SUNIL SYNCHEM LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, has referred the following question of law arising out of its order dated April 28, 1981, in respect of the assessment year 1977-78, under Section 256(1) of the Income-tax Act :

(2.) THE brief facts of the case are that the assessee-company claimed expenses of Rs. 1,01,934 under the head "Inaugural expenses". THE Income-tax Officer allowed a sum of Rs. 79,071 which were in the nature of advertisement expenses. THE Income-tax Officer disallowed the expenditure to the tune of Rs. 22,863 and rejected the contention of the assessee that the said expenses were incurred for popularising the company's products or for carrying on the business. It was submitted that a number of distinguished guests including Ministers, press parties as well as future customers were invited on the inauguration day and the expenses had been incurred on lunch, dinner and for payment of air tickets, etc. THE claim of the assessee was rejected on the ground that the expenses were in the nature of entertainment and are not statutorily admissible under Section 37(2B) of the Income-tax Act, 1961. Against this order, an appeal was preferred to the Commissioner of Income-tax (Appeals) and it was submitted that the company was incorporated on February 5, 1973, and the occasion of inauguration was on April 23, 1976, and the expenses incurred were wholly and exclusively for the purposes of business. THE Commissioner of Income-tax (Appeals) held that the cost of lunch, travelling expenses paid to the guests and other items were incurred actually before the conduct of business and were not for the purposes of business. THE claim was rejected.

(3.) IT is submitted by Mr. Ranka, learned counsel for the assessee, that the decision of the Bombay High Court reported in ACC-Vichers Babcock Ltd. v. CIT [1976] 103 ITR 321 has wrongly been interpreted by the Income-tax Appellate Tribunal. In that case, the claim of Rs. 2,78,619 was made in respect of the inaugural function. The Income-tax Officer rejected the claim on the ground that the company got an enduring benefit by incurring this expenditure and a sum of Rs. 9,128 + 27,318 = 36,446 would in any case fall under the category of entertainment expenditure for which the maximum limit admissible was Rs. 5,000 and since the maximum limit has already been exhausted, the entire claim was liable to be disallowed. The Appellate Assistant Commissioner held that the expenditure was incidental to the carrying on of the assessee's business and no asset of any enduring benefit came into existence. The Income-tax Appellate Tribunal held that the expenditure was incurred wholly and exclusively for the purposes of the assessee's business and. only Rs. 9,128 which was in respect of hotel bills for lodging and boarding of guests in the hotel and Rs. 27,318 being catering charges of guests, were by way of entertainment expenditure and the same could not be allowed under Section 37(2). Applying the analogy of this case, it was submitted that only the expenditure which fell in the category of entertainment should have been disallowed and the rest of the expenditure should have been allowed.