Commissioner of Income-tax, Amritsar vs NITCO Roadways Ltd., Jammu

By this reference under Section 256(1) of the Income tax Act, 1961 (""Act"") the Incometax Appellate Tribunal Amritsar Bench, (""Tribunal"") has

referred the following question of law to this Court for opinion at the instance of the revenue.

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the expenditure incurred by the

assessee in providing tea to its customers was not in the nature of entertainment expenditure as contemplated by Section 37(2B) of the Incometax

Act, 1961?

We have heard Mr. Anil Bhan, learned counsel for the revenue. None appears for the assessee.

This reference pertains to the assessment year 197374. The dispute is about the allow ability of expenditure of a sum of Rs. 10,338 incurred by the

assessee in the relevant previous year on providing tea to its staff and customers. The total expenditure incurred on this account was Rs. 13,338.

The incometax officer allowed deduction of a sum of Rs. 3,000 only which, according to him, was the estimated expenditure on providing tea to

the members of the staff and disallowed the balance expenditure of Rs. 10,338 which according to him, was the estimated expenditure incurred on

providing tea to the customers, as entertainment expenditure. The assessee appealed to the Appellate Assistant Commissioner of Incometax. The

Appellate Assistant Commissioner held that the expenditure incurred on providing tea to the customers could not be regarded as entertainment

expenditure. He, therefore, allowed the appeal of the assessee anil deleted the disallowance. Against the order of the Appellate Assistant

Commissioner, revenue appealed to the Tribunal. The Tribunal dismissed the appeal of the revenue. The Tribunal held that the expenditure incurred

on providing tea to the customers could not be treated as an entertainment expenditure and hence it was allowable as a business expenditure under

Section 37(1) of the Act. In coming to this conclusion, the Tribunal relied upon the decision of the Gujarat High Court in CIT vs. Patel Brothers

and Co. Ltd. (1977) 106 ITR 421. Aggrieved by the above decision, revenue applied under Section 256(1) of the Act to the Tribunal for

reference of the question whether provision of tea to the customers could be regarded as entertainment expenditure within the meaning of Section

37(2B) of the Act to this Court for opinion. As, at that time, there was divergence of opinion on this point between different High Courts and the

Tribunal had followed the Gujarat High Court decision (cited above) which was in favour of the assessee. the Tribunal allowed the application of

therevenue. Hence, this reference.

We have heard the learned counsel for the revenue and perused the order of the Tribunal. There is no dispute about the fact that the expenditure

under consideration was incurred by the assessee wholly and exclusively for the purpose of its business and it was an allowable expenditure under

Section 37(1) of the Act unless it is held to be an expenditure in the nature of entertainment expenditure, in which event, in view of the overriding

provision contained in Section 37(2B), it would not be allowable. Section 37(2B) provides :

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"".

The real controversy in this case therefore, is whether the expenditure incurred by the assessee on providing tea to its customers can be

regarded as expenditure in the nature of entertainment expenditure within the meaning of Section 37(2B) of the Act. Though earlier, there was

divergence of opinion between the High Courts on this point, the controversy has now been set at rest by the Supreme Court in CIT vs. Patel Bros

and Co. Ltd. (1995) 215 ITR 165. In that case, which was an appeal from the Gujarat High Court decision in CIT vs. Patel Bros. and Co. Ltd.

(Supra) the Supreme Court held that the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity is

not ""entertainment expenditure"" within the meaning of Section 37 (2B) of the Act as it stood prior to the insertion of Explanation 2 to Section 37 by

the Finance Act, 1983 with retrospective effect from 1st April, 1976 by which, for the purpose of subsections (2A) and (2B) of Section 37

enlarged meaning was given to the words ""entertainment expenditure"" to include expenditure on provision of hospitality of every kind by the

assesee to any person whether by way of provision of food or beverages or in any other manner. The Supreme Court upheld the conclusion of the

Gujarat High Court that the expenditure incurred on provision of ordinary food or drinks to its customers was not an entertainment expenditure.

The Supreme Court however, did not approve the wide observations and the elaborate guidelines given by the Gujarat High Court which were.

unnecessary for its decision. The Supreme Court also observed that the definition in Explanation 2 was not the ordinary meaning of the words

entertainment expenditure"", but enlarged meaning given for the purpose of the Act with effect from April 1, 1976.

The true meaning and import of the expression ""entertainment expenditure"" in the context of disallowance as business expenditure by virtue of

subsection (2A) and subsection (2B) of Section 37 is thus no more res Integra. It is now wellsettled and though generally ""entertainment

expenditure"" is an expression of wide import, in the context of disallowance of ""entertainment expenditure"" as a business expenditure the word

entertainment"" must be construed strictly and not expansively. So construed, a bare necessity like an ordinary meal is not ""entertainment"". If such a

bare necessity is offered by another, it is hospitality but not entertainment. Unless the definition of ""entertainment"" includes hospitality, the ordinary

meaning of ""entertainment"" cannot include hospitality. The expenditure incurred on providing tea or ordinary meals to the customers, therefore,

cannot be regarded as entertainment expenditure. However, this will not be the position after 1st April. 1976 because the definition of

entertainment expenditure"" for the purposes of subsections (2A) and (2B) of Section 37 has been enlarged with retrospective effect from that date

by the Finance Act, 1983 to include ""hospitality"".

In the present case, the expenditure on providing tea to the customers was incurred by the assessee in the previous year ending 31st March, 1973.

The enlarged definition of entertainment expenditure was made applicable only with effect from 1st April, 1976/Obviously, that definition is not

applicable to the present case. The expenditure in question, therefore, cannot be treated as ""entertainment expenditure

In the premises, we are of the opinion that on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the

expenditure incurred by the assessee in providing tea to its customers was not in the nature of entertainment expenditure as contemplated by

Section 37(2B) of the Incometax Act, 1961. The question referred to us is, therefore, answered in the affirmative i.e. in favour of the assessee and

against the revenue.

This reference is disposed of accordingly with no order as to costs.