TMI Blog1975 (11) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... diency it was necessary for it to provide meals to its farmer customers. The assessee-company on that count, therefore, claimed kitchen expenses of Rs. 22,301, Rs. 25,979 and Rs. 28,620, respectively, for the aforesaid assessment years. The Income-tax Officer disallowed the expenditure to the extent of Rs. 10,101, Rs. 12,979 and Rs. 17,305, corresponding to the expenses incurred on account of providing meals to the farmer customers for the aforesaid respective assessment years, as, in the opinion of the Income-tax Officer, in the absence of any specific provision in the matter of entertainment expenses, he found it difficult to give any concessional treatment to the assessee-company in so far as it entertained by providing meals though it was most ordinary in nature and in no way could it be said to be lavish. The assessee-company, being aggrieved by this order of partial disallowance of the Income-tax Officer, went in appeal before the Appellate Assistant Commissioner, who held that the expenditure incurred by the assessee-company was not entertainment expenditure covered by section 37(2) of the Act for the simple reason that the expenditure incurred was for providing meals which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said Act. Being aggrieved by the aforesaid orders of the Income-tax Officer, the assessee-firm preferred two appeals before the Appellate Assistant Commissioner against the disallowance of Rs. 12,471 for the assessment year 1970-71 and Rs. 8,851 for the assessment year 1971-72. The Appellate Assistant Commissioner accepted the assessee's contention that these were not expenses in the nature of entertainment expenses since they were for the purpose of the business. In this view of the matter, he allowed the expenses except to the extent to which they related to the personal use of the partners which he restricted to Rs. 3,000 in each of the assessment years. The Income-tax Officer, therefore, carried the matter in appeal before the Tribunal. The Tribunal by its consolidated order of May 28, 1973, held that the assessee-firm was supplying meals to its constituents purely for reasons of business expediency and there was no element of entertainment in supplying meals to its constituents. The Tribunal noted that it was not disputed that up-country constituents of the assessee-firm came to Ahmedabad for the purpose of business with the assessee-firm and having regard to the nature an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r some bare hospitality out of commercial expediency and as a customary mode of doing a particular business. In the submission of the learned Advocate-General appearing for the assessees, the question, whether in a given case the expenses are in the nature of entertainment expenses or not, would depend on the facts and circumstances of each case and no hard and fast strait-jacket formula or test can be laid down so as to answer all the contingencies. In the submission of the learned Advocate-General, it would depend, inter alia, on the nature and type of business, item of entertainment, place of entertainment and tradition and habits of the people of the area where an assessee is carrying on its business. In the context of the above rival contentions, we have been called upon to answer the questions referred to us. The relevant provisions relating to entertainment expenditure are contained in sub-sections (2A) and (2B) of section 37 of the Income-tax Act, 1961. The history of the provisions, shortly stated, is that the first step in the direction of controlling these expenses was taken in 1961 and a ceiling was placed on the expenditure that could be allowed, under this head in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any banquets or give dinners on a lavish or grand scale, it could not be said, having regard to the commercial necessity of providing bare meals to the customers--their upcountry constituents, or for that matter farmer customers--that they were " entertaining " and consequently the kitchen expenses incurred for providing square meals would not be in the nature of entertainment expenses. The real problem to which we have to address ourselves is : what is the import and width of the word " entertainment " ? The term " entertainment " or " entertainment expenses " has not been defined in the Act. There is no settled case law on the point which may give guidance in the matter, Unaided as we are, we have, therefore, to make an attempt to find out the true meaning of the term " entertainment " in the context of the Income-tax Act. The term " entertainment ", is of a very wide import and if it is to be accepted so as to mean and include hospitality of any and every kind, we think, we would land the assessees as well as the tax collectors in an absurd and most unfair position where even offering a cup of cold water or a cup of tea or aerated water or drink would be entertainment, leave asi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as in Stroud's Judicial Dictionary. In Corpus Juris Secundum, volume 30, at pages 716-717, the meaning of the term " entertainment " has been given. It is no doubt true that this term " entertainment " has two essentially different meanings as indicated in two sub-divisions. In one sense it is " furnishing of accommodation " and in another sense, it is " amusement or diversion ". The learned advocate for the revenue, so far as these references are concerned, urged that in the first sense of furnishing accommodation, the word " entertainment " has been defined as, inter alia, making hospitable provision for a table--a feast ; a formal or elegant meal, etc., and providing hospitable reception. Our attention has also been invited to the meaning of the term " entertainment " given in Stroud's Judicial Dictionary, 4th edition, volume 2. The following observation has been relied upon which appears at page 916 under the term " entertainment " : " By Refreshment Houses Act, 1860 (c. 27), section 6, a REFRESHMENT-HOUSE requiring a licence was a building 'kept open for public refreshment, resort, and entertainment'. 'Entertainment', as there used, meant, ' not diversion or amusement, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the same dictionary : " The kind and generous reception of strangers or guests ; hospitable treatment or disposition. " In the Random House Dictionary of the English Language, college edition, at page 441, we find the meaning of the term " entertainment " as under : " 1. to hold the attention of persons agreeably ; divert ; amuse. 2. to treat as a guest ; show hospitality to. 3. to admit into or hold in the mind ; consider. 4. Archaic. to maintain or keep up. 5. Obs. to give admittance or reception to ; receive.--v.i. 6. to exercise hospitality ; entertain company. " In the same dictionary, at page 640, we find the meaning of the term " hospitality " as under : " 1. the friendly reception and treatment of guests or strangers. 2. the quality or disposition of receiving and treating guests and strangers in a warm, friendly, generous way. " In Oxford English Dictionary, volume 3, we find the following meaning of the word " entertainment " : " (a) The action of occupying a person's attention agreeably ; interesting employment, amusement. (b) that which affords interest or amusement. (c) a public performance or exhibition intended to interest or amuse. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he wants of a guest in a liberal and generous manner. If the act of entertaining is on a lavish and a grand scale involving wasteful expenditure, it would, no doubt, amount to entertainment. On the other hand, if the acts or practice of being hospitable in the sense of providing meals, drinks or other wants of persons entertained, whether they may be employees, workmen or officers, servants or agents in the service of an assessee, as an express or implied condition of service, they would not amount to acts of entertainment. Similarly, if the acts or practice of being hospitable in the sense of providing meals, drinks or satisfying any other wants of guests, whether they are friends, strangers or customers, as a part and parcel of express or implied terms and conditions of business, trade or profession, or on account of long-standing custom in such trade, business or profession, they would not, in our opinion, amount to acts of entertainment. It is only in the area lying between these two termini that the difficult questions arise, and as regards acts falling in such area we are of the opinion that we should adopt the broad dictionary meaning of the term " entertainment " which we h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different Law Lords in rendering the said judgment. It was contended by the revenue that in Associated Newspapers Group Ltd.'s case [1973] AC 628, 637, 643 ; [1972] 2 All ER 574 (HL), though it was recognised by the House of Lords that it was necessary to provide entertainment to the informants in the shape of drinks, meals, etc., yet the expenses were held to be inadmissible. The first observation on which reliance was placed by the revenue is to be found in the speech of Lord Reid, which reads as under : " Before dealing with its specific provisions it is necessary to have in mind the mischief which it is obviously designed to prevent. For a number of years there had been much public criticism of the lavish expenditure daily to be seen in restaurants and elsewhere on business lunches and the like, and of other methods of business entertainment which had become notorious. It must have been found to be impracticable for the tax authorities to separate entertainment which was reasonable from that which was not. Normally, where traders do not derive any personal benefit from business expenditure no question arises. But here the givers of the entertainment benefited as well as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... schief as conceived by Parliament for which a statutory remedy was being provided ; nor is it necessary nowadays for courts to affect ignorance of what is notorious. But a mere reading of section 15 of the 1965 Act against the background of the preceding law can leave no doubt that it was Parliament's conception that expenditure on business entertainment charged as a deduction against gross trading income was being fiscally abused, or that Parliament in section 15 was seeking to provide a remedy for what it conceived as such abuse. Nor can there be any doubt about the method which the draftsman chose to adopt in order to provide the remedy. Experience must have taught him that if a fiscal abuse is too precisely remedied, taxpayers with expert advice will find a means of evading the fiscal control. To counter this, the draftsman may spread his net very wide at first, in order to make sure that nothing gets by which should not ; and he will then re-examine to ensure that nothing has been caught in the net contrary to fiscal equity, and readjust accordingly. " Lord Simon then examined the scheme of section 15 which by sub-section (1) prohibited deduction of any allowance on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... food, drink, tobacco or a token or voucher exchangeable for goods). " The assessee-company also relied on the observation in the speech of Lord Morris of Borth-y-Gest at page 583 of [1972] 2 All ER 574 (HL) in support of its contention that entertainment does not include every kind of hospitality. The said observation runs as under : " Various explanations of sub-section (9) were offered in the Court of Appeal. With every respect I find them unconvincing, Thus, it was said that one example of the need for the provisions of sub-section (9) was to be found by considering the case of a restaurant proprietor : it was said that he incurs expenses in providing entertainment for which he is paid and that he might, without sub-section (9), find himself in the position of having his receipts taxed without being allowed to deduct the expenses he has incurred in providing the entertainment. I cannot agree with this. If, in connection with a trade which he carried on, someone takes a party of guests to a restaurant and, as host, and at his own expense, orders food and drink for them it cannot, in my view, be said that the restaurant proprietor is providing entertainment (including hospit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scheme kept in mind the expenses laid out. by providing something in the course of business or trade. It is no doubt true that with effect from 28th February, 1970, the Indian Parliament has also prohibited deduction on account of entertainment expenses. Unfortunately, however, it has not thought fit in its wisdom to define the term go " entertainment expenses " or to evolve a scheme as done by the British Parliament. We have, therefore, to keep in mind the ordinary and natural meaning of the term " entertainment " in order to find out whether the prohibition contained in sub-sections (2A) and (2B) operates in a given case. The second decision on which reliance was placed by the revenue is of the Court of Appeal in Bentleys, Stokes Lowless v. Beeson (H. M. Inspector of Taxes) [1952] 33 TC 491 (CA). A question arose in that case, whether the expenses incurred by a firm of solicitors in entertaining its clients was allowable deduction under Schedule D. The Special Commissioners were of the opinion that the provision of entertainment was not necessary for professional purposes and that the expenses could not be wholly divorced from the relationship of host and guest, and were, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in banarsi goods on account of shop expenses, which included partly a sum for providing tea, lassi, jalpan, etc., to the customers. The court, speaking through Gulati J., while negativing the contention urged on behalf of the assessee that " entertainment " does not include the provision of refreshment but is confined to amusement and gratification of some sort other than food, meat and drink, held that " entertainment expenditure " would, in its opinion, include all expenditures incurred in connection with business on the entertainment of customer and constituents, and that such entertainment may consist of providing refreshments or it may consist of providing some other sort of entertainment. We think, with respect to the learned judges of the Allahabad High Court, that that decision is an over simplification of the problem and they have proceeded, as it appears from the judgment, on the simple meaning of the term " entertainment " without considering the aspect in detail to which we have referred above. On behalf of the assessees our attention has been invited to the obser vations made by the learned author in Iyengar's Income-tax, sixth edition, volume 2, at page 1048, where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f food or drinks to a client, customer or constituent is in liberal and friendly way, it may amount to entertainment having regard to the place, item and cost of such provision. (d) The provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment. In the view of the matter which we are taking, therefore, we answer both the questions in the negative in both the references since it has been found on the facts by the Tribunal that it was not in dispute between the parties that up-country constituents of the assessee came to Ahmedabad for the purpose of the business with the assessee in Income-tax Reference No. 64 of 1974, and having regard to the nature and magnitude of the business of the assessee, it would be necessary for the assessee to make arrangements for providing meals to its up-country constituents who visit Ahmedabad for business dealings with it. The Tribunal also found in both the references that it was not the department's case that the assessee was throwing lavish parties or arranging banquets for its constituents and the expenses were claimed on that count. Similarly, in Income-tax Reference No. 151 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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