Client hospitality as entertainment expenditure: bank's coffee and tea costs were held non-deductible under section 37

Explanation 2 to section 37(2A) of the Income-tax Act, 1961 gives entertainment expenditure a wide scope and includes hospitality of every kind by way of food or beverages, other than to employees at the office, factory or other place of work. Expenditure incurred by a bank on supplying coffee, tea and similar refreshments to clients therefore falls within that expression and cannot be deducted as business expenditure under section 37(1). The expenditure was treated as entertainment expenditure and disallowed.

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Issues: Whether expenditure incurred by a bank on supplying coffee, tea and similar hospitality to its clients is deductible as business expenditure or is to be treated as entertainment expenditure under section 37 of the Income-tax Act, 1961.

Analysis: Explanation 2 to section 37(2A), introduced by the Finance Act, 1983 with retrospective effect from 1 April 1976, gives a wide meaning to entertainment expenditure and includes hospitality of every kind by providing food or beverages or in any other manner whatsoever, except to employees in the office, factory or other place of work. Expenditure on supplying coffee, tea and similar items to clients falls within that expression and is not allowable as a deduction under section 37(1).

Conclusion: The expenditure was entertainment expenditure and was not deductible. The question was answered in the negative and in favour of the Revenue.

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