit or not, may do so by making his transaction nebulous and casual or by lending to a settlement which had no power to borrow. In my opinion, the section was not intended to have so limited an application." | https://indiankanoon.org/doc/743169/ |
428b4576e996-42 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 46. The wife of the assessee lent loan from trust monies to purchase shares. On the facts, it was held that it was loan and repayment of the loan and the profits realised are chargeable to tax. This case is an authority for the proposition that it is the substance and not the form of the transaction that governs the case. Entertainment involves hospitality of any kind which an assessee extends to a customer, client or a constituent for furtherence of his business or profession. It must be wholly and exclusively necessary for the purpose of his business or profession. The primary motive behind laying out or expending entertainment expenditure is commercial or professional expediency. The phrase "in the nature of entertainment expenditure" encompasses in its ambit entertainment expenditure proper as well as expenditure akin to it partaking of some, if not all, of the characteristics of entertainment expenditure. Even lavish or frugal hospitality is none the less a hospitality. So any entertainment expenditure would be in the nature of entertainment expenditure, but may not strictly business expenditure. Equally every hospitality does not necessarily constitute per se entertainment expenditure. It would appear to us that the Legislature treated entertainment expenditure as part of business expenditure claimable for allowance under section 37(1) from chargeability to tax. The businessman abused the facility given thereunder. Amendments by gradual process were made in sub-sections (2), (2A) and (2B) of section 37 taking out "entertainment expenditure" from the purview of section 37(1) and transplanted it in later sub-sections by appropriate phraseology; widened its sweep employing "in the nature of entertainment expenditure" with a non obstante clause giving exclusive operation thereof, that notwithstanding the operation of sub-section (1) of section 37, the latter would operate. Entertainment expenditure, whether would come stricto sensu or of its allied nature, partaking of some, if not all, of the characteristics of entertainment expenditure to be operated | https://indiankanoon.org/doc/743169/ |
428b4576e996-43 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | nature, partaking of some, if not all, of the characteristics of entertainment expenditure to be operated within the ambit of sub-sections (2), (2A) or (2B). This view gains support from the latest amendment introduced in 1978 to sub-section (2B) of section 37, treating advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party as a separate item. To get at the substance of the transaction doctrinaire angulation is to be eschewed, and it is to be pragmatically broached from work-a-day basis. It may be illustrated on the basis of some hypothetical questions : | https://indiankanoon.org/doc/743169/ |
428b4576e996-44 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (1) Take a case where a company calls for a general body meeting of its shareholders or board of directors. While transacting its business, it hosts a lunch to all its shareholders or board of directors. The question is whether the expenditure incurred in connection therewith is wholly and exclusively necessary for the purpose of the business of the company. When the board of directors or shareholders met to transact the business of the company and the lunch was hosted, necessarily the expenditure incurred in connection therewith was wholly and exclusively for the purpose of the business of the company. The primary motive is the transaction of business. Though there is an element of hospitality in hosting a lunch, it cannot be said that the company is extending hospitality for itself for pleasure. Therefore, it comes squarely within the ambit of business expenditure under section 37(1).
(2) Take a case where an advocate or an attorney has been engaged by a managing director or chief executive of a business house and requests time for consultation in his pending cases. Counsel or attorney extends an invitation to the client to discuss the problem over a lunch or dinner and the same is arranged in a hotel. After having the lunch or dinner, the problem was discussed and the matter was settled. The question is whether the expenditure incurred by the advocate or attorney or company is wholly and exclusively for the purpose of the profession or business ? Nobody except the host and guest attended. The primary object of arranging the lunch or dinner is to discuss and finalise the problem and incidentally lunch or dinner, as an act of hospitality, has been provided. An element of hospitality, undoubtedly, is involved in it. But the primary purpose is wholly professional or business and the expenditure is exclusively incurred in connection therewith. The consideration of hospitality is secondary. The entertainment expenditure stemmed from professional or business expediency and hospitality is integrally connected. It would thereby appear to be wholly coming under section 37(1) of the Act. | https://indiankanoon.org/doc/743169/ |
428b4576e996-45 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (3) Take another case where a senior counsel of the Supreme Court is engaged on behalf of a company to argue a case in the High Court of Andhra Pradesh at Hyderabad. Counsel has been provided with lodging as an implied term of the contract. Though it is not necessary for the company to provide lunch and dinner to counsel, to make counsel comfortable, as an incident thereof, hospitality has been extended. Therefore, providing boarding to counsel, though it involves the element of hospitality, is incidentally connected with the business purpose which is wholly and exclusively extended in connection with the business of the company. So, it is business expenditure under section 37(1) of the Act.
(4) Take the case that, during the course of the transaction of the business during the business hours, a company like the case on hand, as an act of business courtesy or civility, supplies coffee, tea, snacks, etc., to the clientele or customers that visited the company for the purpose of business. Though there is an element of hospitality involved in it, the primary motivating factor is business courtesy or civility. Therefore the amount expended on that account would come as an incident of business expenditure. The concept of entertainment or pleasure is absent. It attracts section 37(1) of the Act. | https://indiankanoon.org/doc/743169/ |
428b4576e996-46 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (5) Take yet another case where an old client of a counsel or attorney visits the office of his former counsel or attorney but, by that time, there is no relationship of client and counsel. As a courtesy, counsel or attorney invites the old client and extends hospitality by entertaining him over a dinner or lunch and met the expenditure in that regard Though, there is an element of hospitality involved in this case also it is not wholly and exclusively for the purpose of profession. The primary motive or wish is to extend hospitality and the relationship is that of a host and a guest. Though it is in the nature of entertainment expenditure, counsel is not entitled to claim deduction. It would be personal expenditure excluded by section 37(1) itself. The reason is that there must be independent and deliberate business or professional purpose to host a dinner or a lunch. An element of private hospitality pervades the case.
(6) Take another case where the managing director or chief executive of a company is involved in a case, not necessarily connected with the company. But, out of consideration for the meritorious or faithful service rendered by him, the company may agree to bear the expenditure of a counsel and the company hosts lunch and dinner to counsel, at the expense of the company. The question is whether the expenditure incurred by the company can be claimed and is allowable ? Though there is an element of hospitality involved, it is not wholly and exclusively for the purpose of the business of the company. Therefore, it would neither fall under sub-section (1) - business expenditure - nor under sub-section (2) nor (2B) of section 37 and is to be disallowed. | https://indiankanoon.org/doc/743169/ |
428b4576e996-47 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (7) Take the case of a trade delegation, like the present case on hand from USSR and GDR who visited India and the assessee entertains them extending hospitality and arranges residential accommodation, lunch and dinner during their stay in India. The question is whether it is wholly and exclusively necessary for the purpose of the business. The motivating factor may be for immediate benefit to the trade. But, there is no relationship as customers. It is only a prospective order to be placed by the trade delegates with the assessee-company. Though hosting a dinner or lunch and arranging residential accommodation may be due to commercial expediency and indirectly facilitates trade prospects, yet it does not attract in stricto sensu business expenditure but it is certainly entertainment expenditure. Under those circumstances, it is in the nature of entertainment though it is for the purpose of trade, attracting section 37(2) or (2B) of the Act.
(8) Take the case where a race club arranges a meeting of its stewards and office-bearers of the club to transact its business on a day when races are to be conducted. Without inviting any third parties, if the expenditure is incurred in connection with the lunch while transacting business, the expenditure is in connection therewith and it is wholly and exclusively for the purpose of the business. It is a business expenditure. Take, for instance a case where only a few important dignitaries that visited the races are also invited to join them over dinner. Though there is an element of hospitality to a few guests and part of their expenditure is expended, yet the element of hospitality is subordinate and small in degree as host and guest. So, it cannot be said that the expenditure is in the nature of entertainment expenditure. The predominant purpose is business transaction and entertaining guests is incidental. | https://indiankanoon.org/doc/743169/ |
428b4576e996-48 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (9) Take, for instance, a case where without any meeting of the stewards or the office-bearers, they invited a number of invitees to visit the races and hosted a dinner for them along with stewards and office bearers. The object of the invitation is to promote races and the motivating factor for the stewards or office-bearers appears to be to lure a large gathering to attend the races and the expenditure, though not wholly necessary for business, would come within the net of sub-sections (2A) and (2B) of section 37 and not under section 37(1) of the Act. | https://indiankanoon.org/doc/743169/ |
428b4576e996-49 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 47. The above discussion leads us to conclude that the Legislature administered a caveat to an assessee thus : "Look here, assessee, you are free to lay out or expend entertainment expenditure as an incident of your business expenditure. But you must be astute as a frugal businessman that the 'entertainment expenditure' is wholly and exclusively necessary absolutely for the purpose of the business and that it is a reasonable one. You are also free to be lavish or extravagant, having commercial expediency in view in expending entertainment expenditure, though of necessity, for your direct and immediate benefit to the trade indirectly facilitating the carrying of the business and you may feel that it is expended wholly and exclusively for the purpose of the trade. Yet it being within the wide net of 'in the nature of entertainment expenditure', the non obstante clause in sub-sections (2), (2A) and (2B), i.e., notwithstanding that the expenditure is business expenditure, at once catches it and despite the applicability of section 37(1), it would be operated within the parameters of sub-sections (2), (2A) and (2B) and it would be slashed down as per the slab rates prescribed either under sub-section (2) or (2A) depending on your gains or profits during the accounting year. So beware that all entertainment expenditure laid out or expended would not be allowed You are forewarned that the exchequer would not defray it. Oh you the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal eschew adoption of lexicographic consideration and doctrinaire approach but be pragmatic to adopt work-a-day rule, lift the veil encircling the transaction in question, find the primary motive behind laying out or expending entertainment expenditure and put a question to yourself whether it is wholly and exclusively necessary for the purpose of the business or profession and then arrive at the substance of the transaction." | https://indiankanoon.org/doc/743169/ |
428b4576e996-50 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 48. Therefore, the tax authority or the Appellate Assistant Commissioner or the Tribunal has to narrowly scrutinise the accounts in each case, itemwise, whether the expenditure expended or laid out by a company or an assessee is wholly and exclusively for the purpose of the business or profession and it is business or professional expenditure or whether it is in the nature of entertainment expenditure. The authorities while scrutinising the expenditure very narrowly ask the question whether it was laid out or expended for the purpose of the assessee's trade or profession and then ask the second question, was it laid out or expended not wholly or exclusively for the assessee's trade or profession. They should further ask the question whether it is a reasonable expenditure. If the angulation is made in that perspective and the answers are elicited, it would not only subserve the purpose of sub-section (1) of section 37 and, in an appropriate case, relief granted but also brings within the net of sub-sections (2), (2A) or (2B) of section 37 preventing ostentation,, needless wasteful, extravagant or lavish expenditure and put a nail on evasion's coffin. Even if it comes under sections 37(1), 37(2) and(2A), it has still to be investigated whether it is reasonable expenditure. The reason is obvious By a fastidious or lavish person, the act of hospitality with luxurious dishes and costly hot drinks may be regarded as an ordinary lunch or dinner, but, to a common man, it would be a lavish meal or staggering wasteful expenditure. Therefore, care must be taken to maintain the record of expenditure by the assessee and the authorities are to scrutinise the record very narrowly, whether the act of hospitality is an ordinary and frugal one and give allowance accordingly. | https://indiankanoon.org/doc/743169/ |
428b4576e996-51 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 49. At this juncture, the contention of Sri Moorthy, learned standing counsel for the Revenue, merits acceptance. The finding of the Tribunal is that the company hosted dinners to foreign delegates in order to entertain them in "an appropriate and befitting manner". The phrase "appropriate and befitting manner" is an elusive and ambiguous one. No attempt has been made by the Tribunal to find whether it is reasonable. As stated earlier, to a fastidious host, arranging varied dishes with costly items and costly hot drinks is an ordinary act of hospitality, but to a common man it is wasteful expenditure. Therefore, what is appropriate and befitting is always a big question mark affording carte blanche to an assessee to expend lavishly, exhibiting ostentation, with the belief that the public exchequer would defray the wasteful expenditure. If this consideration is allowed to prevail, sub-sections (2), (2A) and (2B) of section 37 would be rendered otiose and ineffectual, defeating the legislative animation. Therefore, the fact finding authorities have to carefully scrutinise the record with circumspection and give the necessary allowance as per law.
50. With regard to question No. (4), it is conceded by the Revenue that it was covered by a decision of this court that the amount of Rs. 893 made for subscriptions to the club for entertainment of the foreign business delegation is allowable. Accordingly, it is answered in favour of the assessee. | https://indiankanoon.org/doc/743169/ |
428b4576e996-52 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 51. With regard to question No. (6), the contention of Sri Moorthy is that no part of the expenditure is allowable, as it is not covered by section 35B(1) (b) (ii), (vi) or (vii) of the Act. He argues that the claim was not laid before the Income-tax Officer; for the first time, it was made before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner is unjustified in coming to the conclusion that the expenditure claimed qualifies for weighted deduction under the above provisions. The resistance of Sri Parvatha Rao is that obtaining agmark from the Indian Standards Institution is necessary for export, which was accepted by the Appellate Assistant Commissioner. It is not disputed that it was required for the purpose of export. The expenditure was necessary for export credit guarantee insurance, inspection charges, salaries of chief buyers for export, etc. As such, items Nos. (1), (2), (3), (5) and (6) were allowed by the Appellate Assistant Commissioner under sub-clauses (ii), (vi) and (vii) of sub-section (1)(b) of section 35B and 50% was allowed as regards items Nos. (4) and (7). The Appellate Tribunal confirmed it and it is a finding of fact and does not warrant an adverse finding. Learned counsel also placed reliance on Union Carbide India Ltd. v. CIT .
52. To appreciate the respective contentions, sub-clauses (ii), (vi) and (vii) of sub-section (1) (b) of section 35B need extraction. Section 35B reads as follows :
"Export markets development allowance - (1)(a).....
(b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on - ........ | https://indiankanoon.org/doc/743169/ |
428b4576e996-53 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | (ii) obtaining information regarding markets outside India and for such goods, services or facilities;......
(vi) furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities;
(vii) travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from, and return to, India;.." | https://indiankanoon.org/doc/743169/ |
428b4576e996-54 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 53. A reading of the above provisions would adumbrate that, where a domestic company or a person other than a company who is a resident of India has incurred after February 29, 1968, whether directly or in association with any other person any expenditure wholly or exclusively on obtaining information regarding markets outside India for such goods services or facilities, the assessee is entitled to claim "weighted deduction". Similarly, if it is required for furnishing to a person outside India samples of technical information for the promotion and sale of such goods, services or facilities or travelling expenses in connection therewith to and from India, weighted deduction is allowable. The question at issue is whether the company is entitled to weighted deduction in respect of the five items mentioned in question No. (6). Rs. 1,40,965-01 was expended for obtaining agmark from the Indian Standards Institution. We did not find any averment either in the order of the Appellate Assistant Commissioner or the Tribunal or the statement of the case that the agmark is wholly and exclusively necessary for the purpose of submitting technical information to the foreign buyers for the promotion of the sale of goods (tobacco) of the company. It is also not the case that the certification by the Indian Standards Institution as an agmark is a condition precedent to export of tobacco or a term of the contract. The decision in Union Carbide's case is of little assistance to the company. Therein, the facts were that obtaining a certificate from the export agency is necessary. Therefore, inspection has got to be made by the certifying officer regarding the quality of the goods. It was contended that it was technical information on the quality of the products for export. Therefore, weighted deduction has to be granted. But in this case as stated earlier, it is not the case of the company nor any material has been placed nor a finding was recorded either by the Appellate Assistant Commissioner or the Tribunal in that regard. | https://indiankanoon.org/doc/743169/ |
428b4576e996-55 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | nor a finding was recorded either by the Appellate Assistant Commissioner or the Tribunal in that regard. Equally, with regard to the alleged export licence fees and inspection charges, no material has been placed on record and nothing of it has been brought to our notice from record. Equally, with regard to items Nos. (5) and (6), viz., subscription to export promotion councils and trade associations and translation charges, no material has been placed that they are of any technical information required to be furnished by the company to foreign buyers for promotion of the sale of the goods of the company. Therefore, none of the items would be eligible for weighted deduction as sub-clauses (ii), (vi) and (vii) of sub-section (1)(b) of section 35B are not attracted. Considered from this perspective, the Tribunals below erred in law in allowing the above weighted deduction from the chargeable income. | https://indiankanoon.org/doc/743169/ |
428b4576e996-56 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 54. Finding,, it difficult to sustain the claims, Sri Parvatha Rao made valiant efforts to persuade us to give an opportunity to the company to lead further evidence before the Appellate Tribunal. We are afraid, we cannot accede to this contention. It is now settled law that the Tribunals cannot take evidence afresh. It cannot take in evidence subsequently gathered after the decision by the Appellate Assistant Commissioner. It has to look into the evidence on record placed by the assessee before the Income-tax Officer. Whatever evidence is available on record, it alone has to be looked into and the company has to satisfy from the record with regard to the claims in respect of questions Nos. (1) to (3).
55. Thus considered, we decline to answer questions Nos. (1) to (3) and direct the Appellate Tribunal to examine the evidence on record afresh, whether the entertainment expenditure on foreign delegates is lavish or extravagant in the light of the law above laid down and to find out what would be the reasonable expenditure and accord allowance according to law. We answer question No. (4) in favour of the assessee and against the Revenue. We answer question No. (5) in favour of the assessee and against the Revenue. We answer guestion No. (6) against the assessee and in favour of the Revenue except to the extent of allowing weighted deduction in respect of the sum of Rs. 1,09,587.
56. The reference is accordingly answered.
Anjaneyulu, J.
57. I agree with the answers proposed by my learned brother to the six questions referred. I would, however, like to make a few observations. | https://indiankanoon.org/doc/743169/ |
428b4576e996-57 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 58. As regards the sum of Rs. 893 which is the subject-matter of consideration in question No. (4), learned standing counsel for the Revenue fairly conceded that it is allowable as business expenditure, as the sum in question represented subscription paid to the clubs for membership and not for entertainment. The amount paid, therefore, qualifies for deduction as business expenditure under section 37(1).
59. There can be no doubt that the sum of Rs. 22,722 claimed by way of entertainment expenditure, which is the subject-matter of consideration in question No. (5), should be allowed as the facts would indicate that this expenditure was incurred for providing coffee, tea and snacks to customers visiting the business premises of the assessee. The expenditure is clearly allowable as business expenditure under section 37(1) of the Act in terms of the decision of this court in Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514. | https://indiankanoon.org/doc/743169/ |
428b4576e996-58 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 60. Questions Nos. (1), (2) and (3) go together. The sum of Rs. 17,056 specified in question No. (1) is claimed to have been spent on entertaining a foreign delegation. The sum of Rs. 2,668 referred to in question No. (2) is claimed to have been spent on providing lunch and dinner to customers. Finally, the sum of Rs. 1,79,154 in question No. (3) is described as "business promotion expenses". The last mentioned sum of Rs. 1,79,154 was part of the total claim of expenditure of Rs. 2,16,215 out of which the Appellate Assistant Commissioner disallowed Rs. 37,061. The balance amount of Rs. 1,79,154 was found to be expenditure incurred in the provision of food and other beverages to foreign buyers. At one stage learned standing counsel for the Revenue sought to urge that the sum of Rs. 1,79,154 included expenditure incurred for the maintenance of guesthouse also and that such expenditure is wholly disallowable. It was, however, found that the expenditure on account of maintenance of guesthouse amounting to Rs. 14,999 was debited in the books of the head office at Guntur and was disallowed wholly by the Income-tax Officer. Learned standing counsel did not dispute, after noticing the disallowance, that the entire expenditure of Rs. 1,79,154 referred to in question No. (3) was incurred on food and beverages for the use of foreign buyers. | https://indiankanoon.org/doc/743169/ |
428b4576e996-59 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 61. The basic question that falls for consideration is whether the three items of expenditure referred to above would qualify for deduction in terms of the tests laid down by the Gujarat High Court in ClT v. Patel Brothers & Co. Ltd. which tests were referred to and followed by a Division Bench of this court in Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514, 517. The approved tests are :
"(i) 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.
(ii) 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 long-standing practice or custom of trade or business, it will not amount to entertainment.
(iii) If the provision of food or drinks to a client, customer or constituent is in a liberal and friendly way, it may amount to entertainment having regard to the place, item and cost of such provision.
(iv) The provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment." | https://indiankanoon.org/doc/743169/ |
428b4576e996-60 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 62. The aforesaid decisions were within the knowledge of the assessee as well as the Tribunal, when the appeals were heard and disposed of on January 30, 1979. Yet, no effort was made by the assessee to furnish the full details of the expenditure and establish its case before the Tribunal that, in the light of the aforesaid tests enunciated, the expenditure qualifies for deduction as business expenditure and could not be treated as expenditure in the nature of entertainment expenditure; nor did the Tribunal make any endeavour to examine the details of the expenditure and record any specific finding whether the expenditure fulfilled the tests laid down by this court. The argument of the assessee regarding the nature of expenditure as well as the conclusions of the Tribunal in regard to the same proceeded on vague and uncertain considerations. In view of the decision of this court in Maddi Venkataratnam's case [1979] 119 ITR 514, following the tests laid down in Patel Brothers' case , the Tribunal should have specifically addressed itself to the question whether the expenditure incurred partook of the nature of entertainment expenditure or not. If, on scrutiny, it is found that the expenditure was incurred in providing accommodation and meals in posh hotels for foreign trade representatives, it cannot be termed as "business promotion expenses". It partakes of the nature of entertainment expenditure. (See the decision in Mysodet (Pvt.) ltd. v. CIT ). There is hardly any material or information in the order of the Tribunal and the authorities below regarding the nature of expenditure incurred. The Tribunal did not refer to the approved tests and record a finding that the expenditure claimed by the assessee qualified for allowance interms of the approved tests. It must, therefore, be said that there is total non-application of mind by the Tribunal to the question before it. The situation is precisely the same as it was in the assessee's own case for an earlier assessment year which was considered | https://indiankanoon.org/doc/743169/ |
428b4576e996-61 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | the same as it was in the assessee's own case for an earlier assessment year which was considered by this court in Nava Bharat Enterprises (P.) Ltd. v. CIT [1983] 143 ITR 804. | https://indiankanoon.org/doc/743169/ |
428b4576e996-62 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 63. Having regard to the above facts and circumstances, it is not possible for this court to answer the first three questions referred by the Tribunal, as relevant details of the expenditure are wanting and the Tribunal has failed to scrutinise the expenditure and record a categorical finding on the admissibility or otherwise of the expenditure based on the approved tests referred to above. Inasmuch as relevant legal principles are laid down, the Tribunal will be entitled while passing an order conformably to this judgment under section 260(1) of the Act, to go into the question and determine the allowability of the whole or any part of the expenditure. The Tribunal shall be entitled to proceed on the basis of the material on record without taking any additional evidence, but the parties may be allowed necessary opportunity to explain the matters to the Tribunal. I, therefore, agree with my learned brother that we should decline to answer questions Nos. (1), (2) and (3) and direct the Tribunal to re-examine the matter bearing in mind the scope of rehearing under section 260 of the Act, as set out by the Supreme Court in CIT v. Indian Molasses Co. P. Ltd. [1970] 78 ITR 474 and Raghunath Prasad Poddar v. CIT [1973] 90 ITR 140. | https://indiankanoon.org/doc/743169/ |
428b4576e996-63 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 64. As regards question No. (6) concerning the eligibility for weighted deduction under section 35B(l)(b) of the Act, learned standing counsel conceded, at the time of hearing, that the assessee is entitled to claim weighted deduction in respect of expenditure of Rs. 1,09,587 pursuant to the decision of this court in the assessee's own case in RC No. 108 of 1982 dated November 5, 1986 (CIT v. Navabharat Enterprises (P.) Ltd. (No. 1) [1988] 170 ITR 326). In view of the above representation made by learned standing counsel, the assessee's claim for weighted deduction in respect of the expenditure of Rs. 1,09,587 is in order and is rightly allowed. | https://indiankanoon.org/doc/743169/ |
428b4576e996-64 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 65. As regards the expenditure of Rs. 1,49,965 on "Agmark charges" (paid to the Indian Standards Institution for certifying quality) and the sum of Rs. 2,14,860 incurred by way of export licence fee and inspection charges, it must be pointed out that there are absolutely no details in respect of these items of expenditure to support the assessee's claim for weighted deduction. No materials are placed before this court regarding the nexus between the expenditure incurred and the export promotion or development for purposes of section 35B. The Tribunal's order does not contain any useful discussion on this matter. All that the Tribunal did was to refer to the order of the Appellate Assistant Commissioner and to record the abrupt conclusion that weighted deduction is allowable. It is not possible to appreciate the reasoning adopted by the Tribunal. The claim for weighted deduction was indeed large and an endeavour should have been made by the Tribunal to ascertain the nature of the expenditure and examine if the expenditure was for the purposes of export promotion. For instance, fee is payable to the ISI for certification not only for the purpose of goods exported, but also for goods sold in the local market. The mere fact that some amount was paid to the ISI does not necessarily lead to the conclusion that the expenditure was incurred on export promotion. Similarly, the record does not contain the analysis of expenditure of Rs. 2,14,860 to show what part represented export licence fee and what part represented the inspection charges. There is also no guidance anywhere in the record to show for what purpose inspection charges were paid and to whom. | https://indiankanoon.org/doc/743169/ |
428b4576e996-65 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 66. The Tribunal did not consider all these aspects. It must be borne in mind that the weighted deduction in respect of these items was not claimed initially by the assessee during the course of the assessment enquiry. The claim was made at the fag end of the assessment enquiry and after the draft assessment order was approved by the Inspecting Assistant Commissioner. Justifiably, the Income-tax Officer had no opportunity to scrutinise this expenditure. The claim for weighted deduction in respect of these items was reiterated by the assessee before the first appellate authority. Although the items of expenditure were not subjected to scrutiny by the Income-tax Officer, the Appellate Assistant Commissioner thought it expedient to consider the matter. If the first appellate authority thought it fit to consider the claim, it was imperative that the matter was referred back to the Income-tax Officer for proper scrutiny. Without doing that the Appellate Assistant Commissioner recorded some ague, uncertain and laconic findings and came to the abrupt conclusion that weighted deduction is allowable. The Tribunal - did precious little when the Revenue came up in appeal; it merely referred to the observations of the Appellate Assistant Commissioner and held that the expenditure qualified for weighted deduction. | https://indiankanoon.org/doc/743169/ |
428b4576e996-66 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 67. Learned counsel, for the assessee, Sri Parvatha Rao, vehemently argued that it is not open to this court to interfere with the findings of fact recorded by the Tribunal, unless for the purpose of reference to this court a specific question is sought for by the applicant, the Revenue in this case. According to learned counsel, if a specific question is not sought for reference challenging the finding of fact, then this court is helpless in setting right an erroneous finding of fact recorded by the Tribunal. Learned counsel urged that in holding that the expenditure fell within the terms of sub-clauses (ii), (vi) and (iii), the Tribunal must be held to have looked into the nature of the expenditure and satisfied itself that the expenditure was incurred for export promotion. Learned counsel, therefore, urged that this court shall not look into the matter further. It is not possible to accept the submission of learned counsel. It is quite clear from the order of the Tribunal that the nature of the expenditure and the purpose for which the expenditure was incurred were not gone into. Without knowing the nature of expenditure, it was inconceivable how the Tribunal has come to the conclusion that the expenditure was incurred for export development. A finding of fact can be regarded as such if the Tribunal refers to the relevant facts and after discussion, records a finding one way or the other. Where, however, the Tribunal totally misdirects itself by omitting to consider the facts, it cannot be said that there is any finding of fact recorded by the Tribunal. Having looked into the order of the Tribunal, it is impossible to escape the conclusion that the claim for weighted deduction in respect of these two items was allowed without any application of mind. The Tribunal was obviously in error in allowing the weighted deduction in respect of these two items. It must be he] d that the assessee is not entitled to claim weighted deduction in respect of the sums of Rs. 1,49,965 and Rs. | https://indiankanoon.org/doc/743169/ |
428b4576e996-67 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | claim weighted deduction in respect of the sums of Rs. 1,49,965 and Rs. 2,14,860. | https://indiankanoon.org/doc/743169/ |
428b4576e996-68 | Commissioner Of Income-Tax vs Navabharat Enterprises (P.) Ltd. on 23 January, 1987 | 68. As regards the remaining sums of Rs. 11,746 and Rs. 1,732 referred to in question No. (6), I do not wish to add anything further to what has already been stated by my learned brother. | https://indiankanoon.org/doc/743169/ |
049e3c4ea2d9-0 | Yanala Malleshwari And Ors. vs Ananthula Sayamma And Ors. on 24 October, 2006 | JUDGMENT V.V.S. Rao, J.
PART - I INTRODUCTION:
1. Almost a century old Registration Act, 1908, which came into force on 01.01.1909, after about fifteen amendments, has now thrown up sea-saw situation played by human ingenuity. These cases have thrown up a couple of interesting questions of law having far reaching consequences. Whether a person can nullify the sale by executing and registering a cancellation deed? Whether a registering officer, like District Registrar and/or Sub Registrar appointed by the State Government, is bound to refuse registration when a cancellation deed is presented? When cancellation deed is registered how the grievance, if any, is to be redressed in law? These and other incidental questions are required to be answered by this Full Bench. | https://indiankanoon.org/doc/803172/ |
049e3c4ea2d9-1 | Yanala Malleshwari And Ors. vs Ananthula Sayamma And Ors. on 24 October, 2006 | BACKGROUND FACTS: | https://indiankanoon.org/doc/803172/ |
049e3c4ea2d9-2 | Yanala Malleshwari And Ors. vs Ananthula Sayamma And Ors. on 24 October, 2006 | 2. At the outset, brief reference may be made to the pleadings, in these petitions. W.P. No. 23005 of 2004 is filed by the petitioner seeking a writ of Mandamus declaring the action of the third respondent (hereafter called, Sub Registrar) in registering the deed of cancellation, dated 20.08.2003, bearing document No. 2854 of 2003 executed by respondents 4 and 5 as void, illegal, contrary to statutory provisions, administrative instructions and circulars. It is the case of the petitioner that her husband purchased Flat No. 302 in II Floor of Ashwood Villa under a registered sale deed, dated 12.01.1994, together with undivided share in the land admeasuring 100 square yards. The same was executed by respondents 5 and 6. The petitioner took possession of the flat and allegedly invested considerable amounts on improvements. It appears there is a dispute between the builder on one side and respondents 4 and 5 on the other side, who are seeking redressal before various authorities. The petitioner also alleges that all the owners of the apartments in the Ashwood Villa formed into an association, spent money for construction of compound wall, landscaping, provision for drain water pipes and for lighting of the stilt. It is stated that the builder contravened the sanction plan and on apprehension, the petitioner and others approached various forums for regularization of constructions. The builder with the connivance of respondents 4 and 5 (owners of the land), made constructions in deviation of the sanctioned plan. They also filed writ petition being W.P. No. 8971 of 1999 for regularization. The same was disposed of by this Court directing the Commissioner, Municipal Corporation of Hyderabad, who by proceedings, dated 26.03.2004, regularized constructions. When the enquiry was pending before the Commissioner, Municipal Corporation of Hyderabad, respondents 4 | https://indiankanoon.org/doc/803172/ |