COMMISSIONER OF INCOME-TAXversusPATEL BROTHERS AND CO. LTD. ETC. ETC.

                  COMMISSIONER OF INCOME-TAX                                         A
                                       v.
            PATEL BROTHERS AND CO. LTD. ETC. ETC.

                                 MAY 9, 1995

       [J.S. VERMA, N.P. SINGH AND M.K. MUKHERJEE, JJ.]                              B

      Income Tax Act, 1961 :

       Section 37(2-A) (As it stood prior to insertion of Explanation 2 i.e. prior
to 1.4.1976)-0bject and Interpretation of-'Entertainment Expenditure'-               C
Scope of-Assessee-Expenditure incumd in providing meals as a bare neces-
sity to outstation customers-Finding that meals were not lavish in any
manner-Held expenditure incurred by assessee was not entertainment expen-
diture-Held such an expenditure was a permissible deduction-lnsertion of
Explanation 2--Effect of-Explained.
                                                                                     D
     Words & Phrases-'Entertainment'-Meaning of-ln the context of In-
come tax Act, 1961:

       The question involved in these appeals relates to the meaning of
"E11tertainment Expenditure" in sub-section. (2-A) of Section 37 of the
Income Tax Act, 1961 before insertion of Explanation 2. therein. The E
respondent-Company had been incurring expenditure for providing meals
to its employees and its customers in the ordinary course of its business
as customary trade usage. For the assessment years 1969-70, 1970-71 and
1971- 72 it claimed deduction of kitchen expenses of Rs. 22301, Rs. 25979
and Rs. 28620 respectively. The Income Tax Officer partially disallowed F
the claim i.e. the expenses incurred for meals provided to the customers
even though it was found that the meals were ordinary and not in any
manner lavish. Against partial disallowance of the expenditure the asses-
see preferred appeal before the Appellate Assistant Commissioner who
held that the meals were bare necessity having regard to the nature of G
business and consequently granted that allowance. The Tribunal con-
firmed the order of the Appellate Assistant Commissioner. Two questions
of law referred to the High Court viz. (1) whether the expenditure in
question was in the natnre of entertainment expenditure in law and (ii)
whether the expenditure in question would be allowable only to the limited
extent of Rs. 5,000 under section 37(2-A) for each of the assessment years H
                                       235
    236                   SUPREME COURT REPORTS [1995] SUPP. 1 S.C.R.

A under reference, were answered in the negative i.e. against the Revenue and
    in favour of the assessee.

           In appeals to this Court it was contended for the Revenue that (i)
    all kinds of hospitality would be entertainment and, therefore, the entire
    expenditure incurred under this head, even for serving ordinary meals as
B   a bare necessity falls under sub- section (2-A) of Section 37; and (ii) since
    Explanation 2 is merely clarificatory its insertion w.e.f. 1.4.1976 is im-
    material and consequently the expression "entertainment expenditure" in
    sub-section (2-A) of Section 37 must be so construed even for the period
    prior to 1.4.1976.
c
          On behalf of the assessee it was contended that (i) the purpose of
    the provision 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 enter-
    tainment; and (ii) the finding in all these cases was that the allowance
D   claimed was only in respect of the expenditure incurred in providing
    ordinary meals as a bare necessity and not any lavish food.

          Dismissing the appeals of the Revencue and allowing the appeals of
    the Assesses, this Court
E          HELD : 1. The expenditure incurred by the assessee in providing
    ordinary meals to the outstation customers according to the established
    business practice, was a permissible deduction inspite of sub-section (2-A)
    of Section 37 of the Income Tax Act, 1961 to which the assessees were
    entitled in the computation of their total income for the pnrpose of
F   payment of tax under Income-Tax Act, 1961 during the relevant period
    prior to 1.4.1976. [246-C]

        2. The general provision in Section 37 is that any expenditure laid
  out or expended wholly or exclusively for the purposes of the business or
  profession shall be allowed but no expenditure in the nature of entertain-
G ment shall be allowed as stated in sub-sections (2) and (2-A) in excess of
  the amount specified. For claiming deduction of the business expenditure
  according to the general rule, the test of commercial expediency is applied
  but exclusion is made of any expenditure which is in the nature of "enter-
  tainment expenditure", Without anything more, it means that an expendi-
H ture incurred for commercial expediency or usage of the trade is a
                 COMMR. OFINCOMETAXv. PATEL BROS.                             237

 permissible deduction unless it partakes the character of an entertainment A
 expenditure, in which case the permissible limit is specified. (244-C-D]

      3. Generally, 11entertainment expenditure" is an expression of -wide
 import. However, in the context of disallowance of "entertainment expen-
 diture" as a business expenditure by virtue of sub-section (2-A) of Section
 37, the word "entertainment" must be construed strictly and not expansive-
                                                                                     B
 ly. Ordinarily, "entertainment" connotes something which may be beneficial
 for the mental or physical well being but is not essential or indispensable
 for human existence. A bare necessity, like an ordinary meal, is essential
 or indispensable and, therefore, is not "entertainment". If such a bare
 necessity is offered by another, it is hospitality but not entertainment.           C
 Unless the definition of "entertainment" includes hospitality, the ordinary
 meaning of'eotertainment" cannot include hospitality. For this reason, the
 expenditure incurred in extending customary hospitality by offering ordi-
 nary meals as a bare necessity, is not "entertainment expenditure" without
 the aid of the enlarged meaning given to the words by Explanation 2                 D
 inserted w.e.f. 1.4.1976. The definition in Explanation 2 is not the ordinary
 meaning of the words "entertainment expenditure", but the enlarged mean-
 ing given for the purpose of the Act w.d. 1.4.1976. [244-G-H, 245-A]

         4. The object of sub-section (2-A) is to disallow any lavish expendi-
  tore in the form of business expenditure. This is obvious from the several         E
  amendments made in the provision from time to time. It is so understood
  even in the circular issued by the Board. The object of the provision clearly
  is to allow deduction of the essential business expenditure incurred due to
  commercial expediency and according to the trade usage excluding the
  lavish expenditure. The dispute in the present case relates only to the            F
  amount which has been held to be essential business expenditure of this
  kind incurred in providing ordinary meals as bare necessity. In this view
  such expenses did not come within the meaning of "entertainment expen-
  diture" prior to 1.4.1976 when Explanation 2 was brought in by a retrospec-
  tive amendment made in 1983 of sub-section (2-A\of Section 37. The                 G
  finding of fact in all cases, therefore, satisfies this test to allow deduction
. of the expenditure incurred by each assessee and claimed under this head
  for the period prior to 1.4.1976. (245-C-D]

       5. Insertion of Explanation 2 made retrospectively but restricted in
 its application only w.e.f. 1.4.1976 is itself an indication that its application   H
    238                  SUPREME COURT REPORTS [1995] SUPP. 1 S.C.R.

A prior to 1.4.1976 is excluded. If Explanation 2 was merely clarificatory or
  the ordinary meaning, it W"dS on necessary to restrict its retrospective
  application in this manner only from 1.4.1976. The construction made or
  sub-section (2-A) or Section 37 as it existed during the relevant assessment
  period cannot, therefore, be affected by Explanation 2 to sub-section (2-A)
B which was inapplicable during the relevant period. [245-H, 246-A]
          Commissioner of Income-Tax, Gujarat v. Patel Brothers & Co. Ltd.,
    (1977) 106 I.T.R. 424 (Guj.), affirmed (without affirming the wide obser-
    vations and elaborate guidelines given therein).

         Commissioner of Income Tax v. Rajasthan Mercantile Co. Ltd. Etc.
c Etc., (1995) 211 I.T.R., approved.

          Brij Raman Das & Sons v. Commissioner of Income Tax, Lucknow,
    (1976) 104 I.T.R. 541, overruled.

D        Bentleys, Stokes & Lawless v. Beeson (H.M., Inspector of Taxes},
    [1952) 33 TC 491 (CA), cited.

          Sampath Iyengar's Law of Income Tax, 8th Edn. Vol.2, referred to.

          CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1455-57
E   of 1976 Etc. Etc.

         From the Judgment and Order dated 12.11.75 of the Gujarat High
    Court in I.T.R.No. 151 of 1974.

          B.B. Ahuja, B.S. Ahuja, Ms. A. Subhashini, Mrs. A.K. Verma, A.
F Sobba Rao, S.K. Mehta, Dhruv Mehta, K.R. Nagaraja, M.G. Rama-
    chandran, S.C. Patel and Ms. Janki Ramachandran for the appearing
    parties.

          The Judgment of the Court was delivered by

G       J.S. VERMA, J. These appeals and the connected matters involve for
  decision the common question of law relating to the meaning of "entertain-
  ment expenditure" in Section 37(2A) of the Income-tax Act, 1961
  (hereinafter referred to as "the Act") during the relevant assessment years.
  The decision of the Gujarat High Court in Commissioner of Income-tax,
H Gujarat v. Patel Brothers & Co. Ltd., [1977] 106 I.T.R. 424 (Guj.), on this
      COMMR. OFINCOMETAXv. PATEL BROS. [J.S. VERMA,J.]                  239

point is challenged by the revenue in these appeals by a certificate granted A
under Section 261 of the Act. The connected matters involve the same
point. All cases relate to the period prior to 1.4.1976 from which date only
Explanation 2 inserted in sub-section (2A) of Section 37 by the Finance
Act, 1983 was applied retrospectively, even though sub-section (2A) was
inserted w.e.f. 1.10.1967 by Taxation Laws (Amendment) Act, 1967.
                                                                               B
       The material facts in these appeals illustrative of all connected
matters, are these : The relevant assessment years are 1969-70, 1970-71 and
1971-72 of which the corresponding previous years ended on September
30, 1968, September 30, 1969 and September 30, 1970 respectively. The
assessee, a limited company, claimed kitchen expenses of Rs. 22,301, Rs.       C
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 Income-tax
Officer disallowed the expenditure to the extent of Rs. 10,101, Rs. 12,979
and Rs. 17,305 respectively corresponding to the expenses incurred for         D
meals provided to the customers even though it was found that the meals
were ordinary and not in any manner lavish. The assessee preferred an
appeal to the Appellate Assistant Commissioner against the partial disal-
lowance of this expenditure. The Appellate Assistant Commissioner held
that the meals were bare necessity having regard to the nature of business
and, therefore, the Income-tax Officer was directed to grant the allowance.    E
The matter then went in appeal to the Tribunal which confirmed the order
of the Appellate Assistant Commissioner. At the instance of the revenue,
the Tribunal referred to the High Court for its decision two questions of
Jaw, namely,

        (!)_Whether, on the facts and in the circumstances of the case, the    F
        expenditure in question was in the nature of entertainment expen-
        diture in law?

        (2) Whether, on the facts and in the circumstances of the case, the
        expenditure in question would be allowable only to the limited G
        extent of Rs. 5,000 under section 37(2A) of the Income-tax Act,
        1961, for each of the ass.essment years under reference?

Identical questions of law were referred for all the three assessment years.

      The High Court answered both the questions in the negative since it H
   240                    SUPREME COURT REPORTS [1995] SUPP. 1 S.C.R.

A was found on the facts by the Tribunal that indisputably the upcountry
  constituents of the assessee came to Ahmedabad for the purpose of busi-
  ness 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
B with it, as it was not the revenue's case that the assessee had spent the
  money for throwing lavish parties for its constituents. It had been found
  that the expenditure was for serving ordinary meals as a bare necessity of
  the business. Accordingly, the references were answered against the
  revenue and in favour of the assessee. These appeals are by certificate
  against that decision. The same question is involved for decision in the
C connected matters.

         There is a conflict in the view taken by the High Courts on the main
  question. The view taken by the High Courts of Andhra Pradesh, Rajas-
  than, Madhya Pradesh and Karnataka is the same as that of the Gujarat
D High Court. The contrary view has been taken by the High Courts of
  Allahabad, Punjab & Haryana, Patna and Kerala. The decision of the Delhi
  High Court in Commissioner of Income-tax v. Rajasthan Mercantile Co. Ltd.
  Etc. Etc., [1995] 211 !TR 400 is in line with the Gujarat view. The difference
  in the views taken by different High Courts has led to one set of decisions
  against the revenue and another set in its favour. This is how in this Court
E some appeals and other matters are by the revenue while the rest are by
  the assessees. As earlier stated, all these matters relate to the period prior
  to 1.4.1976 and, therefore, the decision is to be based on sub-section (2A)
  of Section 37 of the Act minus Explanation 2 inserted later. We would refer
  to the two sets of decisions after mentioning the rival contentions and the
F view taken by us.

        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
G expression "entertainment expenditure" in sub-section (2A) must be con-
  strued to mean from the inception as defined in Explanation 2 to sub-sec-
  tion (2A) of Section 37, since Explanation 2 is merely clarificatory. It was
  urged that for this reason insertion of Explanation 2 is only w.d. 1.4.1976
  is immaterial and the expression 11 entertainment expenditure" in sub-section
H (2A) of Section 37 must be so construed even for the period prior to
     · COMMR OF INCOME TAX v. PATEL BROS. [J.S. VERMA, J.]              241

1.4.1976. In reply, Shri Barish Salve, learned counsel for the assessee A
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. It was urged that the finding in all these cases was B
that the allowance claimed was only in respect of the expenditure incurred
in providing ordinary meals as a bare necessity and not any lavish food.

     Section 37, to the extent material, is as under :

        "37. General. - (1) Any expenditure (not being expenditure of the      C
        nature described in sections 30 to 36 and not being in the nature
        of capital expenditure or personal expenses of the assessee), laid
        out or expended wholly and exclusively for the. purposes of the
        business or profession shall be allowed in computing the income
        chargeable under the head "Profits and gains for business or
        profession".                                                 D

           (2) Notwithstanding anything contained in sub-section (1), no
        expenditure in the natu~e of entertainment expenditure shall be al-
        lowed in the . case of a company, which exceeds the aggregate
        amount computed as hereunder :-
                                                                               E
        xxx                            xxx                            xxx

            *(2A) Notwithstanding anything contained in sub,section (1)
        or sub-section (2), no allowance shall be made in respect of so much
        of the expenditure in the nature of entertainment expenditure incurred F
        by an assessee during any previous year which expires after the
        30th day of September, 1967, as is in excess of the aggregate
      · amount computed as hereunder:-

        xxx                            xxx                            xxx
                                                                               G
              Explanation 1. - .....

           ***Explanation 2. - For the removal of doubts, it is hereby
        declared that for the purposes of this sub-section aCJd sub-section
        (2B), as .it stood before the 1st day of April, 1977, "entertainment
        expenditure" includes expenditure on provision of hospitality of H
    242                  SUPREME COURT REPORTS [1995] SUPP. 1 S.C.R.
                                                                                     ·.
A          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 customs 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.
B
                **(2B) 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 February, 1970."
c                                                           (emphasis supplied)



            *Sub-section (2A) was inserted w.e.f. 1st October, 1967 by the
D           Taxation Laws (Amendment) Act, 1967.

            **Sub-section (2B) was inserted w.e.f. 1st April, 1970 by the
            Finance Act, 1970.

            ***Explanation 2 was inserted by the Finance Act, 1983 retrospec-
E           lively w.e.f. 1.4.1976.

          In Sampath Iyengar's Law of Income Tax, 8th Ed., Vol. 2, reference
    is made to Circular No. 372 dated December, 8, 1983 of the Board, (1984)
    146 !TR St 31, wherein the scope and effect of the above amendments was
    explained as under :-
F
               "Provision for curbing avoidable or ostentatious expenditure in
            business or profession - Section 37 • 30. Section 37 of the Income-tax
            Act provides for deduction in the computation of taxable profits
            of any expenditure other than expenditure of the nature described
            in sections 30 to 36 and section 80VV, or expenditure in the nature
G           of capital expenditure or personal expenses of the assessee, laid
            out or expended wholly and exclusively for the purposes of the
            business or profession carried on by the taxpayer. With a view to
            curbing certain categories of avoidable or ostentatious expenditure
            by assessees carrying on business or profession, the Finance Act
H           has made certain amendments to section 37 of the Income-tax Act.
      COMMR. OF INCOME TAXv. PATEL BROS. [J.S. VERMA,J.]                 243

        The substance of these amendments is explained in paragraphs 31 A
        to 34 hereunder.

            Entertainment expenditure. 31.1. For the removal of doubts
        regarding the scope of the expression "entertainment expenditure",
        the Finance Act has inserted a new Explanation for the purposes
        of sub-section (2A) of section 37 and also sub-section (2B) of that     B
        section as that sub-section stood before 1 April, 1977. The Explana-
        tion clarifies that "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            C
        made by reason of any express or implied contract or custom, usage
        or trade. However, expenditure incurred in providing food or
        beverages by an employer to his employee in office, factory or
        other place of .their work will not be regarded as entertainment
        expenditure.
                                                                                D
           31.2! This amendment takes effect retrospectively from 1 April,
        1976, and will, accordingly, apply in relation to the assessment year
        1976-77 and subsequent years.

           31.3. Under the existing provisions of section 37(2A) of the         E
        Income-tax Act, deduction in respect of expenditure oil entertain-
        ment is subject to certain limits calculated with reference to the
        quantum of profits as under :-

        xxx                         xxx                                xxx
                                                                                F
                                                             (at page 2255)

       In the Income-tax Act, 1961, Chapter IV contains provisions relating
to computation of total income wherein Section D containing Sections 28
to 44D pertains to profits and gains of business or profession. Section 28 G
specifies the in.come which is chargeable to income-tax under the head
"profits and gains of business or profession". Section 29 says that, the
income referred to in Section 28 shall be computed in accordance with the
provisions contained in Sections 30 to 43D. Sections 30 to 36 provide for
deduction of certain expenditures incurred for the purposes of business or
profession. Then comes Section 37 which contains the general provision H
    244                  SUPREME COURT REPORTS [1995] SUPP. 1 S.C.R.

A permitting deduction of "any expenditure ... laid out or expended wholly and
  exclusively for the purposes of the business or profession .... in computing
  the income chargeable under the head "Profits and gains of business or
  profession", by sub-section (1). Sub-section (2) therein begins with a non-
  obstante clause to exclude from the ambit of sub-section (1) the entertain-
B ment expenditure by saying that "no expenditure in the nature of
  entertainment expenditure shall be allowed" in the case of a company which
  exceeds the specified amount. Similar provision is made in sub-section
  (2A) for any assessee. In other words, the general provision in Section 37
  is that any expenditure laid out or expended wholly or exclusively for the
  purposes of the business or profession shall be allowed but no expenditure
C in the nature of entertainment shall be allowed as stated in sub-sections
  (2) and (2A) in excess of the amount specified. For claiming deduction of
  the business expenditure according to the general rule, the test of commer-
  cial expediency is applied but exclusion is made of any expenditure which
  is in the nature of "entertainment expenditure''. Without anything more, it
D means that an expenditure incurred for commercial expendiency or usage
  of the trade is a permissible deduction unless it partakes the character of
   an entertainment expenditure, in which case the permissible limit is
  specified. The controversy in the present case relates to the meaning of
  "e11tertainment expenditure" in sub-section (2A) of Section 37 before inser-
   tion of Explanation 2 therein.
E
           The question involved in these matters relates to deduction of expen-
    diture incurred in providing ordhtary meals and refreshments to the out-
    station customers according to the customary hospitality and trade usage
    satisfying the general test of commercial expendiency.
F
          Generally, "entertainment expenditure" is an expression of wide im-
    port. However, in the context of disallowance of "entertainment expendi-
    ture" as a business expenditure by virtue of sub-section (2A) of Section 37,
    the. word "entertainment" must be construed strictly and not expansively.
    Ordinarily, "entertainment" connotes something which may be beneficial
G   for the mental or physical well being but is not essential or indispensable
    for human existence. A bare necessity, like ordinary meal, is essential or
    indispensable and, therefore is not "entertainment. If such a bare necessity
    is offered by another, it is hospitality but not entertainment. Unless the
    definition of "entertainment" includes hospitality, the ordinary meaning of
H   "entertainment" cannot include hospitality. For this reason the expenditure
      COMMR. OF INCOME TAX v. PATEL BROS. [J.S. VERMA, J.]                245

incurred in extending customary hospitality by offering ordinary meals as A
a bare necess_ity, is not "entertainment expenditure" without the aid of the
enlarged meaning given to the words by Explanation 2 inserted w.e.f.
1.4.1976. The definition in Explanation 2 is not the ordinary meaning of the
words "entertainment expenditure", but the enlarged meaning given for the
purpose of the Act w.e.f. 1.4.1976.                                          B

       The object of sub-section (2A) is to disallow any lavish expenditure
in the form of business expenditure. This is obvious from the several
amendments made in the provision from time to time. It is so understood
even in the circular issued by the Board. The object of the provision clearly
is to allow deduction of the essential business expenditure incurred due to C
commercial expediency and according to the trade usage excluding the
lavish. expenditure. The dispute in the present cases relates only to the
amount which has been held to be essential business expenditure of this
kin& incurred in providing ordinary meals as bare necessity. In the view
taken by us, such expense did not come within the meaning of "entertain- D
ment expenditure" prior to 1.4.1976 when Explanation 2 was brought in by
a retrospective amendment made in 1983 of sub-section (2A) of Section
37. The finding of fact in all cases, therefor, satisfies this test to allow
deduction of the expenditure incurred by each assessee and claimed under
 this head for the period prior to 1.4.1976.
                                                                                  E
      Sub-section (2A) was inserted w.e.f. 1st October, 1967 by the Taxa-
tion Laws (Amendment) Act, 1967 and Explanation 2 inserted therein by
Finance Act, 1983 retrospectively w.e.f. 1.4.1976 while sub-section (2B) was
inserted w.e.f. 1st April, 1970 by the Finance Act, 1970. As earlier stated,
these cases relate to the period prior to 1.4.1976 from which date Explana-       F
tion 2 to sub- section (2A) was inserted retrospectively. We have, therefore,
to construe sub-section (2A) as it existed without the Explanation 2. The
meaning of Explanation 2 is quite clear and it has enlarged the meaning to
widen the tax net.

       Learned counsel for the revenue contended that Explanation 2 is            G
clarificatory and, therefore, even without Explanation 2 the provision must
be understood and construed in the same manner. It appears to us that
insertion of Explanation 2 made retrospectively but restricted in its applica-
tion only w.e.f. 1.4.1976 is itself an indication that its application prior to
1.4.1976 is excluded. If Explanation 2 was merely clarificatory of the            H
    246                   SUPREME COURT REPORTS [1995) SUPP. 1 S.C.R.

A ordinary meaning, as contended by learned counsel for the revenue, it was
  unnecessary to restrict its retrospective application in this manner only
  from 1.4.1976. The construction we have made of sub-section {2A) of
  Section 37 as it existed during the relevant assessment period cannot,
  therefore, be affected by Explanation 2 to sub-section {2A) which was
B inapplicable during the relevant period.

          In our opinion, the construction we have made of the provision as it
    existed during the relevant period flows not merely from the language of
    the provision but also matches with the object thereof. It means that the
    expenditure incurred by the assessees in providing ordinary meals to the
C   outstation customers according to the established business practice, was a
    permissible deduction inspite of sub-section (2A) of Section 37, to which
    the assessees were entitled in the computation of their total income for the
    purpose of payment of tax under the Income-tax Act, 1961 during the
    relevant period prior to 1.4.1976.

D
          We shall now refer briefly to the conflicting decisions of the several
  High Courts on the point. Amongst the decisions in favour of the revenue
  is Brij Raman Dass & Sons v. Commissioner of Income-tax, Lucknow, [1976)
  104 I.T.R. 541 of the Allahabad High Court which has been referred and
  followed in subsequent decisions of other High Courts taking the view in
E favour of the revenue. In this line of cases are the decisions of the High
  Courts of Punjab & Haryana, Patna and Kerala. The other line of cases
  wherein the view taken is in favour of the assessee are the decisions of the
  High Courts of Gujarat, Andhra Pradesh, Madhya Pradesh, Rajasthan and
  Karnataka. The main decision of the Gujarat High Court is Commissioner
F of Income-tax, Gujarat II v. Patel brothers & Co. Ltd., [1977) 106 !TR 424
  which has been referred and followed in the later decisions in that line.

        We would first deal with the decision of the Allahabad High Court
  reported in [1976) 104 !TR 541 which is under appeal in Civil Appeal No.
  1850 of 1975 and the decision of the Gujarat High Court reported in [1977)
G 106 I.T.R. 424 which is under appeal in Civil Appeal Nos. 1455-57 of 1976.
  In Brij Raman Dass & Sons (supra), it was held that sub-section {2A) of
  Section 37 is not an independent provision but is a proviso to sub-section
  {1) of Section 37 since the expenditure falling under sub-section (2A) must
  necessarily come within sub-section {l). Thereafter, while considering the
H meaning of "entertainment" in this context, it was held as under :-
      COMMR. OF INCOME TAX v. PAi;EL BROS. [J.S. VERMA, J.]            247

            "... What we have to see is as to what is the meaning of the A
        worc;l "entertainment" for purposes of section 37(2A) of the Act.
        In the Income-tax Act, this word has not been defined and we will
        have to give it its general meaning. An "entertainment expenditure"
        would, in our opinion, include all expenditures incurred in con-
        nection with business on the entertainment of customer and con- B
        stituents. The entertainment may consist of providing refreshments
        as in this case or it may consist of providing some other sort of .
        entertainment.

            In Bentleys, Stokes & Lawless v. Beeson (H.M. Inspector of
        Taxes), [1952] 33 TC 491 (CA), a firm of solicitors incurred           C
        expenses in entertaining clients. The entertainment consisted of
        providing lunch to the clients. It was held that expenditure was
        incurred wholly and exclusively for purposes of business and was
        an allowable deduction. The same is the position in the instant
        case. The petitioner has been providing to its customers refresh-      D
        ments and this constitutes an expenditure in the nature of "enter-
        tainment expenditure". The entire expenditure would have been
        allowed but for the amendment introduced by section 37(2A)
        which restricts the allowance of such an expenditure to a maximum
        limit of Rs. 5,000.
                                                                               E
                                                              (at page 544)

There is no more discussion on the point in this decision.

      On the other hand, the Gujarat High Court in Patel Brothers & Co.
Ltd. (supra) took a different view. In this decision, certain broad tests or   F
guidelines have also been indicated to determine the nature of expenses
allowed as entertainment expenses. In our opinion, that exercise is un-
necessary since the broad test indicated by us is the only thing which can
safely be indicated and the determination of the question in each case is
one of fact. The conclusion on the basis of the finding of fact recorded       G
therein was stated thus:

             "....... The Tribunal has agreed with the Appellate Assistant
         Commissioner who has found that it was customary for the assessee
         due to very long-established tradition that farmers who came to
         deliver the goods, i.e., cotton, groundnuts, rice, pulses, were given H
    248                  SUPREME COURT REPORTS [1995] SUPP. 1 S.C.R.

A           meals from the kitchen run by the assessee and if the assessee
            failed to give this normal courtesy, it apprehended that the farmers
            might offer their produce to other competitors in the field of the
            assessee and the assessee would lose the goods. The Appellate
            Assistant Commissioner has also found that the expenditure was
            for serving ordinary meals to the employees as well as to the farmer
B           customers and they were not such which entertained or aillused
            the guests since the assessee provided served meals as a bare
            necessity of the business. In that view of the matter, therefore,
            these references must be rejected and we answer the questions
            referred to us in the negative and against the Commissioner, ...."
c
                                                                  (at page 442)

  This conclusion of the Gujarat High Court on the fmding of fact recorded
  by the Tribunal is consistent with the view we have taken and, therefore,
  we uphold the same for the reasons given by us which are sufficient to
D sustain the ultimate view. We may observe that the wide observation and
  the elaborate guidelines given in the Gujarat decision which are in excess.
  of the broad test indicated by us and not necessary to support the con-
  clusion, are unnecessary for the decision and, therefore, affirmance of the
  conclusion reach in the Gujarat decision should not be construed as an
E affirmance of the wide observations therein.
          We may now refer to the decision of the Delhi High Court in
    Commissioner of Income-tax v. Rajasthan Mercantile Co. Ltd. Etc. Etc.,
    [1995] 211 !TR 400. The true effect of Explanation 2 added in sub-section
    (2A) of Section 37 of the Act has been correctly understood therein as
F   under.

                "The declaration and the clarification involved in Explanation
            2, are only for the purposes of assessments with effect from April
            1, 1976. This provision widens the concept of 'entertainment ex-
            penditure" by including in its scope such of the expenditures which
G           are otherwise traditionally understood as routine business expen-
            ditures incurred in connection with "business-hospitality". There-
            fore, the widened meaning cannot be extended to past periods
            when the amended Explanation 2 was not in operation.'

H                                                                 (at page 416)
          COMMR.OFINCOMETAXv. PATEL BROS. [J.S. VERMA,J.]                   249

    We approve the above view which accords with the construction made by          A
    us of the provision.

          In the view we have taken, the contrary view of the Allahabad High
    Court in Brij Raman Dass & Sons, 104 LT.R. 541, cannot be accepted to
    be correct and so also the decisions of the different High Courts which
    have taken the same view. Accordingly, the decision of the Allahabad High      B
    Court and the other decisions of different High Courts taking that view are
    to be treated as overruled.

          Consequently, all these matters are decided in favour of the assessees
    and against the revenue with the result that the appeals of the assessees      C
    are allowed while the appeals, SLPs and Tax References by the revenue
    are dismissed. No costs.


-   T.N.A.                                                  Appeals dismissed.