1. This is a case stated under Section 256(2) of the I.T. Act, 1961, by the Income-tax Appellate Tribunal, Madras, on a direction issued by this court in that regard at the instance of the Commissioner of Income-tax, Madras.
2. The question of law referred to us by the Tribunal in which we have made a textual correction of an obvious mistake is as follows:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of Rs. 20,364 could not be described as an expenditure in the nature of 'entertainment expenditure within the meaning of Section 37(2A) ?'
3. The reference arises in the assessment to income-tax of Messrs. K. P. V, Shaik Mohamed Rowther Company, Madras. This concern is a firm of eight partners carrying on business as agents of shipping companies and victualling contractors. Their main business is said to involve the canvassing of cargo and passengers for oceangoing ships. In their assessment for 1969-70 relevant to the account year ended April 30, 1968, the firm claimed a deduction in respect of Rs. 20,364. This amount had been debited in their profit and loss account under the head 'Entertainment expenditure'. The ITO apparently accepted without question the nature of the expenditure as entertainment expenditure. He, however, did not grant the full allowance claimed, but allowed Rs. 5,000 disallowing the balance of Rs. 15,364. For doing so, he invoked Section 37(2A) of the I.T. Act, 1961.
4. The assessee-firm appealed against the assessment objecting, inter alia, to the disallowance of the entertainment expenses in excess of Rs. 5,000. The AAC, however, confirmed the action of the ITO. He found that the expenses claimed by the assessee under the head 'Entertainment expenditure' related mostly to club bills paid by the partners of the assessee-firm and, as such, they represented merely the personal expenses of the partners. All the same, he confirmed, without modification, the order of assessment under which the ITO had allowed a part of the expenditure claimed to the extent of Rs. 5,000.
5. On further appeal by the assessee, the Tribunal was disposed to look at the matter from quite a different point of view. The Tribunal did not agree either with the basis on which the ITO made the assessment or with the view expressed by the AAC. The Tribunal, while rendering its determination on the assessee's claim, went into the details of the figure of Rs. 20,364. They found that while the amount was debited in the assessee's profit and loss account under the generic description 'entertainment expenditure' the amount covered numerous items, representing payments made by the partners of the assessee-firm on various dates during the account year to several social clubs in the Madras City such as the Cosmopolitan Club, the Madras Gymkhana Club, the Madras Boat Club, the Madras Cricket Club and the Madras Race Club. On a study of the nature of the payments made to these clubs, the Tribunal recorded a finding that they were all laid out to meet expenses incurred by the partners for providing food, refreshments and the like to the firms constituents and customers. In the context of these factual details the Tribunal accepted the contention that the exigencies of the assessee's business required that the partners of the assessee-firm should often be taking their clients as well as members of the crew of the ships touching Madras Port, on a round of visits to various social clubs in the city. The Tribunal accepted the further contention of the assessee that since canvassing of cargo and passengers was the main business of the firm and since it could be successfully done only by maintaining extensive social contacts, the expenditure involved in taking the clientele and the ships, crew round the various clubs was dictated purely by business needs and exigencies. In this view, the Tribunal held that the expenditure could not be regarded either as the assessee's personal expenditure, which is disallowable as such, or as entertainment expenditure which is subject to partial disallowance under s, 37(2-A). The Tribunal expressed the view that in order to treat any expenditure within the mischief of Section 37(2A). the ITO must be in a position to find that it had been incurred by the assessee purely out of motives of hospitality entirely unrelated to the assessee's business. Since in the Tribunal's view that could not besaid of the expenditure incurred in the present case, but, on the contrary, it was dictated by business needs, there was no justification for the disallowance of any portion of the expenditure by invoking Section 37(2A). In the result, the Tribunal directed a full allowance of the entire amount of Rs. 20,364 as business expenditure.
6. The correctness of the Tribunal's determination is canvassed in this reference by the I.T. Dept. In our judgment, the inquiry in this case bears on a construction and application of Section 37(2A). This section is to be found in the Act among a number of provisions grouped together, all concerned with laying down the correct manner of computation of business profits for purposes of charge to income-tax. Section 37 which figures in the I.T. Act almost at the fag end of the chapter on allowances, is not only a residuary provision as is indicated by an express parenthesis in the section, but it is also a general provision as its marginal note describes it. The section lays down the test or standard of allowable business expenditure in the familiar words 'wholly and exclusively'. This requirement for the deduction of business expenditure that it must be wholly and exclusively laid out for the purposes of the assessee's business excludes, by necessary implication, claims for allowance in respect of purely personal expenses of the assessee. This is because personal expenses are, by definition, non-business outgoings. They are also described, and very accurately so, as appropriations or applications out of profits. In this respect they are distinguished from business expenditure properly so called, which is out and out a charge against profits. The conception of allowable business expenditure also excludes the deduction of items of capital expenditure on the principle that only revenue expenditure is properly chargeable against profits so as to arrive at the relevant year's taxable income. All these considerations are found packed in Sub-section (1) of Section 37. Then comes somewhat out of step with the general provisions three sub-sections governing the tax treatment of entertainment expenditure. They are Sub-sections (2), (2A) and (2B) of Section 37, to all of which is superadded an Explanation, Sub-section (2) relates to entertainment expenditure of companies. Sub-section (2B) relates to entertainment expenditure incurred by assessees after February 28, 1970. We are concerned in this case with Sub-section (2A) of Section 37 considering that the assessee in this case is not a company and considering that the expenditure in question relates to a year of account ending after September 30, 1967.
7. Sub-section (2A) of Section 37 provides that notwithstanding anything contained in Sub-sections (1) and (2) of Section 37, any expenditure in the nature of entertainment expenditure, in cases where such expenditure has been incurred during any previous year which expired after September 30, 1967, shall be subject to a graduated ceiling and also to certain other conditionsand restrictions set out in that sub-section. Sub-clause (i) of Sub-section 2(A) draws a line for business profits at the level of Rs. 10,00,000 and provides that the assessee would be entitled to entertainment expenditure as a charge against such profits only at the rate of half a per cent. on such profits or Rs. 5,000 whichever is higher. In the present case, the business profits of the assessee for the year ended March 30, 1968, was computed at Rs. 3,57,448. Half a per cent. thereof clearly exceeds Rs. 5,000. Hence, the ITO allowed only Rs. 5,000, disallowing the rest of the expenditure claimed by the assessee as disallowable entertainment expenditure
8. The question in the present case, however, is not whether the computation is right with reference to the provisions of Section 37(2A), but whether the said provision, at all, can be applied to the expenditure claimed by the assessee.
9. The expression 'entertainment' occurring in Sections 37(2), 37(2A) and 37(2B) of the Act stands severely undefined. There is no doubt, an Explanation to the section which includes, within the statutory conception of entertainment expenditure, one or two outside categories. But there is no attempt at explanation or clarification, much less definition, in this Explanation. We do not derive any assistance from the Explanation for getting at the meaning which the Parliament intended to convey by the expression 'entertainment'. We have, therefore, got to consider the term 'entertainment expenditure' on the basis of the common understanding which has to be given to that expression, subject, of course, to the context in which it is employed in Sections 37(2), 37(2A) and 37(2B).
10. 'Entertainment' is one of those words in the English language possessing a bewildering variety of meanings and usages attached to them. At one end of the scale of meanings we have entertainment of relatives, friends or guests, which is purely dictated by a sense of liberal humanism. At the other end of the scale we have entertainment, which is an attribute of conspicuous consumption. While entertainment of any description is only meant to entertain, there may be mixed motives in the minds of people, according as they are at the expenditure end of the entertainment or at the receiving end of the entertainment. In the general context of Section 37 which is a computation provision for arriving at taxable business profits, entertainment which is the focus of discussion under Sub-sections (2), (2A) and 2(B), can only be entertainment with a business perspective. This, at once, excludes entertainment which proceeds from an effulgence of domestic or personal hospitality. This is not to say that entertainment expenditure, as an item of business outgoing, should be absolutely impersonal or bereft of any human touch. The only implication is that entertainmentfalling within Section 37(2A) must have a business to grind, such that, if there were no business, there would be no entertainment either. This is to be contrasted with entertainment expenditure which is non-business expenditure where the mainspring or dictates the expenditure are pure and simple personal hospitality. Such hospitality expenditure does not enter into the field of discussion at all under Section 37(2A). But, where it is entertainment purchased or provided at his expense by an assessee for the purposes of his business, it would fall within the section, where the entertainment is regarded as a felt necessity of the particular business concerned, or is merely the manifestation of business expediency or is a reflection of the contemporary modes or ethics of the business community, the motives or impulses of the assessee of the kinds mentioned would not make any difference to the expenditure being regarded as entertainment expenditure within the meaning of Section 37(2A) of the Act.
11. In the present case, the Tribunal had very clearly recorded a finding that the expenses incurred by the assessee in meeting the bills payable to the various clubs in Madras City were necessitated by the needs and exigencies of the assessee's business which was that of a canvasser for cargo and passengers for ships. In the words of the Tribunal, it was almost obligatory on the part of the partners of the assessee-firm to maintain contacts and relationship with their customers and constituents, on the one hand, and the crew of the ships, on the other, and maintain extensive social contacts. These findings, undoubtedly, show that the impelling urge for the entertainment was either business necessity or business expediency. Indeed, this was the reason why the Tribunal held that it was an item of business expenditure. The question, however, is whether calling entertainment expenditure as a necessary or expedient expenditure renders the expenditure any the less entertainment expenditure. The error of the Tribunal in our judgment, lay in thinking that expenditure for providing food, refreshment and the like to the customers and constituents and the crew of the ships by taking them to clubs with a view to maintaining social contacts and building up the business is not entertainment expenditure. It seems to us that the very essence of entertainment expenditure is the purveying of food, refreshment, etc., to the entertainees, especially in clubs and other public places. If the whole scheme of this expenditure is to further the business of the entertainer, the intention behind the expenditure as well as the nature of the expenditure combine to stamp the outgoings as entertainment expenditure in the manner comprehended by the provisions of Section 37(2A) of the Act. It is impossible for us to accept the contrary conclusion of the Tribunal. Their conclusion is opposed to their own factual findings as to the nature andpurpose of the expenditure and the nature of the business in which the expenditure had been incurred.
12. Mr. S. V. Subramaniam, learned counsel for the assessee, contended that the Tribunal cannot be said to have misconstrued the statute or misapplied the provisions of Section 37(2A) when they sought to distinguish between entertainment expendituie allowable within certain limits under Section 37(2A) on the one hand and allowable business expenditure under Section 37(1) on the other. Learned counsel referred us to a recent decision of a Division Bench of this court, to which one of us was a party, in CIT v. Karuppuswamy Nadar & Sons : 120ITR140(Mad) . That was a case where a wholesale cloth dealer, carrying on business in Madurai, had claimed an allowance in his taxable profits of amounts spent towards supply of coffee, tea and soft drinks to his constituents coming from upcountry places. The Bench held that what the assessee in that case did was merely to extend the ordinary elementary business courtesy or civility of arranging for the clients to quench their thirst in a place which could not boast of a hospitable climate or weather for the better part of the year. In the course of their judgment, the Bench briefly referred to earlier cases on the subject rendered by other High Courts. Proceeding to express their own view of the provisions of 37(2A) the Bench observed that the applicability of the provision has got to be considered only in the light of the nature of the expenditure incurred by the assessee concerned. They added that no universal formula could be laid down for finding out what is expenditure in the nature of entertainment and what is not.
13. We, however, feel that it is possible to glean certain broad trends of principle from the reported decisions dealing with this subject, although no cut and dried formula can be evolved from any one of these decisions.
14. In Brij Raman Dass & Sons v. CIT : 104ITR541(All) , the Allahabad High Court held that where an assessee, who carried on business in Banarsi goods, incurred expenditure on the provision of tea, lassi, jalpen, etc., to the customers, he could not obtain a deduction for that expenditure in excess of the amounts specified in Section 37(2A) of the I.T, Act. Adverting in detail to the statutory provisions, the learned judges held that entertainment expenditure incurred upon customers would be an expenditure of a business nature and allowable as such, but subject to the limits provided for under Section 37(2A). In their judgment, every item of entertainment expenditure falling under Section 37(2A) must necessarily be an expenditure wholly and exclusively incurred for the purpose of the business, for, otherwise such an expenditure would not be allowable at all. According to the learned judges, Section 37(2A) is not an independent provision, but is in the nature of a proviso to Section 37(1).
15. The Gujarat High Court in CIT v. Paid Brothers & Co. Ltd. : 106ITR424(Guj) , had to deal with the case of an assessee running an oil mill and other businesses. The assessee was under an obligation to provide meals to its workers. Besides, as a custom of the trade, the assessee had to provide meals to the farmers who came to deliver cotton, groundnut, rice and pulses at the mill premises. According to the learned judges, the term 'entertainment', in the context of the I.T. Act and on its true construction and meaning, would include the acts or practice of receiving and entertaining strangers and friends in a very friendly, generous and liberal way. The learned judges proceeded to observe that if the act of entertaining was on a lavish or a grand scale involving wasteful expenditure, it would amount to entertainment, per se. The learned judges, however, excluded from the concept of entertainment expenditure under the I.T. Act, two categories of expenditure: (1) expenditure amounting to hospitality in favour or the assessee's workmen or staff as part of the express or implied conditions of their service ; and (2) expenditure incurred in acts of hospitality in favour of strangers and customers, as part and parcel of the express or implied terms and conditions of business contracts or on account of a custom in the trade. Looking at the facts of the particular case before them in the light of the above analysis, the learned judges held that the expenditure incurred by the assessee for providing meals to its staff and to its customers must be allowed in full, on the ground that it was not entertainment expenditure within the meaning of Section 37(2A).
16. A Full Bench of the Kerala High Court in CIT v. Veeriah Reddiar : 106ITR610(Ker) , held that amounts spent by an assessee in supplying cigarettes, coffee, meals and the like to its customers would fall within the description of 'expenditure' in the nature of 'entertainment expenditure', under Section 37(2A) of the Act. The Full Bench expressly dissented from the decision of the Gujarat High Court in CIT v. Patel Brothers & Co. Ltd. : 106ITR424(Guj) . In the course of their judgment the learned judges laid down that the expression 'entertainment' occurring in Section 37 must be taken to mean hospitality of any kind and would include expenditure incurred by the assessee on the supply of cigarettes, coffee, etc., to its customers. They repelled the argument that only hospitality extended on a lavish or grand scale would amount to entertainment within the meaning of the statute. They particularly relied on the words 'in the nature of entertainment expenditure' to lay down that it is enough for the purpose of the taxing statute that the expenditure in question partakes of the main, if not all, characteristics of entertainment expenditure. They finally expressed their agreement with the judgment of the Allahabad High Court in Brij Raman Dass & Sons v. CIT : 104ITR541(All) .
17. The Punjab High Court dealt with the matter in a different fashion on CIT v. Gheru Lal Bal Chand  111 ITR 134. The case before that court appertained to a firm carrying on business in commission agency, earning income by way of commission on foodgrains, cotton seeds and other commodities. The firm carried on business in three places and in each of these places it maintained a kitchen for preparing and serving meals to its constituents. The expenditure incurred in running the kitchens was held, by the ITO to be entertainment expenditure and dealt with as such in the assessment of that firm in accordance with the provisions of Section 37(2A) of the Act. The appellate authorities did not accept the basis of the allowance and directed the entire expenditure to be allowed as a deduction. On a reference by the Commissioner, the Punjab High Court held that the words in Section 37(2A) 'expenditure in the nature of entertainment expenditure' are words of the widest import and include any expenditure which may be similar to entertainment expenditure although it may not strictly fall within the meaning of that expression. While the learned judges accepted the position that the assessee in that case had spent the amount for providing food for the customers and farmers who brought agricultural produce to the assessee's place of business, nevertheless, they held that the kitchen expenses incurred by the assessee would fall within the meaning of the expression in Section 37(2A). In the course of their judgment, the learned judges observed that in understanding the expression 'entertainment' occurring in the section, the court has to construe its meaning in the context and background in which the Legislature employed it. The learned judges expressed the view that the construction of this expression should be such as to avoid uncertainty in meaning. As an illustration they pointed out that something which may be regarded as an ordinary meal by a fastidious person may really be regarded as a lavish meal by a common man.
18. The last of the cases on this subject, apart from the decision of the Division Bench of this court, to which we have earlier alluded is that of the Nagpur Bench of the Bombay High Court in CIT v. Shah Nctnji Nagsi : 116ITR292(Bom) . In that case, an assessee trading in grains and pulses (claimed) a deduction in respect of Rs. 7,021 as expenditure incurred for providing tea and pan to its customers. The question before the Nagpur Bench was whether the expenditure fell to be considered under Section 37(2B) of the Act. Holding that the entire expenditure had to be allowed under the general provisions of Section 37(1) of the Act, the learned judges expressed their agreement with the view of the Gujarat High Court in CIT v. Patel Brothers & Co. Ltd. : 106ITR424(Guj) . The learned judges observed that anybody having a general idea of the business carried on by the assessee in that case, which was described as pakki adat must be aware that it was an essential condition of that business, if not expressed, in any event, necessarily implied, to provide messing and lodging to constituents who came from outside only for a duration of a day or two for the purpose of business, and since this was an essential part of the business, it could not partake of the nature of hospitality or entertainment. According to the learned judges, the facts in the case before them, satisfied the tests laid down by the Gujarat High Court.
19. We have already referred to the facts of the case which figured in the decision of this court in CIT v. Karuppuswamy Nadar & Sons : 120ITR140(Mad) . We had also summed up the basis of this court's decision in that case. We may further observe that the decisions of the other High Courts which we have noticed in the foregoing paragraphs were referred to by this court in Karuppuswamy Nadar's case with the prefatory observation that the line-up of these cases showed a marked difference of opinion between the Gujarat and Bombay High Courts, on the one hand and the Kerala, Punjab and Allahabad - High Courts on the other. No attempt, however, was made to discover a synthesis of the decisions. We, however, consider that it would be in the interest of tax administration that the question of 'entertainment expenditure' under the Act should be rested on some principle which, of course, must necessarily be extracted from the statutory provisions themselves in the light of the various sections already rendered in that regard. We believe that some guidelines at least, if not high principle, can be. brought out from the web of case law, by attempting synthesis of the seemingly opposite view points expressed on the subject by the different courts. Starting from the position that the idea of entertainment includes hospitality, with or without amusement, and proceeding to the recognition that entertainment in the context of I.T. Act, must perforce be business-orientated, we must hold that hospitality of a purely personal or non-business nature is entirely excluded not only from Section 37(2A) but also from Section 37(1) altogether. Where, however, the expenditure in question has been incurred wholly and exclusively for the purpose of the assessee's business, the question remains as to what would amount to entertainment. The Gujarat High Court and the Nagpur Bench of the Bombay High Court have held that only acts of hospitality which can be regarded as having been woven into the terms of business contracts, can be regarded as per se. entertainment expenditure. The other High Courts were not prepared to draw the line in that way so as to excjude other kinds of entertainment expenditure, which may also be business orientated, notwithstanding that they may not have been incurred as part of an express or implied term in the commercial contracts. It seems to us that the true test would be to find out two things: (1) whether the expenditure is incurred wholly and exclusively for the purpose of business, and (2) whether the expenditure is of a kind which can properly be regarded as entertainment, whether the nature, the form and the other aspects of the entertainment are conditioned by the terms of any business contract or otherwise. Where, however, the expenditure on hospitality of a commercial character is a necessary concomitant of the business itself, the expenditure cannot be regarded as entertainment expenditure, but must be treated only as an element of cost, tending to swell the cost of goods and services produced or purchased by the assessee in the course of his business for being subsequently turned over at a profit, if possible. To take an illustrative example, in a case where an assessee runs a hotel and meets his customers in his office which is attached to the hotel and offers them food and drink while engaged in business discussion, the expenditure therein involved can hardly be regarded as being in the nature of entertainment expenditure, since it is expenditure incurred in the very carrying on or the carrying out of the hotel business and not as a distinct exercise in commercial hospitality either for attracting or for maintaining the custom and the clientele. It is only in the sense expressed last, that we understand the principle behind the earlier decision of this court in CIT v. Karuppuswamy Nadar & Sons : 120ITR140(Mad) .
20. On the clear findings of the Tribunal in the present case, however, we cannot hold that the expenditure incurred by the assessee can at all be regarded as an outgoing, adding to the element of cost nor can it be regarded as necessary for the carrying on or carrying out of the assessee's business. Given the Tribunal's finding to the effect that the expenses were incurred out of business needs and business exigencies and considering that the very nature of the expenditure partakes of the character of business diplomacy, we hold that the Tribunal was in error in holding in this case that the expenditure incurred by the assessee-firm in standing food and drinks to members of the ship crew and other constituents and customers is not entertainment expenditure within the meaning of Section 37(2A) of the I.T. Act, 1961.
21. We, accordingly, answer the question referred to us in the negative and against the assessee. The Commissioner of Income-tax will have his costs from the assessee. Counsel fee is fixed at Rs 500 (rupees five hundred only).