Circular No. 247 — Calculation of percentage limits of entertainment expenditure under section 37(2A)

What this is

Circular No. 247 was issued by the Central Board of Direct Taxes on 21 October 1978. Its subject is 370. Calculation of percentage limits of entertainment expenditure under section 37(2A) - Modification to para 24.2 of Circular No. 202, dated 5-7-1976.

These are the Board’s explanatory notes to a Finance Act. They are the department’s account of what the amendments were meant to do, and they are cited constantly — but the words of the Act govern where the two part.

What it does

Corrects a sentence in the Board's own explanatory notes on the Finance Act, 1976. Paragraph 24.2 of Circular No. 202, dated 5-7-1976 had said that the percentage limits for entertainment expenditure under section 37(2A) are calculated on the profits and gains of the business as reduced by development rebate, development allowance, entertainment expenditure and investment allowance under the new section 32A. As that is not in accordance with section 37(2A), the sentence is substituted so as to read that the percentage limits are calculated on the profits and gains as computed before allowing the deduction in respect of development rebate, development allowance, entertainment expenditure and investment allowance under section 32A. Income-tax Officers are to be told of the modification.

Why it was issued

The sentence as originally worded did not accord with section 37(2A) and would have produced a smaller base and so a smaller entertainment allowance.

Who it reaches

Businesses claiming entertainment expenditure under section 37(2A)
Assessees also claiming development rebate, development allowance or investment allowance
Assessing Officers computing the entertainment ceiling

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.32A	no counterpart recorded
s.37	s.34

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

370. Calculation of percentage limits of entertainment expenditure under section 37(2A) - Modification to para 24.2 of Circular No. 202, dated 5-7-1976
1. Attention is invited to para 24.2 of the Explanatory Notes on the provisions relating to direct taxes in the Finance Act, 1976. The second sentence in the said paragraph reads as under :
"The percentage limits will, however, be calculated with reference to the quantum of profits and gains of the business or profession as reduced by not only development rebate, development allowance and entertainment expenditure but also by investment allowance under the new section 32A."
2. As this is not in accordance with the provisions of section 37(2A), the aforesaid sentence may be substituted by the following :
"The percentage limits will, however, be calculated with reference to the quantum of profits and gains of the business or profession as computed before allowing the deduction not only in respect of development rebate, development allowance and entertainment expenditure, but also in respect of investment allowance admissible under the new section 32A."
3. This modification may be brought to the notice of Income-tax Officers working in your charge.
Circular : No. 247 [F. No. 131(6)/76-TPL(Pt.)], dated 21-10-1978.

What to watch

The change is from profits as reduced by those allowances to profits as computed before allowing them; the base for the percentage limit is the larger figure.
It works by amending paragraph 24.2 of Circular No. 202, dated 5-7-1976, so that circular cannot be read on its own.
Section 37(2A) and the entertainment expenditure limits have since gone in terms this text does not carry.

Where you meet it

In an assessment where the entertainment expenditure allowance is computed on a base net of development rebate or investment allowance.

An example

Ours, not the Board’s: a worked case built from the rule the instrument sets, to show how it falls out.

A business has profits and gains of Rs. 10,00,000 before development rebate of Rs. 2,00,000, investment allowance of Rs. 1,00,000 and entertainment expenditure of Rs. 50,000. On the corrected reading the percentage limit is worked on Rs. 10,00,000, not on Rs. 6,50,000.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 870E — Deduction allowable under this section shall not be allowed in respect of any ship or aircraft acquired or any machinery 12 June 1986
Notification No. 555E — Following machinery and plant notified under section 32A 1 August 1984
Circular No. 324 — 254. Tea companies in whose cases only 40 per cent of income is liable to be taxed - Manner in which amount to be credit 3 February 1982
Circular No. 314 — 255. Investment allowance on new machinery or plant installed in small scale industrial undertaking - Computation of agg 17 September 1981
Circular No. 305 — Section 32A l Investment Allowance 12 June 1981
Circular No. 213 — 256. Textile made wholly or mainly of cotton - Item 21 of Ninth Schedule -Interpretation of word "mainly" - Sub-clause ( 14 March 1977

← Circular No. 250 · Circular No. 246 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.