Law:

Section:

Section 37(2B) of the Income-tax Act, 1961 - Entertainment expenditure - Whether, in case of arhatias, expenditure incurred before 1-4-1976 [i.e., prior to introduction of Explanation 2 in section 37(2A)] in providing tea, cold drinks, food, etc., to customers were not in nature of entertainment expenditure and were allowable as permissible deduction - Held, yes Facts The assessee-firm was engaged in business of arhatias in foodgrains. In the assessment years 1972-73 and 1973-74, the assessee claimed certain miscellaneous expenses in the profit and loss account. The ITO disallowed a part of these expenses as being incurred for providing cold drinks, tea, food, etc., to the customers, treating them as entertainment expenditure not allowable under section 37(2B). The AAC allowed the impugned expenses as being customary expenditure on messing and expenses on beoparies. The Tribunal, however, allowed the department's appeal. On reference: Held The arhatias of Delhi exist because of the large whole-sale market in cloth goods and they earn a small commission on the sales. The purchasers are usually people from out of station, so there is bound to be some expense in relation to food or cold drinks or tea, etc., to them. This type of customary expenditure is expected from the arhatias as part of the business operation. The commission agency business can, therefore, be treated as involving a kind of customary practice to serve beverages by way of hospitality. The Legislature itself has clarified, by the introduction of Explanation 2 in section 37(2A), that from 1-4-1976 hospitality expenses are to be treated as 'entertainment expenditure'. It would follow that this type of expenditure before 1-4-1976, could be treated as a permissible deduction. In the present case, the expenses claimed were certainly more as compared to the total turnover. But, in spite of the quantum being relatively high, the expense could not be treated as 'entertainment expenditure' in the circumstances of this particular line of business. Therefore, the Tribunal was not justified and the impugned expenses were allowable as permissible deduction Cases referred to Brij Raman Dass & Sons v. CIT…

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