H.N Seth, J.:— The Income-tax Appellate Tribunal, Allahabad Bench, has, at the instance of the assessee, M/s. Brijraman Das & Sons, Varanasi, stated the case and has referred the following question in respect of assessment year 1970-71, for the opinion of this court:
“Whether, on the facts and in the circumstances of the case, the disallowance of Rs. 15,680 was justified under section 37(2A) of the Income-tax Act, 1961, and further whether the expenses on Ganeshji ki Puja amounting to Rs. 958 could also be disallowed under section 37(1) of the Act itself?”
2. The assessee is a registered firm dealing in Banarsi goods under the name and style of M/s. Brijraman Das & Sons at Sakshi Vinayak, Varanasi. The accounting year of the assessee ended on Diwali Sambat 2026 corresponding to 8th November, 1969. During the previous year relevant for the assessment year 1970-71, the assessee claimed deduction of business expenses amounting to Rs. 94,665. This claim included the expenditure of Rs. 20,680 made up of the following items:
Rs.
(1) Ganeshji ki Puja
958
(2) Rickshaw, etc., for customers (Rs. 4,620): only ¼th taken in view of the assessee's explanation
1,155
(3) Festival allowance to staff
1,276
(4) Entertainment of jalpan, etc., to customers
17,118
(5) Deepawali sweetmeats
135
(6) Glasses for drinking water to customers
38
Total
20,680
3. The ITO treated the aforementioned expenditures as part of the assessee's expenditure incurred;in furtherance of his business activities. He, however, came to the conclusion that these expenditures partook the nature of entertainment expenditure within the meaning of s. 37(2A) of the I.T Act and as such only a deduction of a sum of Rs. 5,000 could, on that account, be allowed. In the result from out of the aforementioned expenditure, he disallowed a sum of Rs. 15,680 and directed the same to be added to the assessee's income. The assessee then questioned this part of the assessment order by way of appeal before the AAC. The appellate authority, vide its order dated 1st of October, 1971, upheld the order of the ITO adding the sum of Rs. 15,680 to the assessee's income. It observed that there was no warrant for placing a narrow construction on the term “entertainment expenditure” contemplated by s. 37(2A) of the I.T Act as suggested by the assessee. Considering the true import of the nature of expenditure that could be described as entertainment expenditure, it held that the expenditures on rickshaws, etc., for customers, festival allowance to staff, jalpan, etc., for customers, deepawali sweetmeats and glasses for drinking water to customers could be treated as entertainment expenditure and as such the ITO was justified in concluding that from out of the expenditures on aforementioned five items, only a deduction of Rs. 5,000 could be given as provided in s. 37(2A) of the I.T Act. So far as the expenditure of Rs. 958 on Ganeshji ki Puja was concerned, it was not an expenditure laid out wholly and exclusively for the purposes of the assessee's business, and as such the same could not be allowed as deduction. The appellate authority, therefore, concluded that the ITO was justified in allowing only a sum of Rs. 5,000 as permissible deduction in expenses from out of the sum of Rs. 20,680 claimed by the assessee under the aforementioned heads and that the addition of Rs. 15,680 to the assessee's income was justified. Thereafter, the assessee went up in appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal affirmed the decision of the AAC and ruled that an amount of Rs. 958 claimed to have been spent by the assessee on Ganeshji ki Puja was not allowable as an expenditure laid out wholly for carrying on its business as provided in s. 37(2A) of the I.T Act. The remaining expenditure claimed by the assessee were in the nature of entertainment expenditure and as such only a sum of Rs. 5,000 could in respect thereof be allowed under s. 37(2A) of the I.T Act. Thereafter the assessee made an application to the Income-tax Appellate Tribunal which stated the case and has referred the aforementioned question of law for the opinion of this court. In so far as the disallowance of the expenditure amounting to Rs. 958 incurred by the assessee for Ganeshji ki Puja is concerned, the assessee had explained that it was a customary expenditure incurred by the Hindus. The ITO did not reject the aforementioned explanation of the assessee. He seems to have accepted that the said expenditure was a business expenditure by the assessee but as in his opinion it fell within the ambit of the expression “entertainment expenses” contemplated by s. 37(2A), a sum of Rs. 5,000 alone could be allowed from out of all the expenses, including the expenses on Ganeshji ki Puja, that could properly be described as entertainment expenses. The AAC also accepted the assessee's explanation that the said expenditure was a customary expenditure by Hindus but concluded that it was in the nature of personal expenditure of the assessee which had not been laid out wholly and exclusively for purposes of business and, as such, no deduction in respect thereof could be allowed treating it as business expenditure. The Appellate Tribunal merely stated that it agreed with the AAC that the said amount was not allowable as a deduction under s. 37(1) itself.
4. In our opinion, both the AAC and the Income-tax Appellate Tribunal misconstrued the explanation given by the assessee and were wrong in holding that the expenditure incurred by the assessee on Ganeshji ki Puja was a personal expenditure. The statement of the assessee that expenditure on Ganeshji ki Puja was in the nature of customary expenditure incurred by the Hindus, in the context, obviously meant that it was customary for the Hindu traders, like it, to perform Ganeshji ki Puja in connection with their trade and as such the expenditure laid out in connection therewith was a trade expenditure. It is well known that the Hindu traders who keep their account from Diwali to Diwali, perform Ganeshji ki Puja in their business premises while opening new accounts. In these circumstances, it would not be correct to say that the expenditure incurred by the assessee over Ganeshji ki Puja was not connected with its trade and was its personal expenditure like the expenditure incurred by its partner in performing other worship at his own house for personal solace. As would be evident from Chaturvedi and Pithisaria's Income Tax Law, 2nd edn., vol. 1, p. 828, the Board of Direct Taxes issued a Circular No. 17 of 1943, dated 6th of May, 1943, which ran thus:
“It has been represented to the Board that customary payments in respect of Deepawali (or Diwali) and Mahurat (i.e, the auspicious day of starting new accounts) which long usage and custom have made it obligatory for a business to incur, should be allowed as a deduction in computing the income under sections 10 and 12 of the Income-tax Act. The Board understands that such expenses are generally of the nature of advertisement with a view to securing new business and that though varying according to the nature and extent of the business, the maximum expenditure is about Rs. 200 on Diwali or Mahurat. The Board consider that since these expenses are not of a personal, social or religious nature but are in the interest of the business, and are laid out or expended wholly and exclusively for the purposes of the business, they should be allowed as business expenditure provided that the expenditure in question does not exceed the maximum amounts specified above.”
5. The Board thereafter by means of a letter dated 30th of October, 1968, clarified the question further by stating that as the expenses incurred on the occasion of Diwali and Mahurat are in the nature of business expenditure, it had been decided not to lay down any monetary limits for the purpose of their allowance in the income-tax assessments subject to the ITO being satisfied that the expenses were admissible as a deduction under the law and were not expenses of a personal, social or religious nature. It is thus obvious that Ganeshji ki Puja expenses which are incurred by Hindu traders in a customary way at the time of Mahurat or opening of their account books on the auspicious occasion of Diwali are to be treated as expenditures laid out wholly and exclusively for the purposes of the assessee's business. As pointed out by the Board such expenses are incurred in the interest of the business. We are accordingly of the opinion that both the AAC and the Income-tax Appellate Tribunal went wrong in holding that the sum of Rs. 958 spent by the assessee on Ganeshji ki Puja in the assessment year in question was an expenditure of a nature unconnected with the petitioner's business. Correctly interpreting the explanation given by the assessee, the said expenditure had to be considered as an expenditure incurred wholly and exclusively for the purposes of the assessee's business and as such it was an expenditure which was allowable under s. 37(1) of the I.T Act. It may, at this stage, be pointed out that neither the AAC nor the Income-tax Appellate Tribunal have considered this part of the expenditure as an expenditure partaking the nature of an entertainment expenditure as contemplated by s. 37(2A) of the I.T Act and no question of considering whether any part of this expenditure, in conjunction with other expenditure which may be described as entertainment expenditure, being disallowed under s, 37(2A), arises.
6. We now proceed to consider whether any portion of the remaining expenditure claimed by the assessee under the heads, already mentioned above, can be disallowed under the provisions of s. 37(2A) of the I.T Act. Before any portion of a business expenditure can be disallowed under s. 37(2A), it has to be shown that it is in the nature of entertainment expenditure. In the case of Brij Raman Dass & Sons v. Commissioner Of Income-Tax, Lucknow., [1976] 104 ITR 541, a Division Bench of this court pointed out that the word “entertainment” had different meanings for purposes of different Acts. In the I.T Act, the said word had not been defined and it would have to be given its general meaning. It opined that for the purposes of the I.T Act “entertainment expenditure” would include all expenditure incurred in connection with the business on the entertainment of customers and constituents. Such entertainment may consist of providing refreshment to customers or in providing some other sort of entertainment to them. When a similar question, viz., whether messing expenses incurred by the assessee for its constituents could be considered to be entertainment expenditure came up before another Division Bench of this court in the case of Commissioner Of Income-Tax, Lucknow v. Manoo Ram Ram Karan Dass, [1979] 116 ITR 606, the Bench approved and followed the decision in Brij Raman Dass & Sons' case, [1976] 104 ITR 541 (All). When its attention was invited to a decision of the Gujarat High Court in the case of CIT v. Patel Brothers & Co. Ltd., [1977] 106 ITR 424, as also to that of the Bombay High Court in the case of CIT v. Shah Nanji Nagsi, [1979] 116 ITR 292, wherein it has been held that in certain circumstances the expenditure incurred by a trader on the messing of his constituents could not be considered to be entertainment expenditure, contemplated by s. 37(2A) of the Act. The court observed that a Full Bench of the Kerala High Court had in the case of CIT v. Veeriah Reddiar, [1977] 106 ITR 610, approved the decision of this court in the case of Brij Raman Dass & Sons v. Commissioner Of Income-Tax, Lucknow., [1976] 104 ITR 541, and that the said decision of this court was binding on it. It accordingly decided the case in accordance with the decision of this court in Brij Raman Dass & Sons' case and held that the amount spent by the assessee on the messing of its constituents could not be treated as entertainment expenditure.
7. The question again came up for consideration before a Division Bench of this court in the case of CIT v. Kunji Lal Dhanpat Rai, [1979] 116 ITR 608. This court again refused to follow the decision of the Gujarat High Court in the case of CIT v. Patel Brothers & Co. Ltd., [1977] 106 ITR 424, and preferred to follow its earlier decision in the case of Brij Raman Dass & Sons, [1976] 104 ITR 541 (All).
8. In the case of CIT v. Bagraj and Company, [1979] 117 ITR 694 (All) the question that arose for consideration before a Division Bench of this court was as to whether the expenditure incurred in respect of food supplied to low paid employees of the assessee-firm could be treated as an entertainment expenditure under s. 37(2A). This court ruled that such an expenditure did not fall within the purview of entertainment expenditure under s. 37(2A) of the I.T Act.
9. Again after considering the earlier case law, this court, in the case of Commissioner Of Income-Tax, Lucknow v. Manoo Ram Ram Karan Dass, [1979] 116 ITR 606 (All), took the view that any amount spent by a trader on the messing of its constituents is undoubtedly an entertainment expenditure which fell within the purview of s. 37(2A) of the I.T Act.
10. It thus appears that notwithstanding the view taken by other courts. Division Benches of this court have stuck to the view that any expenditure incurred by a trader in providing, in connection with his business. refreshment or any other type of entertainment to its customers, qualifies as entertainment expenditure for the purposes of s. 37(2A). Any expenditure in providing messing to the low paid employees of the trader, however, does not qualify as entertainment expenditure under s. 37(2A) of the Act.
11. During the course of hearing learned counsel for the assessee relied upon the decisions of the Bombay, Karnataka, Madras, Madhya Pradesh and Andhra Pradesh High Courts in the cases of CIT v. Devkaran Nanjee Insurance Co. Ltd., [1977] 110 ITR 815 (Bom), CIT v. Corporation Bank Ltd., [1979] 117 ITR 271 (Kar), Addl. CIT v. Bangalore Turf Club Ltd., [1980] 126 ITR 430 (Kar), CIT v. Karuppusmamy Nadar & Sons, [1979] 120 ITR 140 (Mad), South India Viscose Ltd. v. CIT, [1982] 135 ITR 206 (Mad), CIT v. Lakhmi-chand Muchhal, [1982] 134 ITR 234 (MP) and Addl. CIT v. Maddi Venkataratnam & Co. Ltd., [1979] 119 ITR 514 (AP), wherein a view which is not wholly consistent with the view followed in this court regarding as to what constitutes entertainment expenditure within the meaning of the expression as used in s. 37(2A) of the I.T Act, has been taken. Be that as it may, we are bound by the consistent view taken by this court on this question. We would, therefore, follow the same view and it is not necessary for us to discuss the propositions laid down by various High Courts in the aforementioned cases.
12. As already stated, the view enunciated by this court in the case of Brij Raman Dass & Sons, [1976] 104 ITR 541, and followed in subsequent cases is that in order to qualify as an entertainment expenditure within the meaning of s. 37(2A) of the I.T Act, the expenditure incurred by the assessee in relation to his business must be in connection with the entertainment of his customers and constituents and that an expenditure incurred on the messing or fooding of such customers or constituents, qualifies as such expenditure.
13. We now proceed to consider as to whether the various items of expenditure other than that relating to Ganeshji ki Puja (the item which has already been discussed by us) can, for purposes of s. 37(2A) of the I.T Act, be treated as expenditure on entertainment of customers or constituents.
14. Item No. 2 is an expenditure amounting to Rs. 1,155 said to have been incurred by the assessee in connection with the transportation of its customers. Transporting of customers can hardly be described as providing entertainment to them. We are accordingly of the opinion that the expenditure of Rs. 1,155 in item No. 2 cannot be described as an entertainment expenditure.
15. So far as items Nos. 3 and 5 are concerned (festival allowance to staff Rs. 1,276 and Deepawali sweetmeats Rs. 135) the case of the assessee, which seems to have been accepted by all the I.T authorities, was that these were customary trade expenditure of the assessee. Festival allowance paid to the staff can, by no stretch of imagination, be described as money spent on the entertainment of assessee's customers or constituents. There is nothing on the record to show that a sum of Rs. 135 in respect of Diwali sweetmeats had been spent in feeding the customers. It appears that this expenditure was also incurred in connection with the distribution of sweetmeats amongst members of the assessee's staff after the pujan of Bahis on Diwali day. Be that as it may, there was absolutely no material before the I.T authorities to show that the expenditure of Rs. 135 under the head “Deepawali sweetmeats” had anything to do with the entertainment of the assessee's customers. We are accordingly of opinion that items Nos. 3 and 5, namely, festival allowance to staff amounting to Rs. 1,276 and the expenditure incurred in distributing Deepawali sweetmeats amounting to Rs. 135 do not, for purposes of s. 37(2A) of the Act, constitute assessee's entertainment expenditure.
16. Item No. 4, namely, a sum of Rs. 17,118 said to have been spent by the assessee on jalpan, etc., of its customers and a sum of Rs. 38 said to have been spent by it for purchasing glasses for providing drinking water to the customers are expenses of similar nature and they fall in the same category. According to the view of this court, expenditure incurred by the assessee over providing refreshments, etc., to its constituents or customers qualifies as entertainment expenditure within the meaning of s. 37(2A) of the I.T Act. Obviously, the amount spent in purchasing articles in which the refreshment, etc., is to be provided to the customers would partake of the nature of refreshment expenditure themselves. We are, accordingly of opinion that Rs. 17,118 mentioned at item No. 4 and Rs. 38 mentioned at item No. 6 have to, for purposes of s. 37(2A) of the I.T Act, be treated as entertainment expenditure and that from out of these two amounts, the petitioner would, in conjunction with any other amount that may qualify as entertainment expenditure, be entitled to a deduction of Rs. 5,000 as business expenditure. Net result of the aforesaid discussion is that from out of various amounts mentioned above, the assessee was entitled to a deduction in respect of the following amounts:
(i)
Rs. 958
Ganeshji ki Puja
(disallowed as personal expenditure)
(ii)
Rs. 1,155
Rickshaw, etc., for customers
only a sum of Rs. 5,000 from out of these allowed as entertainment expenditure.
(iii)
Rs. 1,276
Festival allowance to staff, and
(iv)
Rs. 135
Deepawali sweetmeats.
Total
Rs. 3,524
as business expenditure under s. 37(1) of the I.T Act and that no portion of the same can be added back to the assessee's income. From out of total expentiture of Rs. 17,118 spent by the assessee on jalpan, etc., on its customers and Rs. 38 spent for purchasing glasses, etc., for providing drinking water to customers (total Rs. 17,156) the assessee is entitled to claim a deduction of Rs. 5,000 as entertainment expenses. From out of this amount, only a sum of Rs. 12,156 could be added back to the assessee's income.
17. In the result, we answer the question referred to us as follows:
On the fact and circumstances of this case, disallowance of Rs. 15,680 was not justified under s. 37(2A) of the I.T Act, 1961. In this regard only a sum of Rs. 12,156 could have been disallowed. Further, the expenses on Ganeshji ki Puja amounting to Rs. 958 could not be disallowed under s. 37(1) of the Act.
18. In view of partial success of both the parties, we direct them to bear their own costs.