Customer hospitality costs for soft drinks treated as entertainment expenditure and disallowed under tax law

Expenditure on soft drinks supplied to customers visiting branch offices was treated as entertainment expenditure and disallowed under section 37(2A) of the Income-tax Act, 1961. Explanation 2, inserted retrospectively by the Finance Act, 1983, expressly excluded entertainment expenditure incurred for customers, and on the admitted facts there was no material to separate any identifiable employee-related component. The Tribunal's contrary view was therefore incorrect, and the expenditure fell within the disallowance for entertainment expenditure.

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Issues: Whether expenditure incurred for supplying soft drinks to customers could be treated as entertainment expenditure and disallowed under section 37(2A) of the Income-tax Act, 1961 in view of Explanation 2 inserted retrospectively by the Finance Act, 1983.

Analysis: The expenditure was claimed as having been incurred towards supply of soft drinks to customers visiting the branches. Explanation 2 to section 37(2A), inserted by the Finance Act, 1983 with retrospective effect from 1 April 1976, expressly excluded allowance for entertainment expenditure incurred for customers. On the admitted facts, the amount was spent for customers and there was no material on record to segregate any identifiable portion relatable to employees.

Conclusion: The expenditure constituted entertainment expenditure disallowable under section 37(2A) of the Income-tax Act, 1961, and the Tribunal's contrary view was incorrect. The question was answered in the negative and in favour of the Revenue.

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