1. By this reference under Section 256(1) of the I.T. Act, 1961 (hereinafter called "the Act"), the Income-tax Appellate Tribunal, Indore Bench, has referred the following question of law to this court for its opinion :
Whether the Tribunal was justified in holding that the expenditure incurred by the assessee for providing messing in its trade constituents by way of ordinary courtesy did not amount to expenditure in the nature of entertainment expenditure as contemplated by Section 37(2B) of the Income-tax Act, 1961 ?
2. The material facts giving rise to this reference as set out in the statement of the case briefly are as follows :
3. The assessee is a registered firm and the assessment year in question is 1974-75. The assessee derived income from wholesale business in cloth. The assessee claimed an expenditure of Rs. 26,000 incurred for providing messing, tea, etc., to its trade constituents. This claim was disallowed by the ITO who observed that the expenditure was in the nature of entertainment expenditure. On appeal, the AAC held that the ITO was not justified in disallowing the messing expenses. The AAC, however, further held that looking to the volume of the business of the assessee, the expenditure claimed by the assessee was excessive. The AAC, accordingly, reduced the claim to Rs. 15,000. Aggrieved by the order passed by the AAC, the department preferred an appeal before the Tribunal. It was contended on behalf of the department that the expenditure in question was in the nature of entertainment expenditure as contemplated by Section 37(2B) of the Act. The Tribunal, however, rejected that contention and held that the expenditure incurred by a trader on messing, tea, etc., provided to his constituents or customers by way of ordinary courtesy, did not amount to entertainment expenditure. The Tribunal further held that having regard to the extent of the business of the assessee, the AAC was right in allowing expenditure to the extent of Rs. 15,000. The Tribunal, accordingly, upheld the order passed by the AAC. Aggrieved by the order passed by the Tribunal, the department submitted an application for making a reference to this court and that is how the aforesaid question of law has been referred to this court for its opinion.
4. The question arising for consideration in this case has been exhaustively dealt with in CIT v. Patel Brothers & Co. Ltd. [1977] 106 ITR 424 (Guj). A Division Bench of the Gujarat High Court held that the term "entertainment" in the context of Section 37(2B) of the Act on its true construction and meaning would include the acts or practice of receiving and entertaining the strangers and friends ; but if the acts or practice of being hospitable in the sense of providing meals, drinks or other wants of guests are a part and parcel of the express or implied terms and conditions of business, trade or profession or on account of long-standing custom in such trade, business or profession, they would not amount to acts of entertainment. If was further held that hospitality shown on account of obligation of business arising as a result of an express or implied contract or arising on account of the long-standing custom of a trade cannot amount to "entertainment". We, respectfully, agree with the view so taken. The judgment of the Gujarat High Court has been followed in CIT v. Shah Nanji Nagsi [1979] 116 ITR 292 (Bom) and Addl. CIT v. Maddi Venkataratnam &Co. Ltd. [1979] 119 ITR 514 (AP). Learned counsel for the department referred to two decisions in Brij Raman Dass & Sons v. CIT [1976] 104 ITR 541 (All) and CIT v. Veeriah Reddiar [1977] 106 ITR 610 (Ker) [FB], taking a contrary view. But, in our opinion, the test that has been laid down by the Gujarat High Court is consistent with the commercial practice and custom of the trade and is not shown to be contrary to the provisions of the Act.
5. In our opinion, therefore, the answer to the question referred to us is in the affirmative and in favour of the assessee. Parties shall bear their own costs of this reference.
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