TMI Blog1976 (7) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case is important enough to be considered by a Full Bench and the case was accordingly referred to a Full Bench. That is how the matter has come up before us. The assessee is a registered firm dealing in piecegoods both on wholesale and on retail basis. It has its head office at Alleppey and branches at Kottayam and Quilon. In the books of the assessee there is an account styled as Vattachilavu Account to which sundry items of expenses incurred by the assessee in supplying to its customers cigarettes, coffee and sometimes meals have been debited. In the return filed by the assessee for the assessment year 1970-71, which is the relevant assessment year concerned in this case, the assessee had claimed a deduction in respect of the entirety of such expenditure incurred by it as entered in the Vattachilavu Account maintained for the concerned accounting period. The Income-tax Officer took the view that the claim for deduction put forward by the assessee was in respect of " expenditure in the nature of entertainment expenditure " and that, hence, the provisions of sub-sections (2A) and (2B) of section 37 of the Act were applicable to the case. Since under sub-section (2B) no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's business. Since the expenditure is not in the nature of entertainment expenditure, in our opinion, there is no justification to depart from the past practice of disallowing only 1/4th of such expenditure as expenses of a personal nature. The disallowance made by the Income-tax Officer is reduced accordingly." The real point to be decided by this court is whether the amounts spent by the assessee for the supply of coffee, tea, cigarettes and meals (occasionally) to its customers constitute "expenditure in the nature of entertainment expenditure " within the meaning of section 37(2A) of the Act. Before we set out the relevant provisions of section 37 of the Act it will be useful to recall the legislative history of the said provision as that would help to understand the true intent and purpose underlying the introduction of sub-sections (2A) and (2B) in the said section. Under the scheme of the Indian Income-tax Act, 1922, as it was originally enacted, in computing the income chargeable under the head " profits or gains of any business, profession or vocation carried on by an assessee " allowance was to be given in respect of any non-capital expenditure incurred sole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lab basis. By the Finance Act, 1968, an Explanation was added to sub-section (2A) of section 37, the effect of which was to extend the scope of the restrictions imposed by those sub-sections so as to take in any expenditure incurred by an assessee in granting an entertainment allowance to any employee or other person after 29th February, 1968, and also the amount of any expenses in the nature of entertainment expenditure incurred by any employee or other person for the purposes of the business or profession of the assessee otherwise than out of an entertainment allowance paid to him by the assessee. Two years thereafter came the final step in the matter when by the Finance Act, 1970, Parliament introduced sub-section (2B) in section 37 of the Act laying down that 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. Since the present case relates to the assessment year 1970-71, for which the relevant accounting period is the year ended March 31, 1970, that part of the claim for allowance which relates to the expenditure incurred prior to the 28th February, 1970, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first Rs. 10,00,000 of the profits at the rate of 1/2 per and gains of the business or profession (computed cent. or Rs. 5,000, before making any allowance under section 33 or whichever is higher ; section 33A or in respect of entertainment expenditure) (ii) on the next Rs. 40,00,000 of the profits at the rate of 1/4 per and gains of the business or profession (computed cent. ; in the manner aforesaid) (iii) on the next Rs. 1,20,00,000 of the at the rate of 1/8 per profits and gains of the business or profession cent. ; (computed in the manner aforesaid) (iv) on the balance of the profits and gains Nil of the business or profession (computed in the manner aforesaid) Provided that where the previous year of any assessee falls partly before and partly after the 30th day of September, 1967, the allowance in respect of such expenditure incurred during the previous year shall not exceed-- (a) in the case of a company-- (i) in respect of such expenditure incurred before the 1st day of October, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in sub-section (2), the same proportion as the number of days compri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the legislative intention. It is important to note that, instead of merely using the expression " entertainment expenditure ", the words actually used by Parliament in sub-sections (2A) and (2B) are " expenditure in the nature of entertainment expenditure ". The latter expression is much wider in its content inasmuch as it would take within its scope not merely what can strictly be regarded as entertainment expenditure proper but also expenditure of allied nature partaking of some, though not all, of the characteristics of entertainment expenditure. It appears to us to be beyond doubt that the intention of Parliament in employing the additional words " expenditure in the nature of " was to cast the net sufficiently wide as to bring within the scope of the two sub-sections all types of expenditure in respect of which there can be said to be certain elements which invest them with the nature of entertainment expenditure. A reference to the leading dictionaries would show that the word " entertainment " has several different shades of meaning such as, a diversion or amusement : something affording a diversion or amusement, esp. a performance : hospitable provision for guests : m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 37 of the Act. Counsel for the assessee relied strongly on the decision of a Division Bench of the Gujarat High Court in Commissioner of Income-tax v. Patel Brothers Co. Ltd., [1977] 106 ITR 424 (Guj), wherein there are certain observations to the effect that the provision of food or drinks to a constituent or customer will amount to " entertainment " only if it is " on lavish and extravagant scale or is of wasteful nature " and that every hospitality would not constitute entertainment. With great respect we are unable to subscribe to this view. As already observed by us, having regard to the legislative history of the provisions contained in sub-sections (2A) and (2B) which we have traced, and the significant use of the expression "expenditure in the nature of entertainment expenditure " in both the the sub-sections, it is obvious that the intention of Parliament was to bring within the scope of those sub-sections all expenditure incurred by an assessee on hospitality of any kind extended to the clients, customers or constituents directly in connection with the business or profession of the assessee. In Brij Raman Dass and Sons v. Commissioner of Income-tax [1976] ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
