COMMISSIONER OF INCOME-TAX vs. ASHOK MILLS LTD.

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ITR/99/1984HC GujaratGJHC24011773198427 January 1997Bench: HONOURABLE MR. JUSTICE R.K.ABICHANDANI,HONOURABLE MR. JUSTICE R.BALIA3 pages

AI SummaryPartly Allowed

What did the High Court hold?

The High Court answered the first question in the affirmative, in favour of the assessee. It noted that a similar issue for Assessment Year 1977-78 concerning the same assessee and trademark had been decided by the Court in CIT Vs. Ashoka Mills Ltd. (131 CTR p.1), holding the expenditure for the user of the trademark as revenue expenditure. The ratio was deemed fully applicable. For the second question, the Court answered in the negative, in favour of the Revenue. While acknowledging the decision in Patel Brothers Vs. C.I.T. (affirmed by the Supreme Court in CIT Vs. Patel Brothers and Company Ltd. - 215 ITR 165), the Court noted that Explanation (2) inserted with effect from April 1, 1976, in Section 37(2A) extended the meaning of 'entertainment' to include hospitality. Since the assessee's claim did not appear to be founded on expenses for providing food or beverages to employees in the office or factory, the extended definition applied, making the deduction impermissible. The reference was disposed of with no order as to costs.

What were the facts?

The Revenue has referred two questions of law arising from an Income Tax Appellate Tribunal (ITAT) order for the Assessment Year 1978-79 to the High Court. The first question concerns the allowability of Rs. 17,327 paid by the assessee, Ashok Mills Ltd., as service fees for the use of the trademark 'Tabilised' to Mettur Bearshell Limited. The Income Tax Officer had disallowed this as capital expenditure, but the CIT(Appeals) and the ITAT held it to be revenue expenditure. The second question relates to the assessee's claim of Rs. 21,163 as business expenditure for providing tea and soft drinks to guests, purportedly under Section 37(2B) of the Income Tax Act, 1961.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in concluding that the amount paid by the assessee for royalty for the use of the trademark 'Tabilised' was allowable as revenue expenditure? The assessee contended that the expenditure was revenue in nature. The Revenue contended it was capital. 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in concluding that the assessee was entitled to the allowance in respect of entertainment expenses under Section 37(2B) of the Income Tax Act, 1961? The assessee relied on the decision in Patel Brothers Vs. C.I.T. The Revenue's position, implicitly, was that the expenditure was not allowable as per the amended Section 37.

Which sections of the Income-tax Act were involved?

Section 37(2B), Section 37(2A)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 99 of 1984

For Approval and Signature:

Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE R.BALIA. ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements?

To be referred to the Reporter or not?

Whether Their Lordships wish to see the fair copy of the judgement?

Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

Whether it is to be circulated to the Civil Judge?

-------------------------------------------------------------- COMMISSIONER OF INCOME-TAX Versus ASHOK MILLS LTD. -------------------------------------------------------------- Appearance: MR MIHIR J THAKORE instructed by MR M.R BHATT for Petitioner SERVED for Respondent No. 1

--------------------------------------------------------------

CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE R.BALIA. Date of decision: 27/01/97

ORAL JUDGEMENT (Per R.Balia,J.)

Two questions of law arising out of its order in ITA No. 1493/Ahd/1981 for the Assessment Year 1978-79 had been referred to this Court for opinion by the Income Tax Appellate Tribunal, Ahmedabad Bench "A" at the

instance of the Revenue. The two questions are as under:-

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the amount paid by the assessee for the royalty for the use of trademark 'Tabilised" was allowable as revenue expenditure?"

"Whether on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the assessee was entitled to the allowance in respect of entertainment expenses under Section 37(2B) of the Income Tax Act, 1961."

The facts regarding question No.1 are that the assessee claimed service fees of Rs. 17,327/- payable to Messrs Mettur Bearshell Limited for services and user of trademark "Tabilised" or "Tabilised Double Tested". The Income Tax Officer disallowed this amount by holding the expenditure to be of a capital nature. However, same was held to be an expenditure on revenue account by CIT (Appeals) and the conclusion of CIT (Appeals) was affirmed by the Tribunal. It has been brought to our notice that in case of very same assessee for the Assessment Year 1977-78 this question was referred to this Court for its opinion in I.T Reference No.200/83. The relevant question concerned was about the allowability of the amount of Rs. 16,237/- paid by the assessee for the user of trademark "Tabilised" to Messrs Mettur Bearshell Ltd. This Court in its order dated 9th October, 1995 (CIT Vs. Ashoka Mills Ltd. - 131 CTR p.1) came to the conclusion that the expenditure incurred by the assessee for the user of trade mark was a revenue expenditure. The ratio is fully applicable to the facts of this Assessment year as well. Accordingly, question No.1 is answered in the affirmative, that is to say in favour of the assessee and against the revenue by holding that the amounts paid by the assessee for the use of trade mark "Tabilised" or "Tabilised Double Tested" was allowable as revenue expenditure.

So far as question No.2 referred above is concerned, it relates to the assessee's claim for deduction of Rs, 21,163/- as business expenditure which was spent for providing tea, soft drinks etc. on guests. The assessee has founded its claim on the basis of

decision of this Court in Patel Brothers Vs. C.I.T - 106 ITR p. 424. The decision in Patel Brothers' case has been affirmed by Supreme Court in CIT Vs. Patel Brothers and Company Ltd. and others - 215 ITR 165. However, from the aforesaid report itself it is clear that in view of Explanation (2) inserted with effect from 1.4.1976 in Sec. 37 (2A), the narrow meaning assigned to term "entertainment" in the context of disallowance of entertainment expenditure as a business expenditure by virtue of sub-section (2A) of Section 37 of the I.T Act, 1961 is not applicable for the Assessment Year 1976-77 onwards as a result of extended meaning given to the definition of entertainment to include hospitality as well. The only thing excluded from the definition of entertainment expenditure which would otherwise fall into the definition under Explanation (2) is the expenditure on food or beverages provided to its employees in the office, factory or other place of their work. Since it appears from the assessment order that no part of claim of assessee is founded on the expenses having been incurred in providing food or beverages to its employees, the further question for determining the extent of allowability does not arise in the present case. Accordingly, following the decision in Patel Brothers' case (supra), - 215 I.T.R 165, we answer the question No.2 in negative that is to say in favour of revenue and against the assessee.

The reference accordingly stands disposed of with no order as to costs. ------

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