Per Shri S. N. Rotho, Accountant Member - This appeal has been filed by the department against the order dated 30-11-1982 of the Commissioner (Appeals) relating to the assessment year 1979-80, the previous year of which ended on 30-6-1978.
2. The assessee is a limited company deriving income from business, amongst others, as commission agents for the pharmaceutical products of Alembic Chemical Co. Ltd., for the Alcoholic Products of Niraya (P.) Ltd. and for the fertilisers of Paushak Ltd.
3. The first ground in this appeal states that the Commissioner (Appeals) erred in holding that the medical expenses reimbursed by the assessee-company were not in the nature of perquisites for the purpose of disallowance under section 40A (5) of the Income-tax Act, 1961 ('the Act') and that for disallowing the perquisites paid to an employee-director, the provisions of section 40(c) of the Act and not those of section 40A (5) would apply. Smt V. Gopalakrishnan, the learned representative for the department, urged before us that the Commissioner (Appeals) erred in his decision. On the other hand, Shri S. P. Mehta, the learned representative for the assessee, supported the order of the Commissioner (Appeals). We have considered the contention of both the parties as well as the facts on record. We find that both the questions raised in this ground have been answered in favour of the assessee by the Special Bench of the Tribunal in the case of Blackie & Sons (India) Ltd. v. ITO  3 SCT 72 (Bom.). Respectfully following the aforesaid authority, we uphold the order of the Commissioner (Appeals) on this point and reject this ground.
4. The only other ground in this appeal states that the Commissioner (Appeals) erred in allowing the sum of Rs. 9,027 as a deduction even though the said sum was spent for giving free samples of whisky as sales promotion expenses, ignoring the fact that the prohibition and excise law prohibited the distribution of free samples of whisky. The ground further states that the expenditure was really in the nature of lavish entertainment which was rightly disallowed by the ITO under 37(2A) of the Act. Smt. V. Gopalakrishnan urged before us that the Commissioner (Appeals) erred in holding that the distribution of whisky bottles even though to the customers, was not entertainment. According to her, they were nothing but entertainment expenditure which was hit by the new Explanation 2 to section 37 introduced by the Finance Act, 1983 with retrospective effect from 1-4-1976.
5 Shri. S. P. Mehta, on the other hand, supported the order of the Commissioner (Appeals) on the ground that the assessee was the sole selling agents of the alcoholic products manufactured by Niraya (P.) Ltd. As the assessee could not directly advertise its products because of the prohibition under the excise laws, the only alternative open to the assessee to boost its sales and earn greater commission was to give free samples of the products it wants to sell to potential customers. Shri. S. P. Mehta explained that the manufacturer would not bear the cost of the samples and so, the assessee had to buy them and distribute them as samples with a view to promote their sales. Under the circumstances, he urged that the expenses have been rightly allowed as sales promotion expenses by the Commissioner (Appeals) as distinct from entertainment expenses as held by the ITO.
6. We have considered the contentions of both the parties as well as the facts on record. The case of the assessee before the ITO was that the sum of Rs. 9,027 was spent on white field whisky in order to distribute the same amongst few buyers by way of sales promotion. It was urged that the the assessee was trying to push into the market a new product and so the expenses in connection therewith should have been allowed. The ITO did not agree with the argument of the assessee. He held that free supply of whisky even to customers would amount to lavish entertainment. He relied on the decision of the Kerala High Court in the case of CIT v. Veeriah Reddiar : 106ITR610(Ker) in support of his stand. In this view of the matter, he disallowed the sum of Rs. 9,027.
7. The assessee went on appeal and contended before the Commissioner (Appeals) that the expenses under consideration were really in the nature of sales promotion expenses, just like the other sum of Rs. 17,633 spent on tea, coffee, soft drinks, etc. The Commissioner (Appeals) agreed with the assessees contention that supply of whisky is just like supply of tea, coffee and other soft drinks and is, therefore, outside the purview of entertainment expenditure, probably because of the decision in the case of CIT v. Shah Nanji Nagsi : 116ITR292(Bom) .
8. We find that the law on the subject of the allowance of entertainment expenditure has since been retrospectively amended as has been pointed out by the learned representative for the department. Explanation 2 to section 37 has been introduced with retrospective effect from 1-4-1976. This Explanation says 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. It is, therefore, clear that the person to whom the gifts were made is immaterial. Once the assessee provides food or beverages free of cost, as a matter of hospitality, it is immaterial whether the said hospitality was extended with a view to boost sales or otherwise. The test is whether some hospitality was extended. The person to whom it is given or the motive behind it is immaterial for the purpose of this Explanation. The only exception stated in the Explanation itself is the provision of the food or beverages to the assessees own employees and that too only in provisions of the law, we hold that the Commissioner (Appeals) indeed erred in allowing the sum of Rs. 9,027 as a deductible expenditure. We, therefore, reverse his decision on this point and restore the disallowance of Rs. 9,027 as made by the ITO in his order.
9. In the result, the appeal is partly allowed.