D.K. Kapur, J.
1. The reference made by the Income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax is concerned with a private limited company which has been paying 'entertainment allowance' to its directors over a long period of years. It appears that the assessed which carried on business at Lucknow and Delhi and is holder of several agencies at these places for gas and motor cars and other business and also runs petrol pumps, has been paying substantial sums over a period of years to its directors as 'entertainment allowances' but the ITO thought that the allowance which was deductible was limited to Rs. 5,000 under s. 37(2) of the I.T. Act, 1961. The present statement of case relates to the assessment years 1961-62 to 1967-68. The statement requires us to determine the following question :
'Whether, on the facts and in the circumstances of the case, entertainment allowance paid to the directors by the assessed-company could be allowed as a deductible revenue expenses in the computation of the income profits and gains of the assessed-company relating to the assessment years 1961-62 to 1967-68, respectively ?'
2. The provisions of s. 37(2) show that all expenditure not being of a capital nature laid out or expended wholly and exclusively for the purpose of the business or profession is an allowable deduction for the purpose of computing the profits and gains from business or profession. The exception is provided to this section by s. 37(2), which sub-section limits the amounts of expenditure of a particular type, i.e., 'entertainment expenditure' and states that, in the case of companies, a particular percentage of the profits and gains is allowable as a deduction. Before 1967, the provision allowed a deduction of 1% on the first Rs. 10,00,000 of profits and gains or Rs. 5,000, whichever was higher. As the profits and gains of this company appears to be on the low side, the ITO took the higher figure of Rs. 5,000 mentioned in this provisions as being the limit for allowing 'entertainment expenditure'. If the allowances paid to the directors is 'entertainment expenditure' then the finding of the ITO was right. However, the Tribunal held that the allowances paid to the directors could not be described as 'entertainment expenditure' of the company itself. These payments were in the nature of salary paid to persons who were otherwise getting a salary. The provisions of the Act, which done salary, particularly s. 17, show that salary includes not only wages but also various fees, commission perquisites or profits, etc. Any amount paid by the employer to the employee by way of rent free accommodation or any other concession or other benefit, etc., is described as a part of the salary. An allowance of the type mentioned in the statement of the case an also be described as part of the clear received by the directors as employees of the company. It would follow that as far as the directs themselves are concerned it can be said that the 'entertainment allowance' received was no more than a perquisite received by them within the meaning of that term in s. 17 and, thereforee, the amount had to be included as a part of the salary income of the directors. An amount which is paid to an employee as salary income of the directors. An amount which is paid to an employee as salary cannot be described as being an 'entertainment expenditure' of the employer himself. It may be that the employee may use the amount for his own entertainment of entertainment of others, but by no means can it be said it was 'entertainment expenditure' incurred by the employer himself.
3. This interpretation has been accepted by the Income-tax Appellate Tribunal and it has been sought to be given grate emphasis by resort to the Explanationn which was introduced later in the section. The Explanationn read :
'Explanation. - For the purpose of this sub-section....'entertainment expenditure' includes -
(i) the amount of any allowance in the nature of entertainment allowances paid by the assessed to any employee or other person after the day of February 29, 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 February 29, 1968, for the purposes of the business or profession of the assessed by any employee or other person.'
This Explanationn show that 'entertainment allowance' paid by an assessed to any employee or other person after the February 29, 1968, is to be treated as 'entertainment expenditure'. The Explanationn is apparently intended to widen the effect of s. 37(2). The learned counsel for the department contended that actually it is a clarificatory amendment because it merely clarified what was intended to be provided for even earlier. We do not agree with this view. Entertainment allowance paid by an assessed to his employee or other person would not appear to be an entertainment expenditure normally speaking. The Explanationn attracted widened the scope of the section to include such allowances.
4. The learned counsel for the respondent has referred to a decision of the Bombay High Court in CIT v. Devkaran Nanjee Insurance Company Ltd. : 110ITR815(Bom) in which a similar point was involved and it was held that (p. 819 :
'..... we are in agreement with the view of the Tribunal that the limit on entertainment expenses prescribed by s. 37(2) would only apply to such expenses as could be held to have been incurred by the company and there would be no occasion of the applying these provision where certain amounts were paid to the employees which could be considered as part of their salary and where there was no obligation on the part of the recipient to spend out of them for actual entertainment not could it be shown that they were accountable to the assessed in respect of such amounts received by them. We are also in agreement with view accepted by the Tribunal that in such a case whether the recipients would be entitled to claim any deduction (which would depend upon whether the amounts received as such allowance were within the prescribed limit or not) would not have any relevance to the question to taxability of these amounts in the hands of the assessed.'
5. We are in complete agreement with this state of the law a and thus we answer the question in favor of the assessed and against the department. The assessed will get costs, counsel's fee Rs. 250.