1995 (5) TMI 2 - SC - Income Tax

Expenses for ordinary meals to outstation customers before April 1, 1976 qualify as allowable business deduction under section 37(2A)

Commissioner of Income-Tax Versus Patel Brothers And Co. Limited. And Others

SC held that, for periods before April 1, 1976, expenditure on providing ordinary meals and refreshments to outstation customers as customary hospitality ... Meaning of 'entertainment expenditure' in section 37(2A) - deduction of expenditure incurred in providing ordinary meals and refreshments to outstation customers according to the customary hospitality and trade usage satisfying the general test of commercial expediency - Applicability of Explanation 2 to section 37(2A) retrospectively from April 1, 1976 - HELD THAT:- Generally, 'entertainment expenditure' is an expression of wide import. However, in the context of disallowance of 'entertainment expenditure' as a business expenditure by virtue of sub-section (2A) of section 37, the word 'entertainment' must be construed strictly and not expansively. Ordinarily, 'entertainment' connotes something which may be beneficial for mental or physical well being but is not essential or indispensible for human existence. A bare necessity, like an ordinary meal, is essential or indispensable and, therefore, is not 'entertainment'. If such a bare necessity is offered by another, it is hospitality but not entertainment. Unless the definition of 'entertainment' includes hospitality, the ordinary meaning of 'entertainment' cannot include hospitality. For this reason, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity, is not 'entertainment expenditure' without the aid of the enlarged meaning given to the words by Explanation 2 inserted with effect from April 1, 1976. The definition in Explanation 2 is not the ordinary meaning of the words 'entertainment expenditure', but the enlarged meaning given for the purpose of the Act with effect from April 1, 1976. The dispute in the present cases relates only to the amount which has been held to be essential business expenditure of this kind incurred in providing ordinary meals as bare necessity. In the view taken by us, such expense did not come within the meaning of 'entertainment expenditure' prior to April 1, 1976, when Explanation 2 was brought in by a retrospective amendment made in 1983 of sub-section (2A) of section 37. The finding of fact in all cases, therefore, satisfies this test to allow deduction of the expenditure incurred by each assessee and claimed under this head for the period prior to April 1, 1976. Sub-section (2A) was inserted with effect from October 1, 1967, by the Taxation Laws (Amendment) Act, 1967, and Explanation 2 inserted therein by the Finance Act, 1983, retrospectively, with effect from April 1, 1976, while sub-section (2B) was inserted with effect from April 1, 1970, by the Finance Act, 1970. As earlier stated, these cases relate to the period prior to April 1, 1976, from which date Explanation 2 to sub-section (2A) was inserted retrospectively. We have, therefore, to construe sub-section (2A) as it existed without Explanation 2. The meaning of Explanation 2 is quite clear and it has enlarged the meaning to widen the tax net. In our opinion, the construction we have made of the provision as it existed during the relevant period flows not merely from the language of the provision but also matches with the object thereof. It means that the expenditure incurred by the assessees in providing ordinary meals to outstation customers according to established business practice, was a permissible deduction in spite of sub-section (2A) of section 37, to which the assessees were entitled in the computation of their total income for the purpose of payment of tax under the Income-tax Act, 1961, during the relevant period prior to April 1, 1976. Issues Involved:1. Meaning of 'entertainment expenditure' under section 37(2A) of the Income-tax Act, 1961.2. Applicability of Explanation 2 to section 37(2A) retrospectively from April 1, 1976.3. Deduction of expenditure incurred on providing ordinary meals to customers as business expenditure.4. Conflict in judicial decisions across various High Courts regarding the interpretation of 'entertainment expenditure.'Issue-wise Detailed Analysis:1. Meaning of 'entertainment expenditure' under section 37(2A) of the Income-tax Act, 1961:The core question was whether the expenditure on providing ordinary meals to customers constituted 'entertainment expenditure' under section 37(2A). The Supreme Court noted that 'entertainment expenditure' should be construed strictly and not expansively. The term 'entertainment' generally connotes something beneficial for mental or physical well-being but not essential or indispensable for human existence. The court emphasized that ordinary meals, being a bare necessity, do not qualify as 'entertainment.' Instead, such expenses are considered hospitality unless the definition is expanded to include hospitality, which was done by Explanation 2 inserted later.2. Applicability of Explanation 2 to section 37(2A) retrospectively from April 1, 1976:The court examined whether Explanation 2, which was inserted by the Finance Act, 1983, with retrospective effect from April 1, 1976, should apply to the assessment years in question (1969-70, 1970-71, and 1971-72). The court concluded that Explanation 2, which widened the scope of 'entertainment expenditure' to include hospitality, was not applicable to periods before April 1, 1976. The court reasoned that if Explanation 2 were merely clarificatory, it would not have been restricted to apply only from April 1, 1976. Therefore, the court held that the provision must be construed without the aid of Explanation 2 for the relevant assessment years.3. Deduction of expenditure incurred on providing ordinary meals to customers as business expenditure:The assessee claimed deductions for kitchen expenses incurred in providing meals to employees and customers. The Income-tax Officer partially disallowed these expenses, treating them as 'entertainment expenditure.' However, the Appellate Assistant Commissioner and the Tribunal allowed the deductions, finding that the meals were a bare necessity for the business. The Supreme Court upheld this view, stating that the expenditure on ordinary meals, being essential for business and customary trade usage, did not constitute 'entertainment expenditure' under section 37(2A) for the period before April 1, 1976.4. Conflict in judicial decisions across various High Courts regarding the interpretation of 'entertainment expenditure':The court acknowledged the conflicting decisions of various High Courts on this issue. High Courts in Gujarat, Andhra Pradesh, Rajasthan, Madhya Pradesh, and Karnataka had ruled in favor of the assessee, while High Courts in Allahabad, Punjab and Haryana, Patna, and Kerala had ruled in favor of the Revenue. The Supreme Court reviewed these decisions, particularly focusing on the Gujarat High Court's decision in CIT v. Patel Brothers and Co. Ltd. and the Allahabad High Court's decision in Brij Raman Dass and Sons v. CIT. The court endorsed the Gujarat High Court's view that ordinary meals provided to customers as a business necessity did not constitute 'entertainment expenditure.' Consequently, the court overruled the contrary decisions, including the Allahabad High Court's ruling.Conclusion:The Supreme Court concluded that the expenditure incurred by the assessees in providing ordinary meals to outstation customers according to established business practice was a permissible deduction under section 37(2A) for the period prior to April 1, 1976. The court decided in favor of the assessees and against the Revenue, allowing the assessees' appeals and dismissing the Revenue's appeals, special leave petitions, and tax references.