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Interpretation of entertainment expenditure under section 37(2A) of the Income-tax Act for the assessment year 1967-68. Analysis: The case involved a dispute regarding the treatment of a sum of Rs. 18,498 claimed as entertainment expenditure by the assessee for providing tea and cold drinks to customers. The Income-tax Officer initially disallowed a portion of the claimed expenses under section 37(2A) of the Income-tax Act, allowing only Rs. 5,000 as a deduction. The Appellate Assistant Commissioner later allowed a deduction of Rs. 18,498 for expenses related to tea, cold drinks, etc., served to customers. The Income-tax Appellate Tribunal upheld this decision, considering the expenses as not constituting entertainment expenditure. However, a crucial aspect arose due to the insertion of Explanation 2 in section 37(2A) of the Income-tax Act by the Finance Act, 1983, with retrospective effect from April 1, 1976. This Explanation clarified that entertainment expenditure includes expenditure on hospitality provided by the assessee to any person, excluding food or beverages provided to employees at their workplace. The Karnataka High Court's interpretation in CIT v. Mysore Minerals Ltd. affirmed that such hospitality expenses fall under entertainment expenditure. Given the retrospective effect of Explanation 2 and the nature of the expenses incurred by the assessee, providing tea and cold drinks to customers, the court concluded that these expenses should be categorized as entertainment expenditure. Consequently, the court ruled against the assessee, stating that the sum of Rs. 18,498 should be disallowed as entertainment expenditure, in favor of the Revenue. In light of the above analysis and the application of the relevant legal provisions, the court decided the case in favor of the Revenue, emphasizing the retrospective application of Explanation 2 to section 37(2A) and its implications on the treatment of hospitality expenses as entertainment expenditure.
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