CIT v. VEERIAH REDDIAR — 1976 DIGILAW 164 (KER)

Judgment :- 1. In this reference made under S.256 (1) of the Income-tax Act, 1961 (hereinafter referred to as the Act) the following question of law has been referred to this court by the Income-tax Appellate Tribunal, Cochin Bench (hereinafter called the Tribunal): "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the expenses incurred by the assessee in the supply of coffee, tea, cigarettes, etc. to customers is not in the nature of entertainment expenditure within the meaning of S.37 (2A) of the Income-tax Act, 1961, for the assessment year 1970-71?". 2. The Division Bench before whom this case originally came up for hearing felt that the question raised in the case is important enough to be considered by a Full Bench and the case was accordingly referred to a Full Bench. That is how the matter has come up before us. 3. The assessee is a registered firm dealing in piece goods both on wholesale and on retail basis. It has its Head Office at Alleppey and Branches at Kottayam and Quilon. In the books of the assessee these is an account styled as "Vattachilavu Account" to which sundry items of expenses incurred by the assessee in supplying to its customers cigarettes, coffee and sometimes meals have been debited. In the return filed by the assessee for the assessment year 1970-71, which is the relevant assessment year concerned in this case, the assessee had claimed a deduction in respect of the entirely of such expenditure incurred by it as entered in the "Vattachilavu Account" maintained for the concerned accounting period. The Incometax Officer took the view that the claim for deduction put forward by the assessee was in respect of "expenditure in the nature of entertainment expenditure" and that hence the provisions of sub-sections (2A) and (2B) of S.37 of the Act were applicable to the case Since under sub-section (2B) no allowance is admissible in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessee after the 28th day of February, 1970 the Income-tax Officer took note of only the amounts expended by the assessee in the "Vattachilavu Account" up till the 28th February, 1970 The total of such expenses incurred by the assessee upto 28-2-1970 came to Rs. 25,193/-but the Income-tax Officer held that the assessee was entitled to an allowance only to the extent of Rs. 5,000/-under S.37(2A). He disallowed the balance of Rs. 20,193/-and added it to the profits returned. Though the assessee filed an appeal complaining against the said addition that was dismissed by the Appellate Assistant Commissioner of Income-tax, Trivandrum as per his order dated 22nd February, 1972. Thereupon the assessee took up the matter in second appeal before the Tribunal. That appeal was substantially allowed by the Tribunal by the order dated 6th July, 1973, a copy of which has been appended to the statement of the case as annexure ' C' 4. The Tribunal has taken the view that S.37 (2A) of the Act is not attracted to the case since the claim for allowance put forward by the assessee could not be said to relate to "expenditure in the nature of entertainment expenditure". The entirety of the reasoning given by the Tribunal in support of the aforesaid conclusion is contained in the following short paragraph extracted from its order: "The authorised representative of the assessee filed before us the details of the expenses part of which has been disallowed by the Income-tax Officer. On going through the same we find that they are expenses mostly on coffee, cigarettes, etc. and sometimes meals also and having regard to the extent of daily expenditure incurred and the extent of the assessee's custom, in our opinion, there is no element of any entertainment involved in the expenditure incurred by the assessee in this regard. The expenditure cannot, therefore, be really considered as expenditure in the nature of 'entertainment expenditure' within the meaning of S.37 (2A). The expenses are purely of a nominal and customary nature and although the total amount involved over the entire year may be sizeable it does not change the nature of the expenditure actually incurred. The amount involved is only the result of the extent of the assessees business. Since the expenditure is not in the nature of entertainment expenditure, in our opinion, there is no justification to depart from the past practice of disallowing only 1/4th of such expenditure as expenses of a personal nature. The disallowance made by the Income-tax Officer is reduced accordingly." 5. Since the expenditure is not in the nature of entertainment expenditure, in our opinion, there is no justification to depart from the past practice of disallowing only 1/4th of such expenditure as expenses of a personal nature. The disallowance made by the Income-tax Officer is reduced accordingly." 5. The real point to be decided by this court is whether the amounts spent by the assessee for the supply of coffee, tea, cigarettes and meals (occasionally) to its customers constitute "expenditure in the nature of entertainment expenditure" within the meaning of S.37(2A) of the Act. 6. Before we set out the relevant provisions of S.37 of the Act it will be useful to recall the legislative history of the said provision as that would help to understand the true intent and purpose underlying the introduction of sub-ss. (2A), and (2B) in the said section. Under the scheme of the Indian Income-tax Act, 1922 as it was originally enacted, in computing the income chargeable under the head "profits or gains of any business, profession or vocation carried on by an assessee" allowance was to be given in respect of any non-capital expenditure incurred solely for the purpose of earning such profits or gains. The scope of this exemption was enlarged by the amendment effected in clause (XV) of S.10 of the 1922 Act by the Indian Income-tax (Amendment) Act, 1939 whereunder 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 purpose of such business, profession or vocation" was to be allowed. The position that obtained subsequent to the said amendment was that an assessee was entitled to allowance in respect of all items of non-capital expenditure other than personal expenses of the assessee if it could be shown that the amounts in question were laid out or expended wholly and exclusively for the purpose of the business, profession or vocation. The amounts spent by an assessee for the entertainment of his business constituents and customers were deductible under this head on the ground that such hospitality or entertainment was extended wholly for the purpose of promotion of the assessee's business or profession. The Parliament appears to have felt the necessity for checking the abuse of this provision by assessees and by gradual stages restrictions were imposed on the allowability of such entertainment expenditure. The Parliament appears to have felt the necessity for checking the abuse of this provision by assessees and by gradual stages restrictions were imposed on the allowability of such entertainment expenditure. The first of such restrictions was introduced by the Finance Act, 1961 and it took the form of the imposition of ceiling limits on the expenditure that could be allowed to companies under this head. The maximum was prescribed on a slab basis depending upon the profits and gains of the business. This position was retained intact in S.37 of the Act when the Indian Income-tax Act, 1V22 was replaced by the Act with effect from 1st April, 1962. 7. The second step taken by the Parliament came when by S.4 of the Taxation Laws (Amendment) Act, 1967 sub-section (2A) was introduced in S.37 of the Act. By that sub-section a similar restriction in the nature of a ceiling limit on allowable entertainment expenditure was made applicable to all assessees. It is unnecessary to refer to the ceiling limits fixed in sub-section (2A) or the details of the procedure laid down therein for the application of those limits. It would suffice to state that just as in the case of Companies this subsection has specified the maximum allowable entertainment expenditure in the case of other assessees also on a slab basis. By the Finance Act, 1968 an explanation was added to sub-section (2A) of S.37 the effect of which was to extend the scope of the restrictions imposed by those sub-sections so as to take in any expenditure incurred by an assessee in granting an entertainment allowance to any employee or other person after 29th February, 1968 and also the amount of any expenses in the nature of entertainment expenditure incurred by any employee or other person for the purposes of the business or profession of the assessee otherwise than out of an entertainment allowance paid to him by the assessee. Two years thereafter came the final step in the matter when by the Finance Act, 1970 the Parliament introduced sub-section (2B) in S.37 of the Act laying down that 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. 8. Two years thereafter came the final step in the matter when by the Finance Act, 1970 the Parliament introduced sub-section (2B) in S.37 of the Act laying down that 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. 8. Since the present case relates to the assessment year 1970-71 for which the relevant accounting period is the year ended 3131970 that part of the claim for allowance which relates to the expenditure incurred prior to the 28th February, 1970 will be governed by sub-section (2A) of S.37 of the Act and the rest of the claim which pertains to the period between the 28th February, 1970 and the 31st March, 1971 will be governed by sub-section (2B) if the expenditure in respect of which allowance is claimed by the assessee can be regarded as "expenditure in the nature of entertainment expenditure". It is contended on behalf of the assessee that the expenditure incurred by the firm in supplying coffee, cigarettes and meals to its customers does not constitute "expenditure in the nature of entertainment expenditure" and hence sub-sections (2A) and (2B) of S.37 of the Act are not attracted to the case. 9. S.37 of the Act in so far as it is relevant for our present purpose reads: "37. General. (1) Any expenditure (not being expenditure of the nature described in S.30 to 36 and 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 the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". (2) Notwithstanding anything contained in subsection (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as hereunder. (2A). (2) Notwithstanding anything contained in subsection (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as hereunder. (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: Provided that where the previous year of any assessee falls partly before and partly after the 30th day of September, 1967, the allowance in respect of such expenditure incurred during the previous year shall not exceed (a) in the case of a company (i) in respect of such expenditure incurred before the 1st day of October, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in sub-section (2), the same proportion as the number of days comprised in the period commencing on the first day of such previous year and ending with the 30th day of September, 1967, bears to the total number of days in the previous year; (ii) in respect of such expenditure incurred after the 30th day of September, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in this sub-section, the same proportion as the number of days comprised in the period commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to the total number of days in the previous year; (b) in any other case (i) in respect of such expenditure incurred before the 1st day of October, 1967, the amount admissible under sub-section (1); (ii) in respect of such expenditure incurred after the 30th day of September, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in this sub-section, the same proportion as the number of days comprised in the period commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to the total number of days in the previous year. Explanation: For the purposes of this sub-section and sub-section (2B), "entertainment expenditure" includes (i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person after the 29th day of February, 1968; (ii) the amount of any expenditure in the nature of entertainment expenditure (not being expenditure incurred out of an allowance of the nature referred to in clause (i) incurred after the 29th day of February, 1968, for the purposes of the business or profession of the assessee by any employee or other person. (2B). 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 expression "entertainment expenditure" has not been defined in the Act. The words have, therefore, to be construed in accordance with their ordinary and natural meaning. Where the expression admits of more than one connotation the court will prefer that meaning which appears to it to be consistent with the context and setting in which the words have been used in the statute and which would conduce to effectuate the legislative intention. It is important to note that instead of merely using the expression "entertainment expenditure" the words actually used by the Parliament in sub-Ss (2A) and (2B) are "expenditure in the nature of entertainment expenditure". The latter expression is much wider in its content in as much as it would take within its scope not merely what can strictly be regarded as entertainment expenditure proper but also expenditure of allied nature partaking of some, though not all the characteristics of entertainment expenditure. It appears to us to be beyond doubt that the intention of Parliament in employing the additional words "expenditure in the nature of" was to cast the net sufficiently wide as to bring within the scope of the two sub-sections all types of expenditure in respect of which there can be said to be certain elements which invest them with the nature of entertainment expenditure. 10. A reference to the leading dictionaries would show that the word "entertainment" has several different shades of meaning such as, a diversion or amusement: something affording a diversion or amusement, esp. 10. A reference to the leading dictionaries would show that the word "entertainment" has several different shades of meaning such as, a diversion or amusement: something affording a diversion or amusement, esp. a performance: hospitable provision for guests: maintenance in service: reception of and provision for guests: hospitality at table: that which entertains: a performance or show intended to give pleasure: hospitality given or received: the consideration of an idea: reception, admission etc. etc The exact content of the word has therefore to be gathered from the context and setting in which it has been used. We are clearly of opinion that in interpreting the expression "entertainment expenditure" occurring in sub-sections (2A) and (2B) of S.37 of the Act the word "entertainment" should be taken to mean hospitality of any kind 'extended by the assessee directly in connection with his business or profession. 11. We do not see how it can be said that in supplying cigarettes, coffee or meals to its customers and constituents the assessee was not extending to them hospitality in connection with its business. In as much as we have held that the expression "entertainment" occurring in S.37 must be taken to mean hospitality of any kind the expenditure incurred by the assessee on the supply of cigarettes, coffee etc. to its customers clearly falls within the description "entertainment expenditure". It was argued on behalf of the assessee that only hospitality extended on a lavish and grand scale would amount to "entertainment" and that hence only expenditure incurred on that kind of hospitality would be taken in by the expression "entertainment expenditure", we see no justification whatever for placing such a narrow and restricted interpretation on the word "entertainment" occurring in sub-sections (2A) and (2B) of S.37 of the Act. Further, as already noticed, in order to fall within the scope of the two sub-sections, the expenditure in respect of which the allowance is claimed, need not be "entertainment expenditure" in the strict sense of the term and it is sufficient if it partakes of some of the main characteristics of "Entertainment Expenditure". That test is amply satisfied if the expenditure in question was incurred in providing hospitality of some kind in connection with the business of the assessee. Judged in this light, it is clear that the amounts spent by the assessee firm in supplying cigarettes, coffee, meals etc. That test is amply satisfied if the expenditure in question was incurred in providing hospitality of some kind in connection with the business of the assessee. Judged in this light, it is clear that the amounts spent by the assessee firm in supplying cigarettes, coffee, meals etc. to its customers clearly fall within the description "expenditure in the nature of entertainment expenditure" occurring in sub-sections (2A) and (2B) of S.37 of the Act. 12. Counsel for the assessee relied strongly on the decision of a Division Bench of the Gujarat High Court in Commissioner of Income-tax, Gujarat-II, Ahmedabad v. Patel Brothers & Co. Ltd.. Bardoli and Another, (1976) 1 ITJ 31 wherein there are certain observations to the effect that the provision of food or drinks to a constituent or customer will amount to "entertainment" only if it is "on lavish and extravagant scale or is of wasteful nature" and that every hospitality would not constitute entertainment. With great respect we are unable to subscribe to this view. As already observed by us, having regard to the legislative history of the provisions contained in sub sections (2A) and (2B) which we have traced, and the significant use of the expression "expenditure in the nature of entertainment expenditure" in both the sub-sections it is obvious that the intention of the Parliament was to bring within the scope of those subsections all expenditure incurred by an assessee on hospitality of any kind extended to the clients, customers or constituents directly in connection with the business or profession of the assessee. 13. In Brij Raman Das and Sons v Commissioner of Income-tax, Lucknow, (1975) 2 ITJ. 329, a Division Bench of the Allahabad High Court had occasion to consider the question whether expenses incurred by an assessee for providing refreshments to customers fell within the scope of sub-section (2A) of S.37 of the Act. Answering the question in the affirmative the Division Bench held; "What we have to see is as to what is the meaning of the word "entertainment" for purposes of S.37 (2A) of the Act. In the Income-tax Act this word has not been defined and we will have to give it its general meaning. An "entertainment expenditure", would, in our opinion, include all expenditure incurred in connection with business on the entertainment of customer and constituents. In the Income-tax Act this word has not been defined and we will have to give it its general meaning. An "entertainment expenditure", would, in our opinion, include all expenditure incurred in connection with business on the entertainment of customer and constituents. The entertainment may consist of providing refreshments as in this case or it may consist of providing some other sort of entertainment. In Bentleys Stokes and Lawless v. Beeson H. M. (Inspector of Taxes), (1932) 2 All E. R.82: (1952) 33 Tax. Cas. 491 (All.), a firm of solicitors incurred expenses in entertaining clients. The entertainment consisted of providing lunch to the clients. It was held that expenditure was incurred wholly and exclusively for purposes of business and was allowable deduction. The same is the position in the instant case. The petitioner has been providing to its customers refreshments and this constitutes an expenditure in the nature of "entertainment expenditure". The entire expenditure would have been allowed but for the amendment introduced by S.37 (2A) which restricts the allowance of such an expenditure to a maximum limit of Rs. 5,000." We are in respectful agreement with the above view expressed by the Allahabad High Court. 14. We accordingly hold that the Tribunal was in error in holding that, the expenditure incurred by the assessee in the supply of coffee, tea, cigarettes etc. to customers is not in the nature of entertainment expenditure within the meaning of S.37 (2A) of the Act. The question referred is, therefore, answered in the negative, i. e., in favour of the Department and against the assessee. In the circumstances of the case we direct the parties to bear their respective costs. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Tribunal as required by sub-section (1) of S.260 of the Act.