1. The following question has been referred by the Appellate Tribunal under Section 256(1) of the I.T. Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the sum of Rs. 12,495 under Section 37(1) of the Income-tax Act, 1961, by holding that it is not an entertainment expenditure under Section 37(2B) ?'
2. The assessee is a registered firm carrying on business in cloth on wholesale basis. The firm filed a return declaring an income of Rs. 1,45,730. The ITO found that under the item of miscellaneous expenses, there was a sum of Rs. 12,495 which had been spent on the supply of coffee, tea, etc., to the customers. In the ITO's view, this constituted entertainment expenditure and, therefore, disallowable under Section 37(2B), The AAC, on appeal, upheld this order. The Tribunal on further appeal held that the expenditure incurred was an obligatory one due to the exigencies of the business and it cannot be described as an expenditure in the nature of entertainment expenditure. It, therefore, directed allowance of the amount and that is how this matter came before this court under reference.
3. Section 37(2B) which was in force in the relevant year, namely, assessment year 1971-72, ran as follows:
'Notwithstanding anything contained in this Section (section 37), 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.'
4. This provision was removed with effect from 1st April, 1977, by the Finance Act of 1976. The learned counsel for the CIT contended that this provision has been drafted in the widest possible terms and that it required disallowance of any expenditure in the nature of entertainment expenditure like the one here incurred by the assessee. He cited also various decisions in support of his contention.
5. We find that there is difference of opinion between the Gujarat High Court and the Bombay High Court on the one hand and the Kerala, Allahabad and the Punjab High Courts on the other. The Gujarat decision is CIT v. Paid Brothers & Co. Ltd. : 106ITR424(Guj) . In that case, in the course of the assessee's business, it had to deal with the farmers who deliver goods such as cotton, groundnut, etc. The assessee claimed that it was customary, and out of commercial expediency it was necessary, to provide meals to the farmer-customers. The assessee claimed the expenditure incurred in running a kitchen for this purpose. The expenditure was disallowed by the ITO, but on appeal, the AAC and the Tribunal accepted the assessee's claim and the matter was, therefore, brought before the Gujarat High Court. It was held, after referring to the meaning of the term 'entertainment' in the various legal dictionaries, that the meaning of the term was to receive and treat with hospitality, which broadly meansreceiving and entertaining guests in a friendly, generous and liberal way. It was observed at page 434 thus :
'The term 'entertainment' in the context of Section 37(2A) and (2B) of the Income-tax Act, 1961, 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 acts 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 the persons entertained, whether they may be employees, workmen or officers, servants or agents in the service of an assesseee, 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 the express or implied terms 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.....Hospitalityshown 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.'
6. The Kerala High Court considered this question in CIT v. Veeriah Reddiar : 106ITR610(Ker) . The assessee was carrying on business in piece goods on wholesale and retail basis in Alleppey and two other places. In his books were found entries for expenses incurred in supplying to its customers cigarettes, coffee and sometimes meals. The ITO disallowed this expenditure and the matter came on reference to the High Court at the instance of the CIT as the Tribunal had allowed the expenditure. The decision of the Gujarat High Court was considered, but dissented from. Reference was made to an earlier decision of the Allahabad High Court in Brij Raman Dass & Sons v. CIT : 104ITR541(All) , wherein the Allahabad High Court had held that the expenses incurred by an assessee for providing refreshments to customers fell within the scope of the bar enacted in Section 37. In the Allahabad case also the expenditure had beenincurred in providing tea, lassi, jalpan, etc., to the customers. The Full Bench of the Kerala High Court followed this decision in holding that the entertainment expenditure would include all expenditure incurred in connection with business on the entertainment of customers and constituents and that entertainment of customers may consist of providing refreshments or it may consist of providing some other sort of entertainment.
7. In CIT v. Gheru Lal Bal Chand  111 ITR 134 . the expenditure incurred in the maintenance of a kitchen at the three places of business in which the assessee carried on business for the purpose of serving meals to the constituents was held to be entertainment expenditure. In taking this view, the Punjab and Haryana High Court followed the decision in Brij Raman Dass and Sons v. CIT : 104ITR541(All) and dissented from CIT v. Patel Brothers and Co. Ltd. : 106ITR424(Guj) .
8. The Bombay High Court in CIT v. Shah Nanji Nagsi : 116ITR292(Bom) considered the claim for deduction of expenditure on meals in a mess run by the assessee for the benefit of the customers. The business of the assessee was in pakki adat and many adatyas came and dwelt with the assessee. The Bombay High Court followed the decision of the Gujarat High Court and dissented from the decisions of the Kerala and Allahabad High Courts. In the course of the judgment, at page 296, it was observed :
'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 of tea and pan to them is actually an essential part of business and does not partake the nature of hospitality or entertainment.'
9. The question has to be considered in the light of the nature of the expenditure incurred by the assessee. There is no universal formula for finding out as to what is the expenditure in the nature of entertainment or what is not such an expenditure. The very concept of entertainment would rule out cases of business or commercial courtesy extended to clients who visit the businessmen for the purpose of doing business. Entertainment postulates that it is some seeking after pleasure, and cannot comprehend customary hospitalities shown to persons who come to do business. This running after pleasure may be indicated in cases where a lavish party is given in a posh hotel even to the clientele. But the ordinary elementary extension of business courtesy or civility to visiting clients by allowing them to quench their thirst, as in this case, cannot be understood as expenditure in the nature of entertainment. Anybody having any idea of awholesaler in a district headquarter would have come across cases where the clientele come for the purpose of purchase of goods from upcountry places and when they come to do business, they have necessarily to be offered soft drinks, coffee, tea, etc., to quench their thirst especially in a place like Madurai which cannot boast of a comfortable weather for most part of the year. We are in agreement with the decision of the Gujarat and Bombay High Courts.
10. In the circumstances of the case, we are satisfied that the assessee's claim is fully justified and was rightly accepted by the Tribunal. It would be a misnomer to call coffee or tea as items of entertainment. The question is, accordingly, answered in the affirmative and in favour of the assessee. The assessee will be entitled to costs. Counsel's fee Rs. 500.