Jeevan Reddy, J.:— Three questions are referred to us under s. 256(1) of the I.T Act by the Income-tax Appellate Tribunal, Hyderabad. They are:

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the assessee's claim for deduction of guest house expenses in terms of section 37(3) of the Income-tax Act, 1961, and rule 6C(3) of the Income-tax Rules, 1962, for the assessment years 1968-69 and 1969-70?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in not allowing the assessee's claim for deduction of the sum of Rs. 6,000 towards entertainment expenditure and Rs. 74,604 towards business promotion expenses for the assessment year 1968-69 and Rs. 1,69,280 for the assessment year 1969-70 under section 37(1) of the Income-tax Act, 1961, holding that the said amounts constituted entertainment expenditure not allowable in terms of section 37(2A) of the Act?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not an industrial company for the assessment year 1969-70 within the meaning of section 2(6)(c) of the Finance Act, 1969, and as such not entitled to the benefit of lower rate of tax?”

2. The assessee is a private limited company engaged in the export of tobacco and other commodities with its head office at Hyderabad and branches at Guntur, Cochin, Delhi and Calcutta. For the assessment years 1968-69 and 1969-70, the assessee claimed deduction of Rs. 1,34,578 and Rs. 2,06,227 respectively, on account of business promotion expenses. The amount of Rs. 1,34,578 claimed in 1968-69 comprised of three items, viz.:

Rs. (1) Entertainment expenditure 24,806 (2) Guest house maintenance expenditure 24,793 (3) Business promotion expenses 87,081

3. Promotion expenses claimed for the assessment year 1969-70 represented the expenditure on maintenance of guest house, expenditure on entertainment of foreign and other visitors, expenditure on air tickets and hotel accommodation, etc. The ITO held that the entire expenditure claimed for the assessment year 1968-69 was in the nature of entertainment expenditure and accordingly disallowed it in terms of s. 37 of the Act. He added back the entire amount of Rs. 1,34,578 in the assessment of that year. So far as the assessment year 1969-70 is concerned, the ITO allowed Rs. 36,947 on account of air tickets to foreign guests, subscription paid to Indian Institute of Foreign Trade, conveyance charges and petty cash expenses. The balance amount of Rs. 1,69,280 was held to be in the nature of entertainment expenditure and was accordingly disallowed under s. 37 of the Act. The assessee appealed. So far as the assessment year 1968-69 is concerned, the AAC allowed: (i) on account of business promotion expenses, a sum of Rs. 5,302 out of Rs. 38,302 spent at Guntur branch as normal business expenditure; the balance of Rs. 33,000 was held to be entertainment expenses; (ii) with respect to the Delhi branch, he allowed the entire amount claimed, viz., Rs. 27,451 minus Rs. 5,000 as business expenditure; he treated this sum of Rs. 5,000 as entertainment expenditure; (iii) with respect to Cochin branch, in respect of which Rs. 20,045 was claimed, he allowed only Rs. 2,000 as business expenditure and held the balance to be entertainment expenditure; (iv) so far as Calcutta branch is concerned, where an amount of Rs. 1,283 was claimed, he allowed it in entirety. The AAC affirmed the ITO's order in so far as he disallowed the expenses on maintenance of guest house. So far as the assessee's claim for deduction of “entertainment expenditure” of Rs. 24,806 is concerned, the AAC allowed the whole of it except Rs. 6,000 which was treated as entertainment expenditure.

4. For the assessment year 1969-70, the AAC affirmed the orders of the ITO allowing only Rs. 36,944 as business expenditure and disallowing the balance of Rs. 1,69,280, which was treated as entertainment expenditure. Against the orders of the AAC, three appeals were preferred before the Income-tax Appellate Tribunal—two appeals for the two assessment years by the assessee and one by the Department with respect to the assess ment year 1969-70. It would be appropriate to notice the findings of the Tribunal:

(1) The expenditure on maintenance of guest houses cannot be allowed for the reason that the assessee has not maintained the register as required by r. 6C(3) of the I.T Rules.

(2) For the assessment year 1968-69, out of a total amount of Rs. 87,081 claimed by the assessee as business promotion expenses, only an amount of Rs. 12,477 can be allowed, viz., (a) Rs. 2,100 paid towards market survey expenses; (b) Rs. 2,377 spent on conveyance; and (c) Rs. 8,000 on air tickets.

The rest was treated as entertainment expenditure.

So far as the claim of “entertainment expenses” in a sum of Rs. 24,806 for this year was concerned, the Tribunal affirmed the order of the AAC. In other words, the Tribunal held that only Rs. 18,806 was allowable as business expenditure and the balance of Rs. 6,000 had to be disallowed as entertainment expenditure.

(3) For the assessment year 1969-70, the Tribunal affirmed the AAC's finding, viz., that only an amount of Rs. 36,947 is allowable as business expenditure and the balance is to be disallowed as entertainment expenditure. (For this year, the assessee made no distinction between “entertainment expenditure” and “business promotion expenditure”—a distinction put forward for the previous assessment year 1969).

(4) The Tribunal held that the assessee cannot be held to be an “industrial company” for the assessment year 1969-70 for the reason that it cannot be said to be engaged in the “manufacture…of goods” within the meaning of the definition of “industrial company” in s. 2(6)(c) of the Finance Act, 1969, being Act No. XIV of 1969.

5. On the above findings and reasoning, the Tribunal dismissed both the appeals preferred by the assessee and partly allowed the appeal preferred by the Department. Thereupon, the assessee applied for referring certain questions framed by it for the opinion of this court; but the Tribunal has referred only the questions stated by us at the inception of this judgment. We shall now proceed to consider the same.

6. So far as the first question is concerned, Mr. S. Parvatha Rao concedes that inasmuch as the assessee has not maintained the register as required by r. 6C(3) of the I.T Rules, 1962, the expenditure claimed on account of maintenance of guest house for both the assessment years has rightly been disallowed by the authorities under the Act including the Tribunal, and that he has no case to urge in this behalf. Accordingly, question No. 1 is answered in the affirmative and in favour of the Department and against the assessee.

7. For the sake of convenience, we shall deal with question No. 2 year-wise, i.e, separately for the assessment years 1968-69 and 1969-70. For the assessment year 1968-69, the Tribunal has allowed the amounts spent on market survey expenses, conveyance and air tickets as permissible expenditure under s. 37. Mr. Parvatha Rao's complaint is that the Tribunal has picked out the figures on the above counts from the Delhi branch only and has failed to allow the amounts expended in other branches under the same heads. This complaint seems to be true. The Tribunal ought to have allowed the amounts spent on market survey expenses, conveyance and air tickets in all the five branches of the assessee.

8. The next aspect which is common to both the assessment years is, what is the meaning of the expression “in the nature of entertainment expenditure” occurring in sub-s. (2A) of s. 37. It is brought to our notice that there is a divergence of opinion among the High Courts upon the meaning and content of this expression. One view taken by the Full Bench of the Punjab and Haryana High Court in CIT v. Khem Chand Bahadur Chand, [1981] 131 ITR 336, is that all expenditure incurred on account of hospitality, whether frugal or lavish, must be understood as falling within the ambit of the expression “in the nature of entertainment expenditure”. The court emphasised the words “in the nature of” in the above expression and held, on that basis, that not only entertainment expenditure stricto sensu but all expenditure in the nature of entertainment expenditure also fell within the said expression. The court observed further that by holding that hospitality which is not lavish may be expended without any limits would virtually frustrate the object of the Legislature in enacting sub-ss. (2) and (2A) of s. 37, viz., curbing excessive business entertainment at the cost of the public exchequer. Beyond the prescribed limits, of course, business expenditure is left to the discretion of the businessmen themselves but, they are told, not at the cost of public exchequer. It was accordingly held that the expenditure incurred on supply of food and drinks to customers of the assessee, for which purpose the assessee was itself running a regular kitchen, constitutes expenditure “in the nature of entertainment expenditure” irrespective of the fact whether it is lavish or frugal. A Full Bench of the Kerala High Court in Commissioner Of Income-Tax, Kerala v. Veeriah Reddiar., [1977] 106 ITR 610, took a similar view. On the other hand, the Gujarat High Court in CIT v. Patel Brothers & Co. Ltd., [1977] 106 ITR 424, held that providing or catering to ordinary human needs like food, drink, tea or coffee cannot be called entertainment and that such provision falls within the realm of ordinary courtesy. But where the expenditure is generous and lavish, that is to say, on holding banquets or on dinners on a lavish scale, it would fall within the meaning of the said expression. Four broad tests were evolved, namely,

(a) if the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish and extravagant scale, or is of wasteful nature, it is entertainment per se.

(b) If the provision of food or drinks to a client, constituent or customer is in the nature of bare necessity, or by way of ordinary courtesy, or as an express or implied term of the contract of 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 a client, customer or constituent is in a 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 a client, customer or constituent by way of hospitality or otherwise will always be entertainment.

9. Practically, the same view has been taken by the Bombay, Madhya Pradesh and Karnataka High Courts to which we do not think it necessary to refer in any detail, for the reason that the principle of the Gujarat High Court in Patel Brother's case, [1977] 106 ITR 424, has been followed and applied by a Division Bench of this court in Addl. CIT v. Maddi Venkataratnam & Co. Ltd., [1979] 119 ITR 514. That was a case where the assessee engaged in export of tobacco maintained two guest houses for the purpose of arranging lodging facilities to the customers coming from foreign countries. Certain amounts were claimed as business expenditure on account of providing food and lodging facilities to foreign customers which was partly disallowed by the Department. On a reference, this court held, applying the four principles evolved by the Gujarat High Court in Patel Brothers' case, [1977] 106 ITR 424, that the amount claimed by the assessee was expenditure incurred on the guests. This court observed that it was nobody's case that the guest houses were run on a lavish scale looking particularly to the needs of customers from abroad and held that because the said amount was spent on putting up and providing reasonable facilities for the accommodation of foreign guests and for their food and drink, etc., within reasonable limits, the expenditure so incurred had to be allowed. We must, however, observe that the expenditure incurred by an assessee on the maintenance of a guest house is covered by sub-s. (3) of s. 37 which does not fall for our consideration. We are concerned only with the meaning of the expression expenses incurred “in the nature of entertainment expenditure” occurring in sub-ss. (2) and (2A) only and the decision of this court in Maddi Venkataratnam's case, [1979] 119 ITR 514, is relevant only in so far as it approves the principles enunciated by the Gujarat High Court in Patel Brothers' case, [1977] 106 ITR 424. In view of the fact that a Bench of this court has already taken a view agreeing with the view taken by the Gujarat High Court in Patel Brothers' case, we shall proceed on the basis that the tests evolved by the Gujarat High Court are the correct tests, though left to ourselves we may have preferred to adopt the view of the Full Bench of the Punjab & Haryana High Court in Khem Chand's case, [1981] 131 ITR 336. Now, applying the tests laid down in Patel Brothers' case, if the expenditure is incurred on providing food and drink only to a client, constituent or customer, which is in the nature of bare necessity or by way of ordinary courtesy, it would not amount to entertainment expenditure. But if a party is arranged or a banquet is given or some amusement is provided to or in connection with the visit of such a client, constituent or customer, as the case may be, it would fall within the ambit of the said expression. The expenditure claimed by the assessee has to be examined in the light of this legal position.

10. Mr. M. Suryanarayana Murthy, the learned standing counsel for the Department, contends that inasmuch as the assessee has failed to furnish particulars of expenditure and has merely shown lump sums, there was no occasion for any further investigation of this aspect. We are, however, of the opinion that, since the legal position was not clear at the relevant time, the Tribunal had also not approached the problem from the correct legal standpoint, and, that should be done now. We are not saying that the Tribunal should admit any additional evidence at this stage. What we are saying is that the material already on record should be examined from the above legal standpoint and it should be determined which part of the expenditure is permissible expenditure and which part is entertainment expenditure. This observation will apply to amounts claimed both under the head “Business promotional expenses” as well as under the head “Entertainment expenses”.

11. Now, coming to the assessment year 1969-70, the amounts claimed by the assessee on account of business promotional expenses have also to be scrutinised from the standpoint of the above legal principles to determine what part thereof has to be allowed as business expenditure and what part disallowed or dealt with, as the case may be, under s. 37 of the Act. Accordingly, so far as the second question is concerned, we refuse to answer it in the terms in which it is couched except to clarify the legal position and leave it to the Tribunal to re-determine the amounts in the light of the above principles.

12. Now, coming to the third question referred, the contention of the assessee is that it is an industrial company as defined in cl. (c) of sub-s. (6) of s. 2 of the Finance Act, 1969, being Act No. XIV of 1969. The definition of “industrial company” reads as follows:

“(c) ‘Industrial company’ means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.

Explanation.—For the purposes of this clause, a. company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any one or more of the aforesaid activities included in its total income of the previous year (as computed before making any deduction under Chapter VI-A of the Income-tax Act) is not less than fifty-one per cent. of such total income.”

13. The assessee's case before the Tribunal appears to be that it was engaged in the manufacture of goods and that contention has been negatived by the Tribunal. Before us, however, it is contended by Mr. Parvatha Rao that the assessee is an industrial company for the reason that it is mainly engaged in the processing of goods. He submits that this ground too was urged before the Tribunal and that, in any event, it being only an aspect of the question already referred, it is open to him to urge in this referred case. He contends that for the previous assessment year, the Department has, on an examination of the activity undertaken by the assessee, held that it is mainly engaged in the processing of goods and has extended the benefit of s. 2 of the Finance Act, i.e, lower rate of corporate tax, but, he contends, so far as the assessment year 1969-70 is concerned, the Department has taken a contrary view. He also brings to our notice the order of the Income-tax Appellate Tribunal, Hyderabad Bench “A”, dated 9th June, 1980, in I.T.A No. 530.Hyd/79 relating to the assessment year 1966-67 where this very assessee has been held to be an “industrial company” within the meaning of s. 2(6)(c) of the Finance Act on the ground that it is engaged in processing of tobacco. He contends that since the re-drying process is the same for every year, the assessee must be held to be an industrial company for this assessment year as well.

14. For holding that the assessee is an “industrial company” as defined in s. 2(6)(c) of the Finance Act, 1969, it must be held that it is “mainly engaged in the processing of goods”. This is essentially a question of fact. Mr. M. Suryanarayana Murthy, the learned standing counsel for the Department, contends that the main activity of the assessee is export and sale of tobacco and not processing. According to him, processing is only incidental to the sale or export, as the case may be, whereas according to Mr. Parvatha Rao, the learned counsel for the assessee, processing is the main activity of the assessee-company. This is a question which can be decided only on the basis of the facts placed before the authorities. We must, however, express our opinion on the construction and application of the Explanation in the said definition because the Tribunal seems to be under the impression that unless the income attributable to the “specified activity” (in short for “for the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining”) is not less than fifty-one per cent. of the total income of the assessee, a company cannot be an industrial company. We do not think so. According to the main limb of the definition, “industrial company” is a company which is mainly engaged in a specified activity, while the Explanation says that the company shall be deemed to be mainly engaged in a specified activity if the income attributable to the specified activity is not less than fifty per cent. of its total income computed in accordance with the Explanation. Two views are urged before us. Mr. Suryanarayana Murthy, learned standing counsel for the Department, submits that in every case the test prescribed by the Explanation has to be satisfied and that unless it is so satisfied, an assessee would not be called an “industrial company”. The other view urged by Mr. Parvatha Rao is based upon a circular of the Central Board of Direct Taxes which is found printed in para. 507 of Taxman's Direct Taxes Circulars, Vol. I, at p. 851. The circular referred to is Circular No. 103 (F. No. 166/1/73-II (AI) dated 17-2-1973 (see [1973] 88 ITR (St.) 80). It reads:

“Interpretation of the term ‘industrial company’ as given in the Explanation to sub-section (7)(d) of section 2 of the Finance Act, 1966.

“… ‘industrial company’ means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power in the construction of ships or in the manufacture or processing of goods or in mining. According to the Explanation to clause (d) of subsection (7) of section 2 of the above Act, a company shall be deemed to be mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, if the income attributable to any of the aforesaid activities included in its total income for the previous year is not less than fifty-one per cent. of such total income.

2. The question as to the exact meaning of the Explanation to subsection (7)(d) of section 2 of the Finance Act, 1966, came up for consideration and the Board are advised that an ‘industrial company’ would mean—

(i) a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, even if its income from such activities is less than 51 % of its total income; and

(ii) a company which, even though not mainly so engaged, derives in any year, 51% or more of its total income from such activities.”

15. We are of the opinion that the construction placed by the Central Board of Direct Taxes upon the definition represents the correct view. Adopting the view contended for by the Department would result in anomalous and inequitable results. Take the case of a company which is engaged in generation of electricity. Its investment in that behalf is ten crores of rupees. It also engages itself in trading activities, which is not one of the specified activities. The investment in trading activities is, say, 50 lakhs of rupees. Suppose in a given assessment year, its income from generation of electricity is ‘nil’ while its income from trading activities is one lakh of rupees. According to the Department's contention, it would not be an industrial company. In other words, according to the Department, it would not be a company mainly engaged in the generation of electricity, which is, ex facie and from any point of view, untrue and untenable. We, are, therefore, of the opinion that the company which is mainly engaged in the specified activity shall be deemed to be an industrial company notwithstanding the fact that its income from such activity is less than fifty-one per cent. of its total income, and that the Explanation applies only where the company is not mainly engaged in the specified activity but still the income attributable to the specified activity is fifty-one per cent. or more of its total income.

16. Another aspect which needs to be clarified in view of the controversy raised before us is the meaning of the word “attributable”, occurring in the Explanation to sub-s. (6) of s. 2 of the Finance Act, 1969. As pointed out by the Allahabad High Court in Addl. Commissioner Of Income-Tax v. Abbas Wazir (P.) Ltd., [1979] 116 ITR 811, the words “attributable to” are wider in scope than the words “derived from”. In that case it was held that the assessee who has engaged in the manufacture and sale of carpets and who derived certain amount of income by sale of import licences which were granted to it on the basis of its export performance, was held to be an industrial company, by treating the income derived by sale of import licences as income attributable to its activity of manufacturing of carpets. Beyond, saying that we agree with the reasoning of the Allahabad High Court, it is not necessary for us to say whether, in this particular case, the income derived by the assessee from the sale of import licences granted to it on the basis of its export performance, is to be held attributable to its business of processing or not. The question whether the assessee is mainly engaged in the processing of goods is yet to be determined. If so, it would be premature for us to express any opinion on this subsidiary question. The Tribunal may go into this whole question again in the light of the legal position adumbrated above.

17. For the above reasons, we decline to answer the third question in terms it is framed and leave the matter to be re-determined by the Tribunal in the light of the principles set out in this judgment. The referred case is answered accordingly.

18. In the circumstances of the case, there will be no order as to costs.