COMMISSIONER OF INCOME TAX Vs. VEERIAH REDDIAR

JUDGEMENT

(1.) IN this reference made under Section 256(1) of the INcome-tax Act, 1961 (hereinafter referred to as "the Act"), the following question of law has been referred to this court by the INcome-tax Appellate Tribunal, Cochin Bench (hereinafter called "the Tribunal"):

(2.) THE assessee is a registered firm dealing in piece goods both on wholesale and on retail basis. It has its head office at Alleppey and branches at Kottayam and Quilon. In the books of the assessee there is an account styled as Vattachilavu Account to which sundry items of expenses incurred by the assessee in supplying to its customers cigarettes, coffee and sometimes meals have been debited. In the return filed by the assessee for the assessment year 1970-71, which is the relevant assessment year concerned in this case, the assessee had claimed a deduction in respect of the entirety of such expenditure incurred by it as entered in the Vattachilavu Account maintained for the concerned accounting period. THE Income-tax Officer took the view that the claim for deduction put forward by the assessee was in respect of "expenditure in the nature of entertainment expenditure" and that, hence, the provisions of Sub-sections (2A) and (2B) of Section 37 of the Act were applicable to the case. Since under Sub-section (2B) no allowance is admissible in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessee after the 28th day of February, 1970, the Income-tax Officer took note of only the amounts expended by the assessee in the Vattachilavu Account up till the 28th February, 1970. THE total of such expenses incurred by the assessee up to February 28, 1970, came to Rs. 25,193 but the Income-tax Officer held that the assessee was entitled to an allowance only to the extent of Rs. 5,000 under Section 37(2A). He disallowed the balance of Rs. 20,193 and added it to the profits returned. Though the assessee filed an appeal complaining against the said addition that was dismissed by the Appellate Assistant Commissioner of Income-tax, Trivandrum, as per his order dated 22nd February, 1972. THEreupon, the assessee took up the matter in second appeal before the Tribunal. That appeal was substantially allowed by the Tribunal by the order dated 6th July, 1973, a copy of which has been appended to the statement of the case as annexure "C".

(3.) THE second step taken by Parliament came when by Section 4 of the Taxation Laws (Amendment) Act, 1967, Sub-section (2A) was introduced in Section 37 of the Act. By that sub-section a similar restriction in the nature of a ceiling limit on allowable entertainment expenditure was made applicable to all assessees. It is unnecessary to refer to the ceiling limits fixed in Sub-section (2A) or the details of the procedure laid down therein for the application of those limits. It would suffice to state that just as in the case of companies this sub-section has specified the maximum allowable entertainment expenditure in the case of other assessees also on a slab basis. By the Finance Act, 1968, an Explanation was added to Sub-section (2A) of Section 37, the effect of which was to extend the scope of the restrictions imposed by those sub-sections so as to take in any expenditure incurred by an assessee in granting an entertainment allowance to any employee or other person after 29th February, 1968, and also the amount of any expenses in the nature of entertainment expenditure incurred by any employee or other person for the purposes of the business or profession of the assessee otherwise than out of an entertainment allowance paid to him by the assessee. Two years thereafter came the final step in the matter when by the Finance Act, 1970, Parliament introduced Sub-section (2B) in Section 37 of the Act laying down that 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.