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TMI Blog1994 (9) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... d in connection with the " messing expenses " was allowed, following earlier decisions in the assessee's case. The expenditure was incurred for providing food, etc., to the customers and the representatives of the company, as could be gathered from the order of the Appellate Assistant Commissioner (which was affirmed by the Appellate Tribunal). The following questions, which are identical for the two assessment years, have been referred for the opinion of this court : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in upholding the Appellate Assistant Commissioner's order and allowing the expenses of Rs. 25,443 for the assessment year 1972-73 as mess expenses? 2. Was not the amount of Rs. 25,443 claimed by the assessee as 'mess expenses' for the assessment year 1972-73 in fact entertainment expenditure and as such disallowable under section 37(2B) of the Income tax Act, 1961? " In Income-tax Reference No. 246 of 1977, the assessee owns several hotels and has to attract foreign and Indian tourists for its business, apart from customers who would organise various kinds of parties or functions in its premises. In this connection, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to extend the ordinary courtesies of providing tea, biscuits, cold drinks and food to customers. A part of the allowance claimed by the assessee has been upheld as business expenditure. In Income-tax Reference No. 291 of 1977, the question to be answered is : " Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in upholding the deletion of the disallowance of entertainment expense of Rs. 10,296 ? " The assessee being a commission agent had to spend for providing food to beoparies coming from outstation for business. The expenditure was allowed as business expenditure, as the expenses were customary and did not involve any entertainment. In Income-tax Reference No. 285 of 1977, the question referred reads : " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the expenditure amounting to Rs. 11,412 (Rs. 8,568 in fish market and Rs. 2,844 in egg market) incurred on food expenses for the constituents was in the nature of entertainment expenses and thus disallowing them under section 37(2B) of the Act ? " In the fish market account, commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure in the nature of entertainment expenditure (not being expenditure incurred out of an allowance of the nature referred to in clause (i)) incurred after the 29th day of February, 1968, for the purposes of the business or profession of the assessee by any employee or other person." By the Finance Act, 1970, the words " and sub-section (2B) " were inserted in the opening clause, so that the Explanation would read : " For the purposes of this sub-section and sub-section (2B), 'entertainment expenditure' includes,--- etc. . . ." Again, the said words " and sub-section (2B) " were omitted by the Finance Act, 1976, with effect from April 1, 1977. However, for the purpose of these references, we have to read this Explanation as governing sub-section (2B) also. By the Finance Act, 1983 (Act 11 of 1983), the above Explanation was made Explanation 1 and thereafter Explanation 2 was inserted with effect from " 1st day of April, 1976 " (vide section 17 of the Finance Act, 1983). This Explanation 2 reads : " For the removal of doubts, it is hereby declared that for the purposes of this sub-section and sub-section (2B), as it stood before the 1st day of April, 1977, 'entertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1983, amended the original sole Explanation to section 37(2A) and thereafter proceeded under clause (ii), which reads : " The Explanation shall be numbered and shall be deemed to have been numbered with effect from the 1st day of April, 1976, as Explanation 1 and after Explanation 1 as so numbered, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1976, namely :---...." (emphasis supplied). Then came Explanation 2. The source of Explanation 2 is section 17 of the Finance Act, 1983. This Act, having created the Explanation, engrafted it into section 37 of the Income-tax Act. The engrafting is effective as from April 1, 1976. Therefore, while reading Explanation 2, it is also necessary to read the said Explanation, as one with effect from April 1, 1976. In other words, the removal of doubts made by and the declaration contained in Explanation 2 is with effect from April 1, 1976. To repeat, section 17(a)(ii) of the Finance Act states that the insertion of the Explanation shall be deemed to be with effect from April 1, 1976. The legislative practice of deeming a state of affairs, as in existence alway ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset. In the year 1986, this Explanation was inserted with retrospective effect from April 1, 1974. The court held that the retrospectivity need not be confined to the period, after April 1, 1974, because the Explanation was clarificatory in nature, intended to clear up any doubt or ambiguity as to the true meaning of the relevant provision. Therefore, this meaning was held as the true meaning governing the provision for the assessment year 1972-73 also. At page 935, the court held : " The Explanation is a part of the main section and it clears the ambiguity, if any, in the main section. The Explanation cannot be read in isolation. The intention of adding the Explanation is that if anything is not clear in the main section, it shall be made clear by adding the Explanation. As indicated earlier, Explanation 8 has been added in section 43(1) of the Act. We have already extracted the Explanation and the reasons for insertion of the said Explanation. It is evident that the Explanation intends to clarify the position in law as regards the capitalisation of interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that, where an asset is acquired out of borrowed funds, the interest paid or payable on such funds constitutes the cost of borrowings and not the cost of the asset ; (ii) the Explanation itself contained a deeming provision, whereby the relevant interest " shall never be deemed " to have been included in the actual cost of the asset ; and (iii) the Explanation was inserted with effect from April 1, 1974, because of the judgment of the Allahabad High Court taking a contrary view for the first time on May 13, 1974, and the said contrary view was taken in a few decisions subsequent to the said date. The situation in the instant case is not comparable to the above situation. In Thiru Manickam and Co. v. State of Tamil Nadu, AIR 1977 SC 518 ; [1977] 39 STC 12, the Supreme Court held that an amendment which is by way of clarification of an earlier ambiguous provision can be a useful aid in construing the earlier provision even though such amendment is not given retrospective effect. Independently of the amended provision, the court came to the conclusion that refund of the sales tax may be made to a dealer who sells goods in the course of inter-State trade, even though he di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing out the real meaning of the provision all along." In the instant case, Explanation 2 in question actually purports to be a provision defining the concept of entertainment expenditure, by including a few kinds of expenditures within its scope. Only because a provision attached to a section bears the nomenclature, " Explanation ", it cannot always be considered as conveying the true and natural meaning of the words or the provisions of the Act. The meaning attributable to the relevant provisions of the Act without the Explanations shall have to be considered first, to find out whether it created an artificial situation, or created ambiguity, and if so, the Explanation may be considered as having injected, the true and real meaning to those provisions from the very inception of the provisions to which the Explanation is added. In CIT v. S. R. Patton [1992] 193 ITR 49, the Kerala High Court was considering the effect of the Explanation to section 9(1)(ii) of the Act. The Bench held at page 55 : " The mere use of the label 'Explanation' is not decisive of the true meaning and scope of the provision. Ordinarily, the purpose of an Explanation in a statute is to clarify or explai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legislative exposition of the import of the provision. Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 is also a decision of the Supreme Court. One of the questions that arose for consideration was whether Explanation 1 added to section 40(b) of the Act in the year 1984 serves as the parliamentary exposition of the true purport of section 40(b) or whether the said Explanation brought about a change in its meaning. This was considered at page 18 thus : "An 'Explanation', generally speaking, is intended to explain the meaning of certain phrases and expressions contained in a statutory provision. There is no general theory as to the effect and intendment of an Explanation except that the purpose and intendment of the 'Explanation' are determined by its own words. An Explanation, depending on its language, might supply or take away something from the contents of a provision. It is also true that an Explanation may---this is what Sri Ramachandran suggests in this case---be introduced by way of abundant caution in order to clear any mental cob-webs surrounding the meaning of a statutory provision spun by interpretative errors and to place what the Legislature considers to be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also reduced by amending sub-section (2A). The Notes on Clauses. The limited retrospectivity given to the declaratory and clarificatory provision in sub-section (2B) seems to be deliberate and not accidental. The questions referred to us in all these cases, therefore, are to be considered without reference to Explanation 2 added to sub-section (2A) of section 37, which also covers sub-section (2B). In CIT v. New Bank of India Ltd. [1993] 201 ITR 878 (Delhi), the assessee was a commercial bank. The assessee debited in its accounts certain sums by way of entertainment expenses, for the period relevant to the assessment year 1974-75. Most of these expenses represented the expenditure incurred by the assessee in providing light refreshment like tea, cold drinks, etc., to customers in the course of its business. The question was whether this expenditure was not in the nature of entertainment expenditure. The Bench followed the decision of the Gujarat High Court in CIT v. Patel Bros. and Co. Ltd. [1977] 106 ITR 424 and of the Bombay High Court in CIT v. Shah-Nanji Nagsi [1979] 116 ITR 292 and upheld the claim of the assessee to deduct such expenditure on customary courtesy extend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment and such expenditure may be allowable and the bar of sub-section (2B) would not apply. On the contrary, if the provision of food, drinks or any amusement to a client, customer or constituent is on a lavish and extravagant scale or is of wasteful nature, it would fall within the ambit of section 37(2B) of the Act and could not be allowed as business expenditure. We are in respectful agreement with the view expressed by the Gujarat High Court in the said judgment. In fact support is lent to this view by the Legislature itself when we refer to the language of Explanation 2, wherein it is clarified that from April 1, 1976, expenditure on provision of hospitality of every kind to any person is to be treated as 'entertainment expenditure', which, as a necessary corollary, would mean that this type of expenditure before April 1, 1976, could be treated as a permissible deduction." The court also held that " there is little difference between the expression " entertainment expenditure " and " expenditure in the nature of entertainment ". Thus, this court has taken a consistent view regarding the answer to be given to the question raised. Expenditure incurred while extending traditio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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