Income-tax---

----Business expenditure---Disallowance---Entertainment expenditure-- Expenditure on providing meals to merchants in accordance with custom-- Expenditure could not be disallowed in assessment year 1973-74---Indian Income Tax Act, 1961, S.37(2-A).

Held, that the expenditure on providing meals to the merchants in accordance with trade custom was deductible in the assessment year 1973-74.

C.I.T. v. Supreme Motors (P.) Ltd. (1984) 147 ITR 48 (Delhi) and Sandal Kashmirilal v. C.I.T. (1986) 157 ITR 422 (Delhi) fol.

B. Gupta with R.N. Verma for the Commissioner.

Nemo for the Assessee.

JUDGMENT

DR. M. K. SHARMA, J. --- For the assessment year 1973-74, the following question has been referred under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), by the Income-tax Appellate Tribunal

"Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in upholding the order of the Appellate Assistant Commissioner deleting the disallowance of Rs.10,220 under the kitchen expresses by observing that the provision of meals to the beoparies by the assessee cannot be termed as entertainment expenditure?"

The assessee is a registered firm carrying on solely the business of acting as a commission agent in pulses. The total amount of commission received by the assessee was Rs.1,14,221. The claim of the assessee was that under the condition of its trade it had to run a sort of kitchen to provide meals for the various Beoparies who come to it from various places as of business necessity and a trade custom. In maintaining such a kitchen and expenditure of Rs.10,220 was incurred which the assessee claimed as a deduction in computing its income. The Income-tax Officer held that the expenditure incurred by the assessee in running the kitchen was in the nature of entertainment expenditure and accordingly disallowed the same.

On appeal, the Appellate Assistant Commissioner allowed the assessee's claim. Aggrieved by the order of the Appellate Assistant Commissioner, the Department preferred an appeal. The Tribunal, after referring to the decisions of various High Courts and its own decision in the earlier assessment years, came to the conclusion that the expenditure incurred by the assessee was not in the nature of entertainment expenditure. The conclusion of the Tribunal was that the provision of meals to the Beoparies was not in any manner a hospitality but a business necessity. '

On an application filed by the Revenue under section 256(1), the aforesaid question was referred by the Tribunal to this Court for its opinion.

The answer to the aforesaid question depends on whether the expenditure incurred by the assessee on running the kitchen is in the nature of entertainment expenditure as contemplated under the provisions of section 37(2-B) of the Act which was in operation in the relevant assessment year. It appears that there had been a divergence of opinion amongst the various High Courts on the question of entertainment expenditure. It further appears that to set at rest the aforesaid divergence of views a retrospective amendment of the Income Tax Act, 1961, was brought in through the introduction of Explanation 2 in section 37(2-A) of the Act. That Explanation reads as follows:

"For the removal of doubts, it is hereby declared that for the purposes of this subsection and subsection (2-B), 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 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. "

The aforesaid amendment was made by the Finance Act, 1983, with retrospective effect from April 1, 1976. The effect of the aforesaid amendment to the provisions of section 37(2-A) of the Act is that after the first day of April, 1976, hospitality expenses have also to be treated as entertainment expenses. However, to the facts and circumstances of the present case as it relates to the assessment year 1973-74 the aforesaid amendment of explanation to section 37(2-A) of the Act admittedly does not apply.

Our attention has been drawn to a decision of this Court in CIT v. Supreme Motors (P.) Ltd. (1984) 147 ITR 48 in which a similar question came up for decision of this Court. While deciding the aforesaid case in CIT v. Supreme Motors (Pvt.) Ltd. (1984) 147 ITR 48 (Delhi), this Court held that it was not necessary to give any final opinion on the controversial issue as to whether hospitality expenses were an entertainment expenditure. On the facts and circumstances of the said case, this Court held that the expenditure was not that of the nature of "entertainment expenditure". In a subsequent decision in the case of Sandal Kashmirilal v. CIT (1986) 157 ITR 422, this Court again held that Arhtis of Delhi existed because of the large wholesale market and they earn small commission on sales and that the purchasers were usually people from out of station and that there was bound to be some expenses in relation to providing food or cold drinks or tea, etc., to them. It was further held in that case that this type of customary expenditure was expected from Arhtis as part of their business operations. Accordingly, this Court finally held that such type of expenditure before April 1, 1976, could be treated as permissible deduction.

The facts disclosed from the statement of facts of the present case are similar to the aforesaid two cases decided by this Court. We are also in respectful agreement with the view taken by this Court in the cases of CIT v. Supreme Motors (Pvt.) Ltd. (1984) 147 ITR 48 and Sandal Kashmirilal v. CIT (1986) 157 ITR 422. Accordingly, following the ratio of the aforesaid two decision of this Court, we answer the question referred to us in the affirmative and against the Revenue. The reference is disposed of.

M.B.A./1277/FC Reference answered.