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

2. The material facts in theses 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 30-9-1968, 30-9-1969 and 30-9-1970 respectively. 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 Income Tax Officer disallowed the the expenditure to the extent of Rs 10, 101, Rs 12, 979, and Rs 17, 305 respectively corresponding to 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. The assessee preferred an appeal to the Appellate Assistant Commissioner against the partial disallowance 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 that allowance. 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 law, namely(1) Whether, on the facts and in the circumstances of the case, the expenditure in question was in the nature of entertainment expenditure 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 extent of Rs 5000 under Section 37(2-A) of the Income Tax Act, 1961, for each of the assessment years under reference?Identical questions of law were referred for all the three assessment years3. The High Court answered both the questions in the negative since if 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 Revenues 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. Theses appeals are by certificate against that decision. The same question is involved for decision in the connected matters4. 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, Rajasthan, Madhya Pradesh and Karnataka is the same as that of the Gujarat High Court. The contrary view has been taken by the High Courts of Allahabad, Punjab and Haryana, Patna and Kerala. The decision of the Delhi High Court in CIT v. Rajasthan Mercantile Co. Ltd. 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 some appeals and other matters are by the Revenue while the rest are by the assessees. As earlier stated, all these matters related to the period prior on 1-4-1976 and, therefore, the decision is to be based on sub-section (2-A) 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 view taken by us

Court's reasoning:
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