AJIT K. SENGUPTA, J. ( 1 ) THIS reference under Section 256 (2) of the Income-tax Act, 1961, at the instance of the assessee, relates to the assessment year 1971-72. ( 2 ) THE facts leading to this reference are shortly stated hereunder : for the year under consideration, the assessee debited a total amount of Rs. 1,66,585 as expenditure on "refreshments" in the account styled as "non-members profit and loss account". The details of the expenditure furnished to the Income-tax Officer by the assessee are as follows : Rs. (1) Refreshment served to -- (a) Stewards, secretary and others including donors of cups and certain VIPs. 83,518 (b) Permanent and race day officials 19,488 (c) Permanent and race day officials other than officials. 34,300 (2) Morning tea to officials attending to track work in the morning and trainers and jockeys exercising the horses. 13,260 (3) Refreshments served on the occasion of the Turf Invitation Cup Race held on 6th March, 1971 . 7,300 (4) Expenditure on annual party thrown to owners, trained jockeys, book-makers, club-makers, police officers and other persons connected with racing 8,699 TOTAL 1,66,585 ( 3 ) ON an examination of the break up of the expenses furnished by the assessee of the expenses for Rs. 3,302 incurred on one race day, i. e. , August 8, 1970, the Income-tax Officer found that the bulk of the expenses related to drinks and tobacco, which, in his opinion, did not constitute legitimate business expenditure. He also found that, out of the expenses of Rs. 7,300 incurred on March 6, 1971, on Turf Invitation Cup Race Day Rs. 6,500 represented expenditure on hot drinks and cigarettes, which, in his view, was not legitimate business expenditure. He further found that, out of the expenses of Rs. 8,699 incurred on "annual party", Rs. 4,800 represented cost of drinks and Rs. 3,410 cost of lighting arrangement and decorations. He held that the expenditure on hot drinks, soft drinks and tobacco served to stewards, their friends and others was entertainment expenditure in nature and, therefore, not an allowable deduction. He disallowed under Section 37 (2b) of the Act the entire expenses of Rs. 7,300 incurred on the party hosted on the Turf Invitation Cup Day and Rs. 8,699 incurred on the party hosted on the annual day treating the same as entertainment expenditure. Out of the expenditure of Rs. He disallowed under Section 37 (2b) of the Act the entire expenses of Rs. 7,300 incurred on the party hosted on the Turf Invitation Cup Day and Rs. 8,699 incurred on the party hosted on the annual day treating the same as entertainment expenditure. Out of the expenditure of Rs. 83,510 claimed as expenditure on refreshment served to stewards, secretary and other VIPs, the Income-tax Officer disallowed on estimate under Section 37 (2b) Rs. 5,000 on the ground that it represented entertainment expenses on account of lunch, etc. , provided to the guests and friends of stewards, etc. He further disallowed Rs. 69,230 on the ground that it represented expenditure on hot and soft drinks and tobacco served to stewards, their friends and guests. Out of Rs. 19,458 claimed by the assessee as refreshment served to permanent and race day officials, the Income-tax Officer disallowed on estimate Rs. 7,000 on the ground that it represented expenditure on officials of the turf club, unconnected with the business. In this way, he disallowed the deduction claimed by the assessee to the extent of Rs. 97,319 and allowed the same to the extent of Rs. 69,266. ( 4 ) ON appeal, the Appellate Assistant Commissioner held that the disallowance of the expenses made by the Income-tax Officer was not based on accurate estimate. He, therefore, reduced the disallowance to Rs. 70,000. ( 5 ) IN the appeal before the Tribunal, the representative for the assessee urged, as regards the expenditure incurred on hot drinks served to the stewards, their friends and guests, etc. , that most of the stewards are addicted to drink and that in order to get the right type of persons to act as stewards, it was quite necessary for the race club to entertain them with hot drinks on race days. These expenses, it was urged were necessitated by business exigencies and not with the idea of entertaining anybody. ( 6 ) IN reply, the departmental representative did not dispute the fact that the serving of hot "drinks to stewards, etc. , by the race club on race days is an age-long custom in the field of racing. But he disputes the proposition enunciated by learned counsel for the assessee that the right type of persons do not accept stewardship unless hot drinks are served to the stewards on race days. , by the race club on race days is an age-long custom in the field of racing. But he disputes the proposition enunciated by learned counsel for the assessee that the right type of persons do not accept stewardship unless hot drinks are served to the stewards on race days. It is urged that many well-placed persons accept stewardships because of the high prestige in society which that office carries with it and not because of the prospect of taking drinks at the expense of the race club. ( 7 ) THE Tribunal gave consideration to the above arguments and held as under :"we are of the view that the expenditure incurred on snacks, tea, etc. , served to the permanent as well as temporary employees on the race days is a legitimate business expenditure. We do not find any element of entertainment involved in the expenditure. The service of snacks, tea, etc. , to the employees on the race days is, in our opinion, quite necessary in order to enable those employees to put forth their best efforts in making all the arrangements to ensure the smooth conduct of the race. But we do not think that the expenditure on hot drinks served to the stewards, secretary, donors of cups, other VIPs and officials of the race club can be regarded as an expenditure wholly and exclusively laid out for the purpose of the business. Out of the expenditure (Rs. 83,518 and Rs. 19,458) claimed by the assessee in this regard, the Income-tax Officer disallowed Rs. 76,320 and the Appellate Assistant Commissioner sustained this disallowance to the extent of Rs. 70,000. On a consideration of the facts and circumstances of the case and having regard to our above finding, we consider it reasonable to question this disallowance to the extent of Rs. 40,000. 19,458) claimed by the assessee in this regard, the Income-tax Officer disallowed Rs. 76,320 and the Appellate Assistant Commissioner sustained this disallowance to the extent of Rs. 70,000. On a consideration of the facts and circumstances of the case and having regard to our above finding, we consider it reasonable to question this disallowance to the extent of Rs. 40,000. " ( 8 ) ON the aforesaid facts, the following question of law has been referred to this court :"whether, in the absence of any prohibition or bar on the serving of hot drinks, the Tribunal, on the facts and in the circumstances of the case, was right in holding that the expenditure on hot drinks served on race days to stewards, secretary, donors of cups, other VIPs and officials of the club cannot be regarded as an expenditure wholly and exclusively laid out for the purpose of the business and sustained a disallowance in this regard to the extent of Rs. 40,000 ?" ( 9 ) AT the hearing, Dr. Pal, appearing for the assessee, contended that the Tribunal was not justified in making a distinction between hot drinks and soft drinks. The drinks were served to stewards, secretary donors of cups and other VIPs and officials. This expenditure was necessary for the purpose of the turf club. Reliance has been placed on the decision of the Gujarat High Court in the case of CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424 In that case, the assessee-company had claimed kitchen expenses for providing meals to up-country customers out of commercial compulsion and expediency and, according to the assessee, the said expenses could not be treated as expenditure in the nature of entertainment. The Gujarat High Court held that if the provision of food and drinks to customers is in the nature of bare necessity, or by way of ordinary courtesy, or as an express or implied term of the contract of employment spelt out from long-standing practice or custom of trade or business, it will not amount to entertainment. The court also held that only such expenses would come within the ambit of entertainment expenditure which are on a lavish or extravagant scale or wasteful in nature. ( 10 ) RELIANCE has also been place a on the decision made in the case of Addl. The court also held that only such expenses would come within the ambit of entertainment expenditure which are on a lavish or extravagant scale or wasteful in nature. ( 10 ) RELIANCE has also been place a on the decision made in the case of Addl. CIT v. Bangalore Turf Club Ltd. [ 1980] 126 ITR 430 (Kar ). ( 11 ) THE question which calls for determination is whether the expenditure on hot drinks served on race days to stewards, secretary, donors of cups, other VIPs and officials of the club can be regarded as an expenditure wholly and exclusively laid out for the purposes of the business. The expenditure on hot drinks was incurred only in connection with certain special occasions. Even the Revenue authorities did not dispute the fact that the service of hot drinks to the stewards by the race club on race days is an age-long custom in the field of racing. It is also not in dispute that the drinks were served only to the stewards, donors of cups, other VIPs and officials of the race club. Such drinks were served only on special occasions. ( 12 ) IN Addl. CIT v. Bangalore Turf Club [1980] 126 ITR 430 (Kar), the assessee which conducted horse races, incurred expenditure under the head "refreshments" towards the supply of refreshments, lunch, liquors, etc. , in the business meetings of the stewards and of the members of the managing committee as also of the general body. The Tribunal held that only expenses incurred towards refreshments, lunch, including liquor served at the business meetings of the stewards, managing committee members and other office-bearers and officials as well as similar expenses incurred in the general body meetings, would not partake of the character of entertainment expenditure and all other expenses incurred by the assessee were in the nature of entertainment expenditure. This view of the Tribunal was affirmed by the High Court on a reference. The High Court observed that expenditure for providing refreshments, lunch, liquor, etc. , served at the meetings of the stewards and during the official business meetings of the managing committee and office-bearers or in the general body meeting of the members of the club which were also business meetings would be in the nature of administrative and business expenditure and would have no taint of expenditure in the nature of entertainment. , served at the meetings of the stewards and during the official business meetings of the managing committee and office-bearers or in the general body meeting of the members of the club which were also business meetings would be in the nature of administrative and business expenditure and would have no taint of expenditure in the nature of entertainment. ( 13 ) IT is now well settled that the true test of an expenditure laid out wholly and exclusively for the purposes of the trade or business is that it is incurred by the assessee as incidental to his trade for the purposes of keeping the trade going and of making it pay and not in any capacity other than that of a trade. ( 14 ) IN view of the admitted position that serving of hot drinks to stewards, etc. , by the race club on race days is an age-long custom in the field of racing and such drinks are served in order to enable the employees to put forth their best efforts in making all the arrangements to ensure the smooth conduct of the races, such an expenditure is incidental to the trade and as such the expenditure is incurred wholly and exclusively for the purposes of the business. There is no law prohibiting the serving of drinks. There is no reason why such an expenditure which was incurred as incidental to the trade should not be allowed as a business expenditure. ( 15 ) WHETHER a particular expenditure is a revenue expenditure incurred for the purposes of the business must be determined on a consideration of all the facts and circumstances and by the application of the principle of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of, the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character the possession of which is a condition of the carrying on of the business, the expenditure should be regarded as a revenue expenditure incurred wholly and exclusively for the purposes of the business. ( 16 ) THE Supreme Court, in Bombay Steam Navigation Co. (2953) Private Ltd. v. CIT [1965] 56 ITR 52, observed as follows (pp. ( 16 ) THE Supreme Court, in Bombay Steam Navigation Co. (2953) Private Ltd. v. CIT [1965] 56 ITR 52, observed as follows (pp. 59, 60) :"whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of the principles of commercial trading. The question must be reviewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. " ( 17 ) THE Revenue contended, relying on the decision of the Patna High Court in Chandmull Rajgarhia v. CIT [1987] 167 ITR 433, that expenditure incurred by the assessee in supplying hot and soft drinks and tobacco to stewards, their friends and guests would be in the nature of entertainment expenditure as the expenditure was not entirely divorced from the element of hospitality. ( 18 ) ENTERTAINING involves the inevitable characteristic of hospitality. It is no doubt true that there is an element of hospitality which was necessarily inherent in what was done but, in the facts and circumstances of this case, the sole object in incurring the expenditure was the promotion of the activity of the race club. If the sole object is business promotion, the expenditure is not disqualified because the nature of the activity necessarily involves some other result since such result is inherent in the act. Accordingly, the expenditure so far, at any rate, as is reasonable, must be allowed. ( 19 ) FOR the reasons aforesaid, we answer the question in this reference in the negative and in favour of the assessee. There will be no order as to costs.