Entertainment expense and customs show-cause legal fees were held not disallowable, with both issues decided for the assessee.

Entertainment expenditure under section 37(2B) was tested against the controlling Supreme Court principle, and the amount in issue was held not disallowable, with the assessee succeeding on that point. Legal expenses incurred to reply to a customs show-cause notice were also held not to be expenditure in connection with a criminal proceeding, because a show-cause stage is only preliminary and may not result in adjudication. The reference was therefore answered against the Revenue on both questions, in favour of the assessee.

---

---

Issues: (i) Whether the sum of Rs. 5,000 was disallowable as entertainment expenditure within the meaning of section 37(2B) of the Income-tax Act, 1961; (ii) Whether the sum of Rs. 3,835 was disallowable as expenditure incurred in connection with a criminal proceeding.

Issue (i): Whether the sum of Rs. 5,000 was disallowable as entertainment expenditure within the meaning of section 37(2B) of the Income-tax Act, 1961.

Analysis: The question was governed by the Supreme Court's decision on the scope of entertainment expenditure, which was applied to the facts of the case.

Conclusion: The sum of Rs. 5,000 was not disallowable as entertainment expenditure and the answer was in favour of the assessee.

Issue (ii): Whether the sum of Rs. 3,835 was disallowable as expenditure incurred in connection with a criminal proceeding.

Analysis: The expenditure related to legal expenses for replying to a show-cause notice issued by the customs authorities. A show-cause stage is only a preliminary stage, and proceedings at that stage are not themselves criminal proceedings because the matter may be dropped before adjudication.

Conclusion: The sum of Rs. 3,835 was not expenditure incurred in connection with a criminal proceeding and the answer was in favour of the assessee.

Final Conclusion: The reference was answered against the Revenue on the decided questions, with both substantive issues determined in favour of the assessee.

Ratio Decidendi: Expenditure incurred at the show-cause stage of customs proceedings is not expenditure in connection with a criminal proceeding, and entertainment expenditure is to be tested in accordance with the controlling legal principle on its statutory disallowability.

---