{"id":7315,"date":"1995-05-09T00:00:00","date_gmt":"1995-05-08T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-patel-brothers-co-ltd-etc-etc-on-9-may-1995"},"modified":"2016-05-23T01:38:44","modified_gmt":"2016-05-22T20:08:44","slug":"commissioner-of-income-tax-vs-patel-brothers-co-ltd-etc-etc-on-9-may-1995","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-patel-brothers-co-ltd-etc-etc-on-9-may-1995","title":{"rendered":"Commissioner Of Income-Tax vs Patel Brothers & Co. Ltd, Etc. Etc on 9 May, 1995"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Commissioner Of Income-Tax vs Patel Brothers & Co. Ltd, Etc. Etc on 9 May, 1995<\/div>\n
Equivalent citations: 1995 AIR 1829, \t\t 1995 SCC (4) 485<\/div>\n
Author: J S Verma<\/div>\n
Bench: Verma, Jagdish Saran (J)<\/div>\n
           PETITIONER:\nCOMMISSIONER OF INCOME-TAX\n\n\tVs.\n\nRESPONDENT:\nPATEL BROTHERS & CO. LTD, ETC. ETC.\n\nDATE OF JUDGMENT09\/05\/1995\n\nBENCH:\nVERMA, JAGDISH SARAN (J)\nBENCH:\nVERMA, JAGDISH SARAN (J)\nSINGH N.P. (J)\nMUKHERJEE M.K. (J)\n\nCITATION:\n 1995 AIR 1829\t\t  1995 SCC  (4) 485\n JT 1995 (5)   364\t  1995 SCALE  (3)650\n\n\nACT:\n\n\n\nHEADNOTE:\n\n\n\nJUDGMENT:\n<\/pre>\n
\t\t  THE 9TH DAY OF MAY,1995
\nPresent:\n<\/p>\n
\t\tHon’ble Mr.Justice J.S.Verma
\n\t\tHon’ble Mr.Justice N.P.Singh
\n\t\tHon’ble Mr.Justice M.K.Mukherjee
\nMr.B.B.Ahuja, Sr. Adv. Mr.B.S.Ahuja, Ms.A.Subhashini,
\nMrs.A.K.Verma, Mr.A.Subba Rao, Mr.S.K.Mehta, Mr.Dhruv Mehta,
\nMr.K.R.Nagaraja, Mr.M.G.Ramachandran, Mr.S.C.Patel, and
\nMs.Janki Ramachandran, Advs. with him for the appearing
\nparties.\n<\/p><\/blockquote>\n
\t\t      J U D G M E N T
\n     The following Judgment of the Court was delivered:\n<\/p><\/blockquote>\n
\t       IN THE SUPREME COURT OF INDIA
\n\t\tCIVIL APPELLATE JURISDICTION
\n\t     CIVIL APPEAL NOS. 1455-57 OF 1976
\nCommissioner of Income-tax\t\t    …. Appellant
\n\t\t\t    vs.\n<\/p><\/blockquote>\n
Patel Brothers & Co. Ltd.\t\t    …. Respondent
\n[WITH S.L.P.(c) Nos. 1804-1805, 4257 of 1977, C.A. Nos. 6142
\nof 1990, 1075-1078 of 1976, S.L.P.(c) No. 1374 of 1977, C.A.
\nNo. 872 of 1976, S.L.P. (c) Nos. 1385 of 1977, 8865 of 1979,
\nTax Ref. Case Nos. 4-6 of 1979, S.L.P. (c) No.655 of 1977,
\nC.A.No.5662 of 1995 (@ S.L.P.(c) No. 9255 of 1981), 12475 of
\n1985, C.A. No.2116 of 1977, C.A.No.5663 of 1995 (@ S.L.P.\n<\/p>\n
(c) No. 2318 of 1979), C.A. Nos.33, 34-35, 36, 37, 38-39,
\n40, 41, 42, 43-44, 45 of 1978, 698 of 1977, S.L.P. (c) No.
\n478 of 1981, C.A.Nos.1322 of 1978, 3433-34 of 1991, 1850 of
\n1975, 831, 832, 1585-88, 2436, 1077, 1075-76, 1079, 1092,
\n1103-04, 1120 of 1977, 118 of 1984, 6137 of 1990, S.L.P.(c)
\nNo. 745 of 1978, C.A. Nos. 2519 of 1980, 1746 of 1984, Tax
\nRef. Case No. 3 of 1979, C.A. No.2900 of 1977, S.L.P.(c) No.
\n8357 of 1983, and C.A. Nos. 2397-98 of 1977, 1581-82 of
\n1977, and Tax Ref. Case No. 4 of 1977].\n<\/p>\n
\t\t\t  JUDGMENT
\nJ.S.VERMA.J.:\n<\/p>\n
     These appeals  and the  connected matters\tinvolve\t for
\ndecision the  common question of law relating to the meaning
\nof “entertainment  expenditure” in  Section  37(2A)  of\t the
\nIncome-tax Act,\t 1961 (hereinafter referred to as “the Act”)
\nduring the  relevant assessment\t years. The  decision of the
\nGujarat High  Court in\tCommissioner of\t Income-tax, Gujarat
\nvs. Patel Brothers & Co. Ltd.,<\/a> [1977] 106 I.T.R. 424 (Guj.),
\non this\t point is challenged by the revenue in these appeals
\nby a  certificate granted  under Section 261 of the Act. The
\nconnected matters  involve the\tsame point. All cases relate
\nto the\tperiod\tprior  to  1.4.1976  from  which  date\tonly
\nExplanation 2  inserted in sub-section (2A) of Section 37 by
\nthe Finance  Act, 1983\twas  applied  retrospectively,\teven
\nthough sub-section  (2A)  was  inserted\t w.e.f.1.10.1967  by
\nTaxation Laws (Amendment) Act, 1967.\n<\/p>\n
     The material facts in these appeals illustrative of all
\nconnected matters,  are these: The relevant assessment years
\nare 1969-70,  1970-71 and 1971-72 of which the corresponding
\nprevious years\tended on  September 30,\t 1968, September 30,
\n1969 and  September 30,\t 1970 respectively.  The assessee, a
\nlimited company,  claimed kitchen  expenses of\tRs.22,301\/-,
\nRs.25,979\/-   and   Rs.28,620\/-\t  respectively\t for   these
\nassessment years as expenses incurred for providing meals to
\nits employees  and its\tcustomers in  the ordinary course of
\nits  business  as  customary  trade  usage.  The  Income-tax
\nofficer\t disallowed   the  expenditure\t to  the  extent  of
\nRs.10,101\/-,  Rs.12,979\/-,   and  Rs.17,305\/-\trespectively
\ncorresponding to the expenses incurred for meals provided to
\nthe customers  even though  it was found that the meals were
\nordinary  and\tnot  in\t any  manner  lavish.  The  assessee
\npreferred an  appeal to the Appellate Assistant Commissioner
\nagainst the  partial disallowance  of this  expenditure. The
\nAppellate Assistant  Commissioner held\tthat the  meals were
\nbare necessity\thaving regard to the nature of business and,
\ntherefore, the Income-tax officer was directed to grant that
\nallowance. The\tmatter then  went in  appeal to the Tribunal
\nwhich  confirmed   the\torder  of  the\tAppellate  Assistant
\nCommissioner. At  the instance\tof the revenue, the Tribunal
\nreferred to the High Court for its decision two questions of
\nlaw, namely,
\n     (1) Whether,  on the  facts and in the circumstances of
\nthe case,  the expenditure  in question was in the nature of
\nentertainment expenditure in law?\n<\/p>\n
     (2) Whether,  on the  facts and in the circumstances of
\nthe case,  the expenditure  in question\t would be  allowable
\nonly to\t the limited  extent  of  Rs.5,000\/-  under  section
\n37(2A)\tof  the\t Income-tax  Act,  1961,  for  each  of\t the
\nassessment years under reference?\n<\/p>\n
Identical questions  of law  were referred for all the three
\nassessment years.\n<\/p>\n
     The High  Court answered  both  the  questions  in\t the
\nnegative since\tit was\tfound on  the facts  by the Tribunal
\nthat indisputably the upcountry constituents of the assessee
\ncame to\t Ahmedabad for\tthe purpose  of\t business  with\t the
\nassessee and  having regard  to the  nature and magnitude of
\nthe business  of the assessee, it would be necessary for the
\nassessee to make arrangements to provide meals to them while
\nin Ahmedabad  for business  with  it,  as  it  was  not\t the
\nrevenue’s case\tthat the  assessee had\tspent the  money for
\nthrowing lavish\t parties for  its constituents.\t It had been
\nfound that the expenditure was for serving ordinary meals as
\na  bare\t  necessity  of\t  the  business.   Accordingly,\t the
\nreferences were\t answered against  the revenue and in favour
\nof the\tassessee. These\t appeals are  by certificate against
\nthat decision. The same question is involved for decision in
\nthe connected matters.\n<\/p>\n
     There is  a conflict  in the  view taken  by  the\tHigh
\nCourts on  the main  question. The  view taken\tby the\tHigh
\nCourts of  Andhra Pradesh,  Rajasthan,\tMadhya\tPradesh\t and
\nKarnataka is the same as that of the Gujarat High Court. The
\ncontrary  view\t has  been  taken  by  the  High  Courts  of
\nAllahabad, Punjab  & Haryana, Patna and Kerala. The decision
\nof the\tDelhi High  Court in  Commissioner of Income-tax vs.
\nRajasthan Mercantile Co. Ltd.etc.<\/a> etc.,[1995] 211 ITR 400 is
\nin line\t with the  Gujarat view. The difference in the views
\ntaken by   different  High Courts  has led  to\tone  set  of
\ndecisions against the revenue and another set in its favour.
\nThis is how in this court some appeals and other matters are
\nby the\trevenue while  the rest\t are by\t the  assessees.  As
\nearlier stated, all these matters relate to the period prior
\nto 1.4.1976  and, therefore,  the decision is to be based on
\nsub-section (2A)  of Section 37 of the Act minus Explanation
\n2 inserted  later.  We\twould  refer  to  the  two  sets  of
\ndecisions after\t mentioning the\t rival contentions  and\t the
\nview taken by us.\n<\/p>\n
     The contention  of Shri  B.B.Ahuja, learned counsel for
\nthe  revenue   is  that\t  all  kinds   of   hospitality\t  is
\nentertainment  and,   therefore,  the\tentire\t expenditure
\nincurred under this head, even for serving ordinary meals as
\na bare\tnecessity, falls  under sub-section  (2A) of Section
\n37; and\t the expression\t “entertainment expenditure” in sub-
\nsection (2A) must be construed to mean from the inception as
\ndefined in  Explanation 2 to sub-section (2A) of Section 37,
\nsince Explanation  2 is\t merely clarificatory.\tIt was urged
\nthat  for  this\t reason\t insertion  of\tExplanation  2\tonly
\nw.e.f.1.4.1976\t is    immaterial   and\t   the\t  expression
\n“entertainment expenditure”  in sub-section  (2A) of section
\n37 must\t be so\tconstrued  even\t for  the  period  prior  to
\n1.4.1976. In  reply, Shri  Harish Salve, learned counsel for
\nthe assessee  contended that purposive interpretation of the
\nprovision must be made. It was urged that the purpose was to
\ncurb the  tendency of  incurring lavish\t expenditure and not
\ncustomary hospitality extended by offering ordinary meals as
\na bare\tnecessity since\t the traditional  meaning  of  every
\nhospitality is\tnot entertainment.  It was  urged  that\t the
\nfinding in  all these  cases was  that the allowance claimed
\nwas only in respect of the expenditure incurred in providing
\nordinary meals as a bare necessity and not any lavish food.\n<\/p>\n
     Section 37, to the extent material, is as under:
\n     “37. General. – (1) Any expenditure (not
\n     being   expenditure    of\t the   nature
\n     described in  sections 30\tto 36 and not
\n     being   in\t  the\tnature\t of   capital
\n     expenditure or  personal expenses of the
\n     assessee), laid  out or  expended wholly
\n     and exclusively  for the purposes of the
\n     business or  profession shall be allowed
\n     in computing the income chargeable under
\n     the head  “Profits and gains of business
\n     or profession”.\n<\/p>\n
\t  (2)\t Notwithstanding     anything
\n     contained\t in   sub-section   (1),   no
\n     expenditure    in\t  the\t nature\t   of
\n     entertainment   expenditure   shall   be
\n     allowed in\t the case of a company, which
\n     exceeds the aggregate amount computed as
\n     hereunder:-\n<\/p>\n
      ***\t      ***\t\t  ***\n\t  *(2A)\t  Notwithstanding    anything\n     contained in  sub-section\t(1)  or\t sub-\n<\/pre>\n
     section (2),  no allowance shall be made
\n     in respect of so much of the expenditure
\n     in\t  the\t nature\t  of\tentertainment
\n     expenditure  incurred   by\t an  assessee
\n     during any\t previous year\twhich expires
\n     after the\t30th day  of September, 1967,
\n     as is  in excess of the aggregate amount
\n     computed as hereunder:-\n<\/p>\n
     ***\t     ***\t\t ***
\n     Explanation 1.-………\n<\/p>\n
\t  ***Explanation 2.  -For the removal
\n     of doubts,\t it is\thereby declared\t that
\n     for the purposes of this sub-section and
\n     sub-section (2B), as it stood before the
\n     1st day  of April,\t 1977, “entertainment
\n     expenditure”  includes   expenditure  on
\n     provision of  hospitality of  every kind
\n     by the  assessee to  any person, whether
\n     by way of provision of food or beverages
\n     or in  any other  manner whatsoever  and
\n     whether or not such provision is made by
\n     reason  of\t  any  express\t or   implied
\n     contract or  custom or  usage of  trade,
\n     but does not include expenditure on food
\n     or beverages provided by the assessee to
\n     his  employees  in\t office,  factory  or
\n     other place of their work.\n<\/p>\n
\t  **(2B)   Notwithstanding   anything
\n     contained in  this section, no allowance
\n     shall be  made in respect of expenditure
\n     in\t  the\t nature\t  of\tentertainment
\n     expenditure incurred within India by any
\n     assessee after the 28th day of February,
\n     1970.”\n<\/p>\n
\t\t\t (emphasis supplied)
\n     * Sub-section  (2A) was inserted w.e.f.
\n     1st October, 1967 by the Taxation Laws
\n     (Amendment) Act, 1967.\n<\/p>\n
     ** Sub-section (2B) was inserted w.e.f.
\n     1st April, 1970 by the Finance Act,
\n     1970.\n<\/p>\n
     *** Explanation 2 was inserted by the
\n     Finance Act, 1983 retrospectively w.e.f.
\n     1.4.1976.\n<\/p>\n
     In Sampath\t Iyengar’s Law\tof Income Tax, 8th Ed., vol.
\n2, reference  is made to circular No. 372 dated December, 8,
\n1983 of\t the Board,  (1984) 146 ITR st 31, wherein the scope
\nand effect of the above amendments was explained as under:-\n<\/p>\n
\t       “Provision     for     curbing
\n     avoidable or ostentatious expenditure in
\n     business or profession- Section 37 – 30.<\/p>\n
     Section  37   of  the   Income-tax\t  Act
\n     provides\tfor    deduction    in\t  the
\n     computation of  taxable profits  of  any
\n     expenditure other\tthan  expenditure  of
\n     the nature\t described in  sections 30 to
\n     36 and  section 80VV,  or expenditure in
\n     the nature\t of  capital  expenditure  or
\n     personal expenses\tof the assessee, laid
\n     out or  expended wholly  and exclusively
\n     for the  purposes\tof  the\t business  or
\n     profession carried\t on by\tthe taxpayer.
\n     With   a\tview   to   curbing   certain
\n     categories of  avoidable or ostentatious
\n     expenditure  by  assessees\t carrying  on
\n     business or  profession, the Finance Act
\n     has made  certain amendments  to section
\n     37 of  the Income-tax Act. The substance
\n     of\t these\tamendments  is\texplained  in
\n     paragraphs 31 to 34 hereunder.\n<\/p>\n
\t  Entertainment\t expenditure.-\t 31.1
\n     For the  removal of doubts regarding the
\n     scope of  the expression  “entertainment
\n     expenditure”,  the\t  Finance   Act\t  has
\n     inserted  a   new\tExplanation  for  the
\n     purposes of  sub-section (2A) of section
\n     37 and  also sub-section  (2B)  of\t that
\n     section as that sub-section stood before
\n     1 April, 1977. The Explanation clarifies
\n     that     “entertainment\t expenditure”\n<\/p>\n
     includes  expenditure  on\tprovision  of
\n     hospitality  of   every  kind   by\t  the
\n     assessee to  any person,  whether by way
\n     of provision  of food or beverages or in
\n     any other\tmanner whatsoever and whether
\n     or not  such provision is made by reason
\n     of any  express or\t implied contract  or
\n     custom,   usage   or   trade.   However,
\n     expenditure incurred  in providing\t food
\n     or\t beverages  by\tan  employer  to  his
\n     employee in  office,  factory  or\tother
\n     place of their work will not be regarded
\n     as entertainment expenditure.\n<\/p>\n
\t  31.2 This  amendment\ttakes  effect
\n     retrospectively from  1 April, 1976, and
\n     will, accordingly,\t apply in relation to
\n     the   assessment\t year\t1976-77\t  and
\n     subsequent years.\n<\/p>\n
\t  31.3 Under  the existing provisions
\n     of section 37(2A) of the Income-tax Act,
\n     deduction in  respect of  expenditure on
\n     entertainment  is\t subject  to  certain
\n     limits calculated\twith reference to the
\n     quantum of profits as under:-\n<\/p>\n
\t\t\t      (at page 2255)
\n\t  In the  Income-tax Act,  1961, Chapter IV contains
\nprovisions relating  to computation  of total income wherein
\nSection D  containing Sections 28 to 44D pertains to profits
\nand gains  of business\tor profession. Section. 28 specifies
\nthe income  which is chargeable to income tax under the head
\n“profits and  gains of\tbusiness or  profession”. Section 29
\nsays that  the income  referred to  in Section\t28 shall  be
\ncomputed in  accordance with  the  provisions  contained  in
\nSections 30  to 43D. Sections 30 to 36 provide for deduction
\nof  certain   expenditures  incurred  for  the\tpurposes  of
\nbusiness or profession. Then comes Section 37 which contains
\nthe  general   provision  permitting   deduction   of\t“any
\nexpenditure  …..   laid  out\t or  expended\twholly\t and
\nexclusively for\t the purposes  of the business or profession
\n….. in  computing the\t income chargeable  under  the\thead
\n“profits and  gains of\tbusiness  or  profession”,  by\tsub-
\nsection (1),  sub-section (2)  therein begins  with  a\tnon-
\nobstante clause to exclude from the ambit of sub-section (1)
\nthe entertainment expenditure by saying that “no expenditure
\nin the nature of entertainment expenditure shall be allowed”
\nin the case of a company which exceeds the specified amount.
\nSimilar provision  is  made  in\t sub-section  (2A)  for\t any
\nassessee. In  other words,  the general provision in Section
\n37 is  that any\t expenditure laid  out or expended wholly or
\nexclusively for\t the purposes  of the business or profession
\nshall be  allowed  but\tno  expenditure\t in  the  nature  of
\nentertainment shall be allowed as stated in sub-sections (2)
\nand (2A)  in excess  of the  amount specified.\tFor claiming
\ndeduction of  the  business  expenditure  according  to\t the
\ngeneral rule,  the test\t of commercial expediency is applied
\nbut exclusion  is made\tof any\texpenditure which  is in the
\nnature\tof  “entertainment  expenditure”.  Without  anything
\nmore, it  means that  an expenditure incurred for commercial
\nexpediency or  usage of the trade is a permissible deduction
\nunless\tit   partakes  the  character  of  an  entertainment
\nexpenditure,  in   which  case\t the  permissible  limit  is
\nspecified. The\tcontroversy in\tthe present  case relates to
\nthe meaning  of “entertainment\texpenditure” in\t sub-section
\n(2A)  of  Section  37  before  insertion  of  Explanation  2
\ntherein.\n<\/p>\n
     The question  involved  in\t these\tmatters\t relates  to
\ndeduction of  expenditure  incurred  in\t providing  ordinary
\nmeals and refreshments to the outstation customers according
\nto the\tcustomary hospitality and trade usage satisfying the
\ngeneral test of commercial expediency.\n<\/p>\n
     Generally, “entertainment expenditure” is an expression
\nof wide\t import. However,  in the context of disallowance of
\n“entertainment expenditure”  as a  business  expenditure  by
\nvirtue\tof   sub-section  (2A)\t of  Section  37,  the\tword
\n“entertainment”\t must\tbe  construed\tstrictly   and\t not
\nexpansively. Ordinarily,  “entertainment” connotes something
\nwhich may  be beneficial  for the  mental or  physical\twell
\nbeing but  is  not  essential  or  indispensable  for  human
\nexistence.  A\tbare  necessity,   like\t ordinary  meal,  is
\nessential   or\t indispensable\t and,\ttherefore   is\t not
\n“entertainment. If  such a  bare  necessity  is\t offered  by
\nanother, it is hospitality but not entertainment. Unless the
\ndefinition  of\t“entertainment”\t includes  hospitality,\t the
\nordinary   meaning   of\t  “entertainment”   cannot   include
\nhospitality. For  this reason,\tthe expenditure\t incurred in
\nextending customary  hospitality by  offering ordinary meals
\nas a  bare necessity,  is  not\t“entertainment\texpenditure”
\nwithout the  aid of  the enlarged meaning given to the words
\nby Explanation\t2 inserted w.e.f.1.4.1976. The definition in
\nExplanation 2  is not  the ordinary  meaning  of  the  words
\n“entertainment expenditure”,  but the enlarged meaning given
\nfor the purpose of the Act w.e.f.1.4.1976.\n<\/p>\n
     The object\t of sub-section\t (2A)  is  to  disallow\t any
\nlavish expenditure in the form of business expenditure. This
\nis obvious from the several amendments made in the provision
\nfrom time  to time. It is so understood even in the circular
\nissued by  the Board. The object of the provision clearly is
\nto allow  deduction of\tthe essential  business\t expenditure
\nincurred due  to commercial  expediency and according to the
\ntrade usage excluding the lavish expenditure. The dispute in
\nthe present  cases relates only to the amount which has been
\nheld to\t be essential  business\t expenditure  of  this\tkind
\nincurred in  providing ordinary\t meals as bare necessity. In
\nthe view  taken by  us, such expense did not come within the
\nmeaning of  “entertainment expenditure”\t prior\tto  1.4.1976
\nwhen  Explanation  2  was  brought  in\tby  a  retrospective
\namendment made\tin 1983\t of sub-section\t (2A) of Section 37.
\nThe finding  of fact in all cases, therefore, satisfies this
\ntest to\t allow deduction of the expenditure incurred by each
\nassessee and claimed under this head for the period prior to
\n1.4.1976.\n<\/p>\n
     Sub-section (2A)  was inserted w.e.f. 1st October, 1967
\nby the Taxation Laws (Amendment) Act, 1967 and Explanation 2
\ninserted therein by Finance Act, 1983 retrospectively w.e.f.
\n1.4.1976 while\tsub-section (2B)  was  inserted\t w.e.f.\t 1st
\nApril, 1970  by the  Finance Act,  1970. As  earlier stated,
\nthese cases  relate to\tthe period  prior to  1.4.1976\tfrom
\nwhich date  Explanation 2  to sub-section  (2A) was inserted
\nretrospectively. We have, therefore, to construe sub-section
\n(2A) as it existed without the Explanation 2. The meaning of
\nExplanation 2 is quite clear and it has enlarged the meaning
\nto widen the tax net.\n<\/p>\n
     Learned  counsel\tfor  the   revenue  contended\tthat
\nExplanation 2  is clarificatory and, therefore, even without
\nExplanation 2 the provision must be understood and construed
\nin the\tsame manner.  It appears  to us\t that  insertion  of
\nExplanation 2  made retrospectively  but restricted  in\t its
\napplication only w.e.f.1.4.1976 is itself an indication that
\nits  application   prior  to   1.4.1976\t is   excluded.\t  If
\nExplanation 2  was  merely  clarificatory  of  the  ordinary
\nmeaning, as contended by learned counsel for the revenue, it
\nwas unnecessary\t to restrict  its restrospective application
\nin this\t manner only from 1.4.1976. The construction we have
\nmade of\t sub-section (2A) of Section 37 as it existed during
\nthe  relevant\tassessment  period   cannot,  therefore,  be
\naffected by  Explanation 2  to sub-section  (2A)  which\t was
\ninapplicable during the relevant period.\n<\/p>\n
     In our  opinion, the  construction we  have made of the
\nprovision as it existed during the relevant period flows not
\nmerely from  the language  of the provision but also matches
\nwith the  object thereof.  It  means  that  the\t expenditure
\nincurred by the assessees in providing ordinary meals to the
\noutstation customers  according to  the established business
\npractice, was a permissible deduction inspite of sub-section
\n(2A) of\t Section 37, to which the assessees were entitled in
\nthe computation\t of their  total income\t for the  purpose of
\npayment of  tax under  the Income-tax  Act, 1961  during the
\nrelevant period prior to 1.4.1976.\n<\/p>\n
     We shall now refer briefly to the conflicting decisions
\nof the\tseveral\t High  Courts  on  the\tpoint.\tAmongst\t the
\ndecisions in favour of the revenue is Brij Raman Dass & Sons
\nvs. Commissioner  of Income-tax.  Lucknow. [1976] 104 I.T.R.
\n541 of\tthe Allahabad High Court which has been referred and
\nfollowed in subsequent decisions of other High Courts taking
\nthe view in favour of the revenue. In this line of cases are
\nthe decisions  of the High Courts of Punjab & Haryana, Patna
\nand Kerala.  The other\tline of cases wherein the view taken
\nis in  favour of  the assessee are the decisions of the HIgh
\nCourts of Gujarat, Andhra Pradesh, Madhya Pradesh, Rajasthan
\nand Karnataka.\tThe main  decision of the Gujarat High Court
\nis Commissioner of Income-tax, Gujarat II vs. patel Brothers
\n& Co.  Ltd., [1977]  106 I.T.R.\t 424 which has been referred
\nand followed in the later decisions in that line.\n<\/p>\n
     We would  first deal with the decision of the Allahabad
\nHigh Court  reported in [1976] 104 I.T.R. 541 which is under
\nappeal in  Civil Appeal No. 1850 of 1975 and the decision of
\nthe Gujarat  High Court\t reported in  [1977] 106  I.T.R. 424
\nwhich is  under appeal in Civil Appeal Nos. 1455-57 of 1976.
\nIn Brij\t Raman Dass  & Sons  (supra), it  was held that sub-
\nsection (2A)  of Section  37 is not an independent provision
\nbut is\ta proviso to sub-section (1) of section 37 since the
\nexpenditure falling  under sub-section (2A) must necessarily
\ncome within  sub-section (1).  Thereafter, while considering
\nthe meaning  of “entertainment” in this context, it was held
\nas under :-\n<\/p>\n
\t  ” ………  What we have to see is
\n     as to  what is  the meaning  of the word
\n     “entertainment” for  purposes of section
\n     37(2A) of\tthe Act.  In  the  Income-tax
\n     Act, this\tword has not been defined and
\n     we will  have to  give  it\t its  general
\n     meaning. An  “entertainment expenditure”
\n     would,  in\t  our  opinion,\t include  all
\n     expenditures incurred in connection with
\n     business\ton   the   entertainment   of
\n     customer\t and\t constituents.\t  The
\n     entertainment may\tconsist of  providing
\n     refreshments as  in this  case or it may
\n     consist of\t providing some other sort of
\n     entertainment.\n<\/p><\/blockquote>\n
\t  In Bentleys,\tStokes &  Lowless  v.
\n     Beeson (H.M.Inspector  of Taxes), [1952]
\n     33 TC  491 (CA),  a firm  of  solicitors
\n     incurred\texpenses    in\t entertaining
\n     clients. The  entertainment consisted of
\n     providing lunch  to the  clients. It was
\n     held  that\t  expenditure  was   incurred
\n     wholly and\t exclusively for  purposes of
\n     business and was an allowable deduction.
\n     The same  is the position in the instant
\n     case. The\tpetitioner has been providing
\n     to its  customers refreshments  and this
\n     constitutes an expenditure in the nature
\n     of\t  entertainment\t  expenditure”.\t  the
\n     entire  expenditure   would  have\t been
\n     allowed but for the amendment introduced
\n     by section\t 37 (2A)  which restricts the
\n     allowance of  such an  expenditure to  a
\n     maximum limit of Rs. 5,000\/-”\n<\/p><\/blockquote>\n
\t\t\t      (at page 544)
\n     There is  no more\tdiscussion  on\tthe  point  in\tthis
\ndecision.<\/p><\/blockquote>\n
     On the  other hand,  the Gujarat  High Court  in  Patel
\nBrothers &  Co. Ltd.  (supra) took a different view. In this
\ndecision, certain  broad tests\tor guidelines have also been
\nindicated to  determine the  nature of\texpenses allowed  as
\nentertainment expenses.\t In our\t opinion, that\texercise  is
\nunnecessary since the broad test indicated by us is the only
\nthing which can safely be indicated and the determination of
\nthe question  in each case is one of fact. The conclusion on
\nthe basis of the finding of fact recorded therein was stated
\nthus :\n<\/p>\n
\t  “……… The  Tribunal has agreed
\n     with     the     Appellate\t    Assistant
\n     Commissioner who  has found  that it was
\n     customary for  the assessee  due to very
\n     long-established tradition\t that farmers
\n     who came  to deliver  the\tgoods,\ti.e.,
\n     cotton, groundnuts,  rice, pulses,\t were
\n     given meals  from the kitchen run by the
\n     assessee and  if the  assessee failed to
\n     give   this    normal    courtesy,\t   it
\n     apprehended that the farmers might offer
\n     their produce  to other  competitors  in
\n     the  field\t  of  the  assessee  and  the
\n     assessee  would   lose  the  goods.  The
\n     Appellate\tAssistant   Commissioner  has
\n     also found\t that the expenditure was for
\n     serving ordinary  meals to the employees
\n     as well  as to  the farmer customers and
\n     they were\tnot such which entertained or
\n     amused the\t guests\t since\tthe  assessee
\n     provided  served\tmeals\tas   a\t bare
\n     necessity of  the business. In that view
\n     of\t  the\t matter,   therefore,\tthese
\n     references\t must\tbe  rejected  and  we
\n     answer the\t questions referred  to us in
\n     the    negative\tand    against\t  the
\n     Commissioner,……”\n<\/p><\/blockquote>\n
\t\t\t      (at page 442)
\n     This conclusion  of  the  Gujarat\tHigh  Court  on\t the
\nfinding of  fact recorded by the Tribunal is consistent with
\nthe view  we have  taken and,  therefore, we uphold the same
\nfor the\t reasons given by us which are sufficient to sustain
\nthe ultimate view. We may observe that the wide observations
\nand the\t elaborate guidelines  given in the Gujarat decision
\nwhich are  in excess  of the  broad test indicated by us and
\nnot necessary to support the conclusion, are unnecessary for
\nthe decision  and, therefore,  affirmance of  the conclusion
\nreached in  the Gujarat\t decision should not be constured as
\nan affirmance of the wide observation therein.<\/p><\/blockquote>\n
     We may  now refer\tto the\tdecision of  the Delhi\tHigh
\nCourt in Commissioner of Income-tax vs. Rajasthan Mercantile
\nCo. Ltd.  etc. etc.,  [1995] 211 ITR 400. The true effect of
\nExplanation 2 added in sub-section (2A) of Section 37 of the
\nAct has been correctly understood therein as under.\n<\/p>\n
\t  “The\t  declaration\t  and\t  the
\n     clarification involved in Explanation 2,
\n     are only for the purposes of assessments
\n     with  effect  from\t April\t1,1976.\t This
\n     provision\t widens\t   the\t concept   of
\n     “entertainment expenditure” by including
\n     in its  scope such\t of the\t expenditures
\n     which   are    otherwise\ttraditionally
\n     understood\t   as\t  routine    business
\n     expenditures incurred in connection with
\n     “business-hospitality”.  Therefore,  the
\n     widened meaning  cannot be\t extended  to
\n     past   periods    when    the    amended
\n     Explanation 2 was not in operation.”\n<\/p><\/blockquote>\n
\t\t\t      (at page 416)
\nWe  approve   the  above   view\t which\t accords  with\t the
\nconstruction made by us of the provision.<\/p><\/blockquote>\n
     In the  view we  have taken,  the contrary\t view of the
\nAllahabad High\tCourt in  Brij Raman Dass & Sons, [1976] 104
\nI.T.R. 541, cannot be accepted to be correct and so also the
\ndecisions of  the different High Courts which have taken the
\nsame view.  Accordingly, the  decision of the Allahabad High
\nCourt and  the other  decisions\t of  different\tHigh  Courts
\ntaking that view are to be treated as overruled.\n<\/p>\n
     Consequently, all\tthese matters  are decided in favour
\nof the\tassessees and  against the  revenue with  the result
\nthat the  appeals of  the assessees  are allowed  while\t the
\nappeals,  SLPs\t and  Tax  References  by  the\trevenue\t are
\ndismissed. No costs.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Commissioner Of Income-Tax vs Patel Brothers & Co. Ltd, Etc. Etc on 9 May, 1995 Equivalent citations: 1995 AIR 1829, 1995 SCC (4) 485 Author: J S Verma Bench: Verma, Jagdish Saran (J) PETITIONER: COMMISSIONER OF INCOME-TAX Vs. RESPONDENT: PATEL BROTHERS & CO. LTD, ETC. ETC. DATE OF JUDGMENT09\/05\/1995 BENCH: VERMA, […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-7315","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCommissioner Of Income-Tax vs Patel Brothers & Co. Ltd, Etc. 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