Syed Shah Mohammed Quadri, J.:— Pursuant to the direction of this court in I.T.C No. 184 of 1985, dated September 15, 1986, the following question of law is referred to this court for opinion:

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in holding that the amount of Rs. 12,389 is not entertainment expenditure disallowable under the Income-tax Act, 1961?”

2. The assessee is a private limited company carrying on the business of processing and sale of tobacco. It claimed deduction of Rs. 17,336 said to have been the expenditure on the cost of mess of foreign customers. Holding that the said expenditure, except Rs. 5,000, was in the nature of entertainment expenditure and was not allowable, the Income-tax Officer added that amount in the income; however, he found that Rs. 5,000 would not fall within the meaning of “entertainment expenditure” under section 37(2A) of the Income-tax Act, 1961 (for short, “the Act”). Thus, the dispute is with regard to Rs. 12,336, which was disallowed. The assessee appealed to the Commissioner of Income-tax (Appeals) who accepted the plea of the assessee and allowed the appeal holding that the expenditure was a permissible expenditure as it was in the nature of “business hospitality”. The appeal of the Revenue against the said order of the Commissioner of Income-tax (Appeals) was dismissed by the Tribunal on December 8, 1980. It is from that order, the abovesaid question has arisen;

3. Mr. J.V Prasad, learned standing counsel for income-tax, submits that in view of the insertion of Explanation 2 to section 37(2A), with effect from April 1, 1976, the expenditure cannot be allowed even if it is in the nature of “business hospitality”.

4. Mr. C. Kodanda Ram, learned counsel for the respondent, relying upon the decisions of the Division Benches of this court, in Addl. CIT v. Maddi Venhataratnam and Co. Ltd. [1979] 119 ITR 514 and Commissioner Of Income-Tax v. Navabharat Enterprises (P.) Ltd. (No. 2). (No. 2) [1988] 170 ITR 332 contends that the expenditure is not really in the nature of “entertainment expenditure”, but is a business expenditure and, therefore, it is allowable under section 37(1) of the Act.

5. The question arises with reference to the assessment of the assessee for the assessment year 1976-77. Before the insertion of sub-section (2A) with effect from October 1, 1967, by the Taxation Laws (Amendment) Act, 1967, expenditure of the nature in question was an allowable expenditure under section 37(1) of the Act, but after the insertion of sub-section (2A) which opens with a non-obstante clause and excludes the provisions of sub-sections (1) and (2), no allowance shall be made in respect of so much of the expenditure in the nature of “entertainment expenditure” incurred by any assessee during any previous year which expires after September 30, 1967, as is in excess of the aggregate amount computed thereunder. It follows that the amount spent on entertainment of the customers is scaled down for the purposes of making it an allowable expenditure. While so, this court in Maddi Venkataratnam and Co. Ltd.'s case [1979] 119 ITR 514 took the view that the amount spent by the assessee in the accounting year relevant to the assessment year 1967-68 on the guests could be allowed under section 37(1) of the Act. That judgment was rendered on August 20, 1976, in view of the finding of the Tribunal that the amount was spent not by way of “entertainment”, as understood in the context of section 37(2) of the Act. Because it was found that the amount was not spent on entertainment, it was held that it would not fall under section 37(2) of the Act and, therefore, it fell under section 37(1) of the Act.

6. In Navabharat Enterprises (P.) Ltd.'s case [1988] 170 ITR 332, a Division Bench of this court observed as follows (headnote):

“The Legislature treated entertainment expenditure as part of business expenditure claimable for allowance under section 37(1) of the Income-tax Act, 1961, from chargeability to tax. The businessman abused the facility given thereunder. Amendments by gradual process were made in sub-sections (2), (2A) and (2B) of section 37, which took ‘entertainment expenditure’ out of the purview of section 37(1) and transplanted it in later sub-sections by appropriate phraseology; widened its sweep employing the phrase ‘in the nature of entertainment expenditure’ with a non-obstante clause giving exclusive operation thereto. The expression ‘in the nature of entertainment expenditure’ has not been defined in the Income-tax Act. Entertainment involves hospitality of any kind, which an assessee extends to a customer, client or a constituent for furtherance of business or profession. It must be wholly and exclusively necessary for the purpose of business or profession. The primary motive behind laying out or incurring entertainment expenditure is commercial or professional expediency. The phrase ‘in the nature of entertainment expenditure’ encompasses within its ambit entertainment expenditure proper as well as expenditure akin to it, partaking of some, if not all, of the characteristics of entertainment expenditure. Even lavish or frugal hospitality is none the less hospitality. The income-tax authorities have to minutely scrutinise the accounts in each case item-wise and see whether the expenditure by the assessee is wholly and exclusively for the purpose of the business or profession or whether it is in the nature of entertainment expenditure. Even if it comes under sections 37(1), 37(2) and 37(2A), it has still to be investigated whether it is reasonable expenditure. The reason is obvious.”

7. In view of the above observation, the Division Bench in that case directed the Tribunal to examine the evidence afresh and find out whether the entertainment expenditure on foreign customers was lavish or extravagant and what would be the reasonable expenditure and accord allowance according to law.

8. In CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424, a Division Bench of the Gujarat High Court, inter alia, held (headnote):

“Hospitality shown on account of obligation of business arising as a result of express or implied contract or arising on account of longstanding 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’.”

9. Aggrieved by the said judgment and on the certificate granted under section 261 of the Act, the Revenue preferred an appeal against the abovesaid judgment before the Supreme Court. His Lordship, Justice J.S Verma, speaking for the Supreme Court, in CIT v. Patel Bros. and Co. Ltd. [1995] 215 ITR 165, while dismissing the appeal of the Revenue, observed as follows (headnote):

“Generally, ‘entertainment expenditure’ is an expression of wide import. However, in the context of disallowance of ‘entertainment expenditure’ as a business expenditure by virtue of sub-section (2A) of section 37, the word ‘entertainment’ must be construed strictly and not expansively. Ordinarily, ‘entertainment’ connotes something which may be beneficial for mental or physical well being but is not essential or indispensable for human existence. A bare necessity, like an ordinary meal, is essential or indispensable and, therefore, is not ‘entertainment’. If such a bare necessity is offered by another, it is hospitality but not entertainment. Unless the definition of ‘entertainment’ includes hospitality, the ordinary meaning of ‘entertainment’ cannot include hospitality. For this reason, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity, is not ‘entertainment expenditure’.”

10. But it was made clear that that was the position of law before Explanation 2 was inserted with effect from April 1, 1976. It may be noted here that Explanation 2 to sub-section (2A) of section 37 was inserted by amendment made in 1983 with effect from April 1, 1976, by the Finance Act, 1983. That Explanation reads as under:

“Explanation 2.— For the removal of doubts, it is hereby declared that for the purposes of this sub-section and sub-section (2B), as it stood before the 1st day of April, 1977, ‘entertainment expenditure’ includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.”

11. A perusal of Explanation 2 makes it clear that it has enlarged the meaning of the words “entertainment expenditure” by including expenditure on provision of “hospitality” of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever irrespective of the fact that such a provision of hospitality is made by reason of any express or implied contract or custom, usage or trade. From this wide definition, Parliament has excluded the expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.

12. So far as the case on hand is concerned, it has already been pointed out that it relates to the assessment year 197.6-77. Therefore, Explanation 2, referred to above, would apply to the facts of the case and any expenditure incurred by the assessee in the nature of “business hospitality” of every kind would now be within the ambit of “entertainment expenditure”. In this case, the appellate authority and the Tribunal have recorded the finding that the expenditure incurred by the assessee was for providing “business hospitality” to the foreign customers who visited the assessee's business premises and, therefore, it could not be regarded as “entertainment expenditure”. Having regard to the provisions of section 37(2A) of the Act as they stood on the date of the order of the Tribunal, dated December 8, 1980, and in view of the judgment of the Supreme Court in Patel Bros. and Co. Ltd.'s case [1995] 215 ITR 165, it cannot be said that the Tribunal has committed any error of law in reaching the conclusion that it did, namely, that the expenses incurred on the “business hospitality” could not be regarded as “entertainment expenditure”; but taking note of the subsequent change in law by the insertion of Explanation 2 to sub-section (2A) of section 37 by the Finance Act, 1983, with effect from April 1, 1976, the only conclusion we can arrive at is that the expenditure on “business hospitality” would now fall within the meaning of “entertainment expenditure”.

13. Mr. C. Kondanda Ram, however, submits that in R.C No. 12 of 1988 (CIT v. Andhra Sugars Ltd.. [1997] 225 ITR 118), dated July 4, 1996, on similar facts, this court held that “business hospitality” would not fall within the meaning of “entertainment expenditure” and that the same view be taken in this case also. We may point out that in that case the expenditure on “business hospitality” was incurred for providing tea, coffee, beverages, etc., to the employees of the company as well as to the customers and the expenditure incurred on the employees was inseparable from the expenditure incurred on the customers. It was on those facts that it was held that such expenditure on “business hospitality” would not fall even within the enlarged meaning given to that expression by Explanation 2 to sub-section (2A) of section 37.

14. From the above discussion it follows that the expenditure incurred by the assessee is within the enlarged meaning of “entertainment expenditure” given by Explanation 2 to section 37(2A) of the Act and, therefore, the assessee cannot claim deduction of that expenditure in computing its total income.

15. In the result, we answer the question in the negative, i.e, in favour of the Revenue and against the assessee. The reference is accordingly answered.