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Issues:
Whether expenses on providing tea, coca cola, and food to customers are entertainment expenditure disallowable under section 37(2B) of the Income-tax Act, 1961? Analysis: The case involved a firm engaged in the business of arhtias in foodgrains, with total arhat receipts for the relevant years. The Income-tax Officer disallowed expenses on cold drinks, tea, and food provided to constituents as entertainment expenditure. The Appellate Assistant Commissioner allowed the expenses as customary expenditure on messing and beoparies, not falling under entertainment expenditure as per section 37(2A) of the Act. The Tribunal relied on a decision of the Allahabad High Court and allowed the Department's appeal but directed the Income-tax Officer to restrict disallowance to specific items spent on food, soft drinks, and other expenses categorized as entertainment expenses. The retrospective amendment introduced by the Finance Act, 1983, clarified that hospitality expenses are also considered entertainment expenses post-April 1, 1976, but not applicable to the assessment years in question. Various judgments were cited, indicating a divergence of views among High Courts on entertainment expenditure. The court noted that the question is one of degree and fact, emphasizing that the nature of expenses should not be stretched to disallow petty expenses. The business practice of providing food and refreshments to customers was considered customary in the commission agency business. The court concluded that despite the relatively high quantum of expenses, they could not be categorized as entertainment expenditure in the context of the business operations. The expenditure was deemed permissible deduction based on customary practices in the line of business. Therefore, the court answered the question in favor of the assessee, ruling that the expenses were not entertainment expenditure, and each party was to bear its own costs.
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