Entertainment expenditure includes customer hospitality at factory premises under the amended Income-tax definition.

Expenditure on meals, coffee, tea and similar hospitality provided to customers at the factory premises was held to fall within entertainment expenditure under Explanation 2 to section 37(2A) of the Income-tax Act, 1961. The provision enlarges entertainment expenditure to include hospitality of every kind given by an assessee to any person, including food or beverages in any form, whether or not incurred under trade custom or usage; only food or beverages provided to employees are excluded. From 1 April 1976, the amendment made this position clear, so the disputed customer hospitality expenditure was rightly treated as entertainment expenditure and answered in favour of the Revenue.

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Issues: Whether expenditure incurred on providing meals, coffee, tea and similar hospitality to customers at the factory premises was liable to be treated as entertainment expenditure under Explanation 2 to section 37(2A) of the Income-tax Act, 1961 for the assessment years 1976-77 and 1977-78.

Analysis: Explanation 2 to section 37(2A) enlarges the meaning of entertainment expenditure to include expenditure on hospitality of every kind provided by an assessee to any person, including provision of food or beverages in any manner whatsoever, whether incurred out of custom or usage of trade. The only excluded category is food or beverages provided to employees. From 1 April 1976, the legislative amendment put the issue beyond doubt, and the disputed expenditure on hospitality to customers fell within the statutory definition of entertainment expenditure.

Conclusion: The expenditure was rightly treated as entertainment expenditure. The questions were answered in the negative and in favour of the Revenue.

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