TMI Blog1994 (2) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... sets should be taken and not the original cost?" The questions referred at the instance of the Revenue (Income-tax Reference No. 285 of 1982) 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 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 the Calcutta High Court in Century Enka Ltd. v. ITO [1977] 107 ITR 123 (Cal) ? "4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that expenditure of Rs. 92,777 incurred in connection with the foreign tour of Dr. Bharat Ram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 in appeal 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 the Andhra Pradesh High Court in Addl. CIT v. Maddi Venkataratnam 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"). Mr. Rajendra, learned counsel for the Revenue, contended that the expression "in the nature of entertainment" appearing in sub-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tainment expenditure altogether, if incurred within India after February 28, 1970. This provision took effect from April 1, 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 June 30, 1970. Sub-section (2B) (omitted with effect from April 1, 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." From the language of sub-section (2B), it is clear that an expenditure in the nature of entertainment expenditure, if incurred in India from February 28, 1970, to March 31, 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. Before con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 a 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 a lavish and extravagant 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 are in respectful agreement with the view expressed by the Gujarat High Court in the said judgment. In fact support is lent to this view by the Legislature itself when we refer to the language of Explanation 2, wherein it is clarified that from April 1, 1976, expenditure on provision of hospitality of every kind to any person is to be tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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. In the instant case, the expenses aggregating to Rs. 3,44,316, which were disallowed by the Assessing Officer 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 at 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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