Customary hospitality expenses are not entertainment spend, but surtax liability remains nondeductible business expenditure.

Customary hospitality spending on soft drinks, snacks and simple meals for customers and suppliers was treated as ordinary business expenditure, not entertainment expense, so it remained deductible and was not hit by section 37(2B). Surtax liability, however, was regarded as a tax on profits and gains and therefore fell within the prohibition in section 40(a)(ii), making it nondeductible as business expenditure. The reference was disposed of by allowing the hospitality deduction while upholding disallowance of the surtax claim.

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Issues: (i) Whether expenses incurred in providing soft drinks, snacks and simple meals to customers and suppliers as customary hospitality were entertainment expenses hit by section 37(2B) of the Income-tax Act, 1961; (ii) Whether surtax liability was an allowable business expenditure or was barred by section 40(a)(ii) of the Income-tax Act, 1961.

Issue (i): Whether expenses incurred in providing soft drinks, snacks and simple meals to customers and suppliers as customary hospitality were entertainment expenses hit by section 37(2B) of the Income-tax Act, 1961.

Analysis: The expenditure was incurred in the course of business to provide ordinary hospitality to customers and suppliers and was treated as customary commercial expenditure. The governing view applied was that such outlay does not fall within the mischief of entertainment expenses and is not disallowed under section 37(2B).

Conclusion: The question was answered in favour of the assessee. The expenditure was allowable as a business deduction.

Issue (ii): Whether surtax liability was an allowable business expenditure or was barred by section 40(a)(ii) of the Income-tax Act, 1961.

Analysis: Surtax liability was treated as a tax on the profits and gains of the business. On that basis, it fell within the prohibition against deduction of such tax liability as business expenditure under section 40(a)(ii).

Conclusion: The question was answered in favour of the Revenue. Surtax liability was not an allowable deduction.

Final Conclusion: The reference was disposed of by allowing the assessee's claim on hospitality expenditure while upholding the disallowance of surtax liability as a business deduction.

Ratio Decidendi: Customary hospitality expenditure incurred for customers and suppliers is not entertainment expenditure when it is part of ordinary business conduct, whereas surtax liability constitutes a tax on profits and gains and is not deductible as business expenditure.

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