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TMI Blog1985 (4) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... e I.T. Act, 1961 (No. XLIII of 1961) ("the Act " herein), the aforesaid claim could not be allowed. On appeal, the AAC, vide order dated June 14, 1974, held that the expenses in question were not hit by the provisions of s. 37(2B) of the Act as, in his opinion, such expenses were incidental to the business. The AAC, therefore, allowed the expenses to the extent of Rs. 3,000 each year. A further appeal was taken by the Revenue to the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (" the Tribunal " herein). The Tribunal by its order dated November 11, 1975, held that the expenditure incurred on providing food to constituents or entertaining them on soft drinks, namely, coca cola, coffee, tea, etc., will be expenditure in the nature of entertainment. It, therefore, disallowed the claim of messing expenses for both the assessment years in question. It has referred the following questions of law arising out of its order for our opinion: " 1. Whether, on the facts and in the circumstances of the case, the messing expenses claimed by the assessee in both the assessment years under consideration were in the nature of entertainment expenditure within the meaning of s. 37(2B) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37 of the Income-tax Act, (a) in sub-section (2A), (i) for clauses (iii) and (iv), the following shall be substituted with effect from the 1st day of April, 1984, namely: ......... (ii) the Explanation shall be numbered and shall be deemed to have been numbered with effect from the 1st day of April, 1976, as Explanation I and after Explanation I 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, Explanation 2.-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, 'entertainment expenditure' includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work. " Thus, it is clear that the above Explanation 2 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is divergence of judicial opinion on the question among the various High Courts of India. We propose to notice both sets of views. We shall first advert to the authorities cited by the learned counsel for the assessee. The basic authority is CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424 (Guj), wherein four tests have been laid down for determining the nature of entertainment expenditure: 1. If the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish and extravagant scale, or is of wasteful nature, it is entertainment per se. 2. If the provision of food or drinks to a client, constituent or customer is in the nature of bare necessity or by way of ordinary courtesy or as an express or implied term of the contract of employment spelled out from long-standing practice or custom of trade or business, it will not amount to entertainment. 3. If the provision of food or drinks to a client, customer or constituent is in a liberal and friendly way, it may amount to entertainment having regard to the place, item and cost of such provision. 4. The provision of amusement to a client, customer or constituent by way of hospitality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for purposes of its business and hence allowable as a deduction under s. 37(1). It was observed (p. 143): The very concept of entertainment would rule out cases of business or commercial courtesy extended to clients who visit the businessmen for the purpose of doing business. The entertainment postulates that it is some seeking after pleasure, and cannot comprehend customary hospitalities shown to persons who come to do business. This running after pleasure may be indicated in cases where a lavish party is given in a posh hotel even to the clientele. But the ordinary elementary extension of business courtesy or civility to visiting clients by allowing them to quench their thirst, as in this case, cannot be understood as expenditure in the nature of entertainment." The learned judges referred to Patel Bros. Co. Ltd.'s case [1977] 106 ITR 424 (Guj), Veeriah Reddiar's case [1977] 106 ITR 610 (Ker) [FB] and Shah Nanji Nagsi's case [1979] 116 ITR 292 (Bom). In Addl. CIT v. Banglore Turf Club Ltd. [1980] 126 ITR 430 (Kar), it was observed that in order that an expenditure should constitute expenditure in the nature of entertainment within the meaning of s. 37(2A) of the Act, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ros. Co.'s case [1977] 106 ITR 424 (Guj), that the expenses incurred for providing tea, coffee, pan, cold drinks, etc., to customers, being ordinary courtesies shown to customers by business houses, do not amount to expenditure in the nature of entertainment expenditure within the meaning of s. 37(2A) or s. 37(2B) of the Act. In CIT v. Mathuralal Kapoorchand Co. [1983] 141 ITR 297 (MP), it was held that the expenditure incurred by an assessee for providing messing facilities to his trade clients is an admissible business expenditure and such expenses are not in the nature of entertainment within the meaning of s. 37(2B) of the Act. Lakhmichand Muchhal's case [1982] 134 ITR 234 (MP) was followed. In Nava Bharat Enterprises P. Ltd. v. CIT [1983] 143 ITR 804 (AP), business expenditure and entertainment expenditure were again considered by the Andhra Pradesh High Court. The learned judges opined that if expenditure is incurred for providing food and drinks only to a client, constituent or customer, which is in the nature of bare necessity or by way of ordinary courtesy, it would not amount to entertainment expenditure. But if a party is arranged or a banquet is given or some amus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken to mean hospitality of any kind extended by the assessee directly in connection with his business or profession and, therefore, the expenditure incurred by the assessee on the supply of cigarettes, coffee, etc., to its customers would clearly fall within the description 'entertainment expenditure'. In order to fall within the scope of the two sub-sections, the expenditure in respect of which the allowance is claimed need not be 'entertainment expenditure' in the strict sense of the term and it is sufficient if it partakes of some of the main characteristics of ' entertainment expenditure'. The test is amply satisfied if the expenditure in question was incurred in providing hospitality of some kind in connection with the business of the assessee judged in this light, the amounts spent by an assessee-firm in supplying cigarettes, coffee, meals, etc., to its customers would fall within the description 'expenditure in the nature of entertainment expenditure' occurring in sub-sections (2A) and (2B) of section 37 of the Act." In CIT v. Bagraj Co. [1979] 117 ITR 694, the Allahabad High Court opined that the cost of food supplied to the low-paid employees of the assessee-firm wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 1972-73 and 1973-74 were not in the nature of entertainment expenditure within the meaning of s. 37(2B) of the Act. The AAC after holding that the expenditure incurred was not in the nature of entertainment expenditure allowed the same to the tune of Rs. 3,000 each year. On behalf of the assessee, it was contended that the AAC committed an error in allowing deduction of Rs. 3,000 only out of the disallowed amounts in question each year. The Tribunal having come to the conclusion that it was in the nature of entertainment expenditure restored the disallowance of Rs. 4,500 and Rs. 4,800 for the assessment years 1972-73 and 1973-74, respectively. We have held that the messing expenses claimed by the assessee in both the assessment years in question are not in the nature of entertainment expenditure within the meaning of s. 37(2B) of Act. Now, it is for the Tribunal to consider in view of the finding recorded by the AAC in his order dated June 14, 1974, whether Rs. 3,000 should be allowed as messing expenses for each of the assessment years 1972-73 and 1973-74 or Rs. 4,500 and Rs. 4,800 should be allowed as messing expenditure for the assessment years 1972-73 and 1973-74, while compu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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