High Court rules messing expenses for trade constituents not entertainment expenditure

The High Court of Madhya Pradesh ruled in favor of the assessee in a case involving the interpretation of entertainment expenditure under section 37(2B) of the Income-tax Act, 1961. The court held that messing expenses provided to trade constituents did not constitute entertainment expenditure, citing precedents that acts of hospitality as part of business obligations or trade customs do not fall under this category. The court answered the reference question affirmatively, directing each party to bear their own costs related to the case.

---

---

Issues involved: Interpretation of entertainment expenditure u/s 37(2B) of the Income-tax Act, 1961 for expenditure on messing provided to trade constituents.

Summary:
The High Court of Madhya Pradesh considered a reference u/s 256(1) of the Income-tax Act, 1961 regarding the treatment of expenditure incurred by an assessee for providing messing to trade constituents. The assessee, a registered firm in the wholesale cloth business, claimed Rs. 26,000 for messing expenses for its trade constituents for the assessment year 1974-75. Initially disallowed by the ITO as entertainment expenditure, the AAC reduced the claim to Rs. 15,000. The Tribunal upheld the AAC's decision, stating that the messing expenses did not amount to entertainment expenditure u/s 37(2B) of the Act, considering the volume of the assessee's business.

The Court referenced the case law of CIT v. Patel Brothers & Co. Ltd., where it was held that acts of hospitality provided as part of business obligations or long-standing trade customs do not constitute entertainment expenditure. This interpretation was followed in subsequent cases. Despite contrary views in other decisions, the Court found the Gujarat High Court's test consistent with commercial practices and not in conflict with the Act.

Consequently, the Court answered the referred question in the affirmative, favoring the assessee. Each party was directed to bear their own costs related to the reference.

---