TMI Blog1980 (7) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... tractors. Their main business is said to involve the canvassing of cargo and passengers for ocean-going ships. In their assessment for 1969-70 relevant to the account year ended April 30, 1968, the firm claimed a deduction in respect of Rs. 20,364. This amount had been debited in their profit and loss account under the head "Entertainment expenditure ". The ITO apparently accepted without question the nature of the expenditure as entertainment expenditure. He, however, did not grant the full allowance claimed, but allowed Rs. 5,000 disallowing the balance of Rs. 15,364. For doing so, he invoked s. 37(2A) of the I.T. Act, 1961. The assessee-firm, appealed against the assessment objecting, inter alia, to the disallowance of the entertainment expenses in excess of Rs. 5,000. The AAC, however, confirmed the action of the ITO. He found that the expenses claimed by the assessee under the head " Entertainment expenditure " related mostly to club bills paid by the partners of the assessee-firm and, as such, they represented merely the personal expenses of the partners. All the same, he confirmed, without modification, the order of assessment under which the ITO had allowed a part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the expenditure incurred in the present case, but, on, the contrary, it was dictated by business needs, there was no justification for the disallowance of any portion of the expenditure by invoking s, 37(2A). In the result, the Tribunal directed a full allowance of the entire amount of Rs. 20,364 as business expenditure. The correctness of the Tribunal's determination is canvassed in this reference by the I.T. Dept. In our judgment, the inquiry in this case bears on a construction and application of s. 37(2A). This section is to be found in the Act among a number of provisions grouped together, all concerned with laying down the correct manner of computation of business profits for purposes of charge to income-tax. Section 37 which figures in the I.T. Act almost at the fag end of the chapter on allowances, is not only a residuary provision as is indicated by an express, parenthesis in the section, but it is also a general provision as its marginal note describes it. The section lays down the test or standard of, allowable business expenditure in the familiar words " wholly and exclusively ". This requirement for the deduction of business expenditure that it must be wholly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee as disallowable entertainment expenditure. The question in the present case, however, is not whether the computation is right with reference to the provisions of s. 37(2A), but whether the said Provision, at all, can be applied to the expenditure claimed by the assessee. The expression " entertainment " occurring in ss. 37(2), 37(2A) and 37(2B) of the Act stands severely undefined. There is no doubt, an Explanation to the section which includes, within the statutory conception of entertainment expenditure, one or two outside categories. But there is no attempt at explanation or clarification, much less definition, in this Explanation. We do not derive any assistance from the Explanation for getting at the meaning which the Parliament intended to convey by the expression " entertainment. ". We have, therefore, got to consider the term " entertainment expenditure " on the basis of the common understanding which has to be given to that expression, subject, of course, to the context in which it is employed in ss. 37(2), 37(2A) and 37(2B). " Entertainment " is one of those words in the English language possessing a bewildering variety of meanings and usages attached to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the partners of the assessee-firm to maintain contacts and relationship with their customers and constituents, on the one band, and the crew of the ships, on the other, and maintain extensive social contacts. These findings, undoubtedly, show that the impelling urge for the entertainment was either business necessity or business expediency. Indeed, this was the reason why the Tribunal held that it was an item of business expenditure. The question, however, is whether calling entertainment expenditure as a necessary or expedient expenditure renders the expenditure any the less entertainment expenditure. The error of the Tribunal in our judgment, lay in thinking that expenditure for providing food, refreshment and the like to the customers and constituents and the crew of the ships by taking them to clubs with a view to maintaining social-contacts and building up the business is not entertainment expenditure. It seems to us that the very essence of entertainment expenditure is the purveying of food, refreshment, etc., to the entertainees, especially in clubs and other public places. If the whole scheme of this expenditure is to further the business of the entertainer, the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred expenditure on the provision of tea, lassi, jalapeno, etc., to the customers, he could not obtain a deduction for that expenditure in excess of the amounts specified in s. 37(2A) of the I.T. Act. Adverting in detail to the statutory provisions, the learned judges held that entertainment expenditure incurred upon customers would be an )expenditure of a business nature and allowable as such, but subject to the limits provided for under s. 37(2A). In their judgment, every item of entertainment expenditure falling under s. 37(2A) must necessarily be an expenditure wholly and exclusively incurred for the purpose of the business, for, otherwise such an expenditure would not be allowable at all. According to the learned judges, s. 37(2A) is not an independent provision, but is in the nature of a proviso to s. 37(1). The Gujarat High Court in CIT v. Patel Brothers Co. Ltd. [1977] 106 ITR 424, had to deal with the case of an assessee running an oil mill and other businesses. The assessee was under an obligation to provide meals to its workers. Besides, as a custom of the trade, the assessee had to provide meals to the farmers who came to deliver Cotton, groundnut, rice and pulses a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all, characteristics of entertainment expenditure. They finally expressed their agreement with the judgment of the Allahabad High Court in Brij Raman Dass 6 Sons v. CIT [1976] 104 ITR 541. The Punjab High Court dealt with the matter in a different fashion on CIT v. Gheru Lal Bal Chand [1978] 111 ITR 134. The case before that court appertained to a firm carrying on business in commission agency, earning income by way of commission on foodgrains, cotton seeds and other commodities. The firm carried on business in three places and in each of these places it maintained a kitchen for preparing and serving meals to its constituents. The expenditure incurred in running the kitchens was held, by the ITO to be entertainment expenditure and dealt with as such in the assessment of that firm in accordance with the provisions of s. 37(2A) of the Act. The appellate authorities did not accept the basis of the allowance and directed the entire expenditure to be allowed as a deduction. On a reference by the Commissioner, the Punjab High Court held that the words in s. 37(2A) I expenditure in the nature of entertainment expenditure " are words of the widest import and include any expenditure whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tests laid down by the Gujarat High Court. We have already referred to the facts of the case which figured in the decision of this court in CIT v. Karuppuswamy Nadar Sons [1979] 120 ITR 140. We had also summed up the basis of this court's decision in that case. We may further observe that the decisions of the other High Courts which we have noticed in the foregoing paragraphs were referred to by this court in Karuppuswamy Nadar's case with the prefatory observation that the line-up of these cases showed a marked difference of opinion between the Gujarat and Bombay High Courts, on the one hand, and the Kerala, Punjab and Allahabad High Courts on the other. No attempt, however, was made to discover a synthesis of the decisions. We, however, consider that it would be in the interest of tax administration that the question of " entertainment expenditure " under the Act should be rested on some principle which, of course, must necessarily be extracted from the statutory provisions themselves in the light of the various sections already rendered in that regard. We believe that some guidelines at least, if not high principle, can be brought out from the web of case law, by attempting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of the hotel business and not as a distinct exercise in commercial hospitality either for attracting or for maintaining the custom and the clientele. It is only in the sense expressed last, that we understand the principle behind the earlier decision of this court in CIT v. Karuppuswamy Nadar Sons [1979] 120 ITR 140. On the clear findings of the Tribunal in the present case, however, we cannot hold that the expenditure incurred by the assessee can at all be regarded as an outgoing, adding to the element of cost nor can it be regarded as necessary for the carrying on or carrying out of the assessee's business. Given the Tribunal's finding to the effect that the expenses were incurred out of business needs and business exigencies and considering that the very nature of the expenditure partakes of the character of business diplomacy, we hold that the Tribunal was in error in holding in this case that the expenditure incurred by the assessee-firm in standing food and drinks to members of the ship crew and other constituents and customers is not entertainment expenditure within the meaning of 37(2A) of the I.T. Act, 1961. We, accordingly, answer the question referred to us in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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