TMI Blog1991 (1) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... is carrying on the business of manufacture and sale of beer, Indian-made foreign liquor, malt, breakfast food and soft-drinks, etc., and has a number of branches at various places, filed its return for the assessment year 1972-73 on August 9, 1972, declaring an income of Rs. 2,11,30,600. Assessment under section 143(3) of the Act was done on January 25, 1974, on an income of Rs. 2,17,39,290. The assessee debited an amount of Rs. 2,58,387 as expenditure under the head "Entertainment" in its various branches and claimed that an amount of Rs. 1,29,193 was allowable as business expenditure and that the balance of Rs. 1,29,193 not allowable, in view of sub-section (2B) of section 37 of the Act, being in the nature of entertainment expenditure. The Income-tax Officer disallowed the entire claim of Rs. 2,58,387 on the ground that the expenses in question were either on the guest houses maintained by the assessee or on food and refreshment to its customers, suppliers and others coming to it in connection with the business activities. The matter was taken up in appeal by the assessee, to the Appellate Assistant Commissioner who held that, out of the assessee's claim of Rs. 1,29,193 (half o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned counsel for the assessee contended that the expenditure incurred by the assessee is not liable to be disallowed under sub-section (2A) or sub-section (2B) of section 37 of the Act as the expenditure was not on a lavish or an extravagant scale but was in the nature of a bare necessity and by way of ordinary courtesy and, in support of this contention, placed reliance upon a decision of the Gujarat High Court in Patel Brothers' case [1977] 106 ITR 424 and upon CIT v. Shah Nanji Nagsi [1979] 116 ITR 292 (Bom), CIT v. Corporation Bank Ltd. [1979] 117 ITR 271 (Kar), Addl. CIT v. Maddi Venkataratnam and Co, Ltd. [1979] 119 ITR 514 (AP), CIT v. Karuppuswamy Nadar and Sons [1979] 120 ITR 140 (Mad), CIT v. Lakhmichand Muchhal [1982] 134 ITR 234 (MP) and Devi Chand Bastimal v. CIT [1985] 156 ITR 166 (Raj), which have followed the decision of the Gujarat High Court in Patel Brothers' case [1977] 106 ITR 424. The question which falls for consideration before us is as to whether the amount in question spent by the assessee would come within the expression "expenditure in the nature of entertainment expenditure" occurring in sub-section (2A) and sub-section (2B) of section 37 of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see after February 28, 1970. Sub-section (2B) of section 37, reads as under : "(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." Paragraph 27 of the Memorandum explaining the provisions in the Finance Bill, 1970, by which sub-section (2B) was sought to be inserted in section 37, reads as under : "With a view to curbing lavish expenditure on entertainment, it is proposed to make a provision for the disallowance of entertainment expenditure incurred in India after 28-2-1970 altogether in computing the profits and gains of business or profession. Entertainment expenditure incurred outside India will continue to be admissible as a deduction subject to the limits already provided in the law." Clause 10 in the "Notes on Clauses" of the Finance Bill, 1970, by which sub-section (2B) was inserted reads as under : "Sub-clause (b) seeks to insert a new sub-section (2B) in section 37 of the Income-tax Act and sub-clause (a) seeks to make a consequential amendment in the Explanation to sub-section (2A) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." In this background it will be necessary to examine the divergent views on the question of allowing entertainment expenditure. The leading judgment which supports the assessee's view, is that of the Gujarat High Court in Patel Brothers' case [1977] 106 ITR 424. Their Lordships, adverting to the dictionary meaning of the word "entertainment" and by placing reliance upon some English precedents by way of analogy, held as follows (at p. 441): ".......We do not think that we would be justified in laying down any formula so as to provide a readymade answer to this problem ; but, in the context of the legislative intent evinced from the gradual evolution of the present provisions contained in sections 37(2A) and (2B), we venture to indicate a few broad tests so as to facilitate a taxpayer to understand and the Revenue to determine the nature of entertainment expenses though in each case in the ultimate analysis it would be a question of fact depending on many factors, more par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deployed by the Legislature "in the nature of entertainment expenditure". Out of the four tests laid down in Patel Brothers' case [1977] 106 ITR 424 (Guj), (a) and (d) have been opined to be entertainment per se by the Full Bench itself and the tests (b) and (c), even though may not be strictly entertainment, would clearly come within the compendious phraseology deliberately used by Parliament. The observations to the effect that the provision of food or drink to a constituent or a customer will amount to entertainment only, that is, if it is on a lavish and extravagant scale or is of a wasteful nature and that every hospitality would not constitute entertainment are not borne out on the true interpretation of the word "expenditure in the nature of entertainment expenditure". The reasoning adopted in coming to the conclusion cannot be applied to each and every case. Something which may be regarded as an ordinary meal by a person may really be regarded as lavish meal by a common man. Such considerations, as are contained in the four tests laid down, introduce a state of uncertainty in the meaning of the phrase used in a statute and has to be avoided. The other view which supports t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2B) of section 37 and ultimately held that in interpreting the expression "entertainment expenditure" occurring in sub-sections (2A) and (2B) of section 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. A Full Bench of the Punjab and Haryana High Court in Khem Chand Bahadur Chand's case [1981] 131 ITR 336 also agreed with the view of the Kerala High Court and held that the word "expenditure in the nature of entertainment expenditure" is of a much wider connotation. It dissented from the view of the Gujarat High Court in Patel Brothers' case [1977] 106 ITR 424. The decisions of other High Courts on which reliance was placed by the Revenue also proceed on the reasoning adopted by the Kerala High Court in Reddiar's case [1977] 106 ITR 610 [FB]. The matter can be viewed from another angle also. The controversy, in our opinion, has now been set at rest by the Legislature introducing Explanation 2 to sub-section (2A) of section 37 by the Finance Act of 1983 which was made effective with retrospective effect from April 1, 1976. The Explanation has been introduced for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s directed. The reason is that the meaning which is to be given to a statute should be such as will carry out its object. (See Chettiam Veettil Ammad v. Taluk Land Board, AIR 1979 SC 1573). Following the rule in Heydon's case [1584] 76 E. R. 637, it appears to us that to construe the true import of sub-section (2B) of section 37 which starts with a non-obstante clause, it is not only legitimate but convenient to refer both to the former Income-tax Act and the state of uncertainty brought about due to conflict of views between the different High Courts and that Explanation 2 seeks to provide a remedy by not only explaining but by removal of doubts declaring that entertainment expenditure includes expenditure or provision on 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. In view of the above discussion, we have no hesitation in following the ratio of the decision of the Full Bench of the Kerala High Court in Reddiar's case [1977] 106 ITR 610. We, accordingly, answer questions Nos. 1 and 2 in the negative, that is, in favour of the Revenue and against the assessee. No costs. - ..... 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