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Addl. Commissioner Of Income Tax, Mysore v. Bangalore Turf Club Ltd.
Structured Summary of the Opinion
Factual and Procedural Background
The Income-tax Appellate Tribunal, Bangalore Bench, referred the following question to this Court pursuant to directions in C.P. Nos. 44 to 46 of 1975: whether expenses incurred by the assessee on refreshments, lunch, liquor, etc., served at meetings of stewards, managing committee members, other office-bearers and officials and at general body meetings, constitute "expenditure in the nature of entertainment expenditure" within s. 37(2A) of the Income-tax Act, 1961, for the assessment years 1968-69, 1969-70 and 1970-71.
The assessee is a company engaged in conducting horse races and had 190 members. The expenditures in question included amounts for refreshments, lunches and liquor supplied at business meetings (stewards' meetings, managing committee meetings and general body meetings). The assessee claimed full deduction of these amounts under s. 37(1). The ITO treated the entire expenditure as entertainment expenditure and restricted deduction under s. 37(2A). On appeal, the AAC treated liquor/hot drinks and parties to outsiders as entertainment but allowed the remainder that were incurred for business purposes. The Tribunal concluded that refreshments/lunch/liquor served at the business meetings of stewards, managing committee members and at general body meetings did not constitute entertainment expenditure, but that other expenditures (e.g., cocktail parties, lunches during racing season for members/guests) were entertainment expenditure; it directed a re-computation accordingly.
The Commissioner sought a reference under s. 256(1) of the Act. The Tribunal initially declined; the Commissioner filed civil petitions to this Court, and the question above was referred to this Court for opinion.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, expenses incurred by the assessee on refreshments, lunch, liquor, etc., served at meetings of stewards, managing committee members, other office-bearers and officials, and at general body meetings, constitute "expenditure in the nature of entertainment expenditure" within the meaning of s. 37(2A) of the Income-tax Act, 1961, for the assessment years 1968-69, 1969-70 and 1970-71?
Arguments of the Parties
Revenue's Arguments (as presented)
- The expenses were admittedly incurred for providing refreshments, lunch, liquor, etc., and therefore should be treated as entertainment expenditure within the meaning of s. 37(2A).
- Reliance was placed on precedents holding that supplies of tea, lassi, jalapan, cigarettes, coffee, meals, etc., to customers constitute entertainment expenditure and are subject to the limits prescribed by s. 37(2A).
- Specific cases cited by the revenue counsel included: Brij Raman Dass & Sons v. CIT; CIT v. Veeriah Reddiar (Full Bench); and CIT v. Kunji Lal Dhanpat Rai.
Assessee's Arguments (as presented)
- Although the expenditures were for refreshments, lunch and liquor, they were incurred at meetings of stewards, managing committee members, office-bearers and at general body meetings — i.e., business/administrative meetings — and therefore cannot be characterized as entertainment expenditure.
- Such supplies were part of holding business meetings and were not provided in the context of a reception or entertainment for third-party guests; thus they are administrative or business expenses deductible under s. 37(1).
- Precedents cited by the assessee counsel included: CIT v. Corporation Bank Ltd.; CIT v. Patel Brothers & Co. Ltd.; CIT v. Bagraj and Company; CIT v. Shah Nanji Nagsi; CIT v. Karuppuswamy Nadar & Sons; and CIT v. Mysore Paper Mills Ltd. (C.P. No.124 of 1975).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Brij Raman Dass & Sons v. CIT | Held that expenses for serving tea, lassi and jalapan to customers were in the nature of entertainment expenditure and deductions should be limited under s. 37(2A). | Noted as a revenue-cited authority supporting the proposition that supplies of refreshments to customers may be entertainment expenditure; the Court considered this but distinguished the present facts where supplies were made at business meetings of committee/members. |
| CIT v. Veeriah Reddiar (Full Bench) | Full Bench agreed with the view that supplies of cigarettes, coffee and meals to customers constituted entertainment expenditure. | Recorded as cited by the revenue; the Court took the decision into account but concluded that, on the facts of the present case (business meetings of stewards/committee/members), the expenditure lacked the dominant purpose of providing pleasure and was administrative. |
| CIT v. Kunji Lal Dhanpat Rai | Held that expenditure towards supply of meals to customers by a commission agent for handloom cloth was entertainment expenditure. | Noted as revenue authority; Court distinguished such factual contexts from the present case where the refreshments were provided as part of necessary business meetings. |
| CIT v. Corporation Bank Ltd. | Division Bench held that supplying coffee and tea to customers during business hours as a courtesy did not constitute entertainment expenditure where there was no formal guest-host relationship and no reception/party. | Cited by the assessee; the Court relied on the distinction between hospitality in the course of business hours/meetings and entertainment, aligning with the Tribunal's view that refreshments at business meetings are administrative. |
| CIT v. Patel Brothers & Co. Ltd. | Gujarat High Court held that customary provision of meals to farmer-customers by an oil mill was not entertainment expenditure. | Cited by the assessee; the Court recognized this authority as supportive of the proposition that customary business hospitality can be non-entertainment in character and applied that distinction to the facts of business meetings. |
| CIT v. Bagraj and Company | Allahabad High Court held that cost of food supplied to low-paid employees did not constitute entertainment expenditure. | Cited by the assessee; the Court noted the precedent as demonstrating that not all food-related expenditures are entertainment, supporting the Court's conclusion that the questioned expenditure was administrative. |
| CIT v. Shah Nanji Nagsi | Bombay High Court found meals, tea and pawn provided to customers in pakki adat business were customary and not entertainment expenditure. | Cited by the assessee; the Court regarded this as relevant for distinguishing customary/business hospitality from entertainment and applied that reasoning to meetings of managing bodies and general body. |
| CIT v. Karuppuswamy Nadar & Sons | Madras High Court distinguished "hospitality" from "entertainment" and held that supplying tea and coffee was hospitality and not entertainment expenditure. | Cited by the assessee; the Court accepted the hospitality/entertainment distinction and used it in concluding that the subject expenditures were administrative rather than entertainment. |
| CIT v. Mysore Paper Mills Ltd. (C.P. No.124 of 1975) | Division Bench rejected a prayer of the revenue for directing the Tribunal to refer whether refreshments to shareholders at general body meetings were entertainment expenditure. | Cited by the assessee; the Court noted that except for this specific petition, the present matter was confined to the expenditures described and that its consideration would be limited to those particular types of expenditure. |
Court's Reasoning and Analysis
The Court's analysis proceeded in a sequence of legal steps, closely following the statutory text and ordinary meaning of "entertainment":
- Interpretation of s. 37: The Court observed that sub-s. (1) of s. 37 allows deduction for any expenditure laid out wholly and exclusively for the purpose of business unless otherwise provided by the Act; sub-s. (2A) creates a ceiling on allowance where an expenditure "is in the nature of entertainment expenditure." Thus, for s. 37(2A) to apply the expenditure must bear the character of "entertainment expenditure".
- Meaning of "entertainment": Because the term is not defined in the statute, the Court adopted the meaning most appropriate to the context. It cited Webster's Third New International Dictionary definitions of "entertain" and "entertainment" emphasizing reception, hospitality to guests, diversion or amusement, and social gatherings or receptions designed to divert or amuse.
- Criterion established: The Court distilled the test that an expenditure constitutes "entertainment expenditure" when it is expended for entertaining persons (customers or guests) by providing food, drinks, refreshments or other amusement where the dominant purpose is deriving or providing pleasure or amusement.
- Application to the facts: The Court examined the particular categories identified by the Tribunal as non-entertainment expenditures:
- Refreshments, lunch and liquor served at meetings of the stewards — stewards were managing committee members and the meetings were business meetings.
- Similar expenses incurred at official business meetings of the managing committee and office-bearers.
- Similar expenditure at general body meetings of members, which were business meetings.
- Factual findings relied upon: The Court noted it was on record that no sitting fees were paid to members or office-bearers attending the meetings. These facts indicated that the expenses were not incurred to extend entertainment to third parties nor to provide entertainment to the attendees, but were expenses of necessity as part of holding business meetings.
- Characterization of the expenditure: Given the meeting context, the Court concluded that such expenditure — even though involving food, refreshments and liquor — formed part of administrative or business expenditures for holding the meetings and lacked the dominant purpose of entertainment or pleasure. Hence, such expenses did not "partake the character of entertainment expenditure."
- Conclusion on the statutory test: Applying the dictionary-derived test and the facts, the Court agreed with the Tribunal's characterization that the specific expenditures listed were not within s. 37(2A)'s ambit.
Holding and Implications
Holding: The Court endorsed the Tribunal's view and answered the referred question in the affirmative in favour of the assessee — i.e., the expenses on refreshments, lunch and liquor served at the business meetings of stewards, managing committee members, other office-bearers and at general body meetings do not constitute "expenditure in the nature of entertainment expenditure" within s. 37(2A) for the assessment years in question.
Implications:
- Direct effect: The specific category of expenses identified (refreshments, lunch and liquor supplied in the context of the stewards' meetings, official managing committee/office-bearers' meetings and general body meetings) are administrative/business expenditures and are not subject to the ceiling in s. 37(2A); they are deductible under s. 37(1) to the extent otherwise appropriate.
- Scope limitation: The Court confined its decision to the particular type of expenditure forming the subject-matter of the reference (the listed business meetings). The Tribunal's treatment of other items (e.g., cocktail parties, parties to outsiders, meals/luncheons provided during racing season to members/guests) as entertainment expenditure was not disturbed in respect of those items; those remain within the ambit of s. 37(2A) as the Tribunal treated them.
- Precedential note: The Court applied textual interpretation and the ordinary meaning of "entertainment" to distinguish hospitality/administrative expenses in a business-meeting context from expenditures whose dominant purpose is providing pleasure or amusement. The opinion is expressly limited to the factual circumstances described; no broader application beyond these facts is articulated in the opinion.
This summary is prepared exclusively from the information contained in the provided opinion. No information has been added or inferred beyond the text of that opinion.
1. Pursuant to the direction given by this court in C.P.Nos. 44 to 46 of 1975, the Income-tax Appellate Tribunal, Bangalore Bench, has referred the following question for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the expenses incurred by the assessee on refreshments, lunch, liquor, etc., served at the meetings of stewards, managing committee members and other office bearers and officials as well as general body meetings, do not constitute expenditure in the nature of entertainment expenditure within the meaning of section 37(2A) of the Income-tax Act, 1961, for the assessment years 1968-69, 1969-70 and 1970-71 ?"
2. The assessee is a company. Its business is to conduct horse races. It has 190 members. The assessment years are 1968-69, 1969-70 and 1970-71. During the previous years, relevant to the assessment years, the total expenditure for the three years are as follows :
3. The break-up of the expenditure was also furnished. The figures included expenditure incurred for the supply of refreshments, lunch, liquors, etc., in the business meetings of the stewards, members of the managing committee as also of the general body. The assessee claimed deduction of the entire expenditure mentioned above. The ITO, however, was of the opinion that the entire expenditure was in the nature of entertainment expenditure and, therefore, the deduction should be restricted as provided in s. 37(2A) of the I.T. Act, 1961 (hereinafter referred to as "the Act").
4. Aggrieved by the said orders, the assessee appealed before the AAC. The AAC took the view that expenditure on liquors or hot drinks should be treated as entertainment expenditure. He was also of the view that the expenditure incurred on throwing parties including cocktail parties to outsiders was entertainment expenditure, and, therefore, subject to the limits laid down in s. 37(2A) of the Act. Rest of the expenditure was, considered by him as not in the nature of entertainment expenditure and was, therefore, deductible under sub-s. (1) of s. 37 of the Act on the ground that they were incurred for the purpose of the business.
5. Aggrieved by the orders of the AAC, both the assessee and the department appealed before the Tribunal. The Tribunal was of the view that only the expenses incurred towards refreshments, lunch including liquor served at the business meetings of the stewards, managing committee members and other office bearers and officials as well as similar expenses incurred in the general body meetings, did not partake the character of entertainment expenditure and all other expenses incurred by the assessee were in the nature of entertainment expenditure to which provisions of s. 37(2A) of the Act were attracted, and directed the ITO to work out afresh the amount of entertainment expenditure and to apply s. 37(2A) of the Act only to such expenditure. The effect of the order of the Tribunal was, except a smaller portion of the amount debited under the head "Refreshments", spent at the business meetings of stewards, managing committee and general body, major part of the amounts expended for cocktail parties and for providing lunch and shorteats to members and guests during racing season and at joint turf meetings, etc., were treated as entertainment expenditure. The assessee did not pursues the matter. The Commissioner, however, applied to the Tribunal to refer the aforesaid question for the opinion of this court under s. 256(1) of the Act. As the Tribunal declined to make a reference, the Commissioner preferred civil petitions before this court and pursuant to the order made by this court on the civil petitions, the question mentioned earlier has been referred for the opinion of this court.
6. Sri Rajasekhara Murthy, learned counsel for the revenue, contended that as the expenses in question were admittedly incurred for purposes of providing refreshments, lunch, liquor, etc., the Tribunal was wrong in holding that these expenses were not in the nature of entertainment expenditure and consequently in allowing the deductions of the said amounts under s. 37(1) of the Act. In support of his submission, he relied on the following decisions :
(i) Brij Raman Dass & Sons v. CIT . In this case the assessee was a dealer in Banarasi goods. In its returns, the assessee claimed deduction of expenditure incurred towards serving tea, lassi and jalapan to its customers. The Allahabad High Court held that the expenses were in the nature of entertainment expenditure and, therefore, deduction would have to be limited to the extent as provided in s. 37(2A) of the Act.
(ii) CIT v. Veeriah Reddiar [FB]. The assessee in this case was a dealer in piece-goods. He had expended amounts towards supply of cigarettes, coffee and meals to his customers. The Full Bench of the Kerala High Court held, agreeing with the Allahabad High Court in the aforesaid decision, that the expenditure constituted entertainment expenditure.
(iii) CIT v. Kunji Lal Dhanpat Rai . The assessee in this case was a commission agent for handloom cloth. He had incurred expenditure towards supply of meals to his customers. The expenditure was held to be entertainment expenditure.
7. Relying on these decisions, learned counsel for the revenue submitted that the question should be answered in favour of the revenue.
8. Sri Sarangan, learned counsel for the assessee, per contra, submitted that though the expenditure incurred was for supplying refreshments, lunch, liquor, etc., the expenses cannot be considered as expenditure in the nature of entertainment as they were served at the meetings of stewards, managing committee members and other office bearers and officials of the assessee and as also at the general body meetings. In support of his submission, he relied on the following decisions :
(i) CIT v. Corporation Bank Ltd. [1979] 117 ITR 271 (Kar). In this case, the question for consideration was whether the expenses incurred by the Corporation Bank towards supply of coffee and tea to its customers during business hours as a matter of courtesy constituted entertainment expenditure. A Division Bench of this court held that it did not, on the ground that there was no formal relationship of guests and hosts between the bank and its customers and the expenditure so incurred during business hours was not incurred at any reception or entertainment party given by the bank to its customers.
(ii) CIT v. Patel Brothers & Co. Ltd. . The assessee in this case was running an oil mill. It provided meals to its farmers-customers. The Gujarat High Court held that it was customary for the oil mill owners to provide meals to their farmers-customers and it did not constitute entertainment expenses.
(iii) CIT v. Bagraj and Company . In this case, the Allahabad High Court held that cost of food supplied by the assessee to its low-paid employees did not constitute entertainment expenditure.
(iv) CIT v. Shah Nanji Nagsi [1979] 116 ITR 292 (Bom). The assessee in this case was doing pakki adat business. He provided meals, tea and pawn to its customers and constituents. The Bombay High Court found that such an expenditure incurred was customary to the business and, therefore, did not constitute entertainment expenditure.
(v) CIT v. Karuppuswamy Nadar & Sons . The assessee in this case was a wholesale cloth merchant. It had incurred expenses towards supplying tea and coffee to its customers. The madras High Court made a distinction between hospitality and entertainment and held that the expenditure was only in the nature of hospitality, but was not in the nature of entertainment expenditure.
(vi) CIT v. Mysore Paper Mills Ltd. (C.P.No. 124 of 1975 - 5-4-1976) [see p. 437 infra] (Appendix). In this case, a Division Bench of this court rejected the prayer of the revenue for directing the Income-tax Appellate Tribunal to refer to question as to whether the Tribunal was right in holding that the expenditure incurred by the Mysore Paper Mills in providing refreshments to its shareholders at the general body meetings was not in the nature of entertainment expenditure, for the opinion of this court.
9. Relying on these decisions, learned counsel for the assessee submitted that the view taken by the Tribunal on the question was correct and the question should be answered in favour of the assessee.
10 In the present case, we are not concerned with any expenditure by both sides, except the one involved in C.P.No. 124 of 1975, pertaining to the Mysore Paper Mills Ltd. Therefore, we shall confine the consideration to the particular type of expenditure, incurred by the assessee and which forms the subject-matter of reference.
11. Relevant part of s. 37 reads as follows :
"37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80vv and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'......
(2A) Notwithstanding anything contained in sub-section (1) or sub-section (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 the September 30, 1967, as is in excess of the aggregate amount computed as hereunder :-
In view of the wording of sub-s. (1) of s. 37 of the Act, every type of expenditure laid out or expended for the purpose of the business or profession, deduction of which is not specifically provided for by the other provisions of the Act, is an allowable deduction in computing the income chargeable to tax under the Act. But sub-s. 2(A) prescribes a ceiling on the extent of deduction, of any such item of expenditure is in the nature of entertainment expenditure, as indicated therein. Therefore, in order that sub-s. (2A) of s. 37 of the Act is attracted, the expenditure must bear the character of "entertainment expenditure".
12. The next point for consideration is what is meant by "expenditure in the nature of entertainment". This depends upon the meaning of the word "entertainment". The word "entertainment" not having been defined, that meaning, which is most appropriate in the context in which it is used, should be given. The meaning of the words "entertain" and "entertainment" is given in Webster's Third New International Dictionary at p. 757. In our view, out of the various shades of meanings of the words given therein, the meanings which are relevant in the context of s. 37(2A) of the Act are -
" 'Entertain' - ..... To give reception to (a person); to show hospitality to; to provide for the needs of a guest; to cause time to pass pleasantly for (some one); amuse; to provide entertainment esp. for guests.
'Entertainment'. - The act of entertaining; the act of receiving as a guest; hospitable reception; the act of diverting, amusement or causing someone's time to pass agreeably; amusement; something that diverts, amuses, or occupies the attention agreeably; provide for guests whimsical as well as culinary; a social gathering or reception; a public purpose designed to divert or amuse."
13. Therefore, in order that an expenditure should constitute an expenditure in the nature of entertainment, it should have been expended for entertaining persons, whether they are customers or guests, either by way of providing food, drinks, refreshments or in providing any type of pleasure or amusement or an expenditure of a like nature incurred by the assessee for the purpose of entertainment, pleasure or amusement for himself of for his employees. Whatever be the case, the dominant purpose of incurring the expenditure for the purpose of food, drinks, refreshments and amusements, must be for deriving or providing pleasure. Coming to the nature of expenditure, in the present case, the type of expenditures, which are considered by the Tribunal as not expenditures in the nature of entertainment are :
(1) The first item is in respect of refreshments, lunch liquor, etc., served at the meetings of the stewards. It is not in dispute that stewards are members of the managing committee of the assessee, who are entrusted with the responsibility of conducting the races and the meetings in which those expenses were incurred were business meetings.
(2) The second item relates to similar expenses incurred during the official business meetings of the managing committee and of office bearers.
(3) The third item is again a similar expenditure incurred in the general body meetings of the members of the club, which were also business meetings.
14. It is also on record that no sitting fees is provided for to the members of office bearers attending the meetings. These facts indicate that the expenses had not been incurred with the intention of extending entertainment to any third party or with the intention of providing any entertainment to the stewards or members of the managing committee or ordinary members of the assessee-club. The expenses were incurred as of necessity and constituted part of the expenses incurred for the holding of the business meetings. In our view such an expenditure incurred albeit for the purpose of serving food, refreshments, drinks, including liquor, at the business meetings of the members of the managing committee or of ordinary members in the case of an assessee which is a corporate body such as a society or company, would be in the nature of administrative or business expenditure and would have no taint of expenditure, in the nature of entertainment.
15. In the light of the above discussion, we endorse the view taken by the Tribunal and answer the question referred for our opinion in the affirmative, i.e., in favour of the assessee.
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