Commissioner Of Income-Tax vs Rajasthan Mercantile Co. Ltd., ...
1994 Latest Caselaw 633 Del

JUDGMENT

K. Shivashankar Bhat, J.

1. There are references under section 256(1) of the Income-tax Act, 1961. The assesseds are different.

2. Income-tax References Nos. 243 and 244 of 1977 pertain to the assessment years 1972-73 and 1973-74. Income-tax Reference No. 246 of 1977 pertains to the assessment year 1971-72. So are Income-tax References Nos. 249 and 250 of 1977, Income-tax Reference No. 283 of 1977 and Income-tax Reference No. 285 of 1977; Income-tax Reference No. 291 of 1977 pertains to the assessment year 1974-75. Income-tax Reference No. 285 of 1977 is a reference at the instance of the assessed and all the other references are at the instance of the Revenue.

3. The assessed in Income-tax References Nos. 243 and 244 of 1977 is a limited company, carrying on its business in cloth and paper. A part of its claim for deduction as business expenditure incurred in connection with the "messing expenses" was allowed, following earlier decisions in the assessed's case. The expenditure was incurred for providing food, etc., to the customers and the representatives of the company, as could be gathered from the order of the Appellate Assistant Commissioner (which was affirmed by the Appellate Tribunal). The following questions, which are identical for the two assessment years, have been referred for the opinion of this court :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in upholding the Appellate Assistant Commissioner's order and allowing the expenses of Rs. 25,443 for the assessment year 1972-73 as mess expenses?

2. Was not the amount of Rs. 25,443 claimed by the assessed as 'mess expenses' for the assessment year 1972-73 in fact entertainment expenditure and as such disallowable under section 37(2B) of the Income-tax Act, 1961?"

4. In Income-tax Reference No. 246 of 1977, the assessed owns several hotels and has to attract foreign and Indian tourists for its business, apart from customers who would organise various kinds of parties or functions in its premises. In this connection, it claimed allowance in respect of expenses incurred in connection with providing food, etc.; to its prospective customers as business expenditure. A part of the claim was allowed, negativing the Revenue's contention that the expenditure in question is entertainment expenditure. It was held that the expenditure incurred was in the nature of "business promotion, publicity or advertisement than as entertainment". The question referred reads :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure of Rs. 35,118 incurred by the assessed on serving food, etc., to its prospective customers this year was not 'entertainment expenditure' within the meaning of section 37(2B) of the Income-tax Act, 1961?"

5. In Income-tax References Nos. 249 and 250 of 1977, the question referred is as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that be parries expenses to the tune of Rs. 19,822 was an allowable item of deduction as the same was not hit by the provisions of section 37(2B) of the Act?"

6. Though there are two references, the year of assessment is the same. Before the Appellate Tribunal, there were two appeals-one by the Revenue and another by the assessed. The relevant facts, accepted as correct by the Appellate Tribunal, are :

"The claim of the assessed is that during the season of the fruits, customers come to it in Delhi and they stay there. While staying in Delhi, they are given food by the assessed. The food is provided to the customers as a matter of custom. Also, it is claimed that it promotes the business of the assessed. If the customers, during the season of the fruits, are not made comfortable in Delhi by the assessed, then the business of the assessed would be jeopardised as the customers would be in search of another agent, who may provide them better boarding and lodging facilities."

7. The question referred in Income-tax Reference No. 283 of 1977 is as follows :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally correct in upholding the order of the Appellate Assistant Commissioner in allowing Rs. 9,950 on account of beopari expenses incurred by the assessed by not treating the same as entertainment expenses?"

8. The assessed is a commission agent in fruits who was required to extend the ordinary courtesies of providing tea, biscuits, cold drinks and food to customers. A part of the allowance claimed by the assessed has been upheld as business expenditure.

9. In Income-tax Reference No. 291 of 1977, the question to be answered is.

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in upholding the deletion of the disallowance of entertainment expense of Rs. 10,296?"

10. The assessed being a commission agent had to spend for providing food to be parries coming from outstation for business. The expenditure was allowed as business expenditure, as the expenses were customary and did not involve any entertainment.

11. In Income-tax Reference No. 285 of 1977, the question referred reads :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the expenditure amounting to Rs. 11,412 (Rs. 8,568 in fish market and Rs. 2,844 in egg market) incurred on food expenses for the constituents was in the nature of entertainment expenses and thus disallowing them under section 37(2B) of the Act?"

12. In the fish market account, commission receipts of the assessed were declared at Rs. 1,07,648 and in the egg market account, the receipts were Rs. 1,70,087; the assessed claimed a small fraction (Rs. 11,412, as expenditure incurred as food expenses, by way of payments at ad hoc rates to the constituents. The Appellate Assistant Commissioner accepted the assessed's contention and reversed the order of the Income-tax Officer. However, the Appellate Tribunal restored the order of the Income-tax Officer by holding that it was entertainment expenditure.

13. Learned counsel for the Revenue contended that in view of Explanation 2 to section 37(2A), which also governs section 37(2B), all such expenditures involved in these references have to be considered as entertainment expenditure. According to learned counsel, this Explanation contains the exposition of the intention of Parliament as to the meaning attributable to the term "entertainment expenditure". This aspect, according to learned counsel, was not noticed in the earlier decisions of this court and hence the basic question involved requires reconsideration.

14. To appreciate the problem, the relevant provisions in section 37 have to be identified, such as, the amendments to its sub-section (2A), additions to the Explanation and insertion of Explanation 2 and substitution of sub-section (2B), which operated during those assessment years. Fortunately, during those assessment years, the relevant provisions were the same throughout.

15. Section 37(1) provides for the grant of business expenditure as an allowance in computing the income chargeable under the head "Profits and gains of business or profession". Section 37(2) puts a ceiling in the case of a company on the expenditure to be allowed which is in the nature of entertainment expenditure. Section 37(2A) was inserted with effect from October 1, 1967, to govern the eases after September 30, 1967, further restricting the allowance of expenditure. To this sub-section, an Explanation was added by the Finance Act, 1968, with effect from April 1, 1968, which reads (we hope what we reproduce below is as per the original text) :

"For the purposes of this sub-section 'entertainment expenditure' includes -

(i) the mount of any allowance in the nature of entertainment allowance paid by the assessed to any employee or other person after the 29th day of February, 1968;

(ii) the mount of any expenditure in the nature of entertainment expenditure (not being expenditure incurred out of an allowance of the nature referred to in clause (i)) incurred after the 29th day of February, 1968, for the purposes of the business or profession of the assessed by any employee or other person."

16. By the Finance Act, 1970, the words "and sub-section (2B)" were inserted in the opening clause, so that the Explanation would read :

"For the purposes of this sub-section and sub-section (2B), 'entertainment expenditure' includes, - etc. . . ."

17. Again, the said words "and sub-section (2B)" were omitted by the Finance Act, 1976, with effect from April 1, 1977. However, for the purpose of these references, we have to read this Explanation as governing sub-section (2B) also. By the Finance Act, 1983 (Act 11 of 1983), the above Explanation was made Explanation 1 and thereafter Explanation 2 was inserted with effect from "1st day of April, 1976" (vide section 17 of the Finance Act, 1983).

18. This Explanation 2 reads :

"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 assessed 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 assessed to his employees in office, factory or other place of their work."

19. Sub-section (2B) as was in force after April 1, 1970, till April 1, 1977, was as follows :

"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 assessed after the 28th day of February, 1970."

20. Explanation 2 was actually not in the statute till it was inserted by the Finance Act, 1983; however, it was inserted with effect from April 1, 1976.

21. Learned counsel for the Revenue contended that Explanation 2 was inserted "for the removal of doubts" and thereafter it declares that the meaning of the term "entertainment expenditure" for purposes of sub-sections (2A) and (2B) includes expenditure on provision of hospitality of every kind. Being a declaratory provision, the meaning attributed to the term "entertainment expenditure" by this provision should be understood as the real meaning of the term all along, even though the Explanation was inserted with effect from April 1, 1976. Learned counsel pointed out that the date April 1, 1977, was referred to in the Explanation 2 to identify the sub-section (2B), because the said sub-section was substituted there-after by another provision (after April 1, 1977). Therefore, sub-section (2B) which governed the assessment years commencing with April 1, 1976, was the sub-section which was governed by this Explanation. When Explanation 2 said "sub-section (2B) as it stood before the 1st day of April, 1977", it means, sub-section (2B) as it stood during all the years between April 1, 1970, and March 31, 1977.

22. The argument, no doubt, is very attractive and tempting for acceptance. But, a fiscal legislation cannot be interpreted without reference to the language employed by the statute which brought it into existence. Unfortunately, the language of the Finance Act, 1983, is not truly reflected in Explanation 2. Section 17(a)(i) of the Finance Act, 1983, amended the original sole Explanation, to section 37(2A) and thereafter proceeded under clause (ii), which reads :

"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 : -. . . ."

23. Then came Explanation 2. The source of Explanation 2 is section 17 of the Finance Act, 1983. This Act, having created the Explanation, engrafted it into section 37 of the Income-tax Act. The engrafting is effective as from April 1, 1976. Therefore, while reading Explanation 2, it is also necessary to read the said Explanation, as one with effect from April 1, 1976. In other words, the removal of doubts made by and the declaration contained in Explanation 2 is with effect from April 1, 1976. To repeat, section 17(a)(ii) of the Finance Act states that the insertion of the Explanation shall be deemed to be with effect from April 1, 1976.

24. The legislative practice of deeming a state of affairs, as in existence always is well known. If the intention of Parliament was to attribute a wider meaning to the term "entertainment expenditure" from the date of the very inception of sub-section (2B), section 17 of the Finance Act, 1983, would have contained appropriate words to that effect. It could have simply mentioned the date April 1, 1970, instead of April 1, 1976, while introducing the second Explanation.

25. When the statute, enacting an amendment or introducing a new provision, states that the provision is to be read "with effect from" a particular date, normally the court cannot travel beyond the said date along with the said provision, while interpreting the words used prior to the said date, unless the natural meaning of the relevant words was totally ignored earlier and the newly added declaratory provision embodies the ordinary and natural meaning of the said words.

26. Explanation 2 cuts down the scope of the allowable expenditure. It is in a taxing statute; it was introduced through another taxing Act. The meaning and effect of such a provision ought to be limited to the clear words used in the relevant provisions. The often quoted words of Rowlatt J., are quite relevant here :

"In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used"

(Vide G. P. Singh, Principles of Statutory Interpretation, fifth edition, page 456).

27. Mr. Gupta, for the Revenue tried to lead us on a different path. According to learned counsel, Explanation 2 is clarificatory in nature, declaratory in character, and explanatory in substance; therefore, it is not affected by any rule against retrospectivity; the Explanation brings into force the real meaning of the term "entertainment expenditure" and, therefore, should be read as if it was there all along. Learned counsel took us through a few decisions on this aspect :

28. CIT v. India Steamship Co. Ltd. [1992] 196 ITR 917 is a decision of the Calcutta High Court. The court was considering the scope of Explanation 8 to section 43(1) of the Act, which declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset. In the year 1986, this Explanation was inserted with retrospective effect from April 1, 1974. The court held that the retrospectivity need not be confined to the period after April 1, 1974, because the Explanation was clarificatory in nature, intended to clear up any doubt or ambiguity as to the true meaning of the relevant provision. Therefore, this meaning was held as the true meaning governing the provision for the assessment year 1972-73 also. At page 935, the court held :

"The Explanation is a part of the main tion and it clears the ambiguity, if any, in the main section. The Explanation cannot be read in isolation. The intention of adding the Explanation is that if anything is not clear in the main section, it shall be made clear by adding the Explanation. As indicated earlier, Explanation 8 has been added in section 43(1) of the Act. We have already extracted the Explanation and the reasons for insertion of the said Explanation. It is evident that the Explanation intends to clarify the position in law as regards the capitalisation of interest paid in connection with the acquisition of an asset after it has been put to use. We do not find any rhyme or reason in the declaration that the Explanation will come into force from April 1, 1974. Obviously that is due to the fact that the judgment in J. K. Cotton Spinning and Weaving Mills Ltd. was rendered on May 13, 1974, and, accordingly, it was made effective from April 1, 1974. There is no logic behind retroactive effect being given to the amendment from the assessment year 1974-75 when, admittedly, the treatment of interest is contrary to the established accountancy principles. The Explanation makes the clarification whereby what was implicit was made explicit. It cannot be that such Explanation will be effective only from a particular assessment year. The Explanation in itself does not, however, make any such provision. It says that, where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period, after such asset is first put to use, shall not be included and shall be deemed never to have been included in the actual cost of such asset. This clearly indicates that the intention of the Legislature is not to apply this Explanation from a particular assessment year. Although the judgment of the Allahabad High Court in J. K. Cotton. Spinning and Weaving Mills Ltd. [1975] 98 ITR 153 was rendered in May 13, 1974, we do not find any logic or reason or rationale behind making the Explanation effective from April 1, 1974. We are, therefore, of the view that this Explanation being clarificatory in nature and which intends to clear up any doubt or ambiguity must be deemed to be always in existence. It explains the meaning and intendment of the Act.

It is no doubt true that, ordinarily, a statute, and particularly when the same has been made applicable with-effect from a particular date, should be construed prospectively and not retrospectively. But this principle will not be applicable in a case where the provision construed is merely explanatory, clarificatory or declaratory. It cannot be disputed that the object of the Explanation is to explain the meaning and intendment of the Act itself."

29. There are three reasons for the above conclusion :

(i) The treatment of interest was contrary to established accounting principles; the true principle is that, where an asset is acquired out of borrowed funds, the interest paid or payable on such funds constitutes the cost of borrowings and not the cost of the asset;

(ii) the Explanation itself contained a deeming provision, whereby the relevant interest "shall never be deemed" to have been included in the actual cost of the asset; and

(iii) the Explanation was inserted with effect from April 1, 1974, because of the judgment of the Allahabad High Court taking a contrary view for the first time on May 13, 1974, and the said contrary view was taken in a few decisions subsequent to the said date.

30. The situation in the instant case is not comparable to the above situation.

31. In Thiru Manickam, and Co. v. State of Tamil Nadu, , the Supreme Court held that an amendment which is by way of clarification of an earlier ambiguous provision can be a useful aid in construing the earlier provision even though such amendment is not given retrospective effect. Independently of the amended provision, the court came to the conclusion that refund of the sales tax may be made to a dealer who sells goods in the course of inter-State trade, even though he did not himself pay the tax under the State Act, because such a dealer would have purchased the goods at a price which included the sales tax, the court also referred to the relevant statutory rule governing the fact situation and thus found no ambiguity in the relevant provisions, prior to the amendment. The amendment, therefore, was considered as conveying the same natural meaning attributable to the relevant provisions.

32. In CIT v. Mohanlal Bhagwati Prosad , the court held that Explanations 2 and 3 of section 40(b) of the Act are clarificatory in nature, and this was evident from the circular issued by the Central Board of Direct Taxes; hence the Explanations were given retrospective effect by the court. It should be noted here that a literal reading of section 40(b) resulted in treating every kind of payment of interest, salary, bonus, commission or remuneration made by the firm, to the partners, as not deductible in computing the taxable income of the firm. This ignored bona fide payments and the different capacities in which the partners may receive the payment. In fact, this literal meaning of the words Resulted in an unwarranted artificial situation and, therefore, when the Explanations were added to explain the real situation, the court thought it proper to apply those Explanations as giving the true meaning of section 40(b) all along. In fact, one of us (K. S. Bhat J.) is a party to a similar decision of the Karnataka High Court in CIT v. Mangalore Ganesh Beedi Words [1992] 193 ITR 77.

33. After referring to the several decisions, the Karnataka High Court observed at page 87 :

"We have quoted elaborately from several decisions to highlight the problem posed by the wording of section 40(b) without the Explanations now added to it."

34. Again, as to the normal principle governing the Explanation, the court held (at page 87) :

"The normal principle in construing an Explanation is to understand it as explaining the meaning of the provision to which it is added; the Explanation does not enlarge or limit the provision, unless the Explanation. purports to be a definition or a deeming clause; if the intention of the Legislature is not fully conveyed earlier or there has been a misconception about the scope of a provision, the Legislature steps in to explain the purport of the provision; such an Explanation has to be given effect to, as pointing out the real meaning of the provision all along."

35. In the instant case; Explanation 2 in question actually purports to be a provision defining the concept of entertainment expenditure, by including a few kinds of expenditures within its scope. Only because a provision attached to a section bears the nomenclature, "Explanation", it cannot always be considered as conveying the true and natural meaning of the words or the provisions of the Act. The meaning attributable to the relevant provisions of the Act without the Explanations shall have to be considered first, to find out whether it created an artificial situation, or created ambiguity, and if so, the Explanation may be considered as having injected the true and real meaning to those provisions from the very inception of the provisions to which the Explanation is added.

36. In CIT v. S. R. Patton [1992] 193 ITR 49, the Kerala High Court was considering the effect of the Explanation to section 9(1)(ii) of the Act. The Bench held at page 55 :

"The mere use of the label 'Explanation' is not decisive of the true meaning and scope of the provision. Ordinarily, the purpose of an Explanation in a statute is to clarify or explain or settle any doubt or ambiguity or controversy. It may even widen the scope of the main provision in rare cases. The words used alone can reflect the true intent and they should be construed on their own terms. In this regard, the context, background and history of the legislation may be looked into - See Aphali Pharmaceuticals Ltd. v. State of Maharashtra, , wherein the Supreme Court has analysed the entire law on the point."

37. In CIT v. P. Doraiswamy Chetty [1990] 183 ITR 559 (SC), the question was whether the husband was entitled to carry forward the wife's share of the loss when the Act includes the wife's share as the 'income' in the income of the husband. The court held that the husband was entitled to carry forward such a loss, though during the relevant years, there was no specific provision. The court posed the question at page 565 :

"The basic question is whether the expression 'income' in section 64(1) includes 'loss' also."

38. A similar provision in the earlier Indian Income-tax Act, 1922, had already been construed by the Supreme Court (without any similar Explanation), in Gotla's case [1985] 156 ITR 323, wherein the court held that the loss incurred by the wife could be taken into consideration in the hands of the husband for the purpose of carrying forward. It is in this background, the court referred to the newly added Explanation as conveying the true meaning of the legislative intention. At page 566, the court held :

"The provisions dealt with in Gotla's case were, of course, the corresponding provisions of the 1922 Act. But the provisions of section 64(1)(i) are substantially the same and the exposition of the law under the relevant provisions of the 1922 Act must be held to govern the corresponding provision under the 1961 Act as well. Explanation 2 inserted in section 64 with effect from April 1, 1980, though not retrospective in its operation, serves s the legislative exposition of the import of section 64(1)(i)."

39. Though the Supreme Court looked into the Explanation, it had, independently of it, construed the scope of the main section and followed the earlier ruling in Gotla's case . The Supreme Court did not lay down any proposition that invariably, whenever an Explanation is added to a provision, it serves as the legislative exposition of the import of the provision.

40. Keshavji Ravji and. Co. v. CIT [1990] 183 ITR 1 is also a decision of the Supreme Court. One of the questions that arose for consideration was whether Explanation 1 added to section 40(b) of the Act in the year 1984 serves as the parliamentary exposition of the true purport of section 40(b) or whether the said Explanation brought about a change in its meaning. This was considered at page 18 thus :

"An Explanation, generally speaking, is intended to explain the meaning of certain phrases and expressions contained in a statutory provision. There is no general theory as to the effect and intendment of an Explanation except that the purpose and intendment of the 'Explanation' are determined by its own words. An Explanation, depending on its language, might supply or take away something from the contents of a provision. It is also true that an Explanation may-this is what Sri Ramachandran suggests in this case-be introduced by way of abundant caution in order to clear any mental cob-webs surrounding the meaning of a statutory provision spun by interpretative errors and to place what the Legislature considers to be the true meaning beyond any controversy or doubt. Hypothetically, that such can be the possible purpose of an 'Explanation' cannot be doubted. But the question is whether, in the present case, Explanation 1 inserted into section 40(b) in the year 1984 has had that effect.

The 'Notes on Clauses' appended to the Taxation Laws (Amendment) Bill, 1984, say that clause 10 which seeks to amend section 40 will take effect from 1st April, 1985, and will, accordingly; apply in relation to the assessment year 1985-86 and subsequent years. The express prospective operation and effectuation of the 'Explanation' might, perhaps, be a factor necessary detracting from any investment of the intent on the part of the Legislature that the Explanation was intended more as a legislative exposition or clarification of the existing law than as a change in the law as it then obtained."

41. The above observation in no way advances the case of the Revenue before us. The effect to be given to an explanatory amendment depends upon several factors, including its language. The concluding sentence in the above observation indicates that, when the Legislature has made the Explanation operative prospectively by words expressed therein, its operation shall have to be confined to the future date. The same reasoning would govern the case when Parliament limited the retrospectivity of the Explanation with effect from a particular date. In such a situation, giving further retrospectivity to the Explanation will be hijacking the intention of the Legislature into an impermissible area.

42 . The declaration and the clarification involved in Explanation 2, are only for the purposes of assessments with effect from April 1, 1976. This provision widens the concept of "entertainment expenditure" by including in its scope such of the expenditures which are otherwise traditionally understood as routine business expenditures incurred in connection with "business-hospitality". Therefore, the widened meaning cannot be extended to past periods when the amended Explanation 2 was not in operation.

43. Both Mr. Aggarwal and Mr. Dua, learned counsel for some of the assesseds, referred to the Notes on Clauses attached to the Finance Bill, which introduced sub-section (2B). The notes also state that the "amendment will take effect retrospectively from April 1, 1976". By the same amendment, the allowable expenditure was also reduced by amending sub-section (2A). The Notes on Clauses are found in [1983] 140 ITR (St.) pages 123 and 155.

44. The limited retrospectivity given to the declaratory and clarificatory provision in sub-section (2B) seems to be deliberate and not accidental.

45. The questions referred to us in all these cases, therefore, are to be considered without reference to Explanation 2 added to sub-section (2A) of section 37, which also covers sub-section (2B).

46. In CIT v. New Bank of India Ltd. [1993] 201 ITR 878 (Delhi), the assessed was a commercial bank. The assessed debited in its accounts certain sums by way of entertainment expenses, for the period relevant to the assessment year 1974-75. Most of these expenses represented the expenditure incurred by the assessed in providing light refreshment like tea, cold drinks, etc., to customers in the course of its business. The question was whether this expenditure was not in the nature of entertainment expenditure. The Bench followed the decision of the Gujarat High Court in CIT v. Patel Bros. and Co. Ltd. [1977] 106 ITR 424 and of the Bombay High Court in CIT v. Shah Nanji Nagsi [1979] 116 ITR 292 and upheld the claim of the assessed to deduct such expenditure on customary courtesy extended to the customers, as not falling within the description of "entertainment expenditure". Therefore, the expenditure did not fall within the bar enacted in section 37(2B). This court also referred to an earlier decision of this court in Modi Spinning and Weaving Mills Co. Ltd. v. CIT [1993] 200 ITR 544.

47. The question again came up before this court in Delhi Cloth and General Mills Co. Ltd. v. CIT [1994] 208 ITR 785. In the said case, the expenses claimed as deduction by the assessed were incurred on providing transport by air, rail or road, boarding and lodging, catering, decoration, shehnai, dance shows, etc. Some of the guests had come from abroad and some from places outside Delhi to attend the inauguration ceremony at Kota. The expenses incurred were held basically traditional. However, expenses incurred in providing alcoholic drinks and for dance shows were held to be in the category of the entertainment, but they were comparatively of very small amount. Other expenses were held not falling within the concept of entertainment expenses. In this connection, the Bench considered the concept of "entertainment" and "entertainment expenditure" and pointed out that every act of entertainment includes hospitality but every act of hospitality does not constitute entertainment. One of us (D. K. Jain J.), speaking for the Bench, held at page 792 :

"Coming to the main question, the terms 'entertainment' or 'entertainment expenditure' have not been defined in the Act but these terms have been considered and interpreted by the courts in the context of section 37(2A) and (2B) of the Act. In CIT v. Patel Brothers and Co. Ltd., [1977] 106 ITR 424, the Gujarat High Court had occasion to consider the question of allow ability of an expenditure under sections 37(2A) and 37(2B) of the Act. The court considered the meaning of the expressions 'entertainment' and 'hospitality' and came to the conclusion that every act of entertainment included hospitality but every hospitality did not constitute entertainment. The court drew a fine distinction in the terms 'hospitality' and 'entertainment' and held that if the act of being hospitable consists of providing meals and drinks to : (i) employees as a term of service or engagement; and (ii) friends and strangers as a term and condition of contract or custom or usage of trade or by way of ordinary courtesy, it is not entertainment and such expenditure may be allowable and the bar of sub-section (2B) would not apply. On the contrary, if the provision of food, drinks or any amusement to a client, customer or constituent is on a lavish and extravagant scale or is of wasteful nature, it would fall with the ambit of section 37(2B) of the Act and could not be allowed as business expenditure. We are in respectful agreement with the view expressed by the Gujarat High Court in the said judgment. In fact support is lent to this view by the Legislature itself when we refer to the language of Explanation 2, wherein it is clarified that from April 1, 1976, expenditure on provision of hospitality of every kind to any person is to be treated as 'entertainment expenditure', which, as a necessary corollary, would mean that this type of expenditure before April 1, 1976, could be treated as a permissible deduction."

48. The court also held that "there is little difference between the expression "entertainment expenditure" and "expenditure in the nature of entertainment".

49. Thus, this court has taken a consistent view regarding the answer to be given to the question raised. Expenditure incurred while extending traditional hospitality to a customer has to be distinguished from the more ostentatious expenses like arranging dances or serving alcoholic drinks. Offering a cup of coffee or tea, or soft drinks, with some snacks has been a customary hospitality found in almost all business and commercial establishments.

50. In the case of hotels (like Ashoka, Janpath, etc. run by the India Tourism Development Corporation, the assessed in Income-tax Reference No. 246 of 1977), offering free food or soft drinks or coffee, tea, etc., is all the more customary. These hotels not only serve beverages and food as in an ordinary restaurant, but cater to large parties (like marriage parties or other functions) and provide other facilities to have functions organized in their premises. Ton encourage the organisers or as a matter of routine courtesy, when the organisers come to book the premises and place orders for serving food, drinks, etc., serving free food or soft drinks to the organisers cannot be considered an act of "entertainment". It will be stretching the ordinary meaning of the word "entertainment" to hold that serving a cup of tea with snacks is an act of entertainment. In this connection, the Appellate Tribunal held in the case of the assessed in Income-tax Reference No. 246 of 1977 :

"In our view, in running top class hotels as in the instant case, it would become necessary occasionally to lose a part, to catch a whole. Delhi being the national metropolis there is a large concentration here of a special type of clientele, e.g. the diplomatic corps. It is well-known that this section of the population is prone to host lavish parties frequently. There are also numerous travel agents in the city who have good business in arranging for various affluent groups from abroad to visit India and to spend some time here as tourists. Hotels of the type run by the assessed would certainly be interested in cashing in on such opportunities provided by the embassies and the tourist trade. It is, therefore, not abnormal or unbusinesslike that these hotels should give a preview of their attractions to such prospective customers. We, therefore, see nothing wrong in the Appellate Assistant Commissioner looking upon such expenses, in the factual context of this case, more as sales promotion, publicity or advertisement than as entertainment. It is true, that under these heads, entertainment expenses also might be included. The Appellate Assistant Commissioner has estimated the same at 1/5th and we do not see the estimate to be unreasonably low on the facts for this year."

51. We endorse this finding, since the finding cannot be considered unreasonable in the circumstances of the case.

52. In the result, the question referred in Income-tax Reference No. 285 of 1977 (wherein the reference is at the instance of the assessed) is answered in the negative and against the Revenue.

53. In other references, the questions are answered in the affirmative and against the Revenue.

54. References answered accordingly.

55. No costs.