COMMISSIONER OF INCOME TAX v. KAMLA DEVI — 1970 DIGILAW 270 (DEL)

V. S. DESHPANDE, J. ( 1 ) UNDER section 66 (1) of the Income Tax: 1922, (hereinafter called the Act) the following question has been referred to this Court for opinion: "whether on the facts and in the circumstances of the case, the exception under section 7 (2) (ii) of the Income Tax Act, 1922, was a bar to the deductibility of the entertainment allowance or any portion thereof received by the assessee ?" ( 2 ) THE assessee the late Shri Prem Nath, now represented by his legal representatives, was getting a salary as Governing Director from Messrs Prem Nath Motors (P) Ltd. For the assessment year 195"-58. the assessee filed his return of income in which he included a sum of Rs. 7,000 as being his receipt from the said company by way of entertainment allowance. There is no dispute that the assessee had not been receiving such an allowance from his present employer from before the 1st April, 1955. ( 3 ) THE Income Tax Officer held that the actual incurring of expenses over entertainment had not been proved and, therefore, the claim was not allowable. The Appellate Assistant Commissioner accepted the claim of the assessee to a deduction of Rs. 4,800. 00 as being l/5th of his salary of Rs. 24,000. 00 per annum under section 7 (2) (ii) of the Act. The Income Tax Appellate Tribunal went even farther and was of the view that the assessee was entitled to deduct the entire sum received by him by way of entertainment allowance in computing his income by way of salary. Since, however, there was no appeal by the assessee against the order of the Appellate Assistant Commissioner allowing only Rs. 4,800. 00 to be deducted, the actual result was that only a deduction of Rs. 4,800. 00 was allowed. The Revenue, however, contended that the benefit of section 7 (2) (ii) was not available to the assessee at all inasmuch as the assessee had not been receiving such an entertainment allowance from before the 1st of April 1955 and, therefore, no deduction at all should be made on this account in computing the total income of the assessee from salary. Hence this reference at the instance of the Revenue. Hence this reference at the instance of the Revenue. ( 4 ) PRIOR to the Finance Act, 1955, under clause (vi) of sub-section (3) of section 4 of the Act, any income received by an assessee by way of any special allowance or benefit specifically granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment was excluded from the computation of the total income of the assessee to the extent to which such expenses were actually incurred for that purpose. The Finance Act of 1955 brought about the following two changes in this position : Firstly, it took out an allowance in the nature of an entertainment allowance from section 4 (3) (vi) by re-wording the said section as follows : "any special allowance or benefit, riot being in the nature of an entertainment allowance or other perquisite within the meaning of sub-section (1) of section 7, specifically granted to meet expenses wholly and necessarily incurred in the performance of the duties of an office or employment of profit, to the extent to which such expenses are actually incurred for that purpose". ( 5 ) SIMULTANEOUSLY the Finance Act, 1955 substituted a new section 7 in place of the old one in the Income-tax Act, 1922 to deal with income accruing by way of salaries. Clause (ii) of sub-section (2) of the new section 7 provided as follows : " (2) The income chargeable under this section shall be computed after making the following deductions, namely :- (II) in respect of any allowance in the nature of an entertainment allowance specifically granted to the assessee by his employer, a sum equal to one-fifth of his remuneration (exclusive of any special allowance, benefit or other perquisites) or seven thousand five hundred rupees, whichever is less, except in any case where the assessee was not in receipt of such entertainment allowance regularly from his present employer before the year beginning on the 1st day of April 1955". ( 6 ) THE answer to the question referred to us for opinion depends entirely on a correct construction of section 7 (2) (ii ). ( 7 ) THE key to such construction is provided by the intention of the Legislature underlying the amendment of section 4 (3) (vi) and the insertion of the new section 7 (2) (ii) in the Act. ( 7 ) THE key to such construction is provided by the intention of the Legislature underlying the amendment of section 4 (3) (vi) and the insertion of the new section 7 (2) (ii) in the Act. Section 4 (3) (vi) ensures, that a special allowance other than an entertainment allowance shall not be included in the total income of the person receiving it. The entitlement of the assessee that such allowance shall not be included in his total income is not subject thereunder to the restriction that the assessee should have been in receipt of such allowance from before 1st April 1955. The whole of the allowance without any limit on its quantum is to be excluded from the total income -of the assessee. But the exclusion was limited to the extent to which such special allowance was actually spent for the purpose of the performance of the duties of an office. Only the entertainment allowance was specifically excluded from section 4 (3) (vi) when it was amended by the Finance Act of 1955. If the Legislature had intended that the assessee should continue to be entitled even after 1-4-1955 to the exclusion of the entertainment allowance from his total income and that too without any limit on its quantum and that the said allowance, must be actually spent in the performance of the duties of an office, then there was no need for the amendment of section 4 (3) (vi) at all. The Legislature would have allowed the entertainment allowance to be continued to be included in section 4 (3) (vi ). The very fact that the entertainment allowance was specifically excluded from section 4 (3) (vi) by amendment shows that the Legislature intended that the entertainment allowance should be treated differently from other special allowances covered by section 4 (3) (vi ). ( 8 ) THIS was done by the Legislature by enacting a totally new provision and inserting it as clause (ii) of sub-section (2) of section 7 in Chapter III of the Act. Under section 7 (2) (ii), unlike section 4 (3) (vi), it is not necessary that the entertainment allowance should be actually spent in the performance of the duties of an office. But both the entitlement and the quantum are restricted by the new section 7 (2) (ii ). Under section 7 (2) (ii), unlike section 4 (3) (vi), it is not necessary that the entertainment allowance should be actually spent in the performance of the duties of an office. But both the entitlement and the quantum are restricted by the new section 7 (2) (ii ). For, section 7 (12) (ii) deals with a deduction from salary while section 4 (3) (vi) dealt with the exclusion of certain income from the total income of the assessee. Only those entertainment allowances which were being received by the assessees from before 1st April 1955 shall be entitled to be deducted from the salaries of the assessees. Obviously, the Legislature intended to discontinue the benefit given to the assessees till 1st April 1955 of the exclusion of the whole entertainment allowance (to the extent it was actually spent) from the total income of the assessees but gave a partial relief to the assessees only in respect of those entertainment allowances which were being received by the assessees from before 1st April 1955 from the same employers. Any new entertainment allowances granted by their employers to the assessees after 1st April 1955 would not qualify for such deduction from salaries of such assessees. Further, even when the entertainment allowance was being received by an assessee from before 1st April 1955, it was made to be deductible only to the extent of one-fifth of the salary of the assessee or to the extent of Rs. 7,500. 00 whichever is less from the salary of an assessee. Both the entitlement to deduction and the extent of the deduction of an entertainment allowance were thus restricted under section 7 (2) (ii) in contrast with the other special allowances to be excluded from the total income of the assessee under section 4 (3) (vi ). ( 9 ) IN the light of the above legislative history, the meaning of section 7 (2) (ii) appears to us to be as follows : The opening words of subsection (2) of section 7 enunciate that the income derived from salary by an assessee shall be computed after making the deductions enumerated in the various clauses to sub-section (2) which are to follow. The relevant clause (ii) describes the particular kind of entertainment allowance which qualifies for such deduction, namely, the one which was being received by the assessee from before 1st April 1955. The relevant clause (ii) describes the particular kind of entertainment allowance which qualifies for such deduction, namely, the one which was being received by the assessee from before 1st April 1955. Even such entertainment allowance was not necessarily deductible as a whole. It was made deductible only to the extent of one-fifth of the salary of the assessee or to the extent of Rs. 7,500. 00 whichever was less. There is absolutely nothing in the language of section 7 (2) (ii) to show that an entertainment allowance which was not being received by the assessee from before 1st April 1955 was at all qualified for being deducted from the salary. The question whether the whole of it was so qualified or only a part of it, therefore, does not simply arise. The drafting of clause (ii) of sub-section (2) of section 7 was not, however, quite logical inasmuch as the words of qualification requiring that the entertainment allowance must be such as was being received by the assessee from before 1st April 1955 were relegated to the end of the clause. They were separated from the words describing the entertainment allowance by the intervening words relating to the extent of the quantum of the entertainment allowance which was deductible. The qualifying requirement should have been closer to the description of the entertainment allowance and the extent of the quantum deductible should have come at the end of the clause. This improvement has now been effected in the corresponding section 16 (ii) (b) of the Income Tax Act, 1961. ( 10 ) WE, therefore, answer the question referred to us and reproduced above in the affirmative, that is, in favour of the Revenue and against the assessee.