Income‑tax‑

‑‑‑‑Business expenditure‑‑‑Ceiling on expenditure‑‑‑Entertainment expenditure‑‑‑Law applicable‑‑‑Effect of insertion of Expln. 2 to S.37(2A) by Finance Act, 1983, with retrospective effect from 1‑4‑1976‑‑‑Amount spent on providing tea, coffee and meals to customers in accounting year relevant to assessment year 1977‑78 constituted entertainment expenditure‑‑ Indian Income Tax Act, 1961, S.37(2A).

There has been an enlargement of the meaning of "entertainment expenditure" by insertion of Explanation 2 to subsection (2A) of section 37. of the Income Tax Act, 1961, by the Finance, Act, 1983, with retrospective effect from April 1, 1976. By this Explanation the meaning of entertainment expenditure in subsection (2A) of section 37 has been enlarged to include expenditure on provision of hospitality of every kind by the assessee to any person whether by way of provision of food and beverages or in any other manner. As a result, in relation to expenses for the assessment year 1977‑78 and subsequent assessment years, such expenditure ‑would be treated as "entertainment expenditure" within the meaning‑of subsection (2A) of section 37 of the Act and deductibility thereof has to be decided in the light of the restrictions contained therein.

CIT v. Patel Brothers & Co. Ltd. (1995) 215 ITR 165 (SC) ref.

R.V. Desai with P.S. Jetley for the Commissioner.

J. Jain, instructed by Mulla and Mulla and Craigie Blunt and Caroe for the‑Assessee.

JUDGMENT

Dr. B. P. SARAF, J.‑‑‑By this reference under section 256(1) of the Income Tax Act, 1961, the Income‑tax Appellate 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 Tribunal was justified in coming to the conclusion that the assessee was entitled to the deduction of Rs.54,305?"

The material facts giving rise to the question are as under:

The assessee is engaged in the business of manufacture of plastics. It has its factory at Poiser, Kandivali. It has an office at Bombay which is situated at Lotus House. The assessee has also offices in Delhi, Calcutta, Bhagwara and Sonipat. During the previous year ended March 31, 1977, relevant to the assessment year 1977‑78, to which the reference pertains, the assessee incurred expenditure of Rs.59,305 in its various offices for the purpose of providing tea, coffee, cold drinks, snacks, and at times, meals to its customers. The assessee debited this expenditure under the head 'Sales promotion expenses'. The Income‑tax Officer did not allow this claim of the assessee as he was of the opinion that the expenditure incurred by the assessee was in the nature of entertainment expenditure and, as such, had to be processed under the provisions of section 37(2A) of the Income Tax Act, 1961 ("the Act"). The Income‑tax Officer accordingly allowed a deduction of Rs. 5,000 only against the assessee's claim of Rs. 59,305. The assessee appealed to the Commissioner of Income‑tax (Appeals). The Commissioner (Appeals) was of the opinion that the expenditure of Rs.59,305, which was the subject‑matter of dispute, was the normal expense on routine courtesy and hospitality which every businessman has to incur in the interest of his business. He also observed that the expenses were not on a lavish scale. The Commissioner (Appeals), therefore, decided the appeal in favour of the assessee and directed the Income‑tax Officer to allow the claim of the assessee for deduction of the balance amount of Rs. 54,305 under section 37(1) of the Act. The above order was confirmed by the Income‑tax Appellate Tribunal ("the Tribunal"). Hence, this reference at the instance of the Revenue.

We have heard Mr. R. V. Desai, learned counsel for the Revenue, and Mr. J. Jain for the assessee. There is no dispute that the deduction in respect of the expenditure of the nature referred to above was allowable as a deduction in computing the total income of an assessee under subsection (1) of section 37 of the Act. Even the Supreme Court in CIT v. Patel Brothers and Co. Ltd. (1995) 215 ITR 165 had held that despite the restrictions imposed in allowing "entertainment expenditure" as a business expenditure by virtue of subsection (2A) of section 37 of the Act, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity, was not "entertainment expenditure" within the meaning of subsection (2A) of section 37 of the Act.

That position, however, has changed with the enlargement of the meaning of "entertainment expenditure" by insertion of Explanation 2 to subsection (2A) of section 37 of the Act by the Finance Act, 1983, with retrospective effect from April 1, 1976. Explanation 2 reads:

"Explanation 2.‑‑‑For the removal of doubts, it is hereby declared that for the purposes of this subsection and subsection (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." (Emphasis supplied).

By the above Explanation, the meaning of entertainment expenditure in subsection (2A) of section 37 has been enlarged to include expenditure on provision of hospitality of every kind by the assessee to any person whether by way of provision of food and beverages or in any other manner. As a result, in relation to expenses for the assessment year 1976‑77 and subsequent assessment years, such expenditure would be treated as "entertainment expenditure" within the meaning of subsection (2A) of section 37 of the Act and deductibility thereof has to be decided in the light of the restrictions contained therein.

In the present case, the Income‑tax Officer had computed the deduction by applying the provisions of section 37(2A) of the Act and allowed deduction for a sum of Rs.5,000 only and rejected the .claim for deduction of the balance amount of Rs:54,305.

Learned counsel for the parties are agreed that in view of the amendment to section 37(2A) by insertion of the Explanation set out above, the action of the Income‑tax Officer is correct. Deduction cannot be allowed in respect of such expenses now under section 37(1) of the Act as has been done by the Tribunal.

In the premises, it is clear that the Tribunal was not justified in holding that the assessee was entitled to deduction of the expenditure of Rs. 54,305 incurred by the assessee in extending customary hospitality to the customers by offering meals, etc., under section 37(1) of the Act. The question referred to us is, therefore, answered in the negative, i.e., in favour of the Revenue and against the assessee.

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

M.B.A:/345/FCOrder accordingly.