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Issues Involved:
1. Whether the expenditure in question was in the nature of entertainment expenditure in law. 2. Whether the expenditure in question would be allowable only to the limited extent of Rs. 5,000 under section 37(2A) of the Income-tax Act, 1961, for each of the assessment years under reference. Issue-wise Detailed Analysis: 1. Nature of Entertainment Expenditure: The primary issue was whether the expenses incurred by the assessee for providing meals to its farmer customers and up-country constituents were in the nature of entertainment expenditure. The Income-tax Officer disallowed part of the expenditure, considering it as entertainment, while the Appellate Assistant Commissioner and the Tribunal held that these expenses were not entertainment expenses but were incurred out of business necessity. The court examined the legislative history and the dictionary definitions of "entertainment" and "hospitality." It noted that the term "entertainment" in the context of the Income-tax Act includes acts of receiving and entertaining strangers and friends in a friendly, generous, and liberal way. However, if the hospitality is provided as a part of business necessity or long-standing custom, it does not amount to entertainment. The court disagreed with the revenue's broad interpretation that every kind of hospitality should be treated as entertainment. It emphasized that hospitality shown due to business obligations arising from express or implied contracts or long-standing customs does not constitute entertainment. 2. Allowability of Expenditure under Section 37(2A): The second issue was whether the expenditure could be allowable only to the limited extent of Rs. 5,000 under section 37(2A) of the Income-tax Act for each assessment year. The revenue argued that the Tribunal's approach was wrong and that the term "entertainment" should be liberally construed to include all kinds of hospitality to curb expenses at the cost of the public exchequer. The court reviewed the legislative amendments and the intent behind the provisions of section 37(2A) and (2B), which aimed to curb lavish expenditure on entertainment. It found that the Tribunal had correctly held that the expenses incurred by the assessee were not in the nature of entertainment expenses, as they were necessary for business purposes and not lavish or extravagant. The court laid down broad tests to determine the nature of entertainment expenses: (a) Lavish and extravagant provision of food, drinks, or amusement is entertainment per se. (b) Provision of food or drinks as a bare necessity, ordinary courtesy, or business obligation is not entertainment. (c) Liberal and friendly provision of food or drinks may amount to entertainment, depending on the place, item, and cost. (d) Provision of amusement by way of hospitality is always entertainment. Conclusion: The court answered both questions in the negative, holding that the expenses incurred by the assessee were not in the nature of entertainment expenditure and were allowable beyond the limited extent of Rs. 5,000 under section 37(2A). The references were rejected, and the Commissioner was directed to pay costs to the assessees.
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