Supreme Court Dismisses Revenue Appeals in Income Tax Entertainment Expenditure Dispute; Ordinary Meals as Business Necessity Not Covered Under Section 37(2A) Income-tax Act, 1961. The Court Holds That Expenditure on Provision of Ordinary Meals to Customers as Bare Necessity of Business Does Not Constitute Entertainment Expenditure Prior to 1 April 1976, Despite Explanation 2 Inserted by Finance Act, 1983.

Income tax appeals involving common question of law regarding the meaning of 'entertainment expenditure' under Section 37(2A) of the Income-tax Act, 1961 for assessment years 1969-70, 1970-71 and 1971-72.

The revenue sought to disallow expenditure incurred on meals provided to customers as entertainment expenditure in excess of Rs.5,000 under Section 37(2A); the assessee sought full deduction of the expenditure.

The Income-tax Officer partially disallowed kitchen expenses attributable to meals provided to customers, treating them as entertainment expenditure, even though the meals were ordinary and not lavish.

The Appellate Assistant Commissioner allowed the expenditure holding that meals were a bare necessity of business. The Income-tax Appellate Tribunal confirmed the order. The Gujarat High Court answered the references against the revenue, holding that the expenditure on ordinary meals as a bare necessity was not entertainment expenditure.

Whether expenditure incurred by an assessee on providing ordinary meals to customers as a bare necessity of business constitutes 'entertainment expenditure' within the meaning of Section 37(2A) of the Income-tax Act, 1961 for assessment years prior to 1.4.1976. Whether Explanation 2 to Section 37(2A), inserted by the Finance Act, 1983 retrospectively from 1.4.1976, has any application to the period prior to 1.4.1976.

Revenue argued that all kinds of hospitality constitute entertainment and therefore the entire expenditure incurred for serving ordinary meals as a bare necessity falls under Section 37(2A); the expression 'entertainment expenditure' must be construed from inception as defined in Explanation 2 since Explanation 2 is merely clarificatory. Assessee argued for purposive interpretation of Section 37(2A); the purpose was to curb the tendency of incurring lavish expenditure and not customary hospitality extended through ordinary meals as a bare necessity; the traditional meaning of every hospitality is not entertainment. Assessee further submitted that in all these cases the allowance claimed was only for expenditure incurred in providing ordinary meals as a bare necessity and not any lavish food.

Expenditure incurred on providing ordinary meals as a bare necessity of business is not 'entertainment expenditure' within the meaning of Section 37(2A) of the Income-tax Act, 1961 for the period prior to 1 April 1976. Explanation 2 to Section 37(2A), inserted by the Finance Act, 1983 retrospectively from 1 April 1976 only, does not govern assessment years prior to that date. The provision is intended to curb lavish or ostentatious expenditure, not customary hospitality extended through ordinary meals.

The assessee, a limited company, claimed kitchen expenses of Rs.22,301/-, Rs.25,979/- and Rs.28,620/- respectively for these assessment years as expenses incurred for providing meals to its employees and its customers in the ordinary course of its business as customary trade usage. The High Court answered both the questions in the negative since it was found on the facts by the Tribunal that indisputably the upcountry constituents of the assessee came to Ahmedabad for the purpose of business with the assessee and having regard to the nature and magnitude of the business of the assessee, it would be necessary for the assessee to make arrangements to provide meals to them while in Ahmedabad for business with it, as it was not the revenue's case that the assessee had spent the money for throwing lavish parties for its constituents. The contention of Shri B.B.Ahuja, learned counsel for the revenue is that all kinds of hospitality is entertainment and, therefore, the entire expenditure incurred under this head, even for serving ordinary meals as a bare necessity, falls under sub-section (2A) of Section 37; and the expression 'entertainment expenditure' in sub-section (2A) must be construed to mean from the inception as defined in Explanation 2 to sub-section (2A) of Section 37, since Explanation 2 is merely clarificatory. In reply, Shri Harish Salve, learned counsel for the assessee contended that purposive interpretation of the provision must be made. It was urged that the purpose was to curb the tendency of incurring lavish expenditure and not customary hospitality extended by offering ordinary meals as a bare necessity since the traditional meaning of every hospitality is not entertainment.

The Income-tax Officer disallowed part of kitchen expenses attributable to meals provided to customers for assessment years 1969-70, 1970-71 and 1971-72. The Appellate Assistant Commissioner allowed the expenditure holding that meals were a bare necessity. The Income-tax Appellate Tribunal confirmed the order. At the instance of the revenue, the Tribunal referred two questions of law to the Gujarat High Court. The Gujarat High Court answered both questions in the negative, holding that expenditure on ordinary meals as a bare necessity was not entertainment expenditure. The revenue appealed to the Supreme Court by certificate under Section 261 of the Income-tax Act, 1961. The Supreme Court consolidated all connected matters involving the same point from various High Courts.

• Income-tax Act, 1961: Section 261, Section 37(1), Section 37(2), Section 37(2A), Section 37(2B), Explanation 2 to Section 37(2A)
• Finance Act, 1983: Insertion of Explanation 2 to Section 37(2A)
• Taxation Laws (Amendment) Act, 1967: Insertion of Section 37(2A)
• Finance Act, 1970: Insertion of Section 37(2B)