INDOCEAN ENGINEERING (P) LTD. v. INCOME TAX OFFICER
[Citation -1985-LL-0621-2]

Citation 1985-LL-0621-2
Appellant Name INDOCEAN ENGINEERING (P) LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 21/06/1985
Assessment Year 1981-82
Judgment View Judgment
Keyword Tags entertainment expenditure • private limited company • retrospective amendment • rectification order • maintenance of car • co-operative bank • mistake apparent • mistake of law • share capital
Bot Summary: In the rectification order, the ITO had disallowed certain expenditure incurred by the assessee on the ground that these expenses have to be considered as entertainment expenditure. On the retrospective amendment, the order already passed by the ITO was according to the provisions of the Act. The Commissioner felt that since the order originally passed was inconsistent with the statutory provision as it stood at that time, he passed a revisionary order. The Supreme Court held that since there was a retrospective amendment and the ITO's order became a valid order, there was no scope for passing an order under section 35 of the Act. The ITO had passed an order in ignorance of the retrospective amendment. The High Court that in view of the provisions in section 40A(3), the allowance originally made for the expenditure claimed was a mistake and the ITO is authorised in law to recompute the same by disallowing the expenditure. There are a number of authorities for the proposition that where the ITO had misunderstood a provision, the order can be rectified under section 154.


This is appeal by assessee against order of Commissioner (Appeals) confirming ITO's order rectifying assessment. In rectification order, ITO had disallowed certain expenditure incurred by assessee on ground that these expenses have to be considered as entertainment expenditure. 2. business of assessee, private limited company, is representation of manufacturers. In connection with assessee's business, foreign customers come to India. assessee had in connection with their visits incurred expenditure by way of club bills amounting to Rs. 26,914 and bills on liquors amounting to Rs. 20,564. total expense incurred was Rs. 47,478. I n original assessment order, ITO had disallowed only Rs. 2,011. rest of expenditure has been allowed as deduction. This order was passed on 30-9-1983. 3. provisions regarding entertainment expenditure had undergone amendment by inclusion of Explanation 2 by Finance Act, 1983. This Explanation stated that entertainment expenditure would include expenditure on provision of hospitality of every kind by assessee to any person whether by way of provision of food or beverages or in any other manner whatsoever. This explanation has been given retrospective effect from assessment year 1977- 78. This had become part of statute on 30-8-1983. In other words, it has already come into statute by time ITO passed his order. 4. ITO after giving opportunity to assessee sought to rectify original assessment. In this order dated 6-3-1984 he stated that while completing assessment, disallowance to be made under section 37(2A) of Income-tax Act, 1961 ('the Act') in respect of entertainment expenditure was not made. As this is mistake of law apparent from record, he disallowed same under section 154 of Act. We may mention here that he had allowed Rs. 5,000 as fixed by statute and disallowed only Rs. 42,478. 5. Commissioner (Appeals) was of opinion that rectification order was justified. Rectification following retrospective legislative amendment, he said, was valid in law. 6. Against this order, assessee has come on further appeal before us. Shri Namboodri, appearing for assessee, submitted that whether expenditure incurred could be rectified in view of retrospective amendment is highly debatable point and, therefore, rectification was not valid in law. For this purpose, he relied on decision of Supreme Court in case of S.A.L. Narayan Row v. Ishwarlal Bhagwandas [1965] 57 ITR 149. We are of opinion that this Supreme Court decision has no relevance on point at issue before us. In that case, ITO had originally passed order which was clearly inconsistent with terms of section as it stood at time of passing of order. Later, section was amended retrospectively. On retrospective amendment, order already passed by ITO was according to provisions of Act. Nevertheless, Commissioner felt that since order originally passed was inconsistent with statutory provision as it stood at that time, he passed revisionary order. Supreme Court held that since there was retrospective amendment and ITO's order became valid order, there was no scope for passing order under section 35 of Act. ratio of Supreme Court's decision actually supports department in sense that retrospective amendment validates earlier order which was not invalid. 7. Shri Namboodri then submitted that even if there is retrospective amendment, question would still remain whether there is mistake apparent from records. Relying on decision of Calcutta High Court in case of CIT v. General Electric Co. of India Ltd. [1978] 112 ITR 246, he submitted that when Amendment Act had come into existence, long after order sought to be rectified, it cannot be considered as deemed mistake. We are of opinion that this decision is also distinguishable on facts. When ITO had passed his order, amendment to statutory provisions had already been made. ITO had passed order in ignorance of retrospective amendment. Therefore, Calcutta High Court decision which dealt with case of rectification of order passed long before amendment has no relevance. 8. Shri Namboodri then submitted that ITO has already applied his mind and had decided disallowance only to extent of Rs. 2,011. He might have made error in judgment. Such error in judgment cannot be rectified under section 154. For this purpose, he relied on certain passages occurring in Chaturvedi & Pithisaria's Income-tax Rulings, Third edn., p. 3130. He also relied on decision of Karnataka High Court in case of I . N . Sundresh (HUF) [1983] 141 ITR 669. We are unable to accept this submission either. ITO has, no doubt, disallowed only Rs. 2,011. It is also no doubt true that on date on which he passed order, retrospective amendment has already come into force. Now, even cursory reading of Explanation to section 37(2A) which has retrospective effect, would show that it is quite comprehensive and all sorts of expenditure would be caught within its net. Yet, ITO had disallowed only Rs. 2,011. This shows that he had either acted in ignorance of provisions or he had totally misunderstood provisions. We will first cite case decided by Punjab and Haryana High Court in case of CIT v. Ram Nath Prem Kumar [1980] 124 ITR 404. In that case, ITO had allowed cash payments effected by assessee to extent of Rs. 20,224 without applying provisions of section 40A(3) of Act. Later on, he rectified assessment and disallowed amounts as required under section 40A(3). High Court that in view of provisions in section 40A(3), allowance originally made for expenditure claimed was mistake and ITO is authorised in law to recompute same by disallowing expenditure. This is authority to show that if ITO in ignorance of provisions, allows certain expenditure, he is entitled to rectify same. In case before us, he had instead of disallowing Rs. 42,478 had disallowed only lesser amount. If this was done out of ignorance, it is clearly rectifiable. 9. It is also possible to hold that it was not out of ignorance but after considering provisions and applying same that ITO came to finding that only Rs. 2,011 requires disallowance. Even then, it is capable of being rectified under section 154. There are number of authorities for proposition that where ITO had misunderstood provision, order can be rectified under section 154. In case of Alkali & Chemical Corpn. of India Ltd. v. CIT [1980] 122 ITR 490 (Cal.), ITO in original surtax assessment included as assessee's capital sum of Rs. 41 lakhs which represented face value of bonus shares issued out of general reserves. Subsequently, he rectified assessment order. issued out of general reserves. Subsequently, he rectified assessment order. High Court held that what was done originally was to accept increase in paid-up share capital by taking into account bonus shares issued by capitalising reserves and losing sight of fact that by reason of issue of said shares capital has been altered inasmuch as reserves were reduced by being diverted to same extent as issue of bonus shares. This mistake, according to High Court, can be rectified under provisions corresponding to section 154. similar decision has again been given by Calcutta High Court in case of CIT v. Mcleod & Co. Ltd. [1982] 134 ITR 674. In that case, ITO had originally allowed deduction under section 80M of Act on gross amount of dividend without setting off losses under sections 71 and 72 of Act. Later, he rectified assessment order. High Court upheld rectification. They pointed out that where by misreading section, wrong view is taken and wrong calculation is made, it would certainly come within purview of section 154 as mistake apparent on face of records. To similar effect is decision of Allahabad High Court in case of Addl. CIT v. District Co-operative Bank Ltd. [1979] 119 ITR 142. Thus, it will be seen that where ITO had misread provision or ignored provision, order is capable of being rectified. decisions relied on by Shri Namboodri to say that such rectification is not possible can be easily distinguishable. In passage cited in paragraph of commentators Chaturvedi and Pithisaria, cases were where discretion of ITO had been included. In case before us, statute does not give any discretion to ITO. Similar is decision of Karnataka High Court cited by Shri Namboodri. question was whether expenditure on maintenance of car allowed in full in original assessment could be rectified. High Court held that such rectification is not possible. That is because on facts it was quite possible to say that entire expenditure on car was for purpose of business only. High Court had accepted contention of assessee there that expenditure on vehicle which was incurred exclusively for maintenance of car was correctly allowed after full knowledge of such disclosure and, therefore, it cannot be considered as error apparent from records. case, therefore, turned on its own facts. 10. Shri Namboodri then submitted that even if it is open for ITO to consider statutory provisions, rectification is not possible because application of section 37(2A) cannot be retrospective. This argument need not be elaborately considered in view of well settled provisions in law that retrospective amendment has to be basis for rectification. He then submitted that Andhra Pradesh High Court in number of cases had held that law laid down in Maddi Venkataratnam and Co. still continues to be good law. But we find that these decisions of Andhra Pradesh High Court relate to period before amendment. In any case, question of impact of amendment was not before their Lordships. 11. Coming to merits, he submitted that 'hospitality' occurring in that Explanation has not been defined in Act and, therefore, one should go by dictionary meaning. As per dictionary meaning, it means 'entertainment for strangers'. Now, it is well settled, according to Shri Namboodri, that entertainment includes lavishness. Since there was no question of any lavishness, there is no question of any hospitality or amount being treated as entertainment expenditure. We find no merit at all in this submission. Explanation 2 reads as follows: "For removal of doubts, it is hereby declared that for purposes of this, sub-section and sub-section (2B), as it stood before 1st day of April 1977, 'entertainment expenditure' includes expenditure on provisions of hospitality of every kind by assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether o r not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by assessee to his employees in office, factory or other place of their work." It will be seen from above that every kind of hospitality will be considered as entertainment. If assessee were to take foreign customers to clubs or to provide them with liquors, it has to be only because of hospitality. It is not assessee's business of running hotel for providing goods at price to them. It is not as if assessee can bill customers for amounts spent on them. expenditure is not contractual. It has, therefore, to be only hospitality especially when word 'hospitality' has been given very wide amplitude in statute. We have, therefore, no doubt that expenditure incurred is hospitality and, therefore, entertainment expenditure. 12. Even if this provision is wrong, as Shri V. Raghavendra Rao, learned departmental representative, has pointed out, club bills and supply of liquor shows certain amount of lavishness. Even as per law as it stood before amendment, such lavishness will be labelled as entertainment expenditure. For this reason also, we are satisfied that order passed by ITO is valid. 13. In result, appeal stands dismissed. *** INDOCEAN ENGINEERING (P) LTD. v. INCOME TAX OFFICER
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