1. Both these references were heard together and it will be convenient to dispose them of by a common order, for, the arguments in both the references are identical.

2. We may first notice the facts leading to Reference No. 9 of 1977 : The assessee is a registered firm. The previous year relevant to the assessment year 1972-73 ended on Diwali 1971. The asseessee derived income from agricultural commodities and adat. For the assessment years 1972-73 and 1973-74, the assessee filed returns declaring an income of Rs. 85,150 and Rs. 94,580, respectively. The assessee, inter alia, claimed messing expenses to the tune of Rs. 4,500 and Rs. 4,800 for the assessment years 1972-73 and 1973-74, respectively. The Income-tax Officer (ITO) was of the view that the expenses were in the nature of entertainment and, as such, in view of Section 37(2B) of the I.T. Act, 1961 (No. XLIII of 1961) ("the Act" herein), the aforesaid claim could not be allowed. On appeal, the A AC, vide order dated June 14, 1974, held that the expenses in question were not hit by the provisions of Section 37(2B) of the Act as, in his opinion, such expenses were incidental to the business. The AAC, therefore, allowed the expenses to the extent of Rs. 3,000 each year. A further appeal was taken by the Revenue to the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (" the Tribunal " herein). The Tribunal by its order dated November 11, 1975, held that the expenditure incurred on providing food to constituents or entertaing them on soft drinks, namely, coca cola, coffee, tea, etc,, will be expenditure in the nature of entertainment. It, therefore, disallowed the claim of messing expenses for both the assessment years in question. It has referred the following questions of law arising out of its order for our opinion :

" 1. Whether, on the facts and in the circumstances of the case, the messing expenses claimed by the assessee in both the assessment years under consideration were in the nature of entertainment expenditure within the meaning of Section 37(2B) of the Act ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in restoring the disallownace of Rs. 4,500 and Rs. 4,800 for the assessment years 1972-73 and 1973-74, respectively, in question in computing the taxable income of the assessee for the assessment years under consideration ? "

3. Facts in D.B.I.T. Reference No. 42 oj 1977 ;

The assessee is a registered firm. The assessment year in question is 1974-75. The assessee-firm filed its return declaring an income of Rs. 1,15,375. It has claimed messing expenses of Rs. 13,000. The Income-tax Officer (ITO) held that such expenses were in the nature of entertainment. He, therefore, disallowed them. An appeal was lodged and the AAC was of the view that the expenses could be allowed to the extent of Rs. 10,000. He, therefore, vide his order dated January 21, 1976, gave relief in the sum of Rs. 10,000. The Revenue filed a further appeal before the Tribunal. The Tribunal opined that the expenditure in question were in the nature of entertainment and, as such, they were hit by Section 37(2B) of the Act. On these facts, on an application under Section 256(1) of the Act filed by the assessee, the following questions have been referred to this court for opinion:

" 1. Whether, on the facts and in the circumstances of the case, the expenditure on providing food to outstation constituents was in the nature of entertainment expenditure in law ?

2. Whether, on the facts and in the circumstances of the case, the entire expenditure in question could be disallowed under Section 37(2B) of the Income-tax Act, 1961, for the assessment year 1974-75 ? "

4. We have heard Mr, Rajendra Mehta and Mr. Rajesh Balia, learned counsel for the assessees, in each of the references and Mr. J. P. Joshi for the Revenue,

5. By Section 10 of Act No. XIX of 1970, the following Section 37(2B) was inserted with effect from April 1, 1970:

" Notwithstanding anything contained in this section, no allowance shall be made in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessee after the 28th day of February, 1970."

6. It was deleted/omitted by Section 9 of Act No. 66 of 1976, with effect from April 1, 1977. Thereafter, by Section 17 of the Finance Act, 1983 (Act No. XI of 1983), Section 37 of the Act was amended. The material part of Section 17 of the Finance Act, 1983, for our purpose is as follows :

" 17. In Section 37 of the Income-tax Act,--(a) in Sub-section (2 A),--

(i) for Clauses (iii) and (iv), the following shall be substituted with effect from the 1st day of April, 1984, namely:.........

(ii) the Explanation shall be numbered and shall be deemed to have been numbered with effect from the 1st day of April, 1976, as Explanation 1 and after Explanation 1 as so numbered, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1976, namely :--

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 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. "

7. Thus, it is clear that the above Explanation 2 to Section 37(2A) of the Act was inserted with effect from April 1, 1976. In D.B.I.T. Ref. No. 9 of 1977, the assessment years in question are 1972-73 and 1973-74 and in D.B.I.T. Ref. No. 42 of 1977, the assessment year involved is 1974-75. We are, thus, concerned with Section 37(2B) of the Act as it existed in the years 1972-73, 1973-74 and 1974-75.

8. Learned counsel for the Revenue raised the controversy that Explanation 2 which was inserted by the amendment of Section 37, vide Section 17 of the Finance Act, 1983, will be deemed to have been inserted with effect from April 1, 1970, despite that this insertion was made effective from April 1, 1976, and in view of this Explanation, the expenditure in question incurred by the assessees cannot be allowed now. On the other hand, learned counsel for the assessees submitted that Explanation 2 to Section 37(2A) has been inserted with effect from April 1, 1976, and, as such, it will have no application to the assessments that have already been completed prior to this date (April 1, 1976) and the questions referred by the Tribunal may be answered according to Section 37(2B) as it existed then.

9. Having considered the contentions of the learned counsel for the Revenue as well as that of assessees in respect of Explanation 2 to Section 37(2A), we are of the opinion that the questions referred by the Tribunal should be answered having regard to Section 37(2B) as it existed during the assessment years 1972-73, 1973-74 and 1974-75.

10. In both the references, the first question which is common and crops up for our consideration is whether messing expenses claimed by the asses-see for the assessment years in question was in the nature of entertainment expenditure as envisaged by Section 37(2B) of the Act. The Tribunal was of the opinion that the expenditure incurred for providing food to the constituents or entertaining them with soft drinks, namely, coca cola, coffee, tea, etc., is an expenditure in the nature of entertainment. It appears that barring aside Brij Raman Das and Sons v. CIT [1976] 104 ITR 541 (All) and CIT v. Veeriah Reddiar [1977] 106 ITR 610 (Ker) [FB], no other authority was brought to its notice and it, therefore, in accordance with the aforesaid decisions did not agree with the AAC in regard to grant of relief for a sum of Rs. 3,000 in each year under consideration in the matter of Devichand and disallowed the claim in full in respect of Bhanwarlal.

11. There is divergence of judicial opinion on the question among the various High Courts of India. We propose to notice both sets of views.

12. We shall first advert to the authorities cited by the learned counsel for the assessee. The basic authority is CIT v. Patel Brothers and Co, Ltd. [1977] 106 ITR 424 (Guj), wherein four tests have been laid down for determining the nature of entertainment expenditure:

1. If the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish and extravagant scale, or is of wasteful nature, it is entertainment per se,

2. If the provision of food or drinks to a client, constituent or customer is in the nature of bare necessity or by way of ordinary courtesy or as an express or implied term of the contract of employment spelled out from long-standing practice or custom of trade or business, it will not amount to entertainment.

3. If the provision of food or drinks to a client, customer or constituent is in a liberal and friendly way, it may amount to entertainment having regard to the place, item and cost of such provision.

4. The provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment.

13. We may state that learned counsel appearing for the Revenue also wanted to derive support from this decision as according to him while applying the broad test laid down in Patel Bros.' case [1977] 106 ITR 424 (Guj), it is an entertainment expenditure.

14. Patel Bros. & Co. Ltd.'s case [1977] 106 ITR 424 (Guj) was followed in CIT v. Shah Nanji Nagsi [1979] 116 ITR 292 (Bom), wherein their Lordships of the Bombay High Court expressed their agreement with the view that was taken, for, according to them, it was in consonance with the commercial practice and the manner in which business and trade are carried on in large commercial centres. We may state that in Shah Nanji Nagsi's [1979] 116 ITR 292 (Bom), the expenditure incurred by a Pakki Adati was either for messing and lodging to the constituents who came from outside only for a duration of one or two days for the purpose of business or for providing tea and pan to the customers. The learned judges observed as under (at p. 296 of 116 ITR) I

" Any expenditure incurred for providing messing to such customers or constituents or offering tea and pan to them is actually an essential part of business and does not partake the nature of hospitality or entertainment. We feel that the test that has been laid down by the Gujarat High Court is consistent with the commercial practice and the custom of the trade and the view taken by the Gujarat High Court lends itself to us in preference to the one taken by the Full Bench of the Kerala High Court."

15. In Shah Nanji Nagsi's case [1979] 116 ITR 292(Bom), their Lordships of the Bombay High Court expressed their dissent from Veeriah Reddiar's case [1977] 106 ITR 610 (Ker) [FB],

16. In Addl. CIT v. Maddi Venkataratnam & Co. Ltd. [1979] 119 ITR 514 (AP), it was held that the expenditure incurred by the assessee in connection with providing lodging and boarding facilities by maintaining the guest house for the use of foreign visitors is not entertainment expenditure and, hence, it is admissible as a deduction under Section 37(1) of the Act. Patel Bros. & Co. Ltd.'s case [1977] 106 ITR 424 (Guj) was referred to.

17. In CIT v. Karuppuswamy Nadar & Sons [1979] 120 ITR 140 (Mad), the assessee claimed deduction of the expenses incurred by it on supply of coffee, tea, etc., to customers. It was held to be not in the nature of entertainment expenditure but for purposes of its business and hence allowable as a deduction under Section 37(1). It was observed (p. 143):

" The very concept of entertainment would rule out cases of business or commercial courtesy extended to clients who visit the businessmen for the purpose of doing business. The entertainment postulates that it is some seeking after pleasure, and cannot comprehend customary hospitalities shown to persons who come to do business. This running after pleasure may be indicated in cases where a lavish party is given in a posh hotel even to the clientele. But the ordinary elementary extension of business courtesy or civility to visiting clients by allowing them to quench their thirst, as in this case, cannot be understood as expenditure in the nature of entertainment."

18. The learned judges referred to Paid Bros. & Co. Ltd.'s case [1977] 106 ITR 424 (Guj), Veeriah Reddiav's case [1977] 106 ITR 610 (Ker) [KB] and Shah Nanji Nagsi's case [1979] 116 ITR 292 (Bom).

19. In Addl. CIT v. Banglore Turf Club Ltd. [1980] 126 ITR 430 (Kar), it was observed that in order that an expenditure should constitute expenditure in the nature of entertainment within the meaning of Section 37(2A) of the Act, it should have been expended for entertaining persons, whether customers or guests, either by way of providing food, drinks, refreshment or in providing any type of pleasure or amusement or an expenditure of a like nature incurred by the assessee for the purpose of entertainment, pleasure or amusement for himself or for his employees. Whatever be the case, the dominant purpose of incurring the expenditure for the purpose of food, drink, refreshment and amusment must be for deriving or providing pleasure.

20. In CIT v. Lakhmichand Muchhal [1982] 134 ITR 234 (MP), Maddi Venkataratnam & Co.'s case [1979] 119 ITR 514 (AP), Shah Nanji Nagsi's case [1979] 116 ITR 292 (Bom) and Patel Bros. & Co.'s case [1977] 106 ITR 424 (Guj) were followed and it was observed 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 strangers and friends; but when 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 entertainment. It was held that the expenditure incurred by an assessee for providing messing to its trade constituents by way of ordinary courtesy would not amount to expenditure in the nature of entertainment expenditure as contemplated by Section 37(2B). Veeriah Reddiar's case [1977] 106 ITR 610 (Ker) [FB] was referred to.

21. It was found in South India Viscose Ltd. v. CIT [1982] 135 ITR 206 (Mad), that the expenditure on provision of coffee, etc., to customers is not an entertainment expenditure and it is allowable as deduction. Karuppu-swamy Nadar's case [1979] 120 ITR 140 (Mad) was followed. In CIT v. Navalmal Punamchand [1982] 135 ITR 801 (MP), it was held by the Madhya Pradesh High Court that messing expenses in providing meals to upcountry customers in accordance . with the custom of the trade of the assessee does not amount to entertainment expenditure and cannot be disallowed under Section 37(2B) of the Act. In that case, Lakhmichand Muchhal's case [1982] 134 ITR 234 (MP) was followed.

22. In CIT v. Lalubhai B. Patel & Co. [1983] 139 ITR 832 (MP), it was reiterated by the Madhya Pradesh High Court after following Patel Bros. & Co.'s case [1977] 106 ITR 424 (Guj), that the expenses incurred for providing tea, coffee, pan, cold drinks, etc., to customers, being ordinary courtesies shown to customers by business houses, do not amount to expenditure in the nature of entertainment expenditure within the meaning of Section 37(2A) or Section 37(2B) of the Act.

23. In CIT v. Mathuralal Kapoorchand & Co. [1983] 141 ITR 297 (MP), it was held that the expenditure incurred by an assessee for providing messing facilities to his trade clients is an admissible business expenditure and such expenses are not in the nature of entertainment within the meaning of Section 37(2B) of the Act. Lakhmichand Muchhal's case [1982] 134 ITR 234 (MP) was followed. In Nava Bhamt Enterprises P. Ltd. v. CIT [1983] 143 ITR 804 (AP), business expenditure and entertainment expenditure were again considered by the Andhra Pradesh High Court. The learned judges opined that if expenditure is incurred for providing food and drinks only to a client, constituent or customer, which is in the nature of bare necessity or by way of ordinary courtesy, it would not amount to entertainment expenditure. But if a party is arranged or a banquet is given or some amusement is provided to, or in connection with the visit of, such a client, constituent or customer, as the case may be, it would fall within the ambit of the expression "entertainment expenditure ".

24. Our attention was drawn by the learned counsel for the assessees to [1979] Bombay Chartered Accountant Journal-739, to show that the Supreme Court has refused special leave to appeal against the order of the Bombay High Court in I.T.A. No. 273 (Bom) of 1976-77 decided on January 27, 1977. The Bombay High Court refused the application under Section 256(2) in respect of two questions of law which were said to have arisen out of the order of the Tribunal. Question No. 1 sought to be referred was whether, on the facts and in the circumstances of the case, the Tribunal's finding that the expenditure incurred by the assessee company by way of providing hot and cold drinks, lunch, etc., to its upcountry customers were of a customary nature in the assessee's line of business and that the said expenditure did not constitute entertainment expenditure within the meaning of section 37(2b) of the i.t. act, was proper or was contrary to the material on record. This shows that the Supreme Court has impliedly approved the decisions of the Gujarat and the Bombay High Courts and other High Courts which have followed them in preference to the view expressed by the Allahabad and the Kerala High Courts.

25. Learned counsel for the Revenue placed strong reliance on Veeriah Reddiar's case [1977] 106 ITR 610 (Ker) [FB], which has already been noticed. Besides that, he referred to AAdl. CIT v. Kalsi Tyre P. Ltd. [1981] 131 ITR 636 (Delhi) and CIT v. Khem Chand Bahadur Chand [1982] 134 ITR 65 (P&H). A Full Bench of the Kerala High Court took the view in Veeriah Reddiar's case [1977] 106 ITR 610, that the additional words " expenditure in the nature of " in Sub-sections (2A) and (2B) of Section 37 of the Act restricting the allowance for expenditure on entertainment by an assessee is to cast the net sufficiently wide so as to bring within the scope of the two sub-sections all types of expenditure in respect of which there can be said to be certain elements which invest them with the nature of entertainment expenditure. It was observed as follows (headnote):

" In interpreting the expression ' entertainment expenditure ' occurring in Sub-sections (2A) and (2B) of Section 37, the word ' entertainment' should be taken to mean hospitality of any kind extended by the assessee directly in connection with his business or profession and, therefore, the expenditure incurred by the assessee on the supply of cigarettes, coffee, etc., to its customers would clearly fall within the description ' entertainment expenditure'. In order to fall within the scope of the two sub-sections, the expenditure in respect of which the allowance is claimed need not be ' entertainment expenditure' in the strict sense of the term and it is sufficient if it partakes of some of the main characteristics of 'entertainment expenditure '. The test is amply satisfied if the expenditure in question was incurred in providing hospitality of some kind in connection with the business of the assessee. Judged in this light, the amounts spent by an assessee-firm in supplying cigarettes, coffee, meals, etc., to its customers would fall within the description ' expenditure in the nature of entertainment expenditure' occurring in Sunsections (2A) and (2B) of Section 37 of the Act."

26. In CIT v. Bagraj & Co. [1979] 117 ITR 694, the Allahabad High Court opined that the cost of food supplied to the low-paid employees of the assessee-firm would be business expenditure and cannot be disallowed as entertainment expense under Section 37(2A) of the Act. In CIT v. Khem Chand Bahadur Chand [1982] 134 ITR 65 (P & H), it was held that where the assessee itself was running a regular kitchen to furnish wholesome food and drinks to its customers, the expenditure thereon would fall within the ambit of hospitality, whether lavish or frugal, and the entire expenditure would be within the ambit of Section 37(2A) as an expense " in the nature of entertainment expenditure" and, therefore, subject to the ceiling limits prescribed in Clause (i) and (iv) thereof.

27. There is, thus, no doubt that there are two divergent views on the question relating to entertairiment expenditure: one taken in Patel Bros. & Co. Ltd.'s case [1977] 106 ITR 424 (Guj) and the other taken in Veeriah Reddiar's case [1977] 106 ITR 610 (Ker) [FB], The tests that have been laid down in Patel Bros. 6- Co. Ltd.'s case appear to us to be correct for determining the nature of entertainment expenses. Patel Bros, 6- Co. Ltd.'s case [1977] 106 ITR 424 (Guj) has been followed by the Bombay High Court in Shah Nanji Nagsi's case [1979] 116 ITR 292 and other High Courts referred to hereinabove. We respectfully agree with the view taken by the Gujarat High Court in Patel Bros. & Co, Ltd.'s case.

28. It may be stated that the AAC has followed the decision rendered in Patel Bros. & Co. Ltd.'s case [1977] 106 ITR 424 (Guj). A perusal of the order of the Tribunal shows that before it, only those authorities were cited which took the view that the expenditure with which we are concerned is entertainment expenditure. The decisions taking the contrary view from those decisions were not brought to the notice of the Tribunal.

29. In Reference No. 9 of 1977, the assessee is a registered firm and it derives income from agricultural commodities and " adat". The assessee-firm has claimed Rs. 4,800 being messing expenses on outside customers and " adatias ". The assessee in connection with the business provided merely food and soft drinks to such customers and adatiyas. On the basis of the reasons given in Patel Bros. & Co. Ltd.'s case [1977] 106 ITR 424 (Guj), such expenses cannot be characterised as entertainment expenditure under Section 37(2B) of the Act. The Tribunal was, therefore, not right in holding that the messing expenses claimed by the assessee in respect of the assessment years 1972-73 and 1973-74 were not in the nature of entertainment expenditure within the meaning of Section 37(2B) of the Act. The AAC after holding that the expenditure incurred was not in the nature of entertainment expenditure allowed the same to the tune of Rs. 3,000 each year. On behalf of the assessee, it was contended that the AAC committed an error in allowing deduction of Rs. 3,000 only out of the disallowed amounts in question each year. The Tribunal having come to the conclusion that it was in the nature of entertainment expenditure restored the disallowance of Rs. 4,500 and Rs. 4,800 for the assessment years 1972-73 and 1973-74, respectively. We have held that the messing expenses claimed by the assessee in both the assessment years in question are not in the nature of entertainment expenditure within the meaning of section 37(2b) of act. Now, it is for the Tribunal to consider in view of the finding recorded by the AAC in his order dated June 14, 1974, whether Rs. 3,000 should be allowed as messing expenses for each of the assessment years 1972-73 and 1973-74 or Rs. 4,500 and Rs. 4,800 should be allowed as messing expenditure for the assessment years 1972-73 and 1973-74, while computing the taxable income of the assessee for the assessment years keeping in view the finding that the messing expenses incurred by the assessee were not entertainment expenditure under Section 37(2B) of the Act.

30. So far as Reference No. 42 of 1977 is concerned, it is sufficient to state that the expenses incurred by the assessee for providing food to outside constituents was not in the nature of entertainment expenditure in law and, therefore, the entire expenditure could not be disallowed under Section 37(2B) of the Act.

31. The questions referred to us in Reference No. 9 of 1977 are answered in the negative, i.e., in favour of the assessee and against the Revenue. The answer to question No. 2 is limited to the extent we have hereinabove specified, namely, that the assessee is entitled to messing expenses which are not entertainment expenditure within the meaning of Section 37(2B) of the Act, but what quantum should be allowed will be decided by the Tribunal keeping in view the finding recorded by the AAC.

32. So far as Reference No. 42 of 1977 is concerned, both the questions referred to us are answered in the negative, i.e., in favour of the assessee and against the Revenue,

33. The parties shall bear their own costs of these references.

34. Let the answers be returned to the Tribunal in accordance with Section 260(2) of the Act.