D.K Seth, J.:— TWO questions have since been referred to this court in this reference case under section 256(1) of the Income-tax Act, 1961, namely:—

R.A No. 590 (Cal) of 1997:

“Whether, on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was justified in law in holding that part of sales promotion expenses or sales seminar expenses of Rs. 2,03,846 including, inter alia, on account of supply of food and drinks to employees and customers, was business expenditure and an allowable deduction from the asses-see's business income and not in the nature of entertainment expenditure disallowable under section 37(2A) of the Income-tax Act?”

R.A No. 574(Cal) of 1997:

“Whether, on the facts and in the circumstances of the case, the Tribunal correctly applied the provisions of section 36(1)(iii) in confirming the disallowance of interest on borrowed capital in the amount of Rs. 3,05,444?”

The first question:

2. The first question is whether the expenditure on food and drinks provided to the employees and to the customers in the course of the seminar for sales promotion held in the previous year 1989-90 was admissible for deduction as business expenditure or an expenditure for entertainment disallowable under section 37(2A) of the said Act, as applicable to the assessment year 1990-91. The assessee has not claimed the amounts spent on food and drinks supplied to persons other than the employees under this head. It has claimed the expenses for the seminar and the food and drinks supplied to the employees. Sub-section (2A) of section 37 prescribes that no allowance shall be made, notwithstanding anything contained in sub-section (1) or sub-section (2) of section 37, in respect of so much of the expenditure in the nature of entertainment expenditure incurred by the assessee in respect of the matters specified. Explanation 2 was subsequently added with effect from April 1, 1976, for the removal of doubts in the form of a declaration in respect of sub-section (2A) and sub-section (2B). In the said Explanation, it is provided that entertainment expenditure shall include expenditure on provision of hospitality of every kind by the assessee to any person other than employee, 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 express or implied contract. But the cost of food and drinks provided to the employees in office, factory or other place of their work is excepted from being termed as entertainment expenditure otherwise disallowable under the said provision.

3. In the present case, we are concerned with the question of the expenditure incurred for supplying food and beverages to the employees of the assessee and that of the seminar. No claim has been raised by Mr. Khaitan, appearing for the assessee, in respect of the expenses incurred for the customers or persons other than the employees.

4. Learned counsel for the respondents, however, attempts to point out that there is no material on record to show how much was spent for the employees and how much was spent for the customers or other persons. On the facts, there is nothing to indicate that this was supplied to the employees at their place of work. According to him, the place of work is the place other than office or factory where the employee normally works. He elaborated his contention that a hospital or school is neither a factory nor an office and, therefore, the expression “other place of their work” has been used to incorporate and include places other than office and factory and not for any other purpose. It has to be understood on the principle of ejusdem generis having regard to the expression office or factory. Therefore, no other interpretation can be given to the said provision. Expenditure on food and beverages supplied to the employees in the course of a seminar at a place other than office, factory or their place of work cannot be included within the exception.

5. Mr. Khaitan, however, attempted to contend that a narrow meaning to the expression “other place of their work” cannot be imputed in the present case. It should be given its due meaning having regard to the context. If food is supplied to the employees during the course of their work, it would include places where such employees may, for the time being, be at work. It cannot be confined only to the normal place of work. According to him, if such an interpretation is to be given, in that event, we are required to read something the Legislature has not expressly included. The court cannot interpret a provision of a statute, which would amount to adding something to the statute, a proposition otherwise impermissible.

6. The question appears to be very simple. We are not concerned with the distinction of hospitality or entertainment as was sought to be drawn by Mr. Khaitan in the present case. Since the facts do not pose or involve any such question as soon the assessee confines its claims for the expenditure incurred on food and beverages provided to the employees of the assessee and not the expenses incurred on food and beverages for the customers or other persons.

7. So far as the expenses of seminar for business promotion is concerned, the same is definitely a business expenditure, if it is aimed at or necessary for increasing the skill of the salesmen for promotion of sale. Therefore, that part of the expenses does not pose any difficulty for our present purpose. Such an exercise for sales promotion would definitely be a business expense.

8. The food and drinks supplied to the employees is excepted from the wider meaning of entertainment clarified by Explanation 2 to the extent it is spent at other place of their work unless it is spent in the office or the factory. In the present case, there is no material to show that this is spent in the office or the factory. Admittedly, it has been spent in a seminar on a particular day.

9. The expression used in Explanation 2 has to be read in its context and given a simple meaning. A plain reading of the said Explanation indicates that the phrase used can be given its simple grammatical meaning. The simple grammatical meaning does not reveal before us any doubtful proposition. It is capable of being given only one simple meaning. Therefore, we may not look upon any external aid for the purpose of interpretation of the said provision. We may travel by the express words used in the phrase itself. It has not limited the expenditure on food and beverages provided to the employees of the assessee including any expenses either in a regular course or at the normal place of work or by way of terms of employment or otherwise. Immediately before the incorporation of the exception relating to employees, the phrase “entertainment expenditure provided to any other person” has been qualified in such a manner that all kinds of hospitality “notwithstanding any express or implied contract, custom, usage or trade” is included. Whereas the same expression has not been incorporated while introducing the exception. Therefore, the preceding phrase points at two ways. One that the preceding phrase is an indication that this exception is subject to the qualification that irrespective of express implied contract, custom, usage or trade, food and beverages provided to the employees in office, factory or other place of their work is excepted from entertainment expenditure. It can also be read in another manner to indicate that the absence of such qualifying phrase in the exception implies that the exception is unqualified and all kinds of expenditure on food and drinks for the employees, if provided in the office, factory or other place of their work, is excepted.

10. Learned counsel for the Department/respondent had relied on the decision in Commissioner Of Income-Tax, Jodhpur v. Green Roadways, [1985] 154 ITR 639 (Raj). The said decision does not help the respondent but the assessee. Inasmuch as in the said decision, it was held that the hospitality extended to the customer is an entertainment expenditure within the meaning of Explanation 2 to section 37(2A). But the portion spent for the employees is not an entertainment expenditure and, therefore, is not disallowable.

11. Having regard to such a proposition, in our view, the exception is unqualified and it is available where it is given regularly or sporadically or on any particular occasion without attracting the distinction of hospitality or entertainment, if provided in office, factory or other place of their work. Therefore, food and drinks provided to the employees in the course of a seminar is an expense which the assessee is entitled to exclude from entertainment expenditure as explained in Explanation 2.

12. Now let us examine the implication of the phrase “other place of their work”. We are unable to accept the proposition as advanced by learned counsel for the respondent that this phrase indicates place of work other than office or factory to mean normal place of the work where the employees work regularly or normally. The answer is simple. If an employee is deputed for the purpose of doing some work at some place outside office or factory and if the employee is to work there, wherever he will be doing the work, for the time being, would be his place of work. Therefore, no such distinction as had been sought to be made by learned counsel for the respondent can be drawn in this respect. It would include any place where any of the employees of the assessee is asked to perform his work in connection with the employer's business. Therefore, if the seminar is held at a place outside the office or factory and it is held for business of the assessee for the purpose of demonstrating or imparting training to the employees to acquire the skill and expertise for sales promotion then definitely the employees attending the seminar would be at work. The place where such seminar is being held in that event, would be the place of their work. As such, food and drink supplied to the employees at such a seminar be it a hotel or anywhere else would be a business expenditure not included in entertainment expenditure coming squarely within the scope and ambit of the exception provided in Explanation 2.

13. The divergence of opinion with regard to the distinction between hospitality and entertainment has since been settled by the Supreme Court in Commissioner Of Income Tax v. Patel Brothers & Co. Ltd.., [1995] 215 ITR 165 at page 172 affirming Commissioner Of Income Tax v. Patel Brothers & Co. Ltd.., [1977] 106 ITR 424 (Guj). Ordinary meals, a bare necessity, offered to outstation customers were held to be hospitality not entertainment within its enlarged meaning declared in Explanation 2 overruling the contrary view in Brij Raman Dass & Sons v. Commissioner Of Income-Tax, Lucknow., [1976] 104 ITR 541 (All) and other cases following such view. Entertainment of foreign representatives of foreign buyer in a hotel was held to be a business expense not in the nature of entertainment expenditure within the meaning of section 37(2B) in Commissioner Of Income-Tax v. Eskaps (I) Pvt. Ltd., [1991] 191 ITR 674, 676 (Cal) without notice to the extended meaning of the word “entertainment expenditure” declared in the newly inserted Explanation 2 by the Finance Act, 1983, with retrospective effect from April 1, 1976. The Andhra Pradesh High Court in CIT v. Andhra Sugars Ltd., [1997] 225 ITR 118, 122, had taken a similar view with regard to expenses incurred on food and beverages provided by the assessee to the employees in office, factory or other places of their work as well as to the customers holding that such expenditure does not fall within the enlarged meaning of entertainment expenditure given in Explanation 2. In relation to customers having regard to the decision in Patel Brothers' case, [1995] 215 ITR 165 (SC), ordinary meals being a bare necessity, if provided to outstation customers, can well be within the meaning given by the apex court. The Gujarat High Court in Commissioner Of Income-Tax, Gujarat-Iii v. Central India Builders, [1985] 156 ITR 453 held that messing expenses incurred for employees are not entertainment expenditure. The Rajasthan High Court in CIT v. Anjani Kumar and Co. (P) Ltd., [1997] 227 ITR 786, 789-90 held that the expenditure for providing tea and coffee to the factory workers in the factory is outside the purview of Explanation 2. This proposition is apparent on the face of the expressions employed in Explanation 2 itself while excepting the expenses incurred for food and drinks provided to the employees at the office, factory or other places of their work. In Commissioner Of Income-Tax v. Orient Paper Mills Ltd., [1988] 171 ITR 181 (Cal), this court had held that the expenditure incurred for supply of tea and refreshment at the conference of its salesmen and distributing agents was an expenditure in the nature of hospitality and not entertainment expenditure. In Commissioner Of Income-Tax v. Expo Machinery Ltd., [1991] 190 ITR 576, 577, the Delhi High Court had held that the employees accompanying the customers of the assessee in a hotel in discharge of their official duties were at work at the hotel within the meaning of other place of their work, since it was their duty to entertain the customers of the company. As such expenses incurred on their food in the hotel are, therefore, excluded from the purview of section 37(2A). We find support to the views we have taken on this question from the reasoning given in this Delhi decision.

The answer:

14. In the circumstances, the first question referred to us is answered in the affirmative in favour of the assessee to the extent it is proved to have been spent for the seminar and for the purpose of providing food and drinks to the employees in the seminar so held, excluding the part spent on food and drinks for persons other than the employees.

The second question:

15. Now coming to the second question, learned counsel, Mr. Khaitan, for the assessee, points out that this amount was spent in order to acquire a fixed asset for the purpose of establishing a project in connection with the existing business of the assessee, namely, for acquiring a plot of land at Pondicherry from a sister concern with whom the assessee had business dealings of purchasing commodities produced by its sister concern. It is also an admitted proposition that the assessee had borrowed certain amount from the bank. It had advanced the said amount to its sister concern. A part of this amount was adjusted against the supplies made by the sister concern. Therefore, the borrowed capital to the extent it was advanced to the sister concern of the assessee relating to the materials supplied within the previous year is definitely a business expense in connection with the assessee's business entitling him to claim the benefit of section 36(1)(iii) on the interest paid on the borrowed capital to that extent. But the entire amount so advanced was not adjusted against the supplies made during the previous year.

16. Mr. Khaitan contended that this balance amount was adjusted against the interest-free security deposit and payment of advance rent free of interest against the lease obtained in respect of the land of its sister concern at Pondicherry for the purpose of setting up a project in connection with the assessee's business. The negotiation for the lease of the said land was continuing right from the previous year. However, the execution of the deed took place after the closing of the previous year. But pursuant to such negotiation the advances were placed at the disposal of the sister concern. The balance advance so made after adjusting the amount against the supplies were adjusted against the interest-free security deposit and the interest-free advance payment of rent. Therefore, it is allowable for the previous year.

17. Learned counsel for the respondent, on the other hand, contends that there is nothing to prove that negotiation was continuing. He further points out that this amount was adjusted after the close of the previous year. The date of such adjustment shall be the date on which the expenses were incurred. Making of the advance and that too interest-free would not be a business expense from the borrowed capital. Therefore, the interest paid on the said amount cannot come within the scope and ambit of section 36(1)(iii).

18. Doubt may be raised that interest-free security deposit or advance rent may not be an expenditure for acquiring a fixed asset. But then the question has to be looked into as to whether the advance paid was an expense incurred for acquiring a fixed asset for the purpose of business of the assessee. Admittedly, a lease was obtained in the subsequent year. The amount of advance was adjusted against such lease. The very advance and its adjustment having regard to the execution of the lease seems to be a question which is to be determined on the basis of the material that whether such advances followed the negotiation that culminated into execution of the deed of lease after the close of the previous year. If it is proved that the advance was made in order to obtain lease of the land for setting up its business, in that event, it would definitely be an expense for acquiring a fixed asset though in the form of advance. This is a matter, which can be determined on the basis of the materials placed before the authority concerned.

19. The setting up of a project has not been disputed. The appellate authority has not come to any finding contrary to the assessee's claim that it was done for expanding the existing business activities of the assessee. This is also not disputed by learned counsel for the respondent. Now a business commences as soon the preparatory steps are taken for the commencement of the business. Therefore, the negotiation for obtaining and for acquiring a land is also a part of business expenses and if advance is made for this purpose, in that event, it will entitle the assessee to the benefit of section 36(1)(iii). Since the advance was made in the previous year, it cannot be disallowed simply on the basis that the lease deed was executed in the subsequent year. If the amount is spent for the purpose of acquiring the property whether in the form of inter-est-free security deposit or in the form of interest-free advance rent, it is an expenditure for acquiring a fixed asset, if the terms provide so. It is common knowledge that in case of such transaction sometimes advances, premiums are asked for and in the process it might be paid for advance and free of interest. Therefore, if it can be proved that it was so paid for such purpose and that there was a negotiation going on and there were expenses by payment of advance or deposit of security as one or more of the considerations then it will entitle the assessee to the benefit of the said section.

20. Expenses incurred on borrowals for setting up new factory interconnected with existing business were held to be allowable under this section in Prem Spinning and Weaving Mills Co. Ltd. v. CIT, [1975] 98 ITR 20 (All). In Addl. CIT v. Aniline Dyestuffs and Pharmaceutical (P) Ltd., [1982] 138 ITR 843 (Bom), it was held that where new the project set up by the assessee was not totally independent of the existing business, interest paid on the loan for such new project was to be allowed as deduction. In CIT v. Granulated Fertilizers and Feeds (P) Ltd., [1982] 137 ITR 400 (Guj), it was held that interest paid on money borrowed to acquire a fixed asset is revenue expenditure and allowable under this provision. We had occasion to discuss in detail similar question in Tetron Commercial Limited v. Commissioner Of Income Tax, W.B-Iv, Calcutta No. 78 of 1999, disposed of by us on January 15, 2003—[2003] 261 ITR 422 (Cal)), with reference to various decisions on the question. In the said decision, we had held (page 427):

“Whether the deduction under section 36(1)(iii) is available or not is dependent on the question whether the capital borrowed is for the purpose of the business of the assessee. If it is found that the capital was borrowed for the purpose of the business of the assessee, the interest payable thereon, is admissible under the said section. It is immaterial whether the same is in the nature of capital expenditure or revenue expenditure. If the expenditure is a business expenditure relates to any stage of the business activity carried on by the assessee, whether an isolated transaction or not, it is admissible for deduction under the said section. A business commences with the activities undertaken even at the preparatory stage for setting up of the business. Acquisition of immovable property for being used in the business by borrowed capital entitles the assessee to claim benefit of the section on the interest paid thereon, even if the asset acquired is not utilised for the purpose of the business in the relevant previous year.”

21. Learned counsel for the respondent relied on Saraya Sugar Mills (P) Ltd. v. Commissioner Of Income-Tax., [1993] 201 ITR 711 (All). But the said case seems to be distinguishable on facts. Inasmuch as, there the borrowed capital was diverted to the directors and firms in which they were interested and no interest was charged from the directors. In this case, though the advance was made to the sister concern, in which the directors of the assessee may be interested, but then it was for the purpose of acquiring a fixed asset in the form of obtaining lease of a land at Pondicherry for setting up of a project expanding the existing business of the assessee. The interest-free deposit and payment of interest-free advance rent are, more often than not, conditions for obtaining lease for acquiring leasehold lands in normal course of such transaction, a proposition which cannot be ruled out. He then relied upon the decision in Catholic Diocese Of Tiruvalla v. State Of Kerala., [1994] 209 ITR 596 (Ker). In the said case, the claim was made for exemption of the agricultural income and that it was spent for religious and charitable purpose and then it was also not proved by separate account or by any verifiable accounts. Therefore, this decision has no manner of application in the facts and circumstances of the present case. Reliance was placed by him in Phaltan Sugar Works Ltd. v. CIT, [1995] 216 ITR 479 (Bom). This decision is also distinguishable on facts. Inasmuch as, the capital borrowed was spent not for purchase of machinery as claimed by the assessee. On the facts, it was found that it was intended for the purchase of shares in a foreign company, which cannot be a business expenditure. Next he relied upon Commissioner Of Income-Tax v. Sujanni Textiles (P.) Ltd., [1997] 225 ITR 560 (Mad). This is also distinguishable. The borrowed funds were utilised for non-business purpose and, therefore, the interest paid thereon was disallowed.

The answer:

22. In the circumstances, we answer the second question in favour of the assessee in the negative to the extent that if the assessee is able to prove that this was an advance for acquiring a fixed asset and was made pursuant to a negotiation undertaken in the previous year as a condition for obtaining the lease, then it will be entitled to the benefit of section 36(1)(iii).

Conclusion:

23. Admittedly, there are no materials before us to decide the case finally in favour of the assessee in the facts and circumstances of the case. Therefore, we answer both the questions on principle. The said principle has to be applied having regard to the material and facts and circumstances of the case that might be available in the case of the assessee for deciding the questions in the light of the answer we are giving hereby.

Order:

24. In view of the situation that the facts are to be ascertained and the questions are to be determined in the light of the principles we have enunciated, we remand the case before the learned Tribunal to look into both the questions once again and reassess the same in the light of the answer given hereby and make a fresh assessment on both the questions. All parties are to act on a xerox signed copy of this dictated order on the usual undertaking.

R.N Sinha, J.:— I agree.