Income-tax---

----Business expenditure---Disallowance---Entertainment expenditure---Law applicable to assessment---Effect of amendment of S.37(2A) with effect from 1-4-1976---Expenditure on providing soft drinks to customers---Not deductible in assessment year 1979-80---Indian Income Tax Act, 1961, S.37.

The amendment introduced by the Finance Act, 1983, with retrospective effect from April 1, 1976, by way of Explanation 2 to section 37(2A) of the Income Tax Act, 1961, expressly prohibits allowance of entertainment expenditure incurred for customers. Hence, expenditure incurred towards supply of soft drinks to customers would not be deductible. in the assessment year 1979-80.

CIT v. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC) fol.

CIT v. Karuppuswamy Nadar & Sons (1979) 120 ITR 140 (Mad ref

C. V. Rajan for the Commissioner.

P.P.S. Janarthana Raja for the Assessee

JUDGMENT

K. A. THANIKKACHALAM, J.----At the instance of the Department, the Tribunal referred the following question of law for the opinion of this Court under section 256(1) of the Income Tax Act, 1961:

"Whether the Tribunal's finding that the sum of Rs.23,350 being the expenditure incurred towards supply of soft drinks to the customers cannot be treated as entertainment expenditure and disallowed under section 37(2A) of the Income Tax Act, 1961, is sustainable in law?"

The assessee had claimed a sum of Rs.23,350 as entertainment expenditure to customers. On the assessee's appeal, the Commissioner of Income-tax (Appeals) held that these expenses being incurred in supplying soft drinks, etc., to the customers, should be allowed in view of this Court's decision in CIT v. Karuppuswamy Nadar & Sons (1979) 120 ITR 140. Aggrieved, the Department filed an appeal before the Tribunal. The Tribunal agreed with the view taken by the Commissioner of Income-tax (Appeals). According to the Tribunal, the expenditure was incurred for supply of soft drinks to customers, who were visiting the branches and that such expenditure was not of lavish nature and could not be described as entertainment expenditure.

Before us, learned standing counsel appearing for the Department relied upon the amendment introduce by the Finance Act, 1983, with retrospective effect from April 1, 1976, by way of. Explanation 2 to section 37(2A) expressly prohibiting allowance of entertainment expenditure incurred for customers. It means if the expenditure is incurred for its own employees such an expenditure would not come within the purview of Explanation 2 to section 37(2A). Therefore, according to learned standing counsel, inasmuch as it is the admitted case that the entertainment expenditure was incurred for the customers by way of supplying soft drinks, the expenditure cannot be allowed in the teeth of Explanation 2 to section 37(2A) of the Act introduced by the Finance Act, 1983, with retrospective effect from April 1, 1976, since the assessment year under consideration is 1979-80. This view is also supported by decision of the Supreme Court in CIT v. Patel Brothers & Co. Ltd. (1995) 215 ITR 165. However, learned counsel for the assessee submitted that in view of the amendment the matter may be remitted back to the Tribunal so as to enable the assessee to get deduction with regard to the entertainment expenditure incurred to its employees. According to learned counsel, when the soft drinks were served to the customers at branches the employees of the company were also entertained and, therefore, a portion of the expenditure is relatable to the entertainment expenditure, incurred to its employees, which is not lavish in nature. But, according to the fact arising in this case, the assessee claimed a sum of Rs.23,350 being the expenditure incurred towards the supply of soft drinks to the customers. Therefore, in the absence of facts on record, it is not possible to issue the direction as requested by learned counsel for the assessee. Accordingly we hold that the Tribunal was not correct in coming to the conclusion that the expenditure incurred towards the supply of soft drinks to the customers cannot be treated as entertainment expenditure and disallowed under section 37(3A) of the Act. Accordingly, we answer the question referred to us in the negative and in favour of the Department. No costs.

M.B.A./3242/FC???????????????????????????????????????????????????????????????????????????????? Reference answered.