Commissioner Of Income-Tax v. Lalubhai B. Patel & Co.

1. This is a reference made by the I.T. Appellate Tribunal under Section 256(1) of the I.T. Act, 1961, referring for our answer, the following questions of law :

"1. Whether the Appellate Tribunal was right in coming to the conclusion that the entertainment expenses incurred by the assessee were not hit by the provisions of Section 37(2A) or Section 37(2B) of the I.T. Act, 1961 ?

2. Whether the Appellate Tribunal was justified in holding that the expenses incurred for providing tea, coffee, pan, cool drinks, etc., to the customers being ordinary courtesies and hospitalities, did not amount to expenditure in the nature of entertainment expenditure ?

2. The relevant assessment year is 1971-72. The account period ended on Diwali 1970. The ITO disallowed Rs. 13,104, under the head of entertainment expenses. This disallowance was upheld by the AAC. The Tribunal in appeal, held that the expenses were incurred for providing tea, coffee, pan, cool drinks, etc., to the customers and were a customary courtesy shown to customers by business houses and, therefore, did not amount to entertainment expenses, under Section 37(2A) or Section 37(2B) of the Act. In holding so, the Tribunal relied upon the decision of the Gujarat High Court in CIT v. Patel Brothers & Co. Ltd. [1977] 106 ITR 424 (Guj). The view taken by the Gujarat High Court has been accepted as the correct view by a Division Bench of this court in CIT v. Lakmichand Muchhal (Miscellaneous Civil Case No. 15 of 1977, decided on 12th September, 1980 --since reported in [1982] 134 ITR 234 (MP)). The Division Bench in Lakhmichand Muchhal's case took notice of the contrary view taken by the Allahabad and Kerala High Courts in Brij Roman Dass & Sons v. CIT [1976] 104 ITR 541 (All) and CIT v. Veeriah Reddiar [1977] 106 ITR 610 (Ker) [FB] and held that the view taken by the Gujarat High Court was preferable. It was also noticed that the Gujarat case has been followed by the Bombay, Karnataka and Madras High Courts. As this court has accepted the view taken by the Gujarat High Court, it has to be held that the Tribunal was right in holding that the customary expenses in providing tea, pan, coffee, cool drinks, etc., to the customers was not entertainment expenditure within the meaning of Section 37(2A) or Section 37(2B) of the Act.

3. For the reasons given above, we answer both the questions in the affirmative in favour of the assessee and against the Department. There will be no order as to costs of this reference.