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Commissioner of Income-tax Vs. Khem Chand Bahadur Chand - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 41 of 1976
Judge
Reported in[1981]131ITR336(P& H)
ActsIndian Income Tax Act, 1922 - Sections 10(2); Income Tax Act, 1961 - Sections 37(1), 37(2), 37(2A) and 37(2B)
AppellantCommissioner of Income-tax
RespondentKhem Chand Bahadur Chand
Appellant Advocate D.N. Awasthy and; B.K. Jhingan, Advs.
Respondent Advocate H.L. Sibal,; Kapil Sibal and; R.C. Setia, Advs.
Cases ReferredI. Inspector of Taxes) v. Associated Newspapers Ltd.
Excerpt:
- sections 80 (2) & 89 & punjab motor vehicles rules, 1989, rules 85 & 80: [t.s. thakur, cj, jasbir singh & surya kant, jj] appeal against orders of state or regional transport authority imitation held, a stipulation regarding the period of limitation available for invoking the remedy shall have to be strictly construed. that is because any provision by way of limitation is in the nature of a restraint on the remedy provided under the act. so viewed two inferences are clear viz., (1) sections 80 and 89 of the act read with rule 85 of the rules make it obligatory for the authorities making the order to communicate it to the applicant concerned and (2) the period of limitation for any appeal against the order is reckonable from the date of such communication of the reasons would imply.....s.s. sandhawalia, c.j. 1. the precise amplitude of the phrase 'in the nature of entertainment expenditure' designedly employed by the legislature in sub-sections (2) and (2a)of section 37 of the i.t. act, 1961, is the somewhat ticklish question which has necessitated this reference to the full bench in view of a conflict of precedent both within and without this court.2. the issue aforesaid arises from matters mundane. the respondent-assessee, m/s. khem chand bahadur chand, is a registered firm consisting of four partners and carries on the business of ahrat with its head office at abohar' and branches at delhi, sirsa, dhaban kokrian, khuben and tappa khera, which places are scattered in the states of punjab, haryana and the union territory of delhi. for the relevant assessment year.....
Judgment:

S.S. Sandhawalia, C.J.

1. The precise amplitude of the phrase 'in the nature of entertainment expenditure' designedly employed by the Legislature in Sub-sections (2) and (2A)of Section 37 of the I.T. Act, 1961, is the somewhat ticklish question which has necessitated this reference to the Full Bench in view of a conflict of precedent both within and without this court.

2. The issue aforesaid arises from matters mundane. The respondent-assessee, M/s. Khem Chand Bahadur Chand, is a registered firm consisting of four partners and carries on the business of ahrat with its head office at Abohar' and branches at Delhi, Sirsa, Dhaban Kokrian, Khuben and Tappa Khera, which places are scattered in the States of Punjab, Haryana and the Union territory of Delhi. For the relevant assessment year 1970-71, the ITO computed the total income of the assessee at Rs. 61,173 against the returned income of Rs. 41,030, The assessee had claimed deductions under the head of 'Kitchen expenses ' both in the head office and in the Sirsa and Khuben branches accounts. The ITO, however, applied the alternative limit of Rs. 5,000 laid down in item (i) Section 37(2A) of the I.T. Act, 1961 (hereinafter called 'the Act'), treating the kitchen expenses as being in the nature of entertainment expenditure and disallowed the balance claimed by the assessee under the aforesaid head. The respondent-assessee went up in appeal to the AAC, who took the view that the term 'kitchen expenses' was a composite one including within it both 'extertainment expenses' and 'non-entertainment expenses'. He, therefore, reduced the disallowance from Rs. 5,800 to Rs. 3,000 in the head office account and in the branch office accounts from Rs. 3,096 to Rs. 1,000 and Rs. 1,937 to Rs. 500 in the Sirsa and Khuben branches of the firm, respectively.

3. On second appeal before the Income-tax Appellate Tribunal, it was, inter alia, contended on behalf of the assessee that along with 'kitchen expenses' even items of tea, cigarette, pan and bidi had been treated by the AAC as amounting to 'entertainment expenditure' and this was not correct because all these could not be said to be lavish in nature or being an expenditure incurred on items which could pleasurably or amusingly hold the attention of the person served therewith as the expression ' entertainment' connotes. So far as the question of some of the expenses being unvouched was concerned the Tribunal accepted the stand of the assessee that it was just not practicable to obtain receipts in respect of milk, vegetables, spices, etc., purchased in non-bulk quantities from time to time. On the aforesaid broad line of reasoning, the Tribunal deleted the addition of Rs. 3,000, Rs. 1,000 and Rs. 500 which had been sustained by the AAC.

4. The other dispute with which we are not presently concerned related to four items of bad debts in respect of which deduction had been claimed by the assessee and disallowed by the department. Consequently, the following two questions were referred to the High Court for its opinion :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the expenses of Rs. 4,500 allowed by it under the head 'Kitchen expenses' were not in the nature of entertainment expenses ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the debts due by (i) Bhola Ram, (ii) Manghu Ram, and (iii) Jagdish Chemical Works, were established to have become bad, is perverse because of presumption having been wrongly raised against the department ?'

5. When the matter came up before the Division Bench, it noticed that on the first question there was an apparent conflict of authority between the two Division Bench judgments of this court, i. e., CIT v. Gheru Lal Bal Chand [1978] 111 ITR 134 and CIT v. Nadh Shah Kapur & Sons , and, therefore, referred the matter to the Full Bench.

6. At the very outset it may be mentioned that as regards question No. 2 learned counsel for the parties are agreed that it neither involves any complexity or conflict of precedent and should, therefore, be best left for decision by the Division Bench. We, therefore, propose to devote ourselves solely to question No. (1).

7. Now, it is manifest from the earlier resume of facts that in practical terms the issue herein boils down to this whether the 'kitchen expenses' admittedly incurred for the purposes of the business of the respondent-assessee come within the ambit of being in the nature of 'entertainment expenditure ' under Section 37(2A) of the Act.

8. There is no evading the fact that there appears to be a sharp cleavage of judicial opinion on the pristine legal question which arises for determination before this Full Bench. Two parallel streams of thought underlie the rival judicial precedents--one symbolised by the view of the Division Bench of the Gujarat High Court in CIT v. Patel Brothers & Co. Ltd. : [1977]106ITR424(Guj) , and the other by the Full Bench judgment of the Kerala High Court in CIT v. Veeriah Reddiar : [1977]106ITR610(Ker) . In view of these closely matched but divergent views, it becomes necessary to examine the matter in some depth and detail.

9. Ere one inevitably turns to the mass of judicial precedent on the point it is both necessary and refreshing to examine the matter on principle and in the light of the larger scheme of the Act along with the legislative history of the particular provisions of Section 37.

10. It is perhaps too late in the day to deny that entertainment, even to an elongated and lavish extent, has come to be the integral part of the work-a-day world of some competitive business. There is no escape from the reality of the situation that even large respectable business houses as also relatively smaller entrepreneurs, because of business compulsions, have to resort to entertainment, both lavish or frugal, of their clientele for the purposes of the advancement of their business interests. In business morality this has necessarily come to be accepted as its normal social mores. However, the meaningful legal issue that arises therefrom in the field of taxation law is--whether all such expenses in the nature of 'entertainment expenditure' should be at the cost of the taxpayer without any limits whatsoever and should be allowed to be deducted in its totality as a business expenditure Though there obviously 'can be and indeed there need be no bar or limit to any business entertainment at the private or personal levels by the businessmen themselves, the meaningful socio-legal question is--whether all business entertainment should, in essence, be defrayed by the public exchequer and passed on to the helpless taxpayer ?

11. The larger scheme of the Act is in a way indicative of the legislative intent. Chapter IV which is relevant in this context deals with the 'Computation of total income' and numerous different heads of income. Part A thereof deals with 'salaries' whilst Part B pertains to 'interest on securities' and Part C is specific with regard to the 'income from house property'. Part D dealing with 'profits and gains of business or profession' is particularly relevant. Therein the very first Section 28 provides for income which shall be chargeable to income-tax under the head 'Profits and gains of business or profession'. This taxable income is then to be computed in accordance with the provisions contained in Section 30 to 43A as prescribed by Section 29 of the Act. Sections 30 to 36 spell out in great detail and, particularly, the deductions which can be allowed out of the income for its computation for purposes of tax. Section 37(1) is the general provision prescribing with specific exceptions that any expenditure 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 of 'Profits and gains of business or profession'. However, the generality of this provision is being specifically controlled by Sub-sections (2) and (2A) which begin with a non obstante clause and prescribe the legislative limits within which all expenditure 'in the nature of entertainment expenditure ' can be allowed.

12. It would seem that a true interpretation of Section 37 cannot be arrived at except in the context of its earlier legislative history. For our purposes, it is unnecessary to travel beyond the predecessor statute of the Indian I.T. Act, 1922. The legislative parent of Section 37 of the Act is Section 10(2)(xv) of the Indian I.T. Act, 1922 (hereinafter called 'the 1922 Act'). Under the scheme of the 1922 Act, as originally enacted, in computing the income chargeable under the head 'Profits or gains of any business or vocation carried on', necessary allowance was to be given in respect of any noncapital expenditure incurred solely for the purposes of earning such profits or gains. The scope of this exemption was enlarged by the amendment effected in Sub-section (2)(xv) of Section 10 of the 1922 Act by the I.T. (Amend.) Act, 1939. Thereby, any expenditure, 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 such business, profession or vocation, was to be allowed. The resultant effect of this amendment was that an assessee was entitled to an allowance in respect of all items of noncapital expenditure other than personal expenses if it could be shown that the amounts in question were laid out or expended wholly and exclusively for the purpose of business, profession or vocation. Therefore, all amounts spent by an assessee for the entertainment of his business clientele were deductible under this head on the ground that such hospitality or entertainment was extended wholly for the purpose of promotion of the assessee's business or profession.

13. It seems to be manifest that the actual working of the aforesaid provision and its obvious liberality later seems to have impelled second thoughts in Parliament in order to check the abuse of this provision by the assessees by the passing of all kinds of business entertainment on to the public exchequer. By a gradual though deliberate process the Legislature placed restrictions and curbs designedly on the indiscriminate allowance of such entertainment expenditure. The first of such restrictions was introduced by the Finance Act of 1961 (vide Section 6 of the Finance Act, 1961, with effect from April 1, 1962) in the shape of a proviso to Section 10(2)(xv) of the 1922 Act. This, in terms, imposed a ceiling limit on all business expenses in the nature of entertainment expenditure which could be allowed to the companies. The maximum of such deductions were prescribed on a slab basis depending upon the profits and gains of the business of such company. When the present Act came to replace the earlier 1922 Act, this position was retained intact in Sub-section (2) of Section 37 of the Act when the 1922 Act was repealed with effect from April, 1962.

14. In continuation of the aforesaid policy, the second step taken by Parliament was by Section 4 of the Taxation Laws (Amend.) Act, 1967. Thereby, Sub-section (2A) was introduced in Section 37 of the Act. By this sub-section a similar restriction of the nature of ceiling limit of allowance of 'entertainment expenditure' was made applicable to all categories of assessees. Just as in the case of companies, this sub-section also specifies the maximum allowable expense in the nature of entertainment expenditure in the case of other assessees also on a slab basis. The third step later taken by Parliament was by the Finance Act of 1968 which added an Explanation to Sub-section (2A) of Section 37 the effect of which was to expand the scope of the restriction imposed by this sub-section so as to take in any expenditure incurred by an assessee in granting an entertainment allowance to an employee or other person from February 29, 1968, and also the amount of any expenditure in the nature of entertainment expenditure incurred by any employee or other persons for the purpose of business or profession of the assessee otherwise than out of an entertainment allowance paid to him by the assessee. However, the fourth step in this regard which Parliament took is particularly meaningful. Whilst introducing the Finance Bill of 1970 in Parliament the purpose of the proposed insertion of Sub-section (2B) in Section 37, vide Clause 10 of the Bill, was recorded as follows, in the ' Notes on clauses ' (see [1970] 75 ITR 73).

' Clause 10 seeks to amend Section 37 of the Income-tax Act.

Sub-clause (b) seeks to insert a new Sub-section (2B) in Section 37 of the Income-tax Act and Sub-clause (a) seeks to make a consequential amendment in the Explanation to Sub-section (2A) of that section. Under the proposed amendments, expenditure in the nature of entertainment expenditure incurred by any assessee within India after the 28th February, 1970, will be disallowed in its entirety in computing his income from business or profession.'

15. Whilst introducing the Bill, the Finance Minister meaningfully observed as follows (see [1970] 75 ITR 25) :

'Those who enjoy the hospitality of their business friends should now no longer find their sense of gratitute diminished by the thought that a part of the hospitality is really paid for by the Exchequer. '

16. It was in this context that Sub-section (2B) was added to Section 37 which deserves notice in extenso :

'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.'

17. It would be manifest from the above that a blanket bar was placed, thereby disallowing all expenditure in the nature of 'entertainment expenditure' after the 28th of February, 1970. It is true that, later, by the Finance Act, 1976, the stringent provisions of Sub-section (2B) were omitted with effect from April 1, 1977. The afore-noted legal history is a clear pointer as to which way the legislative wind was blowing in this context.

18. Equally interesting is to note that this misuse or abuse of business entertainment at the cost of the public exchequer is not a matter of mere isolation in India but had found its parallels in England as well. There also, its Parliament was similarly compelled to place curbs on indiscriminate business expenditure and that Section 15(5) of the Finance Act of 1965 was enacted in the following terms :

'15. (5) For the purposes 'of this section 'business entertainment' means entertainment (including hospitality of any kind) provided by a person or by a member of his staff, in connection with a trade carried on by that person, but does not include anything provided by him for bona fide members of his staff unless its provision for them is incidental to its provision also for others.'

19. In the celebrated House of Lords case, Fleming (If. III. Inspector of Taxes) v. Associated Newspapers Ltd. [1972] 48 TC 382, Lord Reid, while construing the aforesaid Section 15 was constrained to observe as follows (p. 402):

'Before dealing with its specific provisions it is necessary to have in mind the mischief which it is obviously designed to prevent. For a number of years there had been much public criticism of the lavish expenditure daily to be seen in restaurants and elsewhere on business lunches and the like, and of other methods of business entertainment which had become notorious. It must have been found to be impracticable for the tax authorities to separate entertainment which was reasonable from that which was not. Normally where traders do not derive any personal benefit from business expenditure no question arises. But here the givers of the entertainment benefited as well as the guests, so that to a large extent they were really entertaining themselves at the public expense. In 1965, Parliament thought it necessary to take drastic action, so that, as often happens in such cases, the innocent must suffer as well as the guilty. As I have said, no criticism is made that the appellants are other than innocent. '

20. And again, Lord Simon of Glaisdale, in the same vein, said (p. 410):

'Reasonable as the taxpayers' claim to deduct entertainment expenses may have seemed in that particular case, by 1965 it was conceived that the law as it then stood was being abused. What was called 'expense-account living' had become notorious. Expenses, even 'wholly and exclusively' incurred in trading, were thought to enure to raise certain individual taxpayers' real incomes net of tax in such a way as to offend against general notions of fiscal equity. In some instances it was the mere lavishness or extent of the entertainment which offended; in others an element of reciprocity in entertainment was suggested. Courts of law have no means of knowing how far criticisms of this sort are justified, and it is not ordinarily any part of their function to form any judgment thereon. But it is very much part of the duty of the courts, in their task of statutory interpretation, to ascertain as best they can what was the mischief as conceived by Parliament for which a statutory remedy was being provided ; nor is it necessary nowadays for courts to affect ignorance of what is notorious.'

21. Reverting to the provisions of Section 37 of the Act, it is obviously relevant on the high authority of Heydoris case [1584] 3 Co Rep 7, to see as to what was the state of the law prior to the existing provisions, what was the mischief or defect for which the law had intended to provide, and what remedy in fact Parliament provided as also the reasons therefor. It would appear that the aforementioned legislative history of these provisions can hardly leave any manner of doubt that both under the said 1922 Act as also under the present one, Parliament had thought it necessary to progressively place curbs and restrictions and specify the limits within which the allowances of expenses in the nature of ' entertainment expenditure ' would be permissible. It is with this meaningful and illuminating background that the relevant provisions of Section 37 of the Act may now be read :--

'37. (1). ............

(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 section33 or section 33A or in respect of entertainment expenditure)

atthe rate of 1 per cent. Rs. 5,000,whichever higher;

(ii) on the next Rs. 40,00,000 of the profits and gains ofthe business (computed in the manner aforesaid)

at the rate of 1/2 per cent.;

(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 1/4 per cent.;

(iv)on the balance of the profits and gains of the business (computed in themanner aforesaid)

nil.

(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 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:--

(i)on the first Rs. 10,00,000 of the profits and gains of the business (computed before making any allowance under section33 or section 33A or in respect of entertainment expenditure)

atthe rate of 1 per cent. Rs. 5,000,whichever higher;

(ii) on the next Rs. 40,00,000 of the profits and gains ofthe business (computed in the manner aforesaid)

at the rate of 1/2 per cent.;

(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 1/4 per cent.;

(iv)on the balance of the profits and gains of the business (computed in themanner 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 first 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 purposes of this sub-section '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 purposes of the business or profession of the assessee by any employee or other person.'

22. Now, in construing the aforesaid provisions what first meets the eye and deserves highlighting is the designed and considered use of the phraseology by Parliament in Sub-sections (2) and (2A) aforesaid. The phrase deliberately employed is-- 'in the nature of entertainment expenditure'. It is not merely 'entertainment expenditure' or 'business entertainment' simpliciter. It is a sound canon of construction that the Legislature does not waste its words and every word employed in a statute has to be given a meaning. Undoubtedly, therefore, whilst using the larger and compendious expression 'in the nature of entertainment expenditure', Parliament had an obvious purpose behind it. This expression is much wider in its connotation, inasmuch as it would take within its ambit not merely what may stricto sensu be regarded as entertainment expenditure proper but also all other expenditure of allied nature partaking of some, if not all, of the characteristics of entertainment expenditure. The phrase has indeed a wide amplitude and its use leaves little doubt that the intention of the Legislature in employing it was to cast the net sufficiently wide so as to bring within its field all types of hospitality. Even on behalf of the respondents, it could not be denied that any lavish hospitality expended for business purposes would amount to 'entertainment expenditure'. If that be so all hospitality, even though frugal, would be well within the ambit of the larger phrase 'in the nature of entertainment expenditure'. With respect, it appears to me that this sharp and meaningful distinction between an entertainment expenditure simpliciter and the larger and compendious phrase 'in the nature of entertainment expenditure' has been missed in all the judgments which have taken a contrary view. It must, therefore, be held that all business hospitality, whether lavish or frugal, comes within the net of the legislative intent when it designedly used the wider phrase 'in the nature of entertainment expenditure '.

23. Reverting now to Sub-section (1) of Section 37 of the Act, it appears to be plain that an expenditure wholly and exclusively for the purposes of the business including entertainment at a lavish, modest or even a frugal level would come well within the wide language thereof. What, however, calls for pointed notice is the fact that both Sub-sections (2) and (2A) of Section 37 begin with a nonobstante clause, namely, 'Notwithstanding anything contained in Sub-section (1) thereof'. Plainly, therefore, it would mean that whatever the amount of business entertainment expenses may be, they are subject to the stringent rule and limits provided in Sub-sections (2) and (2A) for companies and other assessees, respectively. Therefore, reading Sub-sections (1), (2) and (2A) together--and doing so is a wholesome rule of construction--the larger scheme appears to be that the law recognises the incidence of business entertainment expenses but does not allow any sky-high deductions therefor and curbs them within the slab limits provided in Clauses (i), (ii), (iii) and (iv) of Sub-sections (2) and (2A) of Section 37 of the Act. To put it in other words the statute is alive to the fact that business entertainment expenses may sometimes have to be incurred at inordinately high levels. That by itself would not give the businessmen the carte blanche to incur any amount of entertainment expenses and claim a total deduction therefor. The Legislature has followed the golden mean by allowing a reasonable rein and also put a plausible leash thereon in the shape of the maximum slabs therefor in Sub-sections (2) and (2A). To construe the provision otherwise and to hold that hospitality which is not lavish may be expended without any financial limits would in effect be frustrating the very purpose of the Legislature in enacting Sub-sections (2) and (2A) and defeating the larger legislative intent of curbing excessive business entertainment, at the cost of the public exchequer. Beyond the prescribed limits, business entertainment is left to the discretion and the personal cost of businessmen themselves, and is not to be defrayed by public revenue.

24. 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.

25. The view I take is buttressed by the authoritative judgment of the Full Bench of the Kerala High Court in Veeriah Reddiar's case : [1977]106ITR610(Ker) . Eradi C.J., speaking for the court, after a discussion on principle and precedent and expressly dissenting from the view of the Gujarat High Court in the case of Patel Brothers & Co. Ltd. : [1977]106ITR424(Guj) , concluded as follows (p. 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 guest; 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., 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 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'.'

26. In the Allahabad High Court, the identical view has first found acceptance in the D. B. judgment in Brij Raman Dass & Sons v. CIT : [1976]104ITR541(All) and has been later followed by another Division Bench in CIT v. Manoo Ram Ram Kamn Dass : [1979]116ITR606(All) .

27. Within this court also the aforesaid view has found acceptance by a Division Bench consisting of O. Chinnappa Reddy, Actg. C.J. and M. R. Sharma J., in CIT v. Gkeru Lal Bal Chand [1978] 111 ITR 134, with the following observations :

'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.'

28. It would be manifest from the above that, apart from principle and statute, there is thus a sizeable weight of precedent as well for the view that business hospitality of any kind is well within the wide net purposely cast by the Legislature in Sub-sections (2) and (2A) of Section 37 of the Act.

29. However, as noticed earlier, there is a schism of judicial opinion on the point. The leading judgment for the rival view is that of the Gujarat High Court in Patel Brothers' case : [1977]106ITR424(Guj) . Since this appears to be the basic judgment which seems to have found acceptance with some other High Courts as well, it becomes necessary to advert to the same in some detail. The facts in this case are also closely similar, in so far as the assessee-company had claimed kitchen expenses for providing meals to up-country customers out of commercial compulsion and expediency. It would appear that at the time of rendering the judgment on November 12, 1975, there as yet appeared to be a paucity of Indian precedent on the point and their Lordships of the Division Bench, after adverting mainly to the dictionary meaning of the word 'entertainment' and English precedents by way of analogy, held as follows (pp. 441-442):

'The following broad tests, in our opinion, will provide a guideline to determine the nature of expenses allowed to be entertainment expenses :

(a) If the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish and extravagant scale, or is of wasteful nature, it is entertainment per se.

(b) If the provision of food or drinks to a client, constituent or customer is in nature of bare necessity, or by way of ordinary courtesy, or as an express or implied term of contract or employment spelled out from long-standing practice or custom of trade or business, it will not amount to entertainment.

If the provision of food or drinks to a client, customer or constituent is in a liberal and friendly way, it may amount to entertainment having regard to the place, item and cost of such provision.

(d) The provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment. '

30. As I said earlier, the aforesaid view in Patel Brothers' case : [1977]106ITR424(Guj) is the sheet-anchor of the respondent's stand and it is, therefore, apt to record a logical, though respectful dissent, therefrom. It appears to me that the Achilles' heel of this judgment is that it missed the purpose, the import and the significance of the deliberate use by Parliament of the compendious phrase 'in the nature of entertainment expenditure'. A close analysis of the judgment would show that this aspect is conspicuous by its absence. Consequently, the rationale and the conclusions of the judgment seem to have been warped because of its ignoring the specific words of the statute which, in a way, are the very key to the construction of Sub-sections (2) and (2A) of Section 37 of the Act. The fallacy which apparently seems to have crept in is evident from the following observations in the judgment (p. 430) :

'The real problem to which we have to address ourselves is : what is the import and width of the word 'entertainment' The term 'entertainment ' or ' entertainment expenses' has not been defined in the Act. There is no settled case law on the point which may give guidance in the matter. Unaided as we are, we have, therefore, to make an attempt to find out the true meaning of the term 'entertainment' in the context of the Income-tax Act. '

31. With great respect, it would appear that the true problem herein is not so much as to what is the import of the word ' entertainment ', but the true intention of the Legislature in not using that word simpliciter, and, instead, employing a much wider and a compendious phrase like 'in the nature of entertainment expenditure'. To repeat, Parliament did not use the word 'entertainment' simpliciter or the words 'business entertainment' alone. The essence of the question, therefore, was : How much did it wish to expand and widen the meaning of the word 'entertainment' when it used a much larger phrase The core of the problem, therefore, was as to what comes within the much wider net cast by the Legislature by deliberately employing a compendious phrase. Therefore, in my humble view, the Gujarat High Court Bench erred in attaching great weight to the innumerable dictionary meanings of the word 'entertainment' and construing the larger phrase narrowly on the hypothesis as if it was merely the word 'entertainment' simpliciter.

32. Viewed in this wider perspective, it would appear that even the reasoning in Patel Brothers' case : [1977]106ITR424(Guj) would aid the appellant-revenue's stand. The Bench therein had observed as follows (p. 435):

'We think that the revenue was right when it was contended on its behalf that entertainment is hospitable treatment of guests 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.'

33. Assuming the above to be true, it would place the case of the revenue on a more plausible and even stronger footing. The matter may be closely analysed thus. On the Gujarat High Court's view itself, a hospitality which is on a lavish or extravagant scale, is entertainment per se. On a lower scale, there may be extended business hospitality which may neither be necessarily lavish nor exceptionally pleasurable. Even though it may be said that this kind of hospitality does not fall stricto sensu within the meaning of the word 'entertainment', can it possibly be denied that it will come within the amplitude of the much wider phrase designedly used by the Legislature, namely, that it is ' in the nature of entertainment expenditure'? It appears to me without any doubt that the phrase is meant to include within it something analogous or similar or in a way connected with the notion of entertainment that may not strictly fall within the phrase. Therefore, on the dictum of the Gujarat High Court Bench, all hospitality may not be entertainment stricto sensu but it, nevertheless, would well be within the meaning of the phrase ' in the nature of entertainment'. Consequently, it would appear that, of the four tests laid down in Patel Brothes's case : [1977]106ITR424(Guj) , (a) and (d) have been opined to be entertainment per se by the Bench itself. The tests (b) and (c), even though they may not be strictly entertainment, can clearly come within the larger phraseology designedly used by Parliament. It bears repetition that it is this latter significant aspect which seems to have not been adequately highlighted on behalf of the revenue before the Gujarat High Court Bench and has been consequently missed therein and in the long line of judgments which seem to follow and accept unreservedly the ratio in Patel Brothers' case : [1977]106ITR424(Guj) .

34. Apart from the above, an in-depth examination of the judgment in Patel Brothers' case : [1977]106ITR424(Guj) , would show that even though the argument of the long and the designed legislative history of Section 37 of the Act was pointedly raised on behalf of the revenue, the Bench either missed to pronounce thereon or drew no inference from the step-by-step attempts of Parliament to curb and curtail unlimited business hospitality at the cost of the public exchequer. It failed to notice the high water mark of the insertion of Sub-section (2B) by the Finance Act of 1970, by which a blanket bar was sought to be placed against the allowance of expenses 'in the nature of entertainment expenditure', even though, later, there appears to have been some receding of the tide by way of its repeal. Again, no notice was taken of the non obstante clauses with which Sub-sections (2) and (2A) of Section 37 begin. Equally the painstakingly precise slabs provided by the Legislature for prescribing the ceilings for all expenses in the nature of entertainment expenditure both for companies and other assessees in Sub-sections (2) and (2A) were neither noticed nor was any inference drawn therefrom. With great respect, an overly emphasis seems to have been placed on the dictionary meanings of the words 'entertainment' and 'hospitality', which patently are innumerable and wide ranging. One is tempted to recall the adage that the construction and interpretation of Acts should avoid any dictatorship dictionaries and give more weight to the larger scheme of the statute. As was forcefully observed by the Full Bench of the Kerala High Court in Veeriah Reddiar's case : [1977]106ITR610(Ker) , in legal construction the exact intent of the word has to be gathered from the context and setting in which it has been used and not by the innumerable connotations or nuances which it may have in language or literature.

35. Lastly, with greatest respect, it appears to me that the four tests sought to be laid down in Patel Brothers' case : [1977]106ITR424(Guj) , far from resolving the problem in practical effect, would only tend to proliferate them. Mr. Awasthy, the learned counsel for the revenue, was not on an implausible ground whilst contending that these ethereal and almost metaphysical considerations would raise the lid of a legal Pandora's box which cannot be, thereafter, possibly put back. Applying these metaphysical and Hegelian tests to the work-a-day job of the assessment of revenue, according to him, cannot but create another hornet's nest both for the revenue as also for the taxpayer. Counsel rightly posed the problem as to what is the yardstick to establish as to : What is lavish What is extravagant What is wasteful in the context of hospitality and entertainment. It was to meet such a situation that the Division Bench in Ghent Lal Bat Chand's case [1978] 111 ITR 134 pithily observed as follows (p. 137):

'The court has to consider the context and the background in which the legislature employs a word. Furthermore, something which may be regarded as on ordinary meal by a fastidious person may really be regarded as a lavish meal by a common man. Such considerations which introduce an element of uncertainty in the meaning of a phrase used in a statute have to be avoided at all costs.'

36. With the greatest respect, it appears to me that the financial distinctions which are sought to be drawn in many judgments that only that hospitality is entertainment which is lavish, ostentatious, extravagant or wasteful or has relevance directly to pleasurability and amusement and not that which satisfies basic necessities or is merely liberal and friendly, would deliberately push the law of taxation into a slippery quagmire from which it might not be possible to extricate each individual case. If the rule prescribed by the Legislature under Section 37 of the Act is to have any concrete meaning of uniformity and is not to be made to depend on the individual idiosyncrasies of every ITO for its application, it is necessary to clear the cob-webs and to go the whole hog to hold that hospitality of every kind comes within the ambit of the larger phrase ' in the nature of entertainment expenditure ' specifically used by Parliament in Section 37 of the Act. This is what has been so held by the Full Bench of the Kerala High Court in Veeriah Reddiar's case : [1977]106ITR610(Ker) and also by a Division Bench of this court in Ghent Lal Bal Chand's case [1978] 111 ITR 134, and this view equally holds sway in the Allahabad High Court. To hold otherwise and to attempt finical classifications of what is lavish, elegant, extravagant, wasteful, pleasurable or amusing, in actual effect, would wholly introduce an element of total ambivalance and the uncertainty in the taxation field which can be its bane and should, therefore, be studiously avoided. Such an approach would make the phrase 'in the nature of entertainment expenditure', a wholly slippery one or make it an unruly horse, as has been said with regard to the rather ambivalent concept of public policy. To remain on the terra firma, it calls for repetition that the law should avoid the reproach of being uncertain and conjectural instead of being certain and uniform.

37. For the detailed reasons aforesaid, I would, with the greatest respect record my dissent from the view enunciated in Patel Brothers' case : [1977]106ITR424(Guj) . Once that is so, it is unnecessary to individually distinguish the judgments which have expressly followed it or have accepted its broad line of reasoning. Therefore, for identical reasons, I would dissent from the view of the Bombay High Court in CIT v. Shah Nanji Nagsi : [1979]116ITR292(Bom) , of the Karnataka High Court in CIT v. Corporation Bank Ltd. : [1979]117ITR271(KAR) and of the Madras High Court in CIT v. Karuppuswamy Nada & Sons : [1979]120ITR140(Mad) .

38. However, I am of the view that Addl. CIT v. Bangalore Turf Club Ltd. : [1980]126ITR430(KAR) is plainly distinguishable. Therein, the expenses had been incurred for providing refreshments in the meetings of the steward, and the general body meetings of the Bangalore Turf Club Ltd. Apparently, on the larger assumption that entertainment presupposes a third party being entertained by the assessee and one does not entertain himself, it was held that there was no intention of extending any entertainment to any third party or the stewards or the members of the managing committee or ordinary members of the assessee-club, etc. Similarly, the judgment of the Andhra Pradesh High Court in Addl. CIT v. Maddi Venkataratnam & Co. Ltd. : [1979]119ITR514(AP) was with regard to the expenses entirely incurred for the maintenance of the guest house. Undoubtedly, this was specifically provided for in Sub-section (3) of Section 37 of the Act. Plainly, this is an altogether different provision employing a wholly different terminology. It was in that context that Chief Justice Divan has made observations with regard to the running of a guest house commensurate with the number and the status of the guests lodged therein, by a tobacco company of standing. These observations, therefore, have no relevance to Sub-sections (2) and (2A) of Section 37 of the Act and the point before us. This case is consequently also distinguishable.

39. This brings me to the Division Bench judgment of this court in CIT v. Nadh Shah Kapur & Sons , which indeed has necessitated this reference. A close analysis of this judgment would indicate that the matter was not adequately canvassed on behalf of the parties before the Division Bench. The earlier judgment in Gheru Lal Bal Chand's case [1978] 111 ITR 134, which covered the field, was not brought to the notice of their Lordships. Nor the authoritative judgment of the Full Bench of the Kerala High Court in Veeriah Reddiars' case : [1977]106ITR610(Ker) and the view of the Allahabad High Court in Brij Raman Dass : [1976]104ITR541(All) and Manoo Ram Ram Karan Dass' case : [1979]116ITR606(All) were brought to the notice of the Bench. Even on the point of principle and the relevant statutory provisions, the issues were not adequately highlighted. It was in this context that broad observations, tacitly following Patel Brothers' case : [1977]106ITR424(Guj) , have been made. For the detailed reasons recorded earlier in dissenting from Patel Brothers' case : [1977]106ITR424(Guj) , we have, with the greatest respect, to overrule this judgment on this specific point.

40. Before parting with the judgment, one must sound a note of caution that in applying the rule we have arrived at, an overly doctrinaire approach must be avoided. We are inclined to the view that all hospitality extended wholly and exclusively for the purposes of the business is within the net of the phrase ' in the nature of entertainment expenditure '. However, it is elementary that, in the first instance, such an expense must be a hospitality expense and that which, in ordinary parlance, cannot be even termed hospitality cannot by any stretch of imagination be either deemed to be entertainment or in the nature of entertainment. To reiterate, for an expense to come within the ambit of being in the nature of entertainment, it must first partake of all the appellations of being hospitable. If it does not even satisfy the broad concept of being hospitable stricto sensu, then it cannot be elongated into either entertainment expenditure or even in the nature of entertainment expenditure. A homely example that comes to one's mind here is that of a businessman serving a thirsty customer with a cold glass of water, an elementary humane act, which he might well extend to any man in the street if asked for. Even in a country so poor as ours, such an act cannot be deemed as one of any hospitality. As in many other fields, the test herein again would be that of a reasonable man. Whether he would think a particular act to be, in essence, hospitable in its nature or otherwise It is only when this first test of the act being hospitable is crossed then the issue of the same being within the net of the phrase 'in the nature of entertainment' can possibly arise.

41. In the light of the aforesaid discussion above, one may now advert to the facts of the present case itself. It is the case of the assessee itself that it was running a regular kitchen to furnish wholesome food and drink to its customers. This would obviously come within the ambit of hospitality, whether lavish or frugal. Once that is so, it would be within the ambit of Section 37(2A) of the Act as an expense in the nature of entertainment, and, therefore, subject to the ceiling slabs prescribed in Clauses (i) to (iv) thereof.

42. We would, therefore, render the answer to question No. 1 (in para. 4 of this judgment--See p. 339 supra), in the negative, that is, in favour of the revenue and against the assessee and hold that the kitchen expenses incurred were in the nature of entertainment expenditure. As was noticed at the very outset in para. 5--(See p. 340 supra), the case would now go back before the Division Bench for consideration and answer of the second question.

Bhopinder Singh Dhillon, J.

43. I agree.

J.V. Gupta, J.

44. I agree.


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