Jagannatha Shetty, A.C.J:— This is a reference under section 256(2) of the Income-tax Act (for short “the Act”). The Tribunal has referred the following questions for the opinion of this court:
“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in confirming the order of the Commissioner of Income-tax (Appeals) allowing a further sum equal to 25% of the total expenditure incurred in connection with the visit of a Japanese delegation, without treating it as expenditure on entertainment and restricting it as per section 37 of the Act?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in confirming the order of the Commissioner of Income-tax (Appeals) allowing further deduction of expenditure in connection with the general body meeting, without treating it as an expenditure in the nature of ‘entertainment expenditure’ and restricting its allowance as per section 37 of the Act?”
2. The assessee is a public limited company. In the previous year ending on March 31, 1976, corresponding to the assessment year 1976–77, there was a trade delegation from Japan in connection with the business of the assessee-company. During the said visit, the assessee has spent a sum Rs. 32,923. The said sum included a sum of Rs. 12,875, being the expenses incurred in connection with dinner, tea and travelling expenses in respect of the Japanese delegation. The company claimed the entire amount as deduction under the head “Business expenditure”. The Income-tax Officer, however, allowed only one-fourth of that amount as “entertainment expenditure” incurred in respect of the employees of the company. The Commissioner (Appeals) has enhanced that allowance to 50%.
3. The Tribunal has agreed with that view.
4. The first question, therefore, is: “Whether the Tribunal was right in confirming the order of the Commissioner of Income-tax (Appeals) allowing a further sum equal to 25% of the total expenditure?”
5. The only provision by which such an expenditure could be allowed is sub-section (2A) of section 37 of the Act. In order to attract that provision, the expenses must bear the character of “entertainment expenditure” and that “entertainment expenditure” must be in connection with the expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.
6. The Commissioner found that 50% of the expenditure incurred by the company might be allocated towards the expenses incurred by the company on the employees who had accompanied the Japanese delegation and who partook in the entertainment. That is a discretion which, in our opinion, cannot be said to be arbitrary. There is no material to show that anything less than that amount could have been allocated. We, therefore, answer the first question in the affirmative and against the Revenue.
7. This takes us to the second question. It relates to the claim of the assessee towards the expenditure incurred in connection with the general body meeting. This court in Addl. CIT v. Bangalore Turf Club Ltd., [1980] 126 ITR 430, has held that such an expenditure would fall within the nature of administrative or business expenditure and would have no taint of expenditure in the nature of entertainment. The ratio of this decision, perhaps, cannot be extended to like cases after the introduction of Explanation 2 to sub-section (2A) of section 37 of the Act.
Explanation 2 reads:
“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.”
8. It will be clear from the above Explanation that 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, would be “entertainment expenditure”, But, it excludes the expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.
9. This Explanation was introduced retrospectively with effect from April 1, 1976. It, therefore, applies to the assessment in question. The sweep of the words “entertainment expenditure” found in the above Explanation is wide and broad enough to cover every expenditure on provision of hospitality of every kind to any person other than the employees. It is not in dispute that the shareholders are not the employees of the company and it is also not in dispute that the expenditure was incurred towards the entertainment of the shareholders. Obviously, therefore, it falls within the first part of Explanation 2. We, therefore, answer the second question in the negative and in favour of the Revenue.