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TMI Blog1995 (5) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 261 of the Act. The connected matters involve the same point. All cases relate to the period prior to April 1, 1976, from which date only Explanation 2 inserted in sub-section (2A) of section 37 by the Finance Act, 1983, was applied retrospectively, even though sub-section (2A) was inserted with effect from October 1, 1967, by the Taxation Laws (Amendment) Act, 1967. The material facts in these appeals illustrative of all connected matters, are these : The relevant assessment years are 1969-70, 1970-71 and 1971-72 of which the corresponding previous years ended on September 30, 1968, September 30, 1969, and September 30, 1970, respectively. The assessee, a limited company, claimed kitchen expenses of Rs. 22,301, Rs. 25,979 and Rs. 28,620, respectively, for these assessment years as expenses incurred for providing meals to its employees and its customers in the ordinary course of its business as customary trade usage. The Income-tax Officer disallowed the expenditure to the extent of Rs. 10, 101, Rs. 12,979 and Rs. 17,305, respectively, corresponding to the expenses incurred for meals provided to the customers even though it was found that the meals were ordinary and not in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n line with the Gujarat view. The difference in the views taken by the different High Courts has led to one set of decisions against the Revenue and another set in its favour. This is how in this court some appeals and other matters are by the Revenue while the rest are by the assessees. As earlier stated, all these matters relate to the period prior to April 1, 1976, and, therefore, the decision is to be based on sub-section (2A) of section 37 of the Act minus Explanation 2 inserted later. We would refer to the two sets of decisions after mentioning the rival contentions and the view taken by us. The contention of Shri B. B. Ahuja, learned counsel for the Revenue, is that all kinds of hospitality are entertainment and, therefore, the entire expenditure incurred under this head, even for serving ordinary meals as a bare necessity, falls under sub-section (2A) of section 37 ; and the expression "entertainment expenditure" in sub-section (2A) must be construed to mean from the inception as defined in Explanation 2 to sub-section (2A) of section 37, since Explanation 2 is merely clarificatory. It was urged that for this reason the insertion of Explanation 2 only with effect from Apr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to his employees in the office, factory or other place of their work. (2B) Notwithstanding anything contained in this section, no allowance shall be made in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessee after the 28th day of February, 1970. " (emphasis supplied). In Sampath Iyengar's Law of Income Tax, Eighth edition, Vol. 2, reference is made to Circular No. 372, dated December 8, 1983, of the Board, wherein the scope and effect of the above amendments was explained as under : " 30. Provision for curbing avoidable or ostentatious expenditure in business or profession (section 37).--Section 37 of the Income-tax Act provides for deduction in the computation of taxable profits of any expenditure, other than expenditure of the nature described in sections 30 to 36 and section 80VV, or expenditure in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession carried on by the taxpayer. With a view to curbing certain categories of avoidable or ostentatious expenditure by assessees carrying on business or profe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xclude from the ambit of sub-section (1), the entertainment expenditure by saying that "no expenditure in the nature of entertainment expenditure shall be allowed" in the case of a company which exceeds the specified amount. Similar provision is made in sub-section (2A) for any assessee. In other words, the general provision in section 37 is that any expenditure laid out or expended wholly or exclusively for the purposes of the business or profession shall be allowed but no expenditure in the nature of entertainment expenditure shall be allowed as stated in sub-sections (2) and (2A) in excess of the amount specified. For claiming deduction of the business expenditure according to the general rule, the test of commercial expediency is applied but exclusion is made of any expenditure which is in the nature of "entertainment expenditure". Without anything more, it means that an expenditure incurred for commercial expediency or usage of the trade is a permissible deduction unless it partakes of the character of an entertainment expenditure, in which case the permissible limit is specified. The controversy in the present case relates to the meaning of "entertainment expenditure" in sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rospective amendment made in 1983 of sub-section (2A) of section 37. The finding of fact in all cases, therefore, satisfies this test to allow deduction of the expenditure incurred by each assessee and claimed under this head for the period prior to April 1, 1976. Sub-section (2A) was inserted with effect from October 1, 1967, by the Taxation Laws (Amendment) Act, 1967, and Explanation 2 inserted therein by the Finance Act, 1983, retrospectively, with effect from April 1, 1976, while sub-section (2B) was inserted with effect from April 1, 1970, by the Finance Act, 1970. As earlier stated, these cases relate to the period prior to April 1, 1976, from which date Explanation 2 to sub-section (2A) was inserted retrospectively. We have, therefore, to construe sub-section (2A) as it existed without Explanation 2. The meaning of Explanation 2 is quite clear and it has enlarged the meaning to widen the tax net. Learned counsel for the Revenue contended that Explanation 2 is clarificatory and, therefore, even without Explanation 2, the provision must be understood and construed in the same manner. It appears to us that insertion of Explanation 2 made retrospectively, but restricted in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 104 ITR 541 (All), it was held that sub-section (2A) of section 37 is not an independent provision but is a proviso to sub-section (1) of section 37 since the expenditure falling under sub-section (2A) must necessarily come within sub-section (1). Thereafter, while considering the meaning of "entertainment" in this context, it was held as under : " What we have to see is as to what is the meaning of the word 'entertainment' for purposes of section 37(2A) of the Act. In the Income-tax Act, this word has not been defined and we will have to give it its general meaning. An 'entertainment expenditure' would, in our opinion, include all expenditures incurred in connection with business on the entertainment of customers and constituents. The entertainment may consist of providing refreshments as in this case or it may consist of providing some other sort of entertainment. " In Bentleys, Stokes and Lawless v. Beeson (H. M. Inspector of Taxes) [1952] 33 TC 491 (CA), a firm of solicitors incurred expenses in entertaining clients. The entertainment consisted of providing lunch to the clients. It was held that expenditure was incurred wholly and exclusively for the purposes of business a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary to support the conclusion, are unnecessary for the decision and, therefore, affirmance of the conclusion reached in the Gujarat decision should not be construed as an affirmance of the wide observations therein. We may now refer to the decision of the Delhi High Court in CIT v. Rajasthan Mercantile Co. Ltd. [1995] 211 ITR 400. The true effect of Explanation 2 added in sub-section (2A) of section 37 of the Act has been correctly understood therein as under : " The declaration and the clarification involved in Explanation 2, are only for the purposes of assessments with effect from April 1, 1976. This provision widens the concept of 'entertainment expenditure' by including in its scope such of the expenditure which are otherwise traditionally understood as routine business expenditure incurred in connection with 'business hospitality'. Therefore, the widened meaning cannot be extended to past periods when the amended Explanation 2 was not in operation." We approve the above view which accords with the construction made by us of the provision. In the view we have taken, the contrary view of the Allahabad High Court in Brij Raman Dass and Sons [1976] 104 ITR 541, canno ..... X X X X Extracts X X X X X X X X Extracts X X X X
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