Divan, C.J. - In this case, at the instance of the Revenue the following question has been referred to us for our opinion :

"Whether on the facts and in the circumstances of the case, the sum of Rs. 38,229/- spent by the assessee on guests could be allowed either under S. 37 (2) or under S. 37 (3) of the Income-tax Act, 1961"

2. The facts leading to this reference are as follows :

We are concerned with the assessment year 1967-68. The assessee is a private limited company. It claimed two amounts namely Rs. 22,098/- and Rs. 45,539/- by way of entertainment expenses and guest expenses respectively. Going into the details of these expenses, the Income-tax Officer found that the actual entertainment expenditure incurred for the customers was only Rs. 5,527/- and the balance represented various other expenses. The details of guest expenses of Rs. 45,539/- included, apart from expenses, that is, salaries etc., a sum of Rs. 38,229/-under the head food etc, expenses. The Income-tax Officer treated the sums of Rs. 5,527/- and Rs. 38,229/- as coming under the head of entertainment expenditure and limited this expenditure to Rs. 5,000/- and disallowed a sum of Rs. 38,756/-. The assessee claimed before the Income-tax, Officer that the guest expenses were in the nature of providing lodging and boarding for foreign customers and representatives who came and stayed with the assessee for effecting purchases of tobacco. The assessee had maintained two guest houses, one at Chilakaluripet and another at Guntur. These guest houses were intended only for the foreign buyers who came to inspect the tobacco which was exported. During the year the assessee had received three guests from London two from Japan, two from Egypt and two from East Germany. It was claimed by the assessee that this was business promotion expenditure necessary for the business and did not constitute entertainment. The Income-tax Officer, as stated above, disallowed the sum of Rs. 38,756/-. He held that the parties, and other forms of entertainment were purely voluntary and ex-gratia. The assessee took the matter in appeal and the Appellate Assistant Commissioner found that out of the disallowed allowance made by the Income-tax Officer only Rs. 527/- was properly disallowed. But there was no justification for disallowing any amount out of the claim of Rs. 38,229/- which represented the boarding and lodging expenses of foreign representatives. The Appellate Assistant Commissioner held that it was neither entertainment expenditure nor expenditure on the maintenance of the guest houses and did not fall under S. 37 (2) or S. 37(3) and this amount could not be disallowed. The expenditure on boarding and lodging of foreign representative was necessary for the business. Even if a part of it was on account of drinks etc., supplied to foreigners, it was not in the nature of entertainment.

3. Against the order of the Appellate Assistant Commissioner the Revenue carried the matter in appeal before the Income-tax Appellate Tribunal and there it was contended by the Revenue that even an item of expenditure incurred for business purposes if it amounts to entertainment expenses must be disallowed except to the extent permitted by law. The Tribunal analysed the decisions on the point and the word "Entertainment" as found in the dictionary and relevant decisions. It held, the word "entertainment" would include refreshment as also amusement. Having in view the purpose of the restriction introduced in S. 37 (2), the Tribunal held that where an item of expenditure was incurred for the necessary subsistence or living of a member of the staff or a visitor to the assessees business premises or constituents or business agent who had to be with the assessee for some time to enable the assessee time to enable the assessee to carry on his business properly, in respect of such as amount, it would not be proper to regard it as entertainment, but only as expenses for business purposes. The Tribunal, therefore, confirmed the order of the Appellate Assistant Commissioner. Thereafter, at the instance of the Revenue, the question hereinabove set out has been referred to us for our opinion.

4. Mr. Rama Rao, the learned Standing Counsel for the Income-tax Department relied upon certain observation of the Bombay High Court ACC-Vickers Babcock Ltd. vs. C.I.T. At page 337 of the report Tulzapurkar J., delivering the judgment of the Division Bench of the High Court has dealt with the question regarding entertainment expenditure. The question related to a sum of Rs. 36,446/- which was spent by the assessee at the time of the inagural function of the assessee-Companys Heavy Engineering at Durgapur at the hands of the then Chief Minister at West Bengal. The amount of Rs. 36,446/- comprised of Rs. 9,128/- and Rs. 27,318/-. The amount of Rs. 9,128/- represented hotel bills for lodging and boarding of quests in hotels and the remaining amount of Rs. 27,328/- represented catering charges of guests. The question was whether the expenditure totalling to Rs. 36,446/- was incurred by the assessee by way of entertainment expenditure. At page 338 Tulzapurkar, J., emphasised the non-obstante clause occurring in S. 37 (2) which says, notwithstanding anything contained in Sub-S. (1) of S. 37 no expenditure in the nature of entertainment expenditure shall be allowed beyond certain specified limit. He observed :

"In other words, notwithstanding the fact that the expenditure might have been laid out of expended wholly or exclusively for the purpose of business, if such expenditure is in the nature of "entertainment expenditure" the same is not to be allowed beyond the specified limit. On the face of it the two items of Rs. 9,128 and Rs. 27,318 were incurred by way of meeting hotel bills for lodging and boarding of guests in hostels and by way of meeting catering charges of guests which are clearly in the nature of entertainment and obviously under sub-S. (2) of S. 37 beyond the specified limit of Rs. 5,000/- no further deduction can be allowed to the assessee. In our view, therefore, the Tribunal was right in taking the view that the expenses of Rs. 36,446 were not allowable as a deduction in computing the profits of the business of the assessee-company. The second question is, therefore, answered in the negative and against the assessee."

It will be noticed that in the decision of the Bombay High Court the question as to what constitutes entertainment and when can a particular item of expenditure be said to amount to entertainment expenditure within the meaning of S. 37(2) was not analysed by the Bombay High Court. However, in Commissioner of Income Tax vs. Patel Brothers & Co. Ltd., Division Bench of Gujarat High court, of which I was a member, has analysed the whole concept of entertainment expenditure. Mehta, J., delivered the judgment of the Division Bench of the Gujarat High Court has observed, "It us difficult, therefore, to lay down hard and fast straight formula so as to answer verious contingenies arising from time to time as to what expenses would be classes as entertainment expenses in the present context of the Income-tax Act, where no scheme as one we find in S. 15 of the Finance Act of 1965 of United Kingdom is to be found. We think what it would be over simplification of the problem to accept the broad submission made on behalf of either of the parties. We do not think that we would be justified in laying down any formula so as to provide ready made answer to this problem; but in the context of legislative intent evinced from the gradual evolution present provisions contained is S. 37(2A) and (2B), we venture to indicate a few broad tests so as to facilitate a tax-prater to understand and the Revenue to determine the nature of entertainment expenses, though in each case in the ultimate analysis it would be a question of fact depending on many factors, more particularly in absence of a well defined scheme in the Indian statute. 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 provisions of proof, drinks or any amusement to client, constituent or customer is on lavish extravagant scale, or is wasteful nature, it is entertainment per se.

(b) If the provision of food or drinks of 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.

(c) If the provision of food or drinks to client, customer or constituent is in 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 client, customer or constituent by way of hospitality or otherwise will always be entertainment."

In the instant case, expenses aggregating to Rs. 38,229/-were incurred by the assessee for putting up foreign visitors namely, people coming from London, Japan, Egypt and East Germany for the purposes of business of the Company. The Company was carrying on the business of exporting tobacco from Indian and these visitors had come to India to inspect tobacco which was exported. For the use of these visitors from abroad one guest and another was run at Guntur. It is obvious that in our opinion to earn money from business these foreign visitors had to be put up and reasonable facilities for their accommodation, food drink, etc., within reasonable limits had to be provided so that the Company can carry on its business of exporting tobacco from India. In these circumstance, the case of the present assessee would fall within categary (b) mentioned in the above passage from the judgment of the Gujarat High Court, provision of food, drinks to client, constituent or customer in the nature of bare necessity or by way of ordinary courtesy or as an express or implied term of contract. It is nobodys case that the guest houses were run on a lavish scale looking houses were run on a lavish scale looking particularly to the needs of customs from abroad. Hence the view taken by the Tribunal that the item of Rs. 38,229/- was by way of entertainment as the word "entertainment" is understood in the context of s. 37(2) of the Income-tax Act, was correct. The process of reasoning which appealed to the Tribunal is different from the reasoning which has appealed to us. We are in antire agreement with the reasoning of the Gujarat High Court in Commissioner of Income Tax vs. Patel Brother & Co. Ltd., and following the principles called out by the Gujarat High Court in that case, we hold in the instant case that the amount of Rs. 38,229/- spent by the assessee on their guests in an item of business expenditure which would fall under s. 37(1) of Act 1961. Since it is not entertainment expenditure it does not fall under S. 37(2) nor can it be said to have been spent by way of advertisement and it was expenditure incurred wholly and exclusively for the purpose of business of the assessee-Company and hence it would fall under S. 37(1) of the Act.

5. Before leaving this case we must observe that it has very often come to our notice that two departments of the Government of India seem to be pursuing contradictory policies. On the one had, there is a drive by the Government of India for encouraging exports and for encouraging industrial development. To that and all the State Governments are also exerting themselves to be utmost. On the other hand the attitude taken up by the department of direct taxes discourages any such drive for encouraging export and industrial development. It is high time that the two departments, one of direct taxes and the other of promotion of export and industries, should work in harmony and lay down policy decision which would work in harmony with each other. We are constrained to make this observation because of the conflicting interests of the two departments of the Government of India.

6. In these circumstances, we answer the question referred to us as follows :-

The amount of Rs. 38,229/- spent by the assessee on the allowed under S. 37(1) of the Income-tax Act, 1961. The question is, therefore, answered in favour of the assessee and against the Revenue. The Additional Commissioner of Income-tax will pay the costs of the assessee. Advocates fee Rs. 250/-.