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 REFERENCES 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 assessee derived income from agricultural commodities and adat. For the assessment years 1972-73 and 1973-74, the assessee filed the returns declaring income of Rs. 85,150 and Rs. 94, 580 respectively. The assessee, inter-alia, claimed messing expenses, to the tune of Rs. 2500/- and Rs. 4500/- for the assessment years 1972-73 and 1973-74 respectively. The Income-tax Officer (I. T. O.) was of the view that the expenses were in the nature of entertainment and as such, in view of s. 37 (2b) of the Income Tax Act, 1961 (No. XLIII of 1961) (the Act herein), the aforesaid claim could not be allowed. On appeal, the Appellate Assistant Commissioner vide order dt. June 14, 1947 held that the expenses in question were not hit by provisions of s. 37 (2b) of the Act as, in his opinion such expenses were incidental to the business. The A. A. C. , 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 entertaining them of the 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 considerations were in the nature of entertainment expenditure within the meaning of s. 37 (2b) of the Act? 2. Whether on the facts and in the circumstances of the case, the Tribunal was justified in restoring the disallowance of Rs. 4,500/- and Rs. 4800/-for the A. Y. 72-73 and 73-74 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 OF 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 (I. T. O.) held that such expenses were in the nature of entertainment. He therefore, disallowed them. An appeal was lodged and the A. A. C. 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 a 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 sec. 37 (2b) of the Act. On these facts, on an application under sec. 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 s. 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 reference and Mr. J. P. Joshi for the Revenue. By s. 10 of Act No. XIX of 1970, the following s. 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 28th day of February, 1970. " It was delated/omitted by s. 9 of Act No. 66 of 1976 with effect from April 1, 1977. Thereafter, by s. 17 of the Finance Act, 1983 (Act No. XI of 1983), s. 37 of the Act was amended. The material part of s. 17 of the Finance Act, 1983 for our purpose is as follows: "17. In s. 37 of the Income - Tax Act- (a) in sub-section (2a ).- (i) for clause (iii) and (iv), the following shall be substituted with effect from the 1st day of April, 1984 namely; (iii ). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (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 I 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. Sub-sec. (2b), as it stood before the 1st day of April 1977) "en 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 with whatso ever 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. " Thus, it is clear that the above Explanation -2 to s. 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 s. 37 (2-B) of the Act as existed in the years 1972-73, 1973-74, and 1974-75. 7. Learned counsel for the Revenue raised the controversy that Explanation -2 which was inserted by the amendment of s. 37 vide s. 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 s. 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 to by the Tribunal may be answered according to s. 37 (2b) as existed then.
(3.) HAVING considered the contentions of the learned counsel for the Revenue as well as that of assessees in respect of Explanation-2 of s. 37 (2a), we are of opinion that the questions referred by the Tribunal should be answered having regard to s. 37 (2b) as it existed during the assessment years 1972-73. 1973-74 and 1974-75. In both the references, the first question which is common and crops up for our consideration is whether messing expenses claimed by the assessee for the assessment years in question was in the nature of entertainment expenditure as envisaged by s. 37 (2b) of the Act. The Tribunal was of the opinion that the expenditure incurred for providing food to the constituents or entertaining them with the soft drinks namely. Coca Cola, Coffee, Tea etc. is an expenditure in the nature of entertainment. It appears that barring aside Bijrammandas and Sons V. C. I. T. , Lucknow (1) and C. I. T. Kerala V. Veeriah Reddiar (2) no other authority was brought to its notice and it, therefore in accordance with the aforesaid decisions did not agree with the A. A. C. in regard to grant of relief for a sum of Rs. 3. 000/- in each year under consideration in the matter of M/s Devichand's case and disallowed the claim in full in respect of Bhanwarlal's case. There is divergence of judicial opinion on the question among the various High Courts of India. We purpose to notice both sets of views. ;