KANTAWALA, J. - (1.) M /s. Shah Nanji Nagsi, the assessee firm, derives income from pakki adat as well as trading in grains and pulses for which separate trading account along with quantitative details are maintained. The net income from pakki adat for the year under consideration as shown by the assessee was Rs. 2,88,456. Many adatyas came and dwelt with the assessee and they were provided with meals by running a mess by the assessee. The expenditure of messing came to Rs. 15,110. The assessee also incurred expenditure of Rs. 7,021 over tea and pan out of which the assessee expended Rs. 2,021 for the employees. In other words, Rs. 5,000 were expended by the assessee for tea and pan to customers. The assessee claimed allowance of Rs. 20,110 as deduction under S. 37(1). However, considering that there was insertion of S. 37(2B) w.e.f. 1970, the ITO treated the expenditure as entertainment expenses. Accordingly, he disallowed Rs. 5,000 on account of tea and pan expenditure to the customers and Rs. 15,110 on account of messing.
(2.) IN an appeal by the assessee, the AAC partly accepted the claim of the assessee. Out of the expenditure of Rs. 5,000 for tea and pan to the customers, only a sum of Rs. 2,500 was allowed as permissible deduction and the rest of the amount was added as part of the income ; while out of the amount of Rs. 15,110, he allowed deduction of Rs. 12,610 but disallowed the rest of the amount of Rs. 2,500 in respect of meals by running a mess for the customers. In an appeal by the Revenue, cross objections were filed by the assessee before the Tribunal. The Tribunal accepted the contention of the assessee in toto and permitted deduction of the amount of Rs. 15,110 in respect of messing charges and Rs. 5,000 in respect of tea and pan to the customers. The Tribunal relied upon the decision of the Gujarat High Court in the case of Patel Brothers (1977) 106 ITR 424 (Guj). From this order of the Tribunal, the following question has been referred to us at the instance of the Revenue for our determination : "Whether, on the facts and in the circumstances of the case, expenditure of Rs. 15,110 towards messing of adatyas and expenditure of Rs. 5,000 towards tea and pan to customers is entertainment expenditure under S. 37(2B) ?"
(3.) MR . Joshi on behalf of the Revenue submitted that even though having regard to the practice and custom of trade such an expenditure may be regarded as having been incurred wholly or exclusively for the purposes of business, in view of the provisions of S. 37(2B) which were introduced by the Finance Act, 1970, w.e.f. April 1, 1970, any expenditure in the nature of entertainment expenditure incurred within India by an assessee after February 28, 1970, was not permissible as a deduction and in view of the said provision, the Tribunal was in error in allowing such deduction as claimed by the assessee. Strong reliance was placed by him upon a decision of the Full Bench of the Kerala High Court in the case of CIT vs. Veeriah Reddiar 1976 CTR (Ker) 341 (FB) : (1977) 106 ITR 610.;