TaxTMI 
TaxTMI 
1995 (5) TMI 2
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....on Laws (Amendment) Act, 1967. The material facts in these appeals illustrative of all connected matters, are these : The relevant assessment years are 1969-70, 1970-71 and 1971-72 of which the corresponding previous years ended on September 30, 1968, September 30, 1969, and September 30, 1970, respectively. The assessee, a limited company, claimed kitchen expenses of Rs. 22,301, Rs. 25,979 and Rs. 28,620, respectively, for these assessment years as expenses incurred for providing meals to its employees and its customers in the ordinary course of its business as customary trade usage. The Income-tax Officer disallowed the expenditure to the extent of Rs. 10, 101, Rs. 12,979 and Rs. 17,305, respectively, corresponding to the expenses incurred for meals provided to the customers even though it was found that the meals were ordinary and not in any manner lavish. The assessee preferred an appeal to the Appellate Assistant Commissioner against the partial disallowance of this expenditure. The Appellate Assistant Commissioner held that the meals were a bare necessity having regard to the nature of business and, therefore, the Income-tax Officer was directed to grant that allowance. Th....
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....he period prior to April 1, 1976, and, therefore, the decision is to be based on sub-section (2A) of section 37 of the Act minus Explanation 2 inserted later. We would refer to the two sets of decisions after mentioning the rival contentions and the view taken by us. The contention of Shri B. B. Ahuja, learned counsel for the Revenue, is that all kinds of hospitality are entertainment and, therefore, the entire expenditure incurred under this head, even for serving ordinary meals as a bare necessity, falls under sub-section (2A) of section 37 ; and the expression "entertainment expenditure" in sub-section (2A) must be construed to mean from the inception as defined in Explanation 2 to sub-section (2A) of section 37, since Explanation 2 is merely clarificatory. It was urged that for this reason the insertion of Explanation 2 only with effect from April 1, 1976, is immaterial and the expression "entertainment expenditure" in sub-section (2A) of section 37 must be so construed even for the period prior to April 1, 1976. In reply, Shri Harish Salve, learned counsel for the assessee, contended that a purposive interpretation of the provision must be made. It was urged that the purpos....
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.... In Sampath Iyengar's Law of Income Tax, Eighth edition, Vol. 2, reference is made to Circular No. 372, dated December 8, 1983, of the Board, wherein the scope and effect of the above amendments was explained as under : " 30. Provision for curbing avoidable or ostentatious expenditure in business or profession (section 37).--Section 37 of the Income-tax Act provides for deduction in the computation of taxable profits of any expenditure, other than expenditure of the nature described in sections 30 to 36 and section 80VV, or expenditure in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession carried on by the taxpayer. With a view to curbing certain categories of avoidable or ostentatious expenditure by assessees carrying on business or profession, the Finance Act has made certain amendments to section 37 of the Income-tax Act. The substance of these amendments is explained in paragraphs 31 to 34 hereunder. 31.1. Entertainment expenditure.--For the removal of doubts regarding the scope of the expression 'entertainment expenditure', the Finance Act has inserted a new....
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.... section 37 is that any expenditure laid out or expended wholly or exclusively for the purposes of the business or profession shall be allowed but no expenditure in the nature of entertainment expenditure shall be allowed as stated in sub-sections (2) and (2A) in excess of the amount specified. For claiming deduction of the business expenditure according to the general rule, the test of commercial expediency is applied but exclusion is made of any expenditure which is in the nature of "entertainment expenditure". Without anything more, it means that an expenditure incurred for commercial expediency or usage of the trade is a permissible deduction unless it partakes of the character of an entertainment expenditure, in which case the permissible limit is specified. The controversy in the present case relates to the meaning of "entertainment expenditure" in sub-section (2A) of section 37 before the insertion of Explanation 2 therein. The question involved in these matters relates to 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 ex....
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....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. Learned counsel for the Revenue contended that Explanation 2 is clarificatory and, therefore, even without Explanation 2, the provision must be understood and construed in the same manner. It appears to us that insertion of Explanation 2 made retrospectively, but restricted in its application only with effect from April 1, 1976, is itself an indication that its application prior to April 1, 1976, is excluded. If Explanation 2 was merely clarificatory of the ordinary meaning, as contended by learned counsel for the Revenue, it was unnecessary to restrict its retrospective application in this manne....
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....ext, it was held as under : " What we have to see is as to what is the meaning of the word 'entertainment' for purposes of section 37(2A) of the Act. In the Income-tax Act, this word has not been defined and we will have to give it its general meaning. An 'entertainment expenditure' would, in our opinion, include all expenditures incurred in connection with business on the entertainment of customers and constituents. The entertainment may consist of providing refreshments as in this case or it may consist of providing some other sort of entertainment. " In Bentleys, Stokes and Lawless v. Beeson (H. M. Inspector of Taxes) [1952] 33 TC 491 (CA), a firm of solicitors incurred expenses in entertaining clients. The entertainment consisted of providing lunch to the clients. It was held that expenditure was incurred wholly and exclusively for the purposes of business and was an allowable deduction. The same is the position in the instant case. The petitioner has been providing to its customers refreshments and this constitutes an expenditure in the nature of 'entertainment expenditure'. The entire expenditure would have been allowed but for the amendment introduced by section 37(2A)....