Law:

Section:

section 37(2b) of the income-tax act, 1961 [as it stood prior to 1-4-1977]-entertainment expenditure-whether expenditure on providing food to constituents and entertaining them with soft drink by assessee-firm, dealing in agricultural commodities and adat, could be treated as entertainment expenditure under section 37(2b) and disallowed-held, no Facts The assessee-firm was carrying on business in agricultural commodities and adat. For the assessment years 1972-73 to 1974-75, the assessee incurred expenses on providing food to constituents and entertaining them with soft drinks, namely, coca cola, coffee, tea, etc. The ITO held that the expenses were in the nature of entertainment and in view of section 37(2B), the claim of the assessee was not allowed. The A AC, however, allowed the expenses partly. The Tribunal restored the ITO's order. On reference : Held In CIT v. Patel Bros. & Co. Ltd. [1977] 106 ITR 424 (Guj.)four tests were laid down for determining the nature of entertainment expenditure. These are : ( i) if the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish and extravagant scale, or is of wasteful nature it is entertainment per se ; (ii ) if the provision of food or drinks to a client constituent or customers is in the nature of bare necessity or by way of ordinary courtesy or as per express or implied terms of the contract of employment spelled out from long-standing practice or custom of trade or busin ess, it will not amount to entertainment; (iii) if the provision of food or drink s to a client, customer, or constituent is in a liberal and friendly way, it may amount to entertainment having regard to the place, item and cost of such provision ; and (iv) the provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment. In the instant case, the assessee in connection with business provided merely food and soft drinks to the customer andAdatiyas. On the basis of reasons given in the above case, the expenses could not be characterised as an entertainment expenditure under section 37(2B). Therefore, the expenditure was not to be disallowed…

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