of Income-Tax Vs. Patel Brothers & Co. Ltd,  INSC 264 (9 May 1995)
Jagdish Saran (J) Verma, Jagdish Saran (J) Singh N.P. (J) Mukherjee M.K. (J) J.S.Verma.J.:
1995 AIR 1829 1995 SCC (4) 485 JT 1995 (5) 364 1995 SCALE (3)650
9TH DAY OF MAY,1995 Present:
Mr. Justice J.S. Verma Hon'ble Mr. Justice N.P. Singh Hon'ble Mr. Justice M.K. Mukherjee
Mr. B.B. Ahuja, Sr. Adv. Mr. B.S. Ahuja, Ms. A. Subhashini, Mrs. A.K. Verma,
Mr. A. Subba Rao, Mr. S.K. Mehta, Mr. Dhruv Mehta, Mr. K.R. Nagaraja, Mr. M.G. Ramachandran,
Mr. S.C. Patel, and Ms. Janki Ramachandran, Advs. with him for the appearing
following Judgment of the Court was delivered:
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 1455-57
OF 1976 Commissioner of Income-tax .... Appellant vs. Patel Brothers & Co.
Ltd. .... Respondent [WITH S.L.P.(c) Nos. 1804-1805, 4257 of 1977, C.A. Nos.
of 1990, 1075-1078 of 1976, S.L.P.(c) No. 1374 of 1977, C.A. No. 872 of 1976,
S.L.P. (c) Nos. 1385 of 1977, 8865 of 1979, Tax Ref. Case Nos. 4-6 of 1979,
S.L.P. (c) No.655 of 1977, C.A.No.5662 of 1995 (@ S.L.P.(c) No. 9255 of 1981),
12475 of 1985, C.A. No.2116 of 1977, C.A.No.5663 of 1995 (@ S.L.P. (c) No. 2318
of 1979), C.A. Nos.33, 34-35, 36, 37, 38-39, 40, 41, 42, 43-44, 45 of 1978, 698
of 1977, S.L.P. (c) No. 478 of 1981, C.A.Nos.1322 of 1978, 3433-34 of 1991,
1850 of 1975, 831, 832, 1585-88, 2436, 1077, 1075-76, 1079, 1092, 1103-04, 1120
of 1977, 118 of 1984, 6137 of 1990, S.L.P.(c) No. 745 of 1978, C.A. Nos. 2519
of 1980, 1746 of 1984, Tax Ref. Case No. 3 of 1979, C.A. No.2900 of 1977,
S.L.P.(c) No. 8357 of 1983, and C.A. Nos. 2397-98 of 1977, 1581-82 of 1977, and
Tax Ref. Case No. 4 of 1977].
appeals and the connected matters involve for decision the common question of
law relating to the meaning of "entertainment expenditure" in Section
37(2A) of the Income-tax Act, 1961 (hereinafter referred to as "the
Act") during the relevant assessment years. The decision of the Gujarat
High Court in Commissioner of Income-tax, Gujarat vs. Patel Brothers & Co.
Ltd.,  106 I.T.R. 424 (Guj.), on this point is challenged by the revenue
in these appeals by a certificate granted under Section 261 of the Act. The
connected matters involve the same point. All cases relate to the period prior
to 1.4.1976 from which date only Explanation 2 inserted in sub-section (2A) of
Section 37 by the Finance Act, 1983 was applied retrospectively, even though
sub-section (2A) was inserted w.e.f.1.10.1967 by Taxation Laws (Amendment) Act,
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 bare necessity having regard to the
nature of business and, therefore, the Income-tax officer was directed to grant
that allowance. The matter then went in appeal to the Tribunal which confirmed
the order of the Appellate Assistant Commissioner. At the instance of the
revenue, the Tribunal referred to the High Court for its decision two questions
of law, namely,
Whether, on the facts and in the circumstances of the case, the expenditure in
question was in the nature of entertainment expenditure in law?
Whether, on the facts and in the circumstances of the case, the expenditure in
question would be allowable only to the limited extent of Rs.5,000/- under
section 37(2A) of the Income-tax Act, 1961, for each of the assessment years
under reference? Identical questions of law were referred for all the three
High Court answered both the questions in the negative since it was found on
the facts by the Tribunal that indisputably the upcountry constituents of the assessee
came to Ahmedabad for the purpose of business with the assessee and having
regard to the nature and magnitude of the business of the assessee, it would be
necessary for the assessee to make arrangements to provide meals to them while
in Ahmedabad for business with it, as it was not the revenue's case that the assessee
had spent the money for throwing lavish parties for its constituents. It had
been found that the expenditure was for serving ordinary meals as a bare
necessity of the business. Accordingly, the references were answered against
the revenue and in favour of the assessee. These appeals are by certificate
against that decision. The same question is involved for decision in the
is a conflict in the view taken by the High Courts on the main question. The
view taken by the High Courts of Andhra Pradesh, Rajasthan, Madhya Pradesh and
Karnataka is the same as that of the Gujarat High Court. The contrary view has
been taken by the High Courts of Allahabad, Punjab & Haryana, Patna and Kerala. The decision of the
Delhi High Court in Commissioner of Income-tax vs. Rajasthan Mercantile Co. Ltd.etc. etc., 211 ITR 400 is in line with the
Gujarat view. The difference in the views taken by different High Courts has
led to one set of decisions against the revenue and another set in its favour.
is how in this court some appeals and other matters are by the revenue while
the rest are by the assessees. As earlier stated, all these matters relate to
the period prior to 1.4.1976 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.
contention of Shri B.B.Ahuja, learned counsel for the revenue is that all kinds
of hospitality is 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
insertion of Explanation 2 only w.e.f.1.4.1976 is immaterial and the expression
"entertainment expenditure" in sub-section (2A) of section 37 must be
so construed even for the period prior to 1.4.1976. In reply, Shri Harish
Salve, learned counsel for the assessee contended that purposive interpretation
of the provision must be made. It was urged that the purpose was to curb the
tendency of incurring lavish expenditure and not customary hospitality extended
by offering ordinary meals as a bare necessity since the traditional meaning of
every hospitality is not entertainment. It was urged that the finding in all
these cases was that the allowance claimed was only in respect of the
expenditure incurred in providing ordinary meals as a bare necessity and not
any lavish food.
37, to the extent material, is as under:
General. - (1) Any expenditure (not being expenditure of the nature described
in sections 30 to 36 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
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:- *** *** *** *(2A)
Notwithstanding anything contained in sub-section (1) or sub- section (2), no
allowance shall be made in respect of so much of the expenditure in the nature
of entertainment expenditure incurred by an 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:- *** *** *** Explanation 1.-.........
2. -For the removal of doubts, it is hereby declared that for the purposes of
this sub-section and sub-section (2B), as it stood before the 1st day of April,
1977, "entertainment expenditure" includes expenditure on provision
of hospitality of every kind by the assessee to any person, whether by way of
provision of food or beverages or in any other manner whatsoever and whether or
not such provision is made by reason of any express or implied contract or
custom or usage of trade, but does not include expenditure on food or beverages
provided by the assessee to his employees in office, factory or other place of
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." (emphasis
supplied) * Sub-section (2A) was inserted w.e.f.
October, 1967 by the Taxation Laws (Amendment) Act, 1967.
Sub-section (2B) was inserted w.e.f.
April, 1970 by the Finance Act, 1970.
Explanation 2 was inserted by the Finance Act, 1983 retrospectively w.e.f.
Iyengar's Law of Income Tax, 8th Ed., vol. 2, reference is made to circular No.
372 dated December, 8, 1983 of the Board, (1984) 146 ITR st 31, wherein the
scope and effect of the above amendments was explained as under:-
"Provision for curbing avoidable or ostentatious expenditure in business
or profession- Section 37 - 30.
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
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.
expenditure.- 31.1 For the removal of doubts regarding the scope of the
expression "entertainment expenditure", the Finance Act has inserted
a new Explanation for the purposes of sub-section (2A) of section 37 and also
sub-section (2B) of that section as that sub-section stood before 1 April, 1977. The Explanation clarifies that
"entertainment expenditure" includes expenditure on provision of
hospitality of every kind by the assessee to any person, whether by way of
provision of food or beverages or in any other manner whatsoever and whether or
not such provision is made by reason of any express or implied contract or
custom, usage or trade. However, expenditure incurred in providing food or
beverages by an employer to his employee in office, factory or other place of
their work will not be regarded as entertainment expenditure.
This amendment takes effect retrospectively from 1 April, 1976, and will, accordingly, apply in relation to the assessment
year 1976-77 and subsequent years.
Under the existing provisions of section 37(2A) of the Income-tax Act,
deduction in respect of expenditure on entertainment is subject to certain
limits calculated with reference to the quantum of profits as under:- (at page
2255) In the Income-tax Act, 1961, Chapter IV contains provisions relating to
computation of total income wherein Section D containing Sections 28 to 44D
pertains to profits and gains of business or profession. Section. 28 specifies
the income which is chargeable to income tax under the head "profits and
gains of business or profession". Section 29 says that the income referred
to in Section 28 shall be computed in accordance with the provisions contained
in Sections 30 to 43D. Sections 30 to 36 provide for deduction of certain
expenditures incurred for the purposes of business or profession. Then comes
Section 37 which contains the general provision permitting deduction of
"any expenditure ..... laid out or expended wholly and exclusively for the
purposes of the business or profession ..... in computing the income chargeable
under the head "profits and gains of business or profession", by sub-
section (1), sub-section (2) therein begins with a non- obstante clause to
exclude from the ambit of sub-section (1) the entertainment expenditure by
saying that "no expenditure in the nature of entertainment expenditure
shall be allowed" in the case of a company which exceeds the specified
provision is made in sub-section (2A) for any assessee. In other words, the
general provision in 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 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
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 insertion of Explanation 2 therein.
question involved in these matters relates to deduction of expenditure incurred
in providing ordinary meals and refreshments to the outstation customers
according to the customary hospitality and trade usage satisfying the general
test of commercial expediency.
"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 the mental or physical well being but is not essential or
indispensable for human existence. A bare necessity, like 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 w.e.f.1.4.1976. 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 w.e.f.1.4.1976.
object of sub-section (2A) is to disallow any lavish expenditure in the form of
business expenditure. This is obvious from the several amendments made in the
provision from time to time. It is so understood even in the circular issued by
the Board. The object of the provision clearly is to allow deduction of the
essential business expenditure incurred due to commercial expediency and
according to the trade usage excluding the lavish expenditure. 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 1.4.1976
when Explanation 2 was brought in by a retrospective amendment made in 1983 of
sub-section (2A) of Section 37.
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 1.4.1976.
(2A) was inserted w.e.f. 1st October, 1967 by the Taxation Laws (Amendment)
Act, 1967 and Explanation 2 inserted therein by Finance Act, 1983
retrospectively w.e.f. 1.4.1976 while sub-section (2B) was inserted w.e.f. 1st April, 1970 by the Finance Act, 1970. As
earlier stated, these cases relate to the period prior to 1.4.1976 from which
date Explanation 2 to sub-section (2A) was inserted retrospectively. We have,
therefore, to construe sub-section (2A) as it existed without the Explanation
2. The meaning of Explanation 2 is quite clear and it has enlarged the meaning
to widen the tax net.
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 w.e.f.1.4.1976 is
itself an indication that its application prior to 1.4.1976 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 restrospective
application in this manner only from 1.4.1976. The construction we have made of
sub-section (2A) of Section 37 as it existed during the relevant assessment
period cannot, therefore, be affected by Explanation 2 to sub-section (2A)
which was inapplicable during the relevant period.
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 the outstation customers according to the
established business practice, was a permissible deduction inspite 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 1.4.1976.
shall now refer briefly to the conflicting decisions of the several High Courts
on the point. Amongst the decisions in favour of the revenue is Brij Raman Dass
& Sons vs. Commissioner of Income-tax. Lucknow.  104 I.T.R. 541 of the Allahabad High Court which has been
referred and followed in subsequent decisions of other High Courts taking the
view in favour of the revenue. In this line of cases are the decisions of the
High Courts of Punjab & Haryana, Patna and Kerala. The other line of cases wherein the view taken is in favour
of the assessee are the decisions of the HIgh Courts of Gujarat, Andhra
Pradesh, Madhya Pradesh, Rajasthan and Karnataka. The main decision of the
Gujarat High Court is Commissioner of Income-tax, Gujarat II vs. patel Brothers
& Co. Ltd.,  106 I.T.R. 424 which has been referred and followed in
the later decisions in that line.
would first deal with the decision of the Allahabad High Court reported in
 104 I.T.R. 541 which is under appeal in Civil Appeal No. 1850 of 1975
and the decision of the Gujarat High Court reported in  106 I.T.R. 424
which is under appeal in Civil Appeal Nos. 1455-57 of 1976.
Raman Dass & Sons (supra), it was held that sub- section (2A) of Section 37
is not an independent provision but is a proviso to sub-section (1) of section
37 since the expenditure falling under sub-section (2A) must necessarily come
within sub-section (1). Thereafter, while considering the meaning of
"entertainment" in this context, 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 customer and constituents. The entertainment may consist of
providing refreshments as in this case or it may consist of providing some
other sort of entertainment.
Bentleys, Stokes & Lowless v. Beeson (H.M.Inspector of Taxes),  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 purposes of business and
was an allowable deduction.
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) which restricts the
allowance of such an expenditure to a maximum limit of Rs. 5,000/-" (at
page 544) There is no more discussion on the point in this decision.
other hand, the Gujarat High Court in Patel Brothers & Co. Ltd. (supra)
took a different view. In this decision, certain broad tests or guidelines have
also been indicated to determine the nature of expenses allowed as
entertainment expenses. In our opinion, that exercise is unnecessary since the
broad test indicated by us is the only thing which can safely be indicated and
the determination of the question in each case is one of fact. The conclusion
on the basis of the finding of fact recorded therein was stated thus :
The Tribunal has agreed with the Appellate Assistant Commissioner who has found
that it was customary for the assessee due to very long-established tradition
that farmers who came to deliver the goods, i.e., cotton, groundnuts, rice,
pulses, were given meals from the kitchen run by the assessee and if the assessee
failed to give this normal courtesy, it apprehended that the farmers might
offer their produce to other competitors in the field of the assessee and the assessee
would lose the goods. The Appellate Assistant Commissioner has also found that
the expenditure was for serving ordinary meals to the employees as well as to
the farmer customers and they were not such which entertained or amused the
guests since the assessee provided served meals as a bare necessity of the
business. In that view of the matter, therefore, these references must be
rejected and we answer the questions referred to us in the negative and against
the Commissioner,......" (at page 442) This conclusion of the Gujarat High
Court on the finding of fact recorded by the Tribunal is consistent with the
view we have taken and, therefore, we uphold the same for the reasons given by
us which are sufficient to sustain the ultimate view. We may observe that the wide
observations and the elaborate guidelines given in the Gujarat decision which
are in excess of the broad test indicated by us and not necessary to support
the conclusion, are unnecessary for the decision and, therefore, affirmance of
the conclusion reached in the Gujarat decision should not be constured as an affirmance
of the wide observation therein.
now refer to the decision of the Delhi High Court in Commissioner of Income-tax
vs. Rajasthan Mercantile Co. Ltd. etc. etc.,  211 ITR 400. The true
effect of Explanation 2 added in sub-section (2A) of Section 37 of the Act has
been correctly understood therein as under.
declaration and the clarification involved in Explanation 2, are only for the
purposes of assessments with effect from April 1,1976. This provision widens
the concept of "entertainment expenditure" by including in its scope
such of the expenditures which are otherwise traditionally understood as
routine business expenditures incurred in connection with "business-hospitality".
Therefore, the widened meaning cannot be extended to past periods when the
amended Explanation 2 was not in operation." (at page 416) We approve the
above view which accords with the construction made by us of the provision.
view we have taken, the contrary view of the Allahabad High Court in Brij Raman
Dass & Sons,  104 I.T.R. 541, cannot be accepted to be correct and so
also the decisions of the different High Courts which have taken the same view.
Accordingly, the decision of the Allahabad High Court and the other decisions
of different High Courts taking that view are to be treated as overruled.
all these matters are decided in favour of the assessees and against the
revenue with the result that the appeals of the assessees are allowed while the
appeals, SLPs and Tax References by the revenue are dismissed. No costs.