Case: Commissioner Of Income-Tax Vs. Patel Brothers &amp; Co. Ltd, Etc. Etc

& Sons v. CIT of the Allahabad High Court which has been referred and followed in subsequent decisions of other High Courts taking the view in favour of the Revenue. In this line of cases are the decisions of the High Courts of Punjab and 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 CIT v. Patel Brothers & Co. Ltd. which has been referred and followed in the later decisions in that line16. We would first deal with the decision of the Allahabad High Court - Brij Raman Dass & Sons v. CIT - which is under appeal in Civil Appeal No. 1850 of 1975 and the decision of the Gujarat High Court - CIT v. Patel Bros & Co. Ltd. - which is under appeal in Civil Appeals Nos. 1455-57 of 1976. In Brij Raman Dass & Sons it was held that sub-section (2-A) 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 (2-A) must necessarily come within sub-section (1). Thereafter, while considering the meaning of entertainment in this context, it was held as under: (All ER p. 544) "... What we have to see is as to what is the meaning of the word entertainment for purposes of Section 37(2-A) 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 connection with business on the entertainment of customer and constituents. The entertainment may consist of providing refreshments as in this case or it may consist of providing some other sort of entertainmentIn Bentleys, Stokes & Lowless v. Beeson (H.M. Inspector of Taxes) a firm of solicitors incurred 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 refreshments and this constitutes an expenditure in the nature of entertainment expenditure. The entire expenditure would have been allowed but for the amendment introduced by Section 37(2-A) which restricts the allowance of such an expenditure to a maximum limit of Rs 5000." There is no more discussion on the point in this decision 17. On the other hand, the Gujarat High Court in Patel Brothers & Co. Ltd. took a different view. In this decision, certain broad tests or guidelines have also been indicated to determine the nature of expenses allowed as entertainment expenses. In our opinion, that exercise is unnecessary 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 therein was stated thus: (ITR p. 442) "... 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 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 customers and they were not such which entertained or amused 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, ...." * This conclusion of the Gujarat High Court on the finding 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 sustain the ultimate view. We may observe that the wide observations 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 conclusion, are unnecessary for the decision and, therefore, affirmance of the conclusion reached in the Gujarat decision should not be construed as an affirmance of the wide observations therein18. We may now refer to the decision of the Delhi High Court in CIT v. Rajasthan Mercantile Co. Ltd. The true effect of Explanation 2 added in sub-section (2-A) of Section 37 of the Act has been correctly understood therein as under: (ITR p. 416) "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 expenditure by including in its scope such of the expenditures which are otherwise traditionally understood as routine business expenditures incurred in connection with business-hospitality. Therefore, the widened meaning cannot be extended to past period when the amended Explanation 2 was not in operation." * We approve the above view which accords with the construction made by us of the provision19. In this view we have taken, the contrary view of the Allahabad High Court in Brij Raman Dass & Sons 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 Court and the other decisions of different High Courts taking that view are to be treated as overruled

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]14. 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 outstation customers according to the established business practice, was a permissible deduction in spite of sub-section (2-A) 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 1-4-197615. 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. CIT of the Allahabad High Court which has been referred and followed in subsequent decisions of other High Courts taking the view in favour of the Revenue. In this line of cases are the decisions of the High Courts of Punjab and 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 CIT v. Patel Brothers & Co. Ltd. which has been referred and followed in the later decisions in that lineWe would first deal with the decision of the Allahabad High Court - Brij Raman Dass & Sons v. CIT - which is under appeal in Civil Appeal No. 1850 of 1975 and the decision of the Gujarat High Court - CIT v. Patel Bros & Co. Ltd. - which is under appeal in Civil Appeals Nos. 1455-57 of 1976. In Brij Raman Dass & Sons it was held that sub-section (2-A) 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 (2-A) must necessarily come within sub-sectionthe other hand, the Gujarat High Court in Patel Brothers & Co. Ltd. took a different view. In this decision, certain broad tests or guidelines have also been indicated to determine the nature of expenses allowed as entertainment expenses. In our opinion, that exercise is unnecessary 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 ofconclusion of the Gujarat High Court on the finding 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 sustain the ultimate view. We may observe that the wide observations 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 conclusion, are unnecessary for the decision and, therefore, affirmance of the conclusion reached in the Gujarat decision should not be construed as an affirmance of the wide observations therein18. We may now refer to the decision of the Delhi High Court in CIT v. Rajasthan Mercantile Co. Ltd. The true effect of Explanation 2 added in sub-section (2-A) of Section 37 of theapprove the above view which accords with the construction made by us of the provision19. In this view we have taken, the contrary view of the Allahabad High Court in Brij Raman Dass & Sons 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 Court and the other decisions of different High Courts taking that view are to be treated as overruled