The Judgment of the Court was delivered by

Paripoornan, J.:— These are connected cases. At the instance of the Revenue, the Incometax Appellate Tribunal, Cochin Bench has referred the following two questions of law for the decision of this Court, in the above reference:

“1. Whether, on the facts and in the circumstances of the case, the Incometax Appellate Tribunal is justified in holding that the premium paid to the Export Credit Guarantee Corporation is eligible for weighted deduction u/s. 35B?

2. Whether, the Incometax Appellate Tribunal is justified in holding that the expenses incurred in presenting curios to foreign buyers and the expenditure incurred in providing lodging to them is not entertainment expenditure for the purpose of S. 37(2) of Incometax Act, 1961?”

2. The respondent is the same assessee in all the four cases. It is a limited company. It is engaged in the business of manufacture of coir mats and mattings. We are concerned with the assessment years 1977-78 and 1978-79. In the course of the accounting year, the assessee had exported a large portion of production. In respect of the expenses connected with export, the assessee had claimed weighted deduction under S. 35B of the Incometax Act. One of the items on which such weighted deduction claimed was the premium paid to Export Credit Guarantee Corporation. In the accounting year relevant to the assessment year 1977-78, the assessee-company had paid a premium of Rs. 7,204/-. Anamount of Rs. 11,078/- was also paid through Bank. For the assessment year 1978-79, the amount paid was Rs. 34,344/-. The Income Tax Officer did not allow the claim for both the years. In appeal, the Commissioner of Incometax (Appeals) took the view, that E.C.G.C premium was paid in part for guaranteeing the export credit given by the assessee to the various purchasers. The payment was not exclusively for obtaining information regarding the creditworthiness of the buyers. He held that 50% of the amount should be treated as eligible for deduction under S. 35B of the Act. The assessee as well as the Revenue appealed against the order passed by the Commissioner of Incometax (Appeals). The Appellate Tribunal relied on its decision of the Special Bench in G & Company v. ITO (3 ITD 566) and allowed the assessee's claim as falling under sub-clause ‘(H). of S. 35B(1)(b) of the Act. The assessee was held entitled to 100% deduction. It is this aspect which forms a common question for both the assessment years, formulated as question No. 1 by the Appellate Tribunal. An additional aspect was involved for the assessment year 1978-79 and that forms the subject matter of question No. 2 formulated by the Appellate Tribunal. In the course of the export business, foreigners representing buyers came to Kerala. During the accounting period relevant for the assessment year 1978-79, the assessee had given certain presents to those persons. A sum of Rs. 2,693/- represented the cost of curios presented to foreign guests. The assessee had also incurred a sum of Rs. 8,782/- towards the lodging expenses of the buyers. The Incometax Officer disallowed both the above items of expenditure holding that they are in the nature of entertainment expenditure. In appeal, the Commissioner of Incometax (Appeals) held that as per the ratio of the decision of the Kerala High Court in C.I.T v. Veeriah Reddiar (1976 KLT 684 : 106 ITR 610), the above two expenses should be held to be in the nature of entertainment expenditure. He rejected the assessee's claim forweighted deduction holding that such expenditure do not come under any of the clauses of S. 35B of the Act. The assessee filed an appeal before the Appellate Tribunal. Certain other allowances were afforded to the assessee by the Commissioner of Incometax (Appeals) against which the Revenue had filed an appeal. In the appeals, in so far as it concerned the expenses incurred in presenting curios to the foreign buyers and the expenses incurred for providing loding facilities to them, the Appellate Tribunal held that such expenditure cannot be treated as entertainment expenditure. The claim for deduction under S. 37 of the Income tax Act, on the above two items, was allowed. It is thereafter, at the instance of the Revenue the Incometax Appellate Tribunal has referred the above two questions of law, which arose out of its common appellate order dated 2-9-1983 in disposing of the four appeals for the two years —1977-78 and 1978-79.

3. We heard counsel for the Revenue—Standing Counsel for Government of India (Taxes) Mr. P.K.R Menon as also counsel for the respondent/assessee Mr. P.R Raman.

4. Counsel for the Revenue contended that ordinarily the exporters obtained information about the credit-worthiness of the particular foreign buyers through their foreign agents and in this case the charges paid by the assessee to the Export Credit Guarantee Corporation to obtain information about the credit-worthiness of the foreign buyer is an additional expenditure which was not authorised. Such services are usually rendered by the foreign agents for which necessary commission is paid. It was unnecessary and uncalled for to have availed of the services of the Export Credit Guarantee Corporation to obtain information about the creditworthiness of particular foreign buyers, their reputation etc. Counsel referred to the decision of this Court in CIT v. Kerala Nut Food Co. (192 ITR 585) to contend that the payment made to the Export Credit Guarantee Corporation should not have been allowed as eligible for weighted deduction under S. 35B of the Incometax Act.

5. Regarding the curios presented to the foreign buyers and the expenses incurred for providing lodging facilities to them, the submission of the Revenue was that the expenditure on the above two accounts is in the nature of entertainment expenditure and in the light of the Full Bench decision of this Court in C.I.T v. Veeriah Reddiar (1976 KLT 684 : 106 ITR 610) the said expenditure should not have been allowed.

6. On the other hand, counsel for the assessee contended that the asscssee-company availed of the services of the Export Credit Guarantee Corporation to obtain relevant information about the creditworthiness of the particular foreign buyers, their reputation etc. before actually receiving the price thereof. The expenditure was incurred for obtaining information regarding the foreign market. The information was necessary to know the trustworthiness, business connection, solvency, capacityetc, to enter into thedeal and so the premium paid to the Export Credit Guarantee Corporation is eligible for weighted deduction under S. 35B of the Act. Regarding the presentation of curios to the foreign buyers and the expenses incurred for providing lodging facilities to them, counsel for the assessee submitted that it cannot be considered to be an entertainment expenditure and pressed into service the decision of the Madras High Court in C.I.T v. Prasad Process (P) Ltd. (141 ITR 9); the decisions of the Andhra Pradesh High Court in Addl. CIT v. Maddi Venkataralnam & Co. Lld. (119 ITR 514) and CIT v. Navabharat Enterprises (P) Ltd. (170 ITR 332). It was submitted that in the decision in Maddi Venkataralnam & Co. Ltd. case (119 ITR 514), the Andhra Pradesh High Court was expressly dealing with the lodging expenses and held that the expenses incurred in that connection will not be an entertainment expenditure for the purpose of S. 37(2) of the Incometax Act. Counsel for the assessee submitted that the Appellate Tribunal has allowed the deduction properly and no error of law has been committed by the Appellate Tribunal in affording the above relief to the assessee.

7. The points in controversy are two fold. They are: (1) whether the premium paid to the Export Credit Guarantee Corporation is eligible for weighted deduction under S. 35B of the Act and (2) whether the expenditure incurred by the assessee in presenting curios to the foreign buyers and expenses incurred for providing lodging facilities to them is an entertainment expenditure for the purpose of S. 37(2) of the Act and so not allowable.

8. The above aspects were considered by the Incometax Appellate Tribunal in paras. 4 and 13 of the common order dated 2-9-1983. They are as follows:

“4. The next item to be considered is an expenditure incurred in paying the premium to Export Credit Guarantee Corporation. The assessee has paid Rs. 7,204 for the assessment year 1977-78 and Rs. 34,344 for the assessment year 1978-79. The claim was rejected by the Income-tax Officer, but the CIT (Appeals) had accepted that half of this expenditure is eligible for deduction. So this issue figures both in the departmenal appeals as well as assessee's appeals. The point at issue has been considered by another Special Bench (Bombay Bench “C”) in I.T Appeal Nos. 3247 (Bom.)/76 and 68(Bom.)/77-78 dated 23-6-1978. This is reported in selected orders of ITAT Volume I, p. 142. According to the finding of the Special Bench the assessee is entitled to 100% deduction in respect of this expenditure following with respect the reasons given therein, we will accept the assessee's appeals on this point and reject the department's grounds.

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13.” For the assessment year 1978-79, the assessees had incurred-an expenditure of Rs. 58,619, which had been treated as entertainment expenditure. The claim under S. 37 has to be rejected in respect of this expenditure also. An expenditure of Rs. 2,693/- has been incurred by the assessee in making presents to the foreign guests. We find that this expenditure cannot be treated as entertainment and therefore it should be fully allowed as a deduction. Again an expenditure of Rs. 8,782 has been incurred in providing lodging facilities for the foreign buyers. This also cannot be treated as entertainment expenditure. So, the assessee is entitled to an allowance of this amount also.”

9. On hearing the rival pleas, urged before us, we are of opinion that the premium paid by the assessee to the Export Credit Guarantee Corporation is eligible for weighted deduction under S. 35B of the Incometax Act. It is seen that the services of the Corporation are taken by the assessee for obtaining information about the creditworthi ness of the particular foreign buyers, their reputation and the outer limit upto which goods could be supplied to them before actually receiving the price thereof. For such services, payments were made. It is an expenditure incurred for obtaining information regarding the foreign market. The Appellate Tribunal has adopted the reasons given by the Special Bench (3 ITD 566) that ‘information regarding a market’ is to be understood not only about the demand and supply position and the rate prevalent there but also about the buyers available there, their trustworthiness, business connections, solvency, capacity etc., and so the assessee's claim on this aspect must be upheld as falling within sub-clause (ii) of S. 35B(1)(b) of the Incometax Act.

10. We see no error in the reasoning and conclusion of the Appellate Tribunal aforesaid bearing in mind the language of S. 35B(1)(a) and (b)(ii) of the Incometax Act, 1961 which is the following effect:

“35B.(1)(a). Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th day of February, 1968, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in clause (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year;

(b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on—

(i)……………

(ii) obtaining information regarding markets outside India for such goods, services or facilities.”

11. The Revenue has no case that the assessee did not pay the charges to the Export Credit Guarantee Corporation nor was the information obtained from the said Corporation. The only plea was that such information was usually obtained through a foreign agent. It may be so in some cases. In this case, since factually the assessee has obtained the pertinent information about the creditworthiness of particular foreign buyers, their reputation etc., through the Export Credit Guarantee Corporation, the premium paid to them is certainly eligible for weighted deduction under sub-clause (ii) of S. 35B(1)(b) of the Incometax Act. It cannot be said to be a payment made twice over for the same purpose. There is no such plea by the Revenue, at any point of time. The decision relied on by the Revenue in Kerala Nut Food Co. case (192 ITR 585) has no relevance to the facts of this case.

12. We, therefore, answer question No. 1 in the affirmative — in favour of the assessee and against the Revenue.

13. Counsel for the Revenue very much relied on the following passage from the Full Bench decision of this Court in Commissioner Of Income-Tax, Kerala v. Veeriah Reddiar. (1916 KLT 684 : 106 ITR 610) at p. 617, to contend that the expenses incurred for presenting curios to foreign buyers and the expenses incurred for providing lodging facilities to them is an entertainment expenditure:

“…We are clearly of opinion that in interpreting the expression “entertainment expenditure” occurring in sub-section (2A) and (2B) of S. 37 of the Act the word Entertainment” should be taken to mean hospitality of any kind extended by the assessee directly in connection with his business or profession.”

14. In Veeriah Reddiar's case (1976 KLT 684 : 106 ITR 610), the assessee claimed deduction for expenses incurred in connection with the supply of cigarettes, coffee, meals etc., to their customers. The question was whether the expenditure so incurred will be “entertainment expenditure” within the meaning of S. 37(2) of the Act. The Full Bench held that the supply of cigarettes, coffee or meals to its customers by an assessee/businessman will be extending to them “hospitality” in connection with “the business” and so “entertainment expenditure” coming under S. 37(2) of the Incometax Act. A Bench decision of the Bombay High Court in Acc-Vickers Babcock Ltd. v. Commissioner Of Income-Tax, Bombay City Ii. (103 ITR 321) at p. 338 states that the expenditure, laid out or incurred for meeting the hotel bills for lodging and boarding of guests in hotels and by way of meeting catering charges of guests is clearly in the nature of entertainment expenditure coming under sub-section (2) of S. 37 of the Incometax Act. On the other hand, a Bench decision of the Andhra Pradesh High Court in Addl. C.I.T v. Maddi Venkataratnam & Co. Ltd., (119 ITR 514) has held that the expenditure incurred for providing boarding and lodging facilities to foreign customers visiting in connection with business will not amount to “entertainment expenditure” under S. 37(2) of the Incometax Act. According to the Revenue, the broad observations of the Full Bench decision of this Court in C.I.T v. Veeriah Reddiar (1976 KLT 684 : 106 ITR 610) at p. 617 as also the decision of the Bombay High Court in Acc-Vickers Babcock Ltd. v. Commissioner Of Income-Tax, Bombay City Ii. (103 ITR 321) at p. 338 should govern the issue and the expanses incurred for presenting curios to the foreign buyers and for providing lodging facilities to them in an entertainment expenditure for the purpose of S. 37(2) of the Act.

15. On the oilier hand, counsel for the assessee pressed for acceptance the decision of the Andhra Pradesh High Court in Maddi Venkataratnam & Co. case (119 ITR 514) which is in point and submitted that the ratio of the Full Benchin Veeriah Reddiar's case (1976 KLT 684 : 106 ITR 610) should be confined to expenses incurred in connection with the supply of cigarettes, coffee and meals to their customers and not to other items or other expenses.

16. In evaluating the above rival pleas, we have to bear in mind S. 37(2A) and also the newly inserted Explanation 2 to S. 37(2A) by the Finance Act of 1983 with retrospective effect from 1-4-1976 (by way of amendment). Explanation 2 aforesaid which had retrospective effect from 1-4-1976 is in the following terms:

“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 Apirl, 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 customs 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.”

17. The Notes on Clauses of the Finance Act, 1983 explains the object of the amendment to the following effect:

“Sub-clause (a)(ii) seeks to add a new Explanation to clarify that “entertainment expenditure” includes expenditure on hospitality of every kind whether provided under any express or implied contract or custom or usage of trade, but does not inclde expenditure on food or beverages provided to the employees in their place of work.

18. This amendment will take effect retrospective from 1st April, 1976.”

“Current Central Legislation, Part I April 1983, page 90].”

19. The above explanation will apply in relation to the assessment year 1976-77 and subsequent years.

20. We are inclined to take the view that by inserting an inclusive definition as Explanation 2 to the words “entertainment expenditure”, the legislature has in effect accepted the statement of the law laid down by the Full Bench of this Court in Veeriah Reddiar's case (1976 KLT 684 : 106 ITR 610 at p. 617). In that view, any expenditure incurred for extending hospi tali ty of any kind whatsoever willbe taken inby Explanation 2 to S. 37(2A) of the Incometax Act. The expenses cannot be confined to supply of cigaretes, coffee, meals etc., but will take within its fold any kind of hospitality extended to the customers. In this perspective, we are of the view that the expenses incurred for presenting curios to foreign buyers and expenses incurred for providing lodging facilities to them will be “entertainment expenditure” for the purpose of S. 37(2) of the Incometax Act, 1961. The Appelate Tribunal has failed to advert or discuss the scope and effect of S. 37(2), 37(2A) along with Explanation 2, though the amendment to the Finance Act, 1983 which had retrospective effect from 1-4-1976, had come into force when the Appellate Tribunal decided the appeals on 2nd of September, 1983. The order of the Appellate Tribunal on this aspect is of a very general nature and without reference to the relevant provisions of the statute, and in particular, Explanation 2 to S. 37(2A), which was introduced by Finance Act, 1983 with retrospective effect from 1-4-1976. Non-advcrtanee to the above statutory provision had led to the error committed by the Appellate Tribunal in holding that in making presents to the foreign guests or providing lodging facilities to them the assessee cannot be said to have incurred any “entertainment expenditure”. The conclusion of the Appellate Tribunal is a clear error in law. The decisions in 103 ITR 321 and 119 ITR 514 were rendered before the amendment, and so, inapplicable to the instant situation.

21. We, therefore, hold that the expenses incurred for presenting curios to the foreign buyers and, for providing lodging facilities to them is “entertainment expenditure” for the purpose of S. 37(2) of the Incometax Act, 1961. We answer question No. 2 in the negative — against the assessee and in favour of the Revenue. The references are disposed of as above.

22. A copy of this judgment, under the seal of this Court and the signature of the Registrar, shall be forwarded to the Incometax Appellate Tribunal, Cochin Bench.