D. K. Jain, J. ( 1 ) THESE arc two cross-references by the assessee and the revenue in respect of assessment year 1971-72. Since a common statement of case has been drawn by the Income-tax Appellate Tribunal, these are being disposed of together. The questions referred at the instance of the assessee (ITR No. 284/82) are as under:- "1. Whether in computing the capital employed in respect of new industrial undertaking for the purpose of Section 80-J, the debts owed by the assessee relating to the undertaking should be deducted? 2. Whether in computing the capital employed in respect of a new industrial undertaking for the purpose of Section 80-J, the W. D. V. of assets should be taken and not the original cost?" ( 2 ) THE questions referred at the instance of the revenue (ITR No-285/82) are as follows:- "1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire expenditure of Rs. 3,44,316. 00 was incurred wholly and exclusively for the purpose of the assessee s business and no part of this expenditure was to be disallowed as being in the nature of entertainment expenditure? 2. Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that borrowed money formed part of the capital employed for purposes of computing deduction allowable under section 80j? 3. Whether on the facts and in the circumstances of the case, the Tribunal was right in directing that the average capital for purposes of section 80j should be computed on the basis of the decision of Calcutta High Court in Century Enka Ltd. v. lncome-tax Officer (l977) 107 I. T. R. 123 (Cal)?" 4. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that expenditure ofrs. 92,777. 00 incurred in connection with the foreign tour of Dr. Bharat Ram is an allowable expense ?" ( 3 ) AS regards the two questions referred at the instance of the assessee and Question Nos. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that expenditure ofrs. 92,777. 00 incurred in connection with the foreign tour of Dr. Bharat Ram is an allowable expense ?" ( 3 ) AS regards the two questions referred at the instance of the assessee and Question Nos. 2 and 3 referred at the instance of the revenue, learned counsel for the assessee fairly stated that in view of the decision of the Supreme Court in Lohia Machines Ltd v. Union of India (1985) 152 ITR 308, wherein Rule 19a of the Income-tax Rules, 1962 has been held to be valid in its entirety, these questions require to be answered in favour of the revenue. The questions are answered accordingly. ( 4 ) IN relation to question No. 1, in revenue s reference, the facts found by the Tribunal are that during the previous year ended on 30 June 1970, the assessee, a Public Limited Company, held aninaugural function for its fertilizer plant at Kota (Rajasthan), which was set up with Japanese collaboration. The plant had come into operation in the preceding year ended on 30th June 1969 and was in production during the relevant previous year. The inauguration took place at the hands of the Prime Minister of India and the function was attended by Union Ministers, Chief Ministers, other high dignitaries and representatives of the foreign collaborators. The details of the expenditure incurred at the function are as under:-The entire expenditure was claimed by the assessee as revenue expenditure on the plea that the purpose of the inaugural function was to advertise and to bring to the notice of the public at large that the company had successfully commissioned a large scale plant for the manufacture of fertilizers, which was a matter of pride not only for the company but also for India and Japan. In other words, the claim of the assessee was that the expenditure was on advertisement and publicity. While framing assessment for the relevant assessment year, the Income-tax Officer went into the details of these expenses and held that except for the expenses incurred for advertisement in newspapers (Rs. 2,13,479) and on gifts to employees, amounting to Rs. 25,903, claimed under the head "miscellaneous Expenses", the entire expenditure was in the nature of entertainment. He accordingly disallowed the balance claim amounting to Rs. 2,13,479) and on gifts to employees, amounting to Rs. 25,903, claimed under the head "miscellaneous Expenses", the entire expenditure was in the nature of entertainment. He accordingly disallowed the balance claim amounting to Rs. 3,44,316 and added the same to the total income of the assessee. The assessee did not get any relief in its appeal to the Appellate Assistant Commissioner. It carried the matter further inappeal to the Tribunal. The Tribunal, relying on the decisions of the Gujarat High Court in the case of CIT v. Patel Brothers and Co. Ltd (1977) 106 ITR 424 and Andhra Pradesh High Court in Addl. CIT v. Maddi Venkatratnam and Co. Ltd. , (1979) 119 ITR 514, held that no part of the expenditure incurred on the occasion of inauguration could be considered to be entertainment expenditure. The entire addition of Rs. 3,44,316 was thus deleted. It is thereafter that the aforesaid question has been referred to this Court under Section 256 (1) of the Income-tax Act, 1961 (briefly the Act ). ( 5 ) MR. Rajendra, learned counsel for the revenue contended that the expression "in the nature of entertainment" appearing in Sub-Section 2b of Section 37 of the Act is of wide amplitude to mean and include any and every kind of expenditure which has an element of hospitality. In support he relied on three Full Bench decisions reported as CIT v. Veeriah Reddiar (1977) 106 ITR 610 (Ker), CIT v. Khem Chand Bahadur Chand (1981)131 ITR 336 (Pandh) and Phool Chand Gajanand v. CIT (1989) 177 ITR 265 (All) and the decisions of the Rajasthan, Patna, Madhya Pradesh and Karnataka High Courts, reported as (1994) 205 ITR 298. Chandmull Rajgarhia v. CIT (1987) 167 ITR 433, Central Paints Ltd. v. CIT, (1984) 146 ITR 2l2 and Mysodet (Pvt.) Ltd v. CIT (1987) 163 ITR 848 respectively, wherein the said Full Bench decisions have been followed. He furthersubmitted that with the insertion of Explanation 2 in Section 37 of the Act by the Finance Act, 1983, all doubts regarding the scope of the expression "entertainment expenditure" stand removed and expenditure on provision of hospitality of every kind, whether by provision of food or beverages or any other manner whatsoever, would be included within the meaning of the expression entertainment expenditure . He urged that Explanation 2 being clarificatory in nature, has retrospective effect and, therefore, would be applicable for the relevant assessment year as well. ( 6 ) ON the other hand, Mr. O. P. Vaish, learned counsel for the assessee, while deriving support from three decisions of this Court in CIT v. Supreme Motors (P) Ltd. (1984) 147 ITR 48, Santlal Kashmirilal v. CIT (1986) 157 ltr 422 and Modi Spinning and Weaving Mills Co. Ltd. v. CIT (1993) 200 ITR 544 and a decision of the Calcutta High Court in CIT v. Hindustan Aluminium Corporation Ltd. (1989) 176 ITR 206 , has submitted that no part of the expenditure incurred on the inaugural function could be regarded as entertainment expenditure as contemplated by Section 37 (2b) of the Act. ( 7 ) FOR the purpose of the present reference, we feel, it is not necessary to go into the history of the relevant provisions relating to the entertainment expenditure. Suffice it to say that the steps initiated in the direction of gradually controlling these expenses by prescribing ceiling limits on the entertainment expenditure reached their crescendo in the year 1970, when by the Finance Act 1970, Sub-section 2b was inserted in Section 37 of the Act prohibiting deduction of entertainment expenditure altogether, if incurred within India after 28 February 1970. This provision took effect from 1 April 1970 and applied to assessments for and from the assessment year 1970-71. As noted above, we are concerned with the assessment year 1971-72, for which the accounting period ended on 30 June 1970. Sub-section 2b (omitted with effect from 1 April 1977), reads as follows: " (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. " ( 8 ) FROM the language of sub-section 2b it is clear that an expenditure in the nature of entertainment expenditure, if incurred in India from 28 February 1970 to 31 March 1977 is to be disallowed altogether in computing the profits and gains of business or profession. " ( 8 ) FROM the language of sub-section 2b it is clear that an expenditure in the nature of entertainment expenditure, if incurred in India from 28 February 1970 to 31 March 1977 is to be disallowed altogether in computing the profits and gains of business or profession. However, the material question which falls for consideration is as to what constitutes entertainment and whether every act of hospitality amounts to an expenditure in the nature of entertainment within the meaning of Section 37 (2b) of the Act, as pleaded on behalf of the revenue. ( 9 ) BEFORE considering the main question, posed above, we may at this stage itself deal with the contention of learned counsel for the revenue to the effect that though Explanation 2 has been inserted by Finance Act 1983, with retrospective effect from 1 April 1976 but the same being clarificatory in nature is applicable in the instant case also because in our view the issue is no longer res integra. Explanation 2 to Section 37 (2a) of the Act provides that, for the removal of doubts, it is hereby declared that for the purposes of this Sub-section and Sub-section (2b), as it stood before 1 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 places of their work. In Santlal Kashmirilal s case. (supra), dealing with the assessment years 1972- 73 and 1973-74. this Court held that the amendment in the form of Explanation 2 was made retrospective from 1 April 1976 and, therefore, the expenditure in the said assessment years did not come within the mischief of the said Explanation. Even the Central Board of Direct Taxes, in its circular dated 8 December 1983, published in (1984)146 ITR Statute 31 has also clarified that the said Explanation will apply in relation to the assessment year 1976-77 and subsequent years. In the instant case the expenditure in question having been incurred prior to 1 April 1976, the said Explanation shall not be applicable. In the instant case the expenditure in question having been incurred prior to 1 April 1976, the said Explanation shall not be applicable. The argument of learned counsel for the revenue is, therefore, devoid of any merit and is accordingly rejected. ( 10 ) COMING to the main question, the terms "entertainment" or "entertainment expenditure" have not been defined in the Act but these terms have been considered and interpreted by the Courts in the context of Section 37 (2a) and (2b) of the Act. In CIT v. Patel Brothers (Supra), the Gujarat High Court had the occasion to consider the question of allowability of an expenditure under Section 37 (2a) and 37 (2b) of the Act. The Court considered the meaning of the expressions "entertainment" and "hospitality" and came to the conclusion that every act of entertainment included hospitality but every hospitality did not constitute entertainment. The Court drew a fine distinction in the terms "hospitality" and "entertainment" and held that if the act of being hospitable consists of providing meals and drinks to: (i) employees as a term of service or engagement and (ii) friends and strangers as term and condition of contract or custom or usage of trade or by way of ordinary courtesy, it is not entertainment and such expenditure may be allowable and the bar of Sub-section 2b would not apply. On the contrary if the provision of food, drinks or any amusement to a client, customer or constituent is on lavish and extravagent scale or is of wasteful nature, it would fall within the ambit of Section 37 (2b) of the Act and could not be allowed as business expenditure. We arein respectful agreement with the view expressed by the Gujarat High Court in the said judgment. Infact support is lent to this view by the Legislature itself when we refer to the language of the Explanation 2, wherein it is clarified that from 1 April 1976 expenditure on provision of hospitality of every kind to any person is to be treated as "entertainment expenditure", which, as a necessary corollary would mean that this type of expenditure before 1 April 1976 could be treated as a permissible deduction. Similar view has been expressed by this Court in Santlal Kashmirilal s case (supra) and Modi Spinning and Weaving Mills Co. Ltd s case (supra ). Similar view has been expressed by this Court in Santlal Kashmirilal s case (supra) and Modi Spinning and Weaving Mills Co. Ltd s case (supra ). With respect, we are unable to subscribe to the view expressed in Full Bench decisions of Kerala, Punjab and Haryana and Allahabad High Courts as also by the other High Courts holding that the expression "in the nature of entertainmer expenditure" has a wide amplitude and its user in sub-section 2b is a pointer to the intention of the Legislature to cast the net sufficiently wide so as to bring within its fold all types of hospitality, even though it is modest or frugal. ( 11 ) IN our view there is little difference between the expression "entertainment expenditure" and "expenditure in the nature of entertainment", on which expression too much stress appears to have been laid in these decisions, and the scope of the latter expression cannot be said to be wider as compared to the former. The view expressed in the Full-Bench decisions docs not seem to be in consonance with the legislative intent reflected in subsequent clarification in the form of Explanation 2, inserted in the section by the Finance Act, 1983 because if the scope of the latter expression was intended to be wider than the expression "entertainment expenditure", the legislature would not have used that expression in the said Explanation instead of the latter. ( 12 ) THE next question for determination is as to what particular item of expenditure can be said to amount to an expenditure in the nature of entertainment. Here again we agree with the observations of the Gujarat High Court in Patel Brothers case (supra) to the effect that it is difficult to lay down a hard and fast strait jacket formula so as to answer various contingencies arising from time to lime as to what expenses could be classified as entertainment expenses in the context of the provisions of the Act in vogue at the relevant time. In our opinion answer to the question will depend on the facts of each case as many factors like (he purpose or the occasion, their nature and quantum and the persons on whom such expenses are incurred will have to be taken into account, which may vary from case to case. Broadly speaking, we feel. In our opinion answer to the question will depend on the facts of each case as many factors like (he purpose or the occasion, their nature and quantum and the persons on whom such expenses are incurred will have to be taken into account, which may vary from case to case. Broadly speaking, we feel. that an expenditure which is not on a lavish extravagant scale or of wasteful nature or merely for the purpose of amusement but is in the nature of a bare necessity or by way of an ordinary courtesy will not amount to entertainment. ( 13 ) IN the instant case, the expenses, aggregating Rs. 3,44,316. 00 , which were disallowed by the Asessing Oficer were incurred by the assessee on providing transport by air, rail or road, boarding and lodging, catering, decoration, shehnai, dance show etc. , and on miscellaneous items. The Tribunal has found as a fact that some of the guests who had come from abroad or from outside places had to be provided with hotel accommodation at Delhi for facilitating their visit to the inauguration ceremony, which was to be held Kota. The city of Kota did not have adequate boarding and lodging facilities and it was for that reason that the assessee had to provide boarding and lodging facilities and also lunch and dinner to the guests who had arrived there from within the country and from abroad. These expenses in the present context, in our view, were necessary to ensure that the function, to be attended by the Prime Minister of the country, was asuccess. As regards the expenses incurred on decoration and shehnai, we feel that these are basically traditional and also having regard to the fact that high dignitaries were to attend the function, these expenses could not be classified either as wasteful or for the purpose of amusement. In so far as the miscellaneous expenses are concerned, out of the total expenditure of Rs. 25,903. 00 incurred by the assessee under the said head, an expense of Rs. 1. 469. 00 was incurred for providing alcoholic drinks. In our opinion this expense was clearly in the nature of entertainment and we are not inclined to accept the contention of learned counsel for the assessee that for the foreigners alcoholic drink was also a necessity. 25,903. 00 incurred by the assessee under the said head, an expense of Rs. 1. 469. 00 was incurred for providing alcoholic drinks. In our opinion this expense was clearly in the nature of entertainment and we are not inclined to accept the contention of learned counsel for the assessee that for the foreigners alcoholic drink was also a necessity. Similarly we feel that the expenses incurred on dance show would also be classifiable in the category of entertainment . However, keeping in view the quantum of the said two expenses, which is relatively very small, we do not propose to upset the view taken by the Tribunal on the facts of the instant case though in principle we disagree with the view expressed. We, therefore, endorse the view taken by the Tribunal that the expenditure incurred by the assessee on the inaugural function was not in the nature of entertainment expenditure and was incurred wholly and exclusively for the purpose of assessee s business and is allowable as revenue expenditure. ( 14 ) AS regards question No. 4, learned counsel for the revenue fairly concedes that in view of the decision of this Court in the case of assessee itself, reported as Delhi Cloth And General Mills Co. Ltd v. CIT (1986) 158 ITR 64, wherein it has been held that expenses incurred by an assessee for attending a business conference by its employee would be deductible as business expenditure, the question requires to be answered in the affirmative and in favour of the assessee. We may note that Revenue s Special Leave Petition to appeal against the said judgment has also been dismissed (See (1992)193 ITR St. 5 ). The question is accordingly answered. ( 15 ) IN the result the two references are answered as follows: ITR No. 284/82 (assessee s reference) ( 16 ) BOTH the questions are answered in the negative, in favour of the revenue. ITR No. 285/82 (revenue s reference) ( 17 ) QUESTION Nos. 1 and 4 are answered in the affirmative, in favour of the assessee and questions 2 and 3 are answered in the negative, in favour of the revenue. ( 18 ) THERE will be no order as to costs.