Law:

Section:

Section 37(2B) of the Income-tax Act, 1961 - Entertainment expenditure - Assessment year 1974-75 - Whether expenditure incurred by an assessee on providing messing facility to its customers was in the nature of entertainment expenditure within ambit of section 37(2B) and was, therefore, not allowable as business expenditure - Held, yes Facts The assessee, a registered firm, was engaged in the wholesale business of cloth. During the assessment year 1974-75 it claimed deduction in respect of messing expenses incurred on its customers, but the ITO disallowed the claim under section 37(2B). On appeal, however, the AAC was of the view that the only idea in running a mess was to make available the bare necessity of life, i.e., an ordinary meal, and so long as an element of amusement or lavishness was not involved, the expenditure in running the mess was not an entertainment expenditure. The AAC, accordingly, allowed the deduction as business expenditure. On further appeal by the revenue, the Tribunal held that even though the assessee had, by maintaining facility of mess only provided meals to its customers, the expenditure so made was in the nature of entertainment expenditure and was, therefore, not allowable. On reference under section 256(1), there being divergence of views on the point between the various High Courts, particularly the one held by the Allahabad High Court in the case of Brij Raman Dass & Sons v. CIT [1976] 104 ITR 541 as against another view held by the Gujarat High Court in the case of CIT v. Patel Bros. & Co. Ltd. [1977] 106 ITR 424 , the matter was referred by the Division Bench to the Full Bench for its opinion. Held The legislative history of section 37 showed that the object in inserting a new sub-section (2B) was to curb the tendency for ostentatious entertain- ment by the assessees thereby providing that all expenditure in the nature of entertainment expenditure incurred within India after 28-2-1970 was liable to be disallowed. The Parliament had an obvious purpose behind the use of the words 'in the nature of entertainment expenditure'. The expression is much wider in its connotation as it would take within its sweep not merely…

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