JUDGMENT
B.N. Agrawal, J.
1. In these references under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) which relate to assessment years 1970-71 to 1972-73, the Income-tax Appellate Tribunal, Patna Bench, has referred to this court the following questions for its opinion :
“1. Whether, on the facts and in the circumstances of the case, the expenses incurred on the foreign guests and visitors were allowable as deduction under Section 37(1) of the Income-tax Act notwithstanding the provision in Sub-section (2A) and Sub-section (2B) of that section ?
2. Whether, on the facts and in the circumstances of the case, the salary and interest paid to Sri Ramratan Lal Rajgarhia and Sri Maniklal Rajgarhia have been correctly added while computing the income of the assessee firm by applying the provision of Section 40(b) of the Income-tax Act in the assessment of the firm for the assessment years 1970-71 and 1971-72?
3. Whether, on the facts and in the circumstances of the case, interest paid to Sri Ramratan Lal Rajgarhia and Sri Maniklal Rajgarhia has been correctly added while computing the income of the assessee firm by applying the provision of Section 40(b) of the Income-tax Act in the assessment of the firm for the assessment year 1972-73 ? ”
2. The relevant facts for answering question No. 1, in short, are that the assessee has a mica business during the course of which it has to receive several foreign guests and visitors. In the assessment year 1970-71, the assessee spent Rs. 42,625 as expenditure in entertaining the foreign guests and visitors. The Income-tax Officer allowed the expenditure to the extent of Rs. 5,000 out of the aforesaid expenditure claimed by the assessee and disallowed the balance sum of Rs. 37,625. The assessee took the matter in appeal and the Appellate Assistant Commissioner remanded the matter to the Income-tax Officer as the details of expenditure were not furnished by the assessee and the assessee was not entitled to claim any expenditure incurred on this count after February 28, 1970. In the assessment years 1971-72 and 1972-73, the assessee claimed Rs. 22,380 and Rs. 21,742 respectively on the aforesaid two counts which claims were disallowed by the Income-tax Officer in their entirety as after February 28, 1970, no entertainment expenditure could be allowed and the disallowance was affirmed by the Appellate Assistant Commissioner. Thereafter the assessee preferred three separate appeals before the Tribunal against the orders passed by the Appellate Assistant Commissioner but the Tribunal has rejected all the three appeals. Hence, these references to this court.
3. Learned counsel appearing for the assessee contended that the expenditure incurred by the assessee on foreign guests and visitors cannot be said to be expenditure in the nature of entertainment expenditure within the meaning of Section 37(2A) and 37(2B) of the Act as the expenditure incurred was not on a lavish and extravagant scale and, therefore, the Income-tax Officer was bound to allow the entire expenditure claimed by the assessee on this count under Section 37(1) of the Act. In support of his contention, learned counsel has placed reliance upon the cases in CIT v. Paid Brothers & Co. Ltd. [1977] 106 ITR 424 (Guj), CIT v. Corporation Bank Ltd. [1979] 117 ITR 271 (Kar), CIT v. Karuppuswamy Nadar & Sons [1979] 120 ITR 140 (Mad), CIT v. Lakhmichand Muchhal [1982] 134 ITR 234 (MP) and Addl. CIT v. Maddi Venkataratnam & Co. Ltd. [1979] 119 ITR 514 (AP).
4. Learned counsel for the Revenue, on the other hand, contended that each and every expenditure incurred in entertaining foreign guests and visitors is expenditure in the nature of entertainment expenditure within the meaning of Section 37(2A) and (2B) of the Act irrespective of the fact whether the expenditure incurred was on a lavish and extravagant scale or not. In support of his contention, learned counsel placed reliance upon the cases in CIT v. Veeriah Reddiar [1977] 106 ITR 610 (Ker) [FB], Brij Raman Dass and Sons v. CIT [1976] 104 ITR 541 (All), CIT v. Gheru Lal Bal Chand [1978] 111 ITR 134 (P & H), CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336 (P & H) [FB] and Mysodet (Pvt.) Ltd. v. CIT [1987] 163 ITR 848 (Kar).
5. The point to be decided in the case on hand would be whether the amount spent by the assessee on foreign guests and customers would come within the expression “expenditure in the nature of entertainment expenditure” within the meaning of Section 37(2A) and (2B) of the Act. For answering this question it is necessary to go into the legislative history of Section 37 of the Act. Under Section 10(2)(xv) of the Indian Income-tax Act, 1922, the amount spent by an assessee for the entertainment of his business constituents and customers was deductible against the income under the head “Profits or gains of any business, profession or vocation carried on by an assessee” on the ground that such hospitality or entertainment is extended wholly for the purpose of promotion of the assessee’s business or profession. It appears that this provision was being misused by assessees as there had been a growing tendency on the part of companies and their directors and executives to entertain on a lavish scale at the expense of the company and claim the same as expenditure. In order to check the abuse of this provision, it was found expedient to put restrictions on entertainment expenditure and, therefore, by the Finance Act of 1961 with effect from April 1, 1962, a proviso was inserted in Section 10(2)(xv) of the Indian Income-tax Act, 1922 which imposed a ceiling on all expenses in the nature of entertainment expenditure which can be allowed to a company. The maximum was prescribed on a slab basis depending on profits and gains of business. When the present Act was passed, the aforesaid proviso was retained therein as Section 37(2) of the Act. Thereafter it was found that the assessees other than companies were misusing the provision. Therefore, by the Taxation Laws Amendment Act, 1967, Sub-section (2A) was inserted in Section 37 of the Act whereby in the case of assessees other than companies, a ceiling on expenditure in the nature of entertainment expenditure was fixed. Later on, by the Finance Act of 1970, Sub-section (2B) was inserted in Section 37 of the Act whereby no expenditure in the nature of entertainment could be claimed by an assessee after February 28, 1970. It appears that subsequently this Sub-section (2B) was omitted by the Finance Act 1976 with effect from April 1, 1977. The relevant portion of Section 37 of the Act reads as follows :
“37. General.–(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and Section 80VV and not being 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 shall be allowed in computing the income chargeable under the head ‘ Profits and gains of business or profession .
(2) Notwithstanding anything contained in Sub-section (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as hereunder:–
(i)
On the first Rs. 10,00,000
of the profits and gains of the business (computed before making any
allowance under section 33 or section 33A or in respect of entertainment
expenditure)
at the rate of 1% or Rs. 5,000, whichever is higher;
(ii)
on the next Rs. 40,00,000
of the profits and gains of the business (computed in the manner aforesaid)
at the rate of ½%
(iii)
on the next Rs. 1,20,00,000 of the profits and gains of the business
(computed in the manner aforesaid)
at the rate of ¼%
(iv)
on the balance of the profits and gains of the business (computed in the
manner aforesaid)
Nil.
(2A) Notwithstanding anything contained in Sub-section (1) o Sub-section (2), no allowance shall be made in respect of so much of the expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year which expires after the 30th day of September, 1967, as is in excess of the aggregate amount computed as hereunder :-
(ii)
on the next Rs. 40,00,000
of the profits and gains of the business or profession (computed in
the manner aforesaid)
at the rate of ¼%
(iii)
on the next Rs. 1,20,00,000 of the
profits and gains of the business or profession (computed in the manner aforesaid)
at the rate of 1/8%
(iv)
on the balance ofÂ
the profits and gains of the business or profession (computed in the manner aforesaid)
Nil.
Provided that where the previous year of any assessee falls partly before and partly after the 30th day of September, 1967, the allowance in respect of such expenditure incurred during the previous year shall not exceed—
(a) in the case of a company-
(i) in respect of such expenditure incurred before the 1st day of October, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in Sub-section (2), the same proportion as the number of days comprised in the period commencing on the first day of such previous year and ending with the 30th day of September, 1967, bears to the total number of days in the previous year ;
(ii) in respect of such expenditure incurred after the 30th day of September, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in this sub-section, the same proportion as the number of days comprised in the period commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to the total number of days in the previous year ;
(b) in any other case-
(i) in respect of such expenditure incurred before the 1st day of October, 1967, the amount admissible under Sub-section (1);
(ii) in respect of such expenditure incurred after the 30th day of September, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in this sub-section, the same proportion as the number of days comprised in the period commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to the total number of days in the previous year.
Explanation.–For the purpose of this sub-section and Sub-section (2B) ‘entertainment expenditure’ includes-
(i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person after the 29th day of February, 1968 ;
(ii) the amount of any expenditure in the nature of entertainment expenditure (not being expenditure incurred out of an allowance of the nature referred to in Clause (i)) incurred after the 29th day of February, 1968, for the purpose of the business or profession of the assessee by any employee or other person.
(2B) Notwithstanding anything contained in this section, no allowance shall be made in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessee after the 28th day of February, 1970.”
6. In Section 37(2A) and (2B), the Legislature has not merely used the expression “entertainment expenditure” but the expression used therein is “expenditure in the nature of entertainment expenditure”. The expression “entertainment expenditure” has nowhere been defined in the Act. The expression used by the Legislature in Section 37(2A) and (2B) is very wide and would embrace within its ambit not merely expenditure which can be strictly considered as entertainment expenditure but also the expenditure of allied nature. It appears that Parliament has deliberately used the expression “expenditure in the nature of entertainment expenditure” so that all types of expenditure on entertainment could be covered under Section 37(2A) and (2B) of the Act. The leading case on this question is the Full Bench decision of the Kerala High Court in CIT v. Veeriah Reddiar [1977] 106 ITR 610, wherein the assessee claimed that the amount spent by him in supplying cigarettes, coffee, meals etc., to its customers cannot come within the expression ” expenditure in the nature of entertainment expenditure ” within the meaning of Sub-sections (2A) and (2B) of Section 37 of the Act and he was entitled to claim the same under Section 37(1) of the Act. Repelling the contention of the assessee, Eradi J., as he then was, expressly dissenting from the view of the Gujarat High Court in the case of CIT v. Paid Brothers & Co. Ltd, [1977] 106 ITR 424, laid down the law as follows ([1977] 106 ITR 610 (Ker) [FB] at page 617);
“A reference to the leading dictionaries would show that the word ‘entertainment’ has several different shades of meaning such as, a diversion or amusement : something affording a diversion or amusement, especially a performance : hospitable provision for guests : maintenance in service : reception of and provision for guests : hospitality at table : that which entertains : a performance or show intended to give pleasure : hospitality given or received : the consideration of an idea : reception, admission, etc. The exact content of the word has, therefore, to be gathered from the context and setting in which it has been used. We are clearly of the opinion that in interpreting the expression ‘entertainment expenditure ‘occurring in Sub-sections (2A) and (2B) of Section 37 of the Act, the word ‘ entertainment’ should be taken to mean hospitality of any kind extended by the assessee directly in connection with his business or profession.
We do not see how it can be said that in supplying cigarettes, coffee or meals to its customers and constituents, the assessee was not extending to them hospitality in connection with its business. Inasmuch as we have held that the expression ‘entertainment’ occurring in Section 37 must be taken to mean hospitality of any kind, the expenditure incurred by the assessee on the supply of cigarettes, coffee, etc., to its customers clearly falls within the description ‘entertainment expenditure’. It was argued on behalf of the assessee that only hospitality extended on a lavish and grand scale would amount to ‘entertainment’ and that, hence, only expenditure incurred on that kind of hospitality would be taken in by the expression ‘entertainment expenditure’. We see no justification whatever for placing such a narrow and restricted interpretation on the word ‘entertainment’ occurring in Sub-sections (2A) and (2B) of Section 37 of the Act. ”
7. The Allahabad High Court has also taken the identical view in Brij Raman Dass and Sons v. CIT [1976] 104 ITR 541. A Division Bench of the Punjab High Court presided over by O. Chinnappa Reddy, Acting Chief Justice, as he then was, took the same view in CIT v. Gheru Lal Bal Chand [1978] 111 ITR 134 and observed as follows (at page 136):
” I think the key to the interpretation of this section is provided by the words ‘in the nature of entertainment expenditure’. These words are of wide import and embrace in their ambit an expenditure which may be similar to entertainment expenditure, even though it does not strictly fall within the meaning of this expression. The reason is obvious, because the Legislature intended to curb the expenditure of providing hospitality of any kind at the cost of the public exchequer. ”
8. A Full Bench of the Punjab High Court also, after considering all the previous decisions, has taken a similar view in CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336 and concluded as follows (p. 348):
” To conclude on this aspect it appears to me that on the larger principle of safeguarding the public exchequer, on the broad scheme of Chap. IV of the Act in general and Part ‘ D ‘ thereof in particular, in the context of the legislative history of Section 37 of the Act and its predecessor provision of Section 10(2)(xv) of the 1922 Act, and the specific language and phraseology used in Sub-sections (2) and (2A) of Section 37, it must be held that all hospitality extended for the purpose of business, whether lavish or frugal, is within the wide net of the compendious phrase ‘ in the nature of entertainment expenditure ‘ purposely employed by Parliament. ”
9. The same view has been taken by the Karnataka High Court in Mysodet (Pvt.) Ltd. v. CIT [1987] 163 ITR 848. From the aforesaid decisions, it would be clear that Section 37(2A) and (2B) would take within its ambit all types of expenditure without any exception and I am in respectful agreement with the view expressed therein.
10. The leading case cited on behalf of the assessee in support of his contention is that of the Gujarat High Court in CIT v. Patel Brothers & Co. Ltd. [1977] 106 ITR 424. In that case, the assessee company had claimed kitchen expenses for providing meals to upcountry customers out of commercial compulsion and expediency and according to the assessee, the said expenses could not be treated to be expenditure in the nature of entertainment expenditure. Their Lordships laid down that if the provision of food or drinks to customers is in the nature of bare necessity or by way of ordinary courtesy or as an express or implied term of the contract of employment spelt out from long standing practice or custom of trade or business, it will not amount to entertainment and, therefore, the provisions of Section 37(2A) and (2B) will not apply to such a case.
11. Accordingly, the expenses claimed by the assessee lay in its entirety under Section 37(1) of the Act. Their Lordships further laid down that only such expenses would come within the ambit of Section 37(2A) and (2B) which are on a lavish and extravagant scale or wasteful in nature. It appears that their Lordships have not taken into consideration the expression “expenditure in the nature of entertainment expenditure” as used in Sub-sections (2A) and (2B) which expression is much wider than the expression “entertainment expenditure”. It further appears that in that case, their Lordships have considered various meanings given in different dictionaries of the expression “entertainment” and have given too narrow a meaning to the expression “entertainment” and thereby held that only those expenses would come within the expression “entertainment” which are spent on a lavish and extravagant scale or are of wasteful nature. It further appears that the attention of the Bench in that case was not drawn towards the legislative history of Section 37 of the Act by which restrictions have been put from time to time in claiming expenditure in the nature of entertainment expenditure by the assessee. In my view, the interpretation put forth by the Gujarat High Court is contrary to the intention of the Legislature. For these reasons, I am in respectful disagreement with the view taken by the Gujarat High Court.
12. Besides the Gujarat High Court, some other High Courts have either followed that decision or decided the cases on the same lines. Those decisions are of the Karnataka High Court in CIT v. Corporation Bank Ltd. [1979] 117 ITR 271, the Madras High Court in CIT v. Karuppuswamy Nadar and Sons [1979] 120 ITR 140, the Madhya Pradesh High Court in CIT v. Lakhmichand Muchhal [1982] 134 ITR 234 and the Rajasthan High Court in Devichand Bastimal v. CIT [1985] 156 ITR 166. For the same reasons, I am in respectful disagreement with the view expressed in the aforesaid decisions.
13. So far as the judgment of the Andhra Pradesh High Court in Addl. CIT v. Maddi Venkataratnam and Co, Ltd. [1979] 119 ITR 514 is concerned, the same was with regard to the expenses entirely incurred for the maintenance of a guest house. This case was specifically covered by sub-section (3) of Section 37 of the Act. Therefore, this case is entirely distinguishable from the case on hand and the ratio laid down therein cannot affect the cases which are covered under Sub-sections (2A) and (2B) of Section 37 of the Act.
14. Thus, I have not the slightest doubt that the expenditure incurred by the assessee in entertaining foreign guests and visitors would come within the expression “expenditure in the nature of entertainment expenditure” within the meaning of Section 37(2A) and (2B) of the Act and the assessee is not entitled to claim the same as expenditure under Section 37(1) of the Act. The Tribunal, in my view, was wholly correct in upholding the disallowance of expenditure claimed by the assessee and, therefore, the first question referred to this court is answered accordingly.
15. The second question referred to this court relates to assessment years 1970-71 and 1971-72 and the third question relates to assessment year 1972-73. It appears that Ram Ratan Lal Rajgarhia and Manik Lal Raj-garhia were partners of the assessee firm. In the assessment years 1970-71 and 1971-72, the assessee-firm claimed deduction of salary and interest paid to the aforesaid two partners which was paid to them besides their share of profits of the firm. In the year 1972-73, the assessee firm claimed deduction of interest paid to the aforesaid two partners besides their share of profits of the firm. The Income-tax Officer rejected the claim of deduction of salary and interest in all the three years and the rejection was upheld by the Appellate Assistant Commissioner on appeal and then by the Tribunal on further appeal.
16. It has been brought to my notice that an identical question in respect of the very same assessee relating to the assessment years 1965-66 to 1969-70 was raised before this court in Ckandmul Rajgarhia v. CIT [1987] 164 ITR 486 and the question was answered against the assessee and in favour of the Revenue. Therefore, in my view, the Tribunal was justified in disallowing the claim of the assessee for deduction of salary and interest paid to two of its partners. Thus, all the three questions referred to this court are answered in favour of the Revenue and against the assessee. These references are thus disposed of with costs. Hearing fee Rs. 250 payable by the assessee for each of the three years.
17. Let a copy of this judgment be transmitted to the Assistant Registrar, Income-tax Appellate Tribunal, Patna Bench, in terms of Section 260 of the Act.
Uday Sinha, J.
18. I agree.
