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TMI Blog1981 (6) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... d income of Rs. 41,030. The assessee had claimed deductions under the head of " Kitchen expenses " both in the head office and in the Sirsa and Khuben branches accounts. The ITO, however, applied the alternative limit of Rs. 5,000 laid down in item (i) s. 37(2A) of the I.T. Act, 1961 (hereinafter called " the Act "), treating the kitchen expenses as being in the nature of entertainment expenditure and disallowed the balance claimed by the assessee under the aforesaid head. The respondent-assessee went up in appeal to the AAC, who took the view that the term " kitchen expenses " was a composite one including within it both " entertainment expenses " and " non-entertainment expenses ". He, therefore, reduced the disallowance from Rs. 5,800 to Rs. 3,000 in the head office account and in the branch office accounts from Rs. 3,096 to Rs. 1,000 and Rs. 1,937 to Rs. 500 in the Sirsa and Khuben branches of the firm, respectively. On second appeal before the Income-tax Appellate Tribunal, it was, inter alia, contended on behalf of the assessee that along with " kitchen expenses " even items of tea, cigarette, pan and bidi had been treated by the AAC as amounting to " entertainment expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent assessee come within the ambit of being in the nature of " entertainment expenditure " under s. 37(2A) of the Act. There is no evading the fact that there appears to be a sharp cleavage of judicial opinion on the pristine legal question which arises for determination before this Full Bench. Two parallel streams of thought underlie the rival judicial precedents-one symbolised by the view of the Division Bench of the Gujarat High Court in CIT v. Patel Brothers Co. Ltd. [1977] 106 ITR 424, and the other by the Full Bench judgment of the Kerala High Court in CIT v. Veeriah Reddiar [1977] 106 ITR 610. In view of these closely matched but divergent views, it becomes necessary to examine the matter in some depth and detail. Ere one inevitably turns to the mass of judicial precedent on the point it is both necessary and refreshing to examine the matter on principle and in the light of the larger scheme of the Act along with the legislative history of the particular provisions of s. 37. It is perhaps too late in the day to deny that entertainment, even to an elongated and lavish extent, has come to be the integral part of the work-a-day world of some competitive business. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tante clause and prescribe the legislative limits within which all expenditure " in the nature of entertainment expenditure " can be allowed. It would seem that a true interpretation of s. 37 cannot be arrived at except in the context of its earlier legislative history. For our purposes, it is unnecessary to travel beyond the predecessor statute of the Indian I.T. Act, 1922. The legislative parent of s. 37 of the Act is s. 10(2)(xv) of the Indian I.T. Act, 1922 (hereinafter called " the 1922 Act "). Under the scheme of the 1922 Act, as originally enacted, in computing the income chargeable under the head " Profits or gains of any business or vocation carried on ", necessary allowance was to be given in respect of any non-capital expenditure incurred solely for the purposes of earning such profits or gains. The scope of this exemption was enlarged by the amendment effected in sub-s. (2)(xv) of s. 10 of the 1922 Act by the I.T. (Amend.) Act, 1939. Thereby, any expenditure, not being in the nature of " capital expenditure or personal expenses " of the assessee laid out or expended wholly and exclusively for the purposes of such business, profession or vocation, was to be allowed. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f s. 37 the effect of which was to expand the scope of the restriction imposed by this sub-section so as to take in any expenditure incurred by an assessee in granting an entertainment allowance to an employee or other person from February 29, 1968, and also the amount of any expenditure in the nature of entertainment expenditure incurred by any employee or other persons for the purpose of business or profession of the assessee otherwise than out of an entertainment allowance paid to him by the assessee. However, the fourth step in this regard which Parliament took is particularly meaningful. Whilst introducing the Finance Bill of 1970 in Parliament the purpose of the proposed insertion of sub-s. (2B) in s. 37, vide cl. 10 of the Bill, was recorded as follows, in the " Notes on clauses ". "Clause 10 seeks to amend section 37 of the Income-tax Act. Sub-clause (b) seeks to insert a new sub-section (2B) in section 37 of the Income-tax Act and sub-clause (a) seeks to make a consequential amendment in the Explanation to sub-section (2A) of that section. Under the proposed amendments, expenditure in the nature of entertainment expenditure incurred by any assessee within India after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture daily to be seen in restaurants and elsewhere on business lunches and the like, and of other methods of business entertainment which had become notorious. It must have been found to be impracticable for the tax authorities to separate entertainment which was reasonable from that which was not. Normally where traders do not derive any personal benefit from business expenditure no question arises. But here the givers of the entertainment benefited as well as the guests, so that to a large extent they were really entertaining themselves at the public expense. In 1965, Parliament thought it necessary to take drastic action, so that, as often happens in such cases, the innocent must suffer as well as the guilty. As I have said, no criticism is made that the appellants are other than innocent. And again, Lord Simon of Glaisdale, in the same vein, said (p. 410): " Reasonable as the taxpayers' claim to deduct entertainment expenses may have seemed in that particular case, by 1965 it was conceived that the law as it then stood was being abused. What was called " expense-account living " had become notorious. Expenses, even " wholly and exclusively " incurred in trading, were thought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business (computed in the manner aforesaid) (iv) on the balance of the profits nil. and gains of the business (computed in the manner aforesaid) (2A) Notwithstanding anything contained in sub-section (1) or subsection (2), no allowance shall be made in respect of so much of the expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year which expires after the 30th day of September, 1967, as is in excess of the aggregate amount computed as hereunder : (i) on the first Rs. 10,00,000 of the at the rate of 1 per cent. or profits and gains of the business or pro- Rs. 5,000, whichever is fession (computed before making any higher ; allowance under section 32A or section 33 or section 33A or in respect of entertainment expenditure) (ii) on the ext Rs. 40,00,000 of the at the rate of 1/4 per cent. ; profits and gains of the business or profession (computed in the manner aforesaid) (iii) on the next Rs. 1,20,00,000 of at the rate of 1/8th per cent. ; the profits and gains of the business or profession (computed in the manner aforesaid) (iv) on the balance of the profits nil. and gains of the business or profession (computed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. (2) and (2A) aforesaid. The phrase deliberately employed is "in the nature of entertainment expenditure ". It is not merely " entertainment expenditure " or " business entertainment " simpliciter. It is a sound canon of construction that the Legislature does not waste its words and every word employed in a statute has to be given a meaning. Undoubtedly, therefore, whilst using the larger and compendious expression " in the nature of entertainment expenditure ", Parliament had an obvious purpose behind it. This expression is much wider in its connotation, inasmuch as it would take within its ambit not merely what may stricto sensu be regarded as entertainment expenditure proper but also all other expenditure of allied nature partaking of some, if not all, of the characteristics of entertainment expenditure. The phrase has indeed a wide amplitude and its use leaves little doubt that the intention of the Legislature in employing it was to cast the net sufficiently wide so as to bring within its field all types of hospitality. Even on behalf of the respondents, it could not be denied that any lavish hospitality expended for business purposes would amount to " entertainment expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of the Legislature in enacting sub-ss. (2) and (2A) and defeating the larger legislative intent of curbing excessive business entertainment, at the cost of the public exchequer. Beyond the prescribed limits, business entertainment is left to the discretion and the personal cost of businessmen themselves, and is not to be defrayed by public revenue. To conclude on this aspect it appears to me that on the larger principle of safeguarding the public exchequer, on the broad scheme of Chap. IV of the Act in general and Part 'D' thereof in particular, in the context of the legislative history of s. 37 of the Act and its predecessor provision of s. 10(2)(xv) of the 1922 Act, and the specific language and phraseology used in sub-ss. (2) and (2A) of s. 37, it must be held that all hospitality extended for the purpose of business, whether lavish or frugal, is within the wide net of the compendious phrase " in the nature of entertainment expenditure " purposely employed by Parliament. The view I take is buttressed by the authoritative judgment of the Full Bench of the Kerala High Court in Veeriah Reddiar's case [1977] 106 ITR 610. Eradi C.J., speaking for the court, after a discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough it does not strictly fall within the meaning of this expression. The reason is obvious, because the legislature intended to curb the expenditure of providing hospitality of any kind at the cost of the public exchequer." It would be manifest from the above that, apart from principle and statute, there is thus a sizeable weight of precedent as well for the view that business hospitality of any kind is well within the wide net purposely cast by the Legislature in sub-ss. (2) and (2A) of s. 37 of the Act. However, as noticed earlier, there is a schism of judicial opinion on the point. The leading judgment for the rival view is that of the Gujarat High Court in Patel Brothers' case [1977] 106 ITR 424. Since this appears to be the basic judgment which seems to have found acceptance with some other High Courts as well, it becomes necessary to advert to the same in some detail. The facts in this case are also closely similar, in so far as the assessee-company had claimed kitchen expenses for providing meals to up-country customers out of commercial compulsion and expediency. It would appear that at the time of rendering the judgment on November 12, 1975, there as yet appeared to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the matter. Unaided as we are, we have, therefore, to make an attempt to find out the true meaning of the term 'entertainment' in the context of the Income-tax Act. " With great respect, it would appear that the true problem herein is not so much as to what is the import of the word " entertainment ", but the true intention of the Legislature in not using that word simpliciter, and, instead, employing a much wider and a compendious phrase like " in the nature of entertainment expenditure". To repeat, Parliament did not use the word " entertainment " simpliciter or the words " business entertainment " alone. The essence of the question, therefore, was : How much did it wish to expand and widen the meaning of the word " entertainment " when it used a much larger phrase ? The core of the problem, therefore, was as to what comes within the much wider net cast by the Legislature by deliberately employing a compendious phrase. Therefore, in my humble view, the Gujarat High Court Bench erred in attaching great weight to the innumerable dictionary meanings of the word " entertainment " and construing the larger phrase narrowly on the hypothesis as if it was merely the word " entertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case [1977] 106 ITR 424 (Guj). Apart from the above, an in depth examination of the judgment in Patel Brothers' case [1977] 106 ITR 424 (Guj), would show that even though the argument of the long and the designed legislative history of s. 37 of the Act was pointedly raised on behalf of the revenue, the Bench either missed to pronounce thereon or drew no inference from the step-by-step attempts of Parliament to curb and curtail unlimited business hospitality at the cost of the public exchequer. It failed to notice the high water mark of the insertion of sub-s. (2B) by the Finance Act of 1970, by which a blanket bar was sought to be placed against the allowance of expenses " in the nature of entertainment expenditure ", even though, later, there appears to have been some receding of the tide by way of its repeal. Again, no notice was taken of the non obstante clauses with which sub-ss. (2) and (2A) of s. 37 begin. Equally the painstakingly precise slabs provided by the Legislature for prescribing the ceilings for all expenses in the nature of entertainment expenditure both for companies and other assessees in sub-ss. (2) and (2A) were neither noticed nor was any inference drawn th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability and amusement and not that which satisfies basic necessities or is merely liberal and friendly, would deliberately push the law of taxation into a slippery quagmire from which it might not be possible to extricate each individual case. If the rule prescribed by the Legislature under s. 37 of the Act is to have any concrete meaning of uniformity and is not to be made to depend on the individual idiosyncrasies of every ITO for its application, it is necessary to clear the cob-webs and to go the whole hog to hold that hospitality of every kind comes within the ambit of the larger phrase " in the nature of entertainment expenditure " specifically used by Parliament in s. 37 of the Act. This is what has been so held by the Full Bench of the Kerala High Court in Veeriah Reddiar's case [1977] 106 ITR 610 and also by Division Bench of this court in Gheru Lal Bal Chand's case [1978] 111 ITR 134, and this view equally holds sway in the Allahabad High Court. To hold otherwise and to attempt finical classifications of what is lavish, elegant, extravagant, wasteful, pleasurable or amusing, in actual effect, would wholly introduce an element of total ambivalance and the uncertainty in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) of s. 37 of the Act and the point before us. This case is consequently also distinguishable. This brings me to the Division Bench judgment of this court in CIT v. Nadh Shah Kapur Sons [1980] 122 ITR 972, which indeed has necessitated this reference. A close analysis of this judgment would indicate that the matter was not adequately canvassed on behalf of the parties before the Division Bench. The earlier judgment in Gheru Lal Bal Chand's case [1978] 111 ITR 134 (P H), which covered the field, was not brought to the notice of their Lordships. Nor the authoritative judgment of the Full Bench of the Kerala High Court in Veeriah Reddiar's case [1977] 106 ITR 610 and the view of the Allahabad High Court in Brij Raman Dass [1976] 104 ITR 541 and Manoo Ram Ram Karan Dass' case [1979] 116 ITR 606 were brought to the notice of the Bench. Even on the point of principle and the relevant statutory provisions, the issues were not adequately highlighted. It was in this context that broad observations, tacitly following Patel Brothers' case [1977] 106 ITR 424 (Guj), have been made. For the detailed reasons recorded earlier in dissenting from Patel Brothers' case [1977] 106 ITR 424 (Guj), ..... X X X X Extracts X X X X X X X X Extracts X X X X
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