J.S.VERMA - (1.) THESE appeals and the connected matters involve for decision the common question of law relating to the meaning of "entertainment expenditure" in Section 37(2A) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") during the relevant assessment years. The decision of the Gujarat High Court in Commr. of Income-tax Gujarat v. Patel Brothers & Co. Ltd., (1977) 106 ITR 424 : (1977 Tax LR 688), on this point is challenged by the revenue in these appeals by a certificate granted under Section 261 of the Act. The connected matters involve the same point. All cases relate to the period prior to 1-4-1976 from which date only explanation 2 inserted in sub-section (2A) of Section 37 by the Finance Act, 1983 was applied retrospectively, even though sub-section (2A) was inserted w.e.f. 1-10-1967 by Taxation Laws (Amendment) Act, 1967.
(2.) THE material facts in these appeals illustrative of all connected matters, are these : THE relevant assessment years are 1969-70, 1970-71 and 1971-72 of which the corresponding previous years ended on 30/09/1968, Septe 30/09/1969 and Sep 30/09/1970 respectively. THE assessee, a limited company, claimed kitchen expenses of Rs. 22,301.00 Rs. 25,979.00 and Rs. 28,620.00 respectively for these assessment years as expenses incurred for providing meals to its employees and its customers in the ordinary course of its business as customary trade usage. THE Income-tax Officer disallowed the expenditure to the extent of Rs. 10,101.00 Rs. 12,979.00 and Rs, 17,305/- respectively corresponding to the expenses incurred for meals provided to the customers even though it was found that the meals were ordinary and not in any manner lavish. THE assessee preferred an appeal to the Appellate Assistant Commissioner against the partial disallowance of this expenditure. THE Appellate Assistant Commissioner held that the meals were bare necessity having regard to the nature of business and, therefore, the Income-tax Officer was directed to grant that allowance. THE matter then went in appeal to the Tribunal which confirmed the order of the Appellate Assistant Commissioner. At the instance of the revenue, the Tribunal referred to the High Court for its decision two questions of law, namely, (1) Whether, on the facts and in the circumstances of the case, the expenditure in question was in the nature of entrainment expenditure in law? (2) Whether, on the facts and in the circumstances of the case, the expenditure in question would be allowable only to the limited extent of Rs. 5,000.00 under Section 37(2A) of the Income-tax Act, 1961, for each of the assessment years under reference? Identical questions of law were referred for all the three assessment years. The High Court answered both the questions in the negative since it was found on the facts by the Tribunal that indisputably the upcountry constituents of the assessee came to Ahmedabad for the purpose of business with the assessee and having regard to the nature and magnitude of the business of the assessee, it would be necessary for the assessee to make arrangements to provide meals to them while in Ahmedabad for business with it, as it was not the revenue's case that the assessee had spent the money for throwing lavish parties for its constituents. It had been found that the expenditure was for serving ordinary meals as a bare necessity of the business. Accordingly, the references were answered against the revenue and in favour of the assessee. These appeals are by certificate against that decision. The same question is involved for decision in the connected matters. There is a conflict in the view taken by the High Courts on the main question. The view taken by the High Courts of Andhra Pradesh, Rajasthan, Madhya Pradesh and Karnataka is the same as that of the Gujarat High Court. The contrary view has been taken by the High Courts of Allahabad, Punjab & Harayana, Patna and Kerala. The decision of the Delhi High Court in Commr. of Income-tax v. Rajasthan Mercantile Co. Ltd., (1995) 211 ITR 400, is in line with the Gujarat view. The difference in the views taken by different High Courts has led to one set of decisions against the revenue and another set in its favour. This is how in this Court some appeals and other matters are by the revenue while the rest are by the assessees. As earlier stated, all these matters relate to the period prior to 1-4-1976 and, therefore, the decision is to be based on sub-section (2A) of Section 37 of the Act minus Explanation 2 inserted later. We would refer to the two sets of decisions after mentioning the rival contentions and the view taken by us.
(3.) THE contention of Shri B.B. Ahuja, learned counsel for the revenue is that all kinds of hospitality is entertainment and, therefore, the entire expenditure incurred under this head, even for serving ordinary meals as a bare necessity, falls under sub-section (2A) of Section 37; and the expression "entertainment expenditure" in sub-section (2A) must be construed to mean from the inception as defined in Explanation 2 to sub-section (2A) of Section 37, since Explanation 2 is merely clarificatory. It was urged that for this reason insertion of Explanation 2 only w.e.f. 1-4-1976 is immaterial and the expression "entertainment expenditure" in sub-section (2A) of Section 37 must be so construed even for the period prior to 1-4-1976. In reply. Shri Harish Salve, learned counsel for the assessee contended that purposive interpretation of the provision must be made. It was urged that the purpose was to curb the tendency of incurring lavish expenditure and not customary hospitality extended by offering ordinary meals as a bare necessity since the traditional meaning of every hospitality is not entertainment. It was urged that the finding in all these cases was that the allowance claimed was only in respect of the expenditure incurred in providing ordinary meals as a bare necessity and not any lavish food. Section 37, to the extent material, is as under : "37. General.- (1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure of personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession." (2) Notwithstanding anything contained in sub-section (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceed the aggregate amount computed as hereunder :- ;