Devi Chand Bastimal v. C. I. T. Jaipur — 1985 DIGILAW 250 (RAJ)

S.K. MAL LODHA, J.—Both these references were heard together and it will be convenient to dispose them of by a common order, for, the arguments in both the references are identical. 2. We may first notice the facts leading to REFERENCES NO 9 OF 1977: 3. The assessee is a registered firm. The previous year relevant to the assessment year 1972-73 ended on Diwali 1971. The assessee derived income from agricultural commodities and adat. For the assessment years 1972-73 and 1973-74, the assessee filed the returns declaring income of Rs. 85,150 and Rs.94, 580 respectively. The assessee, inter-alia, claimed messing expenses, to the tune of Rs. 2500/- and Rs.4500/- for the assessment years 1972-73 and 1973-74 respectively. The Income-tax Officer (I.T.O.) was of the view that the expenses were in the nature of entertainment and as such, in view of s. 37(2B) of the Income Tax Act, 1961 (No. XLIII of 1961) (the Act herein), the aforesaid claim could not be allowed. On appeal, the Appellate Assistant Commissioner vide order dt. June 14, 1947 held that the expenses in question were not hit by provisions of s.37(2B) of the Act as, in his opinion such expenses were incidental to the business. The A.A.C. , therefore, allowed the expenses to the extent of Rs.3,000/- each year. A further appeal was taken by the Revenue to the Income Tax Appellate Tribunal, Jaipur, Bench Jaipur ( the Tribunal herein ). The Tribunal by its order dated November 11,1975 held that the expenditure incurred on providing food to constituents or entertaining them of the soft drinks, namely Coca Cola, Coffee, Tea, etc. will be expenditure in the nature of entertainment. It therefore, disallowed the claim of messing expenses for both the assessment years in question. It has referred the following questions of law arising out of its order for our opinion: 1. Whether on the facts and in the circumstances of the case, the messing expenses claimed by the assessee in both the assessment years under considerations were in the nature of entertainment expenditure within the meaning of s. 37(2B) of the Act? 2. Whether on the facts and in the circumstances of the case, the Tribunal was justified in restoring the disallowance of Rs. 4,500/- and Rs. 4800/-for the A.Y. 72-73 and 73-74 respectively in question in computing the taxable income of the assessee for the assessment years under consideration? 2. Whether on the facts and in the circumstances of the case, the Tribunal was justified in restoring the disallowance of Rs. 4,500/- and Rs. 4800/-for the A.Y. 72-73 and 73-74 respectively in question in computing the taxable income of the assessee for the assessment years under consideration? FACTS IN D.B.I.T. REFERENCE NO. 42 OF 1977: 4. The assessee is a registered firm. The assessment year in question is 1974-75. The assessee firm filed its return declaring an income of Rs 1,15, 375/-. It has claimed messing expenses of Rs. 13,000/-. The Income Tax Officer (I.T.O.) held that such expenses were in the nature of entertainment. He therefore, disallowed them. An appeal was lodged and the A.A.C. was of the view that the expenses could be allowed to the extent of Rs. 10,000/-. He, therefore, vide his order dated January 21, 1976 gave a relief in the sum of Rs. 10,000/-. The Revenue filed a further appeal before the Tribunal. The Tribunal opined that the expenditure in question were in the nature of entertainment and as such, they were hit by sec. 37(2B) of the Act. On these facts, on an application under sec. 256(1) of the Act filed by the assessee, the following questions have been referred to this Court for opinion: 1. Whether on the facts and in the circumstances of the case, the expenditure on providing food to outstation constituents was in the nature of entertainment expenditure in law? 2. Whether on the facts and in the circumstances of the case, the entire expenditure in question could be disallowed under s. 37(2B) of the Income Tax Act, 1961 for the assessment year 1974-75? 5. We have heard Mr. Rajendra Mehta and Mr. Rajesh Balia. learned counsel for the assessees in each of the reference and Mr. J.P. Joshi for the Revenue. 6. By s. 10 of Act No. XIX of 1970, the following s. 37(2B) was inserted with effect from April 1, 1970: "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 28th day of February, 1970." It was delated/omitted by s. 9 of Act No. 66 of 1976 with effect from April 1, 1977. Thereafter, by s. 17 of the Finance Act, 1983 (Act No. XI of 1983), s. 37 of the Act was amended. Thereafter, by s. 17 of the Finance Act, 1983 (Act No. XI of 1983), s. 37 of the Act was amended. The material part of s. 17 of the Finance Act, 1983 for our purpose is as follows: "17. In s. 37 of the Income - Tax Act-(a) in sub-section (2A).- (i) for clause (iii) and (iv), the following shall be substituted with effect from the 1st day of April, 1984 namely; (iii) ..................................................................................... (ii) the Explanation shall be numbered and shall be deemed to have been numbered with effect from the 1st day of April, 1976 as Explanation 1 and after Explanation I as so numbered, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1976, namely: "Explanation 2.- For the removal of doubts, it is hereby declared that for the purposes of this sub-section. Sub-sec. (2B), as it stood before the 1st day of April 1977) "en 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 with whatso ever 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." Thus, it is clear that the above Explanation -2 to s. 37(2A) of the Act was inserted with effect from April 1, 1976. In D. B. I. T. Ref. No. 9 of 1977, the assessment years in question are 1972-73 and 1973-74 and in D. B. I. T. Ref. No. 42 of 1977, the assessment year involved is 1974-75. We are, thus, concerned with s. 37(2-B) of the Act as existed in the years 1972-73, 1973-74, and 1974-75. 7. Learned counsel for the Revenue raised the controversy that Explanation -2 which was inserted by the amendment of s. 37 vide s. 17 of the Finance Act. 1983 will be deemed to have been inserted with effect from April 1, 1970 despite that this insertion was made effective from April 1, 1976 and in view of this Explanation, the expenditure in question incurred by the assessees cannot be allowed now. 1983 will be deemed to have been inserted with effect from April 1, 1970 despite that this insertion was made effective from April 1, 1976 and in view of this Explanation, the expenditure in question incurred by the assessees cannot be allowed now. On the other hand, learned counsel for the assessees submitted that Explanation -2 to s. 37 (2A) has been inserted with effect from April 1, 1976 and as such, it will have no application to the assessments that have already been completed prior to this date (April 1, 1976) and the questions referred to by the Tribunal may be answered according to s. 37 (2B) as existed then. 8. Having considered the contentions of the learned counsel for the Revenue as well as that of assessees in respect of Explanation-2 of s. 37(2A), we are of opinion that the questions referred by the Tribunal should be answered having regard to s. 37 (2B) as it existed during the assessment years 1972-73. 1973-74 and 1974-75. 9. In both the references, the first question which is common and crops up for our consideration is whether messing expenses claimed by the assessee for the assessment years in question was in the nature of entertainment expenditure as envisaged by s. 37 (2B) of the Act. The Tribunal was of the opinion that the expenditure incurred for providing food to the constituents or entertaining them with the soft drinks namely. Coca Cola, Coffee, Tea etc. is an expenditure in the nature of entertainment. It appears that barring aside Bijrammandas and Sons V. C. I. T., Lucknow (1) and C.I.T. Kerala V. Veeriah Reddiar (2) no other authority was brought to its notice and it, therefore in accordance with the aforesaid decisions did not agree with the A. A. C. in regard to grant of relief for a sum of Rs. 3. 000/- in each year under consideration in the matter of M/s Devichands case and disallowed the claim in full in respect of Bhanwarlals case. 10. There is divergence of judicial opinion on the question among the various High Courts of India. We purpose to notice both sets of views. 11. We shall, first, advert to the authorities cited by the learned counsel for the assesse. The basic authority is C.I.T.V. Patel Brothers & Co. Ltd. (3), wherein four tests have been laid down for determining the nature of entertainment expenditure: 1. We purpose to notice both sets of views. 11. We shall, first, advert to the authorities cited by the learned counsel for the assesse. The basic authority is C.I.T.V. Patel Brothers & Co. Ltd. (3), wherein four tests have been laid down for determining the nature of entertainment expenditure: 1. If the provision of food, drinks or any amusement to a cilent, constitutent or customer is on a lavish and extravagent scale, or is of wasteful nature, it is entertainment per se. 2. If the provision of food or drinks to a client constituent or customer is in the nature of bare necessity or by way of ordinary courtsey or as an express or implied term of the contract of employment spelled out from long-standing practice or custom of trade or business, it will not amount to entertainment. 3. If the provision of food or drinks to a client customer, or constituent is in a liberal and friendly way, it may amount to entertainment having reward to the place, item and cost of such provision. 4. The provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment. We may state that learned counsel appearing for the Revenue also wanted to derive support from this decision as according to him while applying the broad test laid down in C.I.T.s case(3), it is an entertainment expenditure. 12. CI.T.s case (3) was followed in C.I.T. V. Shah Nanji Naggi(4), wherein their Lordships of the Bombay High Court expressed their agreement with the view that was taken, for, according to them, it was in consonance with the commercial practice and the manner in which business and trade is carried on in large commercial centres. We may state that in C.I.Ts case(4), the expenditure incurred by a Pakka Adati was either for messing and lodging to the constituents who came from outside only for a duration of one or two days for the purpose of business or for providing tea and Pan to the customers. The learned Judges observed as under : "Any expenditure incurred for providing messing to such customers or constituents or offering tea and Pan to them is actually an essential part of business and does not partake the nature of hospitality or entertainment. The learned Judges observed as under : "Any expenditure incurred for providing messing to such customers or constituents or offering tea and Pan to them is actually an essential part of business and does not partake the nature of hospitality or entertainment. We feel that the test that has been laid down by the Gujarat High Court is consistent with the commercial practice and the custom of the trade and the view taken by the Gujarat High Court lends itself to us in preference to the one taken by the Full Bench of the Kerala High Court." In C. I. T. s case (4), their Lordships of the Bombay High Court expressed their dissent from C. I. T.s case (2). 13. In Addl. C.I.T.V. Maddi Venkataratnam & Co. Ltd. (5), it was held that the expenditure incurred by the assessee in connection with providing lodging and boarding facilities by maintaining the guest house for the use of foreign visitors is not entertainment expenditure and hence, it is admissible as a deduction under s. 37 (1) of the Act. C. I. T s case (3) was referred to. 14. In C.I.T.V. Karuppuswamy Nadar & Sons (6), the assessee claimed deduction of the expenses incurred by it on supply of coffee, tea etc. to the customers. It was held to be not in the nature of entertainment expenditure but for purposes of its business and hence allowable as a deduction under s. 37 (1). It was observed: "The very concept of entertainment would rule out cases of business or commercial courtesy extended to clients who visit the businessman for the purpose of doing business. The entertainment postulates that it is some seeking after pleasure, and cannot comprehend customary hospitalities shown to persons who come to do business. This running after pleasure may be indicated in cases where a lavish party is given in a poch hotel even to the client etc. But the ordinary elementary extension of business courtesy or civility to visiting clients by allowing them to quench their thirst, as in this case, cannot be understood as expenditure in the nature of entertainment." The learned Judges referred to C. I. T. s case (3), C. I. Ts case (2) and C. I. T. s case (4). 15. In Addl. But the ordinary elementary extension of business courtesy or civility to visiting clients by allowing them to quench their thirst, as in this case, cannot be understood as expenditure in the nature of entertainment." The learned Judges referred to C. I. T. s case (3), C. I. Ts case (2) and C. I. T. s case (4). 15. In Addl. C. I. T. V. Banglore Turf Club Ltd. (7) it was observed that in order that an expenditure should constitute expenditure in the nature of entertainments within the meaning of s. 37 (2A) of the Act, it should have been expended for entertaining persons/whether customers or guests, either by way of providing food, drinks, refreshment or in providing any type of pleasure or amusement or an expenditure of a like nature incurred by the assessee for the purpose of entertainment, pleasure or amusement for himself or for his employees. Whatever be the case, the dominent purpose of incurring the expenditure for the purpose of food, drink, refreshment and amusement must be for deriving or providing pleasure. 16. In C. I. T. V. Lakhmichand Muchhal (8), Addl. C. I. Ts case (5), C.I.Ts case (4) and C.I.T.s case (3) were followed and it was observed that the term entertainment in the context of s. 37 2B) of the Act on its true construction and meaning would include the acts or practice of receiving and entertaining strangers and friends; but when the acts of practice of being hospitable in the sense of providing meals, drinks or other wants of guests are a part and parcel of the express or implied terms and conditions of business, trade or profession or on account of longstanding customs in such trade, business, or profession, they would not amount to entertainment. It was held that the expenditure incurred by an assessee for providing messing to its trade constituents by way of ordinary courtesy would not amount to expenditure in the nature of entertainment expenditure as contemplated by s. 37 (2-B). C. I. Ts case (2) was referred to. 17. It was found in South India Viscose Ltd. V. C. I. T. (9) that the expenditure on provision of coffee etc. to customers is not an entertainment expenditure and it is allowable as deduction. C. I. T.s case (6) was followed. C. I. Ts case (2) was referred to. 17. It was found in South India Viscose Ltd. V. C. I. T. (9) that the expenditure on provision of coffee etc. to customers is not an entertainment expenditure and it is allowable as deduction. C. I. T.s case (6) was followed. In C. I. T. V. Navalmal Punamchand (10), it was held by the Madhya Pradesh High Court that messing expenses to provide meals to upcountry customers in accordance with the custom of the trade of the assessee does not amount to entertainment expenditure and cannot be disallowed under s. 37(2B) of the Act. In that case C.I.T s case (8) was followed. 18. In C. I. T. V. Swadeshi Match Co. (11) it was reiterated by the M. P. High Court after following C. I. T. s case (3) that the expenses incurred for providing tea, coffee, pan, cold drinks etc., to customers being ordinary courtesies shown to customers by business houses, do not amount to expenditure in the nature of entertainment expenditure within the meaning of s.37 (2A) or s. 37 (2B) of the Act. 19. In C. I. T. V. Mathuralal Kapoorchand & Co. (12), it was held that expenditure incurred by an assessee for providing messing facilities to his trade clients is an admissible business expenditure and such expenses are not in the nature of entertainment within the meaning of s. 37 (2B) of the Act, C. I. Ts case(8) was followed. In Nava Bharat Interprises P. Ltd. V. C. I. T. (13), the business expenditure and entertainment expenditure were again considered by the Andhra Pradesh High Court. The learned Judges opined that if expenditure is incurred for providing food and drink only to a client, constituent or customer, which is in the nature of bare necessity or by way of ordinary courtesy, it would not amount to entertainment expenditure. But if a party is arranged or a banquet is given or some amusement is provided to or in connection with the visit of such a client, constituent or customer as the case may be it would fall within the ambit of the expression "entertainment expenditure." 20. But if a party is arranged or a banquet is given or some amusement is provided to or in connection with the visit of such a client, constituent or customer as the case may be it would fall within the ambit of the expression "entertainment expenditure." 20. Our attention was drawn by the learned counsel for the assessees to 1979 Bombay Chartered Accountant Journal - 739 to show that the Supreme Court has refused Special Leave to Appeal against the order of the Bombay High Court in I. T. No. 273 (BOM) of 1976-77 decided on January 27, 1977. The Bombay High Court refused application under s. 256 (2) in respect of two questions of law which were said to have arisen out of the order of the Tribunal. Question No. 1 sought to be referred was whether on the facts and in the circumstances of the case, the Tribunals finding that the expenditure incurred by the assessee company by way of providing hot and cold drinks, lunch etc. to its upcountry customers were of a customary nature in the assessees line of business and that the said expenditure did not constitute entertainment expenditure within the meaning of s. 37 (2B) of the Income Tax Act, was proper or was contrary to the material on record. This shows that the Supreme Court has impliedly approved the decisions of Gujarat and Bombay High Courts and other High Courts which have followed them in preference to the view expressed by Allahabad and Kerala High Courts. 21. Learned counsel for the Revenue placed strong reliance on C.I.T. case (2), which has already been noticed. Besides that, he referred to C.I.T. vs. Kalai Tyre P. Ltd. (14) and C.I.T. vs. Khemchand Bahadur Chand (15). 21. Learned counsel for the Revenue placed strong reliance on C.I.T. case (2), which has already been noticed. Besides that, he referred to C.I.T. vs. Kalai Tyre P. Ltd. (14) and C.I.T. vs. Khemchand Bahadur Chand (15). A Full Bench of the Kerala High Court took the view in C I.Ts case(2) that the additional words "expenditure in the nature of" sub-sections (2 A) and (2B) of Sec. 37 of the Act restricting the allowance for expenditure on entertainment by an assessee is to cast the net sufficiently wide so 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, It was observed as follows: "In interpreting the expressions "entertainment expenditure occurring in sub-sections (2A) and (2B) of section 37, the word entertainment should be taken to mean hospitality of any kind extended by the assessee directly in connection with his business or profession and, therefore, the expenditure incurred by the assessee on the supply of cigarettes, coffee, etc., to its customers would certainly fall within the description "entertainment expenditure." 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". The 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, the amounts spent by an assessee firm in supplying, cigarettes, coffee, meals etc. to its customers would fall within the description "expenditure in the nature of entertainment expenditure occurring in sub-sections (2A) and (2B) of section 37 of the Act." In C.I.T. v. Bagraj & Co. (16), the Allahabad High Court opined that the cost of food supplied to the low-paid employees of the assessee - firm would be business-expenditure and cannot be disallowed as entertainment expense under s. 37 (2A) of the Act. (16), the Allahabad High Court opined that the cost of food supplied to the low-paid employees of the assessee - firm would be business-expenditure and cannot be disallowed as entertainment expense under s. 37 (2A) of the Act. In C.I.Ts case (15), it was held that where the assessee itself was running a regular kitchen to furnish wholesome food and drink to its customers, the expenditure thereon would fall within the ambit of hospitality whether lavish or frugal, and the entire expenditure would be within the ambit of s. 37 (2A) as an expense "in the nature of entertainment expenditure" and, therefore, subject to the ceiling limits prescribed in cls. (i) and (iv) thereof. 22. There is thus no doubt that there are two divergent views on the question relating to entertainment expenditure; one taken in C.I.Ts case (3) and the other taken in C.I.Ts case (2). The tests that have been laid down in C.I.Ts case (3) appear to us to be correct for determining the nature of entertainment expenses. C.I.Ts case (3) has been followed by Bombay High Court in C.I.Ts case (4) and other High Courts referred to hereinabove. We respectfully agree with the view taken by the Gujarat High Court in C.I.Ts case (3). 23. It may be stated that the A.A.C. has followed the decision rendered in C.I.T.s case (3). A perusal of the order of the Tribunal shows that before it, only those authorities were cited which took the view that the expenditure with which we are concerned is entertainment expenditure. The decisions taking the contrary view from those decisions were not brought to the notice of the Tribunal. 24. In Reference No. 9 of 1977, the assessee is a registered firm and it derives income from agricultural commodities and adat. The assessee firm has claimed Rs. 4800/- being messing expenses on outside customers and adaties. The assessee in connection with the business provided merely food and soft drinks to such customers and adatiyas. On the basis of the reasons given in C.I.Ts a case (3), such expenses cannot be characterised as entertainment expenditure under s. 37 (2B) of the Act. The Tribunal was, therefore, not right in holding that the messing expenses claimed by the assessee in respect of the assessment years 1972-73 and 1973-74 were not in the nature of entertainment expenditure within the meaning of s. 37 (2B) of the Act. The Tribunal was, therefore, not right in holding that the messing expenses claimed by the assessee in respect of the assessment years 1972-73 and 1973-74 were not in the nature of entertainment expenditure within the meaning of s. 37 (2B) of the Act. The A.A.C. after holding that the expenditure incurred was not in the nature of entertainment expenditure allowed the same to the tune of Rs. 3,000/- each year. On behalf of the assessee, it was contended that the A.A.C. committed an error in allowing deduction of Rs. 3,000/- only out of the disallowed amounts in question each year. The Tribunal having come to the conclusion that it was in the nature of entertainment expenditure restored the disallowance of Rs. 4500/- and Rs. 4800/- for the assessment years 1972-73 and 1973-74 respectively. We have held that the messing expenses claimed by the assessee in both the assessment years in question are not in the nature of entertainment expenditure within the meaning of s. 37 (2B) of the Act. Now it is for the Tribunal to consider in view of the finding recorded by the A.A.C. in his order dated June 14, 1974 whether Rs. 3,000/- should be allowed as messing expenses for each of the assessment years 1972-73 and 1973-74 or Rs. 4500/- and Rs. 4800/- should be allowed as messing expenditures for the assessment years 1972-73 and 1973-74, while commuting the taxable income of the assessee for the assessment years keeping in view the finding that the messing expenses incurred by the assessee were not entertainment expenditures under s. 37 (2B) of the Act. 25. So far as Reference No. 42 of 1977 is concerned it is sufficient to state that the expenses incurred by the assessee for providing food to outside constituents was not in the nature of entertainment expenditure in law and, therefore, the entire expenditures could not be disallowed under s. 37 (2B) of the Act. 26. The question referred to us in Reference No. 9 of 1977 are answered in the negative i.e. in favour of the assessee and against the Revenue. 26. The question referred to us in Reference No. 9 of 1977 are answered in the negative i.e. in favour of the assessee and against the Revenue. The answer to Question No. 2 is limited to the extent we have hereinabove specified, namely that the assessee is entitled to messing expenses which are not entertainment expenditures within the meaning of s 37 (2B) of the Act but what quantum should be allowed, that will be decided by the Tribunal keeping in view the finding recorded by the A.A.C. 27. So far as Reference No. 42 of 1977 is concerned, both the questions referred to us are answered in the negative i.e. in favour of the assessee and against the Revenue. 28. The parties shall bear their own costs of these References. 29. Let the answers be returned to the Tribunal in accordance with s. 260 (2) of the Act.