B.P. Saraf, Chief Justice
1. By this reference under section 256(1) of the Income-tax Act,1961 ('Act'),the Income-tax Appellate Tribunal ,Amritsar Bench, Amritsar ('Tribunal') has referred the following question of law to this Court for opinion at the instance of the revenue:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the expenditure incurred by the assessee in providing tea to its customers was not in the nature of entertainment expenditure as contemplated by Section 37(2B) of the Income-tax Act, 1961?'
2. We have heard Mr.Anil Bhan, learned counsel for the revenue. None appears for the assessee.
3. This reference pertains to the assessment year 1973-74. The dispute is about the allowability of expenditure of a sum of Rs.10,338 incurred by the assessee in the relevant previous year on providing tea to its staff and customers. The total expenditure incurred on this account was Rs.13,338. The Income-tax Officer allowed deduction of a sum of Rs 3,000 only which, according to him, was the estimated expenditure on providing tea to the members of the staff and disallowed the balance expenditure of Rs.10,338 which, according to him, was the estimated expenditure incurred on providing tea to the customers, as entertainment expenditure. The assessee appealed to the Appellate Assisstant Commissioner of Income-tax . The Appellate Assistant Commissioner held that the expenditure incurred on providing tea to the customers could not be regarded as entertainment expenditure . He, therefore, allowed the appeal of the assessee and deleted the disallowance. Against the order of the Appellate Assistant Commissioner, revenue appealed to the Tribunal . The Tribunal dismissed the appeal of the revenue .The Tribunal held that the expenditure incurred on providing tea to the customers could not be treated as an entertainment expenditure and hence it was allowable as a business expenditure under section 37(1) of the Act. In coming to this conclusion , the Tribunal relied upon the decision of the Gujarat High Court in CIT v. Patel Brothers & Co. Ltd. : [1977]106ITR424(Guj) . Aggrieved by the above decision , revenue applied under section 256(1) of the Act to the Tribunal for reference of the question whether provision of tea to the customers could be regarded as entertainment expenditure within the meaning of section 37(2B) of the Act to this Court for opinion. As, at that time, there was divergence of opinion on this point between different High Courts and the Tribunal had followed the Gujarat High Court decision ( cited above ) which was in favour of the assessee, the Tribunal allowed the application of the revenue. Hence this reference.
4. We have heard the learned counsel for the revenue and perused the order of the Tribunal. There is no dispute about the fact that the expenditure under consideration was incurred by the assessee wholly and exclusively for the purpose of its business and it was an allowable expenditure under section 37(1) of the Act unless it is held to be an expenditure in the nature of entertainment expenditure in which event , in view of the overriding provision contained in section 37(2B), it would not be allowable. Section 37(2B) provides :
'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.'
5. The real controversy in this case, therefore ,is whether the expenditure incurred by the assessee on providing tea to its customers can be regarded as expenditure in the nature of entertainment expenditure within the meaning of section 37(2B) of the Act. Though, earlier, there was divergence of opinion between the High Courts on this point, the controversy has now been set at rest by the Supreme Court in CIT v. Patel Bros and Co. Ltd. : [1995]215ITR165(SC) . In that case, which was an appeal from the Gujarat High Court decision in CIT v. Patel Bros. & Co. Ltd. (Supra), the Supreme Court held that the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity ,is not 'entertainment expenditure' within the meaning of section 37(2B) of the Act as it stood prior to the insertion of Explanation 2 to section 37 by the Finance Act,1983 with retrospective effect from 1 st April, 1976 by which, for the purpose of sub-sections (2A) and (2B) of section 37, enlarged meaning was given to the words 'entertainment expenditure' to include 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. The Supreme Court upheld the conclusion of the Gujarat High Court that the expenditure incurred on provision of ordinary food or drinks to its customers was not an entertainment expenditure. The Supreme Court, however, did not approve the wide observations and the elaborate guidelines given by the Gujarat High Court which were unnecessary for its decision. The Supreme Court also observed that the definition in Explanation 2 was not the ordinary meaning of the words 'entertainment expenditure', but enlarged meaning given for the purpose of the Act with effect from April 1,1976.
6. The true meaning and import of the expression 'entertainment expenditure' in the context of disallowance as business expenditure by virtue of sub-section (2A) and sub-section (2B) of section 37 is thus no more res integra. It is now well-settled that though generally 'entertainment expenditure' is an expression of wide import, in the context of disallowance of 'entertainment expenditure' as a business expenditure,the word 'entertainment'must be construed strictly and not expansively. So construed, a bare necessity like an ordinary meal 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 'entertainment' cannot include hospitality. The expenditure incurred on providing tea or ordinary meals to the customers, therefore, cannot be regarded as entertainment expenditure However, this will not be the position after 1st April,1976 because the definition of ' entertainment expenditure' for the purposes of sub-sections (2A) and (2B) of section 37 has been enlarged with retrospective effect from that date by the Finance Act,1983 to include 'hospitality'.
7. In the present case, the expenditure on providing tea to the customers was incurred by the assessee in the previous year ending 31st March 1973. The enlarged definition of entertainment expenditure was made applicable only with effect from 1st April,1976. Obviously , that definition is not applicable to the present case. The expenditure in question , therefore, cannot be treated as 'entertainment expenditure'.
8. In the premises, we are of the opinion that on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure incurred by the assessee in providing tea to its customers was not in the nature of entertainment expenditure as contemplated by section 37(2B) of the Income-tax Act,1961.The question referred to us is, therefore, answered in the affirmative, i.e., in favour of the assessee and against the revenue.
9. This reference is disposed of accordingly with no order as to costs.