1. M/s. Shah Nanji Nagsi, the assessee-firm, derives income from pakki adat as well as trading in grains and pulses for which separate trading account along with quantitative details are maintained. The net income from pakki adat for the year under consideration as shown by the assessee was Rs. 2,88,456. Many adatyas came and dwelt with the assessee and they were provided with meals by running a mess by the assessee. The expenditure of messing came to Rs. 15,110. The assessee also incurred expenditure of Rs. 7,021 over tea and pan out of which the assessee expended Rs. 2,021 for the employees. In other words, Rs. 5,000 were expended by the assessee for tea and pan to customers. The assessee claimed allowance of Rs. 20,110 as deduction under s. 37(i). However, considering that there was insertion of s. 37(2B) with effect from 1970, the ITO treated the expenditure as entertainment expenses. Accordingly, he disallowed Rs. 5,000 on account of tea and pan expenditure to the customers and Rs. 15,110 an account of messing.
2. In an appeal by the assessee, the AAC partly accepted the claim of the assessee. Out of the expenditure of Rs. 5,000 for tea and pan to the customers, only a sum of Rs. 2,500 was allowed as permissible deduction and the rest of the amount was added as part of the income; while out of the amount of Rs. 15,110, he allowed deduction of Rs. 12,610 but disallowed the rest of the amount of Rs. 2,500 in respect meals by running a mess for the customers. In an appeal by the revenue, cross-objections were filed by the assessee before the Tribunal. The Tribunal accepted the contention of the assessee in toto and permitted deduction of the amount of Rs. 15,110 in respect of messing charges and Rs. 5,000 in respect of tea and pan to the customers. The Tribunal relied upon the decision of the Gujarat High Court in the case of Patel Brothers : 106ITR424(Guj) .
3. From this order of the Tribunal, the following question has been referred to us at the instance of the revenue for our determination :
'Whether, on the facts and in the circumstances of the case, expenditure of Rs. 15,110 towards messing of adatyas and expenditure of Rs. 5,000 towards tea and pan to customers is entertainment expenditure under s. 37(2B) ?'
4. Mr. Joshi on behalf of the revenue submitted that even though having regard to the practice and custom of trade such an expenditure may be regarded as having been incurred wholly or exclusively for the purposes of business, in view of the provisions of s. 37(2B) which were introduced by the Finance Act, 1970, with effect from April 1, 1970, any expenditure in the nature of entertainment expenditure incurred within India by an assessee after February 28, 1970, was not permissible as a deduction and in view of the said provision, the Tribunal was in error in allowing such deduction as claimed by the assessee. Strong reliance was placed by him upon a decision of the Full Bench of the Kerala High Court in the case of CIT v. Veeriah Reddiar : 106ITR610(Ker) .
5. Under s. 37, sub-s. (1) of the I.T. Act, 1961, any expenditure (not being expenditure of the nature described in ss. 30 to 36 and s. 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'. Sub-s. (2B) was added in this section by the Finance Act, 1970, with effect from April 1, 1970, and it provides that 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. In view of the said provisions, the short question that we have to consider in the present case is whether the two items in respect of which deduction is claimed are items of expenditure in the nature of entertainment expenditure as understood in law and in general parlance. It may be stated that the Full Bench of the Kerala High Court has taken a view which is favourable to the revenue. That decision is in the case of Veeriah Reddiar : 106ITR610(Ker) . The Full Bench of the Kerala High Court considered the legislative history of the provisions relating to entertainment allowance contained under the earlier Act as well as under the present I.T. Act, and at page 616, it observed :
'The expression 'entertainment expenditure ' has not been defined in the Act. The words have, therefore, to be construed in accordance with their ordinary and natural meaning. Where the expression admits of more than one connotation the court will prefer that meaning which appears to it to be consistent with the context and setting in which the words have been used in the statute and which would conduce to effectuate the legislative intention. It is important to note that, instead of merely using the expression 'entertainment expenditure' the words actually used by Parliament in sub-ss. (2A) and (2B) are 'expenditure in the nature of entertainment expenditure'. The latter expression is much wider in its content inasmuch as it would take within its scope not merely what can strictly be regarded as entertainment expenditure proper but also expenditure of allied nature partaking of some, though not all, of the characteristics of entertainment expenditure. It appears to us to be beyond doubt that the intention of Parliament in employing the additional words 'expenditure in the nature of' was to cast the net sufficiently wide as to bring within the scope of the two sub-sections all types of expenditure in respect of which there can be said to be certain elements which invest them with the nature of entertainment expenditure.'
6. After referring to dictionary meanings of the word 'entertainment', the Full Bench took the view that in interpreting the expression 'entertainment expenditure' occurring in sub-ss. (2A) and (2B) of s. 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. The Full Bench of the Kerala High Court declined to follow the decision of the Gujarat High Court in the case of CIT v. Patel Brothers & Co. Ltd. : 106ITR424(Guj) . Having regard to the legislative history of the provision and the significant use of the expression 'expenditure in the nature of entertainment expenditure', it approved of the view taken by the Division Bench of the Allahabad High Court in Brij Raman Dass and Sons v. CIT : 104ITR541(All) , where it was held that an 'entertainment expenditure' would include all expenditure 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.
7. In Patel Brothers & Co.'s case : 106ITR424(Guj) , the Division Bench of the Gujarat High Court not only considered the legislative history as regards the various provisions pertaining to the allowance of entertainment expenditure but it also considered the various meanings of the expression 'entertainment'. After referring to various dictionary meanings of the word 'entertainment', it came to the following conclusion at page 434 :
'It is, therefore, clear to us that the dictionary meaning of the term 'entertainment' is to receive and treat with hospitality, which broadly means receiving and entertaining strangers or guests in a friendly, generous and liberal way. The term 'entertainment', in the context of the I.T. Act, on its true construction and meaning, would include the acts or practice of receiving and entertaining strangers and friends in a friendly, generous and liberal way. These act may consist of providing, inter alia, a formal or elegant meal, a banquet and being hospitable in providing for the wants of a guest in a liberal and generous manner. If the act of entertaining is on a lavish and a grand scale involving wasteful expenditure, it would, no doubt, amount to entertainment. On the other hand, if the acts or practice of being hospitable in the sense of providing meals, drinks, or other wants of persons entertained, whether they may be employees, workmen or officers, servants or agents in the service of an assessee, as an express or implied condition of service, they would not amount to acts of entertainment. Similarly, if the acts or practice of being hospitable in the sense of providing meals, drinks or satisfying any other wants of guests, whether they are friends, strangers or customers, as a part and parcel of express or implied forms and conditions of business, trade or profession, or on account of long-standing custom in such trade, business or profession, they would not, in our opinion, amount to acts of entertainment. It is only in the area lying between these two termini that the difficult questions arise, and as regards acts falling in such area we are of the opinion that we should adopt the broad dictionary meaning of the term 'entertainment' which we have indicated above. We think that the revenue was right when it was contended on its behalf that entertainment is hospitable treatment of guest and every act of entertainment includes hospitality. But, in our opinion, that would not warrant the converse position to be correct and every hospitality would not constitute entertainment. Hospitality shown on account of obligation of business arising as a result of an express or implied contract or arising on account of the long standing custom of a trade, business or profession cannot amount to entertainment, and acts done in discharge of such obligation cannot be included and covered in the term 'entertainment' without violence to language.'
8. In our opinion, we are in respectful agreement with the view that has been taken by the Gujarat High Court as that view is in consonance with commercial practice and the manner in which business and trade is carried on in large commercial centres. In the case before us, we are concerned with the expenditure incurred by a pakka adati either for messing expenditure or for providing tea and pan, to the customers who come normally from outside. Anybody having even a general idea of the business of pakki adat is aware of the fact that it is an essential condition of his business, if not express, in any event necessarily implied, to provide messing and lodging to the constituents who come from outside only for a duration of one or two days for the purposes of business. Any expenditure incurred for providing messing to such customers or constituents or offering tea and pan to them is actually an essential part of business and does not partake the nature of hospitality or entertainment. We feel that the test that has been laid down by the Gujarat High Court is consistent with the commercial practice and the custom of the trade and the view taken by the Gujarat High Court lends itself to us in preference to the one taken by the Full Bench of the Kerala High Court. In our opinion, the Tribunal was right in permitting the deduction of both the items under s. 37(1) of the I.T. Act.
9. Accordingly, the question referred to us is answered in the negative, against the revenue. The revenue shall pay the costs of the assessee.