S.K. Mal Lodha, J. - (1.) BOTH these references were heard together and it will be convenient to dispose them of by a common order, for, the arguments in both the references are identical.
(2.) WE may first notice the facts leading to Reference No. 9 of 1977 : The assessee is a registered firm. The previous year relevant to the assessment year 1972-73 ended on Diwali 1971. The asseessee derived income from agricultural commodities and adat. For the assessment years 1972-73 and 1973-74, the assessee filed returns declaring an income of Rs. 85,150 and Rs. 94,580, respectively. The assessee, inter alia, claimed messing expenses to the tune of Rs. 4,500 and Rs. 4,800 for the assessment years 1972-73 and 1973-74, respectively. The Income-tax Officer (ITO) was of the view that the expenses were in the nature of entertainment and, as such, in view of Section 37(2B) of the I.T. Act, 1961 (No. XLIII of 1961) ("the Act" herein), the aforesaid claim could not be allowed. On appeal, the A AC, vide order dated June 14, 1974, held that the expenses in question were not hit by the provisions of Section 37(2B) of the Act as, in his opinion, such expenses were incidental to the business. The AAC, therefore, allowed the expenses to the extent of Rs. 3,000 each year. A further appeal was taken by the Revenue to the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (" the Tribunal " herein). The Tribunal by its order dated November 11, 1975, held that the expenditure incurred on providing food to constituents or entertaing them on soft drinks, namely, coca cola, coffee, tea, etc,, will be expenditure in the nature of entertainment. It, therefore, disallowed the claim of messing expenses for both the assessment years in question. It has referred the following questions of law arising out of its order for our opinion : " 1. Whether, on the facts and in the circumstances of the case, the messing expenses claimed by the assessee in both the assessment years under consideration were in the nature of entertainment expenditure within the meaning of Section 37(2B) of the Act ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in restoring the disallownace of Rs. 4,500 and Rs. 4,800 for the assessment years 1972-73 and 1973-74, respectively, in question in computing the taxable income of the assessee for the assessment years under consideration ? " Facts in D.B.I.T. Reference No. 42 oj 1977 ; The assessee is a registered firm. The assessment year in question is 1974-75. The assessee-firm filed its return declaring an income of Rs. 1,15,375. It has claimed messing expenses of Rs. 13,000. The Income-tax Officer (ITO) held that such expenses were in the nature of entertainment. He, therefore, disallowed them. An appeal was lodged and the AAC was of the view that the expenses could be allowed to the extent of Rs. 10,000. He, therefore, vide his order dated January 21, 1976, gave relief in the sum of Rs. 10,000. The Revenue filed a further appeal before the Tribunal. The Tribunal opined that the expenditure in question were in the nature of entertainment and, as such, they were hit by Section 37(2B) of the Act. On these facts, on an application under Section 256(1) of the Act filed by the assessee, the following questions have been referred to this court for opinion: " 1. Whether, on the facts and in the circumstances of the case, the expenditure on providing food to outstation constituents was in the nature of entertainment expenditure in law ? 2. Whether, on the facts and in the circumstances of the case, the entire expenditure in question could be disallowed under Section 37(2B) of the Income-tax Act, 1961, for the assessment year 1974-75 ? " We have heard Mr, Rajendra Mehta and Mr. Rajesh Balia, learned counsel for the assessees, in each of the references and Mr. J. P. Joshi for the Revenue, By Section 10 of Act No. XIX of 1970, the following Section 37(2B) was inserted with effect from April 1, 1970: " Notwithstanding anything contained in this section, 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. " It was deleted/omitted by Section 9 of Act No. 66 of 1976, with effect from April 1, 1977. Thereafter, by Section 17 of the Finance Act, 1983 (Act No. XI of 1983), Section 37 of the Act was amended. The material part of Section 17 of the Finance Act, 1983, for our purpose is as follows : " 17. In Section 37 of the Income-tax Act,--(a) in Sub-section (2 A),-- (i) for Clauses (iii) and (iv), the following shall be substituted with effect from the 1st day of April, 1984, namely:......... (ii) the Explanation shall be numbered and shall be deemed to have been numbered with effect from the 1st day of April, 1976, as Explanation 1 and after Explanation 1 as so numbered, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1976, namely :-- Explanation 2.--For the removal of doubts, it is hereby declared that for the purposes of this sub-section and Sub-section (2B), as it stood before the 1st day of April, 1977, 'entertainment expenditure' includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work. "
(3.) THUS, it is clear that the above Explanation 2 to Section 37(2A) of the Act was inserted with effect from April 1, 1976. In D.B.I.T. Ref. No. 9 of 1977, the assessment years in question are 1972-73 and 1973-74 and in D.B.I.T. Ref. No. 42 of 1977, the assessment year involved is 1974-75. We are, thus, concerned with Section 37(2B) of the Act as it existed in the years 1972-73, 1973-74 and 1974-75. Learned counsel for the Revenue raised the controversy that Explanation 2 which was inserted by the amendment of Section 37, vide Section 17 of the Finance Act, 1983, will be deemed to have been inserted with effect from April 1, 1970, despite that this insertion was made effective from April 1, 1976, and in view of this Explanation, the expenditure in question incurred by the assessees cannot be allowed now. On the other hand, learned counsel for the assessees submitted that Explanation 2 to Section 37(2A) has been inserted with effect from April 1, 1976, and, as such, it will have no application to the assessments that have already been completed prior to this date (April 1, 1976) and the questions referred by the Tribunal may be answered according to Section 37(2B) as it existed then. Having considered the contentions of the learned counsel for the Revenue as well as that of assessees in respect of Explanation 2 to Section 37(2A), we are of the opinion that the questions referred by the Tribunal should be answered having regard to Section 37(2B) as it existed during the assessment years 1972-73, 1973-74 and 1974-75. ;