DIPAK KUMAR SEN, J. - (1.) ON an application of the Revenue under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following questions, as questions of law, arising out of its order, for the opinion of this Court : " 1. Whether, on the facts and in the circumstances of the case, and on a correct interpretation of s. 37(2B) of the IT Act, 1961, the Tribunal was correct in holding that the expenditure of Rs. 53,487 was an allowable expenditure in computing the profits and gains of the assessee's business ? 2.Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 48,440 representing 'difference' paid for non-fulfilment of contract for supply of flour and cement bags was an allowable deduction in computing the total income for the asst. yr. 1972-73 ? "
(2.) SO far as question No. 2 is concerned, the controversy raised therein is covered by the two decisions of this Court in CIT vs. Pioneer Trading Company (P) Ltd. (1968) 70 ITR 347 (Cal) and CIT vs. Ramjeewan Sarawgee and SOns (1977) 107 ITR 845 (Cal). The decision of this Court in Pioneer Trading Co. (P) Ltd. (supra) has been approved by the Supreme Court subsequently in CIT vs. Shantilal (P) Ltd. (1983) 35 CTR (SC) 395 : (1983) 144 ITR 57 (SC). In view of the aforesaid, we answer question No. 2 in the affirmative and in favour of the assessee. The facts relating to question No. 1 are, inter alia, that the Agarpara Co. Ltd., the assessee, was assessed to income- tax in the asst. yr. 1972-73, the accounting year ending on March 31, 1972. After the assessment was completed, the CIT, West Bengal-V, initiated proceedings under s. 263 of the IT Act, 1961. The CIT noted that in the said assessment year, the assessee had spent Rs. 53,487 on cigarettes and other items supplied to its customers and claimed deduction of the same under the head " general charges ". The said claim was allowed by the ITO in computing the total income of the assessee. It appeared to the CIT that the said amount was not allowable as deduction under s. 37(2B) of the IT Act, 1961, being expenditure on entertainment, and, therefore, the assessment was prejudicial to the interests of the Revenue. On a show-cause notice issued, the assessee appeared before the CIT and contended that the said expenditure on cigarettes and other items was incurred for its customers and such expenditure was incurred wholly and exclusively for the purpose of the business of the assessee. It was contended that the said expenditure was not on account of entertainment but to provide basic necessity or by way of ordinary courtesy according to the long-standing practice or custom of trade and business.
(3.) THE CIT did not accept the contention of the assessee. He held that the expenditure was incurred for the purpose of business, but the same was not allowable as a deduction by reason of s. 37(2B) of the Act, as the said expenditure was on account of entertainment. He held, following a decision of the Allahabad High Court in Brij Raman Dass and Sons vs. CIT 1975 CTR (All) 223 : (1976) 104 ITR 541 (All), that refreshment or gratification of all kinds supplied would come within the meaning of entertainment. THE CIT directed the ITO to disallow the said expenditure and modify the assessment accordingly. Being aggrieved, the assessee preferred an appeal to the Tribunal. THE Tribunal noted its earlier decision in the case of the same assessee for the subsequent asst. yr. 1973-74, where the Tribunal had followed a decision of the Gujarat High Court in CIT vs. Patel Brothers and Co. Ltd. (1977) 106 ITR 424 (Guj), and had held that the expenditure incurred by the assessee in providing cigarettes and other items to its customers was an expenditure incurred out of commercial expediency and to meet customary hospitality. THE Tribunal set aside the decision of the CIT and restored the original assessment by the ITO allowing deduction of the said amount. THE present reference was initiated from the above order of the Tribunal. At the hearing, the learned advocate for the Revenue submitted that there was divergence of opinion between High Courts on the point involved. He submitted that other High Courts have followed the decision of the Allahabad High Court in Brij Raman Dass and Sons (supra), and have dissented from the view taken by the Gujarat High Court. Learned advocate relied on and cited the following decisions: (a) Brij Raman Dass and Sons vs. CIT (supra) : In this case, expenditure had been incurred by the assessee for providing tea, lassi and other refreshments to its customers and a deduction of such expenditure was claimed. A Division Bench of the Allahabad High Court considered the meaning of the word "entertainment" from Stroud's Judicial Dictionary in connection with the Refreshment Houses Act, 1960, and found that entertainment would include provision of food, drinks and other items reasonably required for personal comfort of the guests. It was held that entertainment expenditure would include expenditure incurred in connection with the business of the assessee for the entertainment of its customers and constituents and such entertainment might consist of providing refreshments as also other forms of entertainments. It was held that the provision of refreshments to the customers by the assessee resulted in an expenditure in the nature of entertainment expenditure and came within the mischief of s. 37(2A) of the IT Act, 1961. (b) CIT vs. Veeriah Reddiar 1976 CTR (Ker) 341 (FB) : (1977) 106 ITR 610 (Ker) (FB). In this case, the assessee carrying on business in piece-goods on wholesale and retail basis incurred expenses in supplying to its customers cigarettes, coffee and occasional meals. The assessee had claimed deduction in respect of the expenditure incurred in respect of the aforesaid in the relevant assessment year. The question was considered by a Full Bench of the Kerala High Court. The Court noted the legislative history in respect of the allowability of such expenditure and considered the relevant section of the Indian IT Act, 1922, as also s. 37 of the IT Act, 1961, and further sub-ss. (2A) and (2B) which were introduced in the said s. 37 by subsequent amendment. The Court noted that in sub-ss. 37(2A) and 37(2B), the expression used was not entertainment expenditure but expenditure in the nature of entertainment. It was held that the expression used was much wider than the expression " entertainment expenditure " and included expenditure of allied nature having the characteristic of entertainment expenditure. On a consideration of the dictionary meaning of the word "entertainment", the Court came to the conclusion that the expression "entertainment expenditure" occurring in sub-ss. (2A) and (2B) of s. 37 of the Act should be taken to mean hospitality of any kind extended by an assessee directly in connection with his business. The Court dissented from the view expressed by the Gujarat High Court in Patel Brothers and Co. Ltd.'s case (supra) followed the decision of the Allahabad High Court in Brij Raman Dass's case (supra) and held that the expenditure incurred by the assessee in supplying coffee, tea and other refreshments to its customers was expenditure in the nature of entertainment within the meaning of s. 37(2A) of the Act. (c) CIT vs. Khem Chand Bahadur Chand (1981) 23 CTR (PandH) 319 : (1981) 131 ITR 336 (PandH). In this case, a Full Bench of the Punjab and Haryana High Court also considered the question whether expenditure incurred by an assessee in supplying food and drinks to its customers was in the nature of entertainment expenditure and came within the mischief of s. 37(2A) of the Act of 1961. The Court considered the legislative history of the relevant provisions in respect of entertainment expenditure in the Indian IT Acts as also the corresponding provisions in English law and came to the conclusion that it was the intention of the legislature to disallow all expenditure in the nature of entertainment expenditure. The Court also took note of the expression " in the nature of entertainment expenditure " and held that the said expression was wide enough to include all types of expenditure incurred on hospitality. It was held that the judgment of the Gujarat High Court and to other High Courts which had taken a contrary view did not consider the effect and the meaning of the wide expression. It was held that there was no reason to make a distinction between entertainment and hospitality in the manner in which it was done by the Gujarat High Court and to come to a conclusion that only where the hospitality was lavish or extravagant, the same could be held to be entertainment. It was observed that this distinction would make the application of the law difficult in individual cases. The Court, however, noted that there may be cases where certain facilities like providing customers with drinking water would neither be entertainment nor hospitality and such cases might be excluded from the mischief of s. 37(2B) of the Act.;