Law:

Section:

Section 37(2B) of the Income-tax Act, 1961 - Entertainment expenditure - Assessment year 1971-72 - Whether amount spent by assessee, a race club, on serving hot drinks, etc., on race days to stewards, secretary, donors, other VIPs and officials of the club can be disallowed as entertainment expenditure - Held, no Section 37(1) of the Income-tax Act, 1961 - General - Assessment year 1971-72 - Whether expenditure by a race club on hot drinks served on race days to stewards, secretary, donors of cups, other VIPs and officials of the club is allowable as revenue expenditure - Held, yes FACTS The assessee debited a total amount of Rs. 1,66,585 as expenditure on refreshment in the accounts for the assessment year 1971-72. The ITO on examination of accounts disallowed certain amount under section 37(2B) by treating the same as entertainment expenditure. On appeal, the AAC reduced the disallowance to Rs. 70,000. The Tribunal, on further appeal, sustained disallowance to the extent of Rs. 40,000 pertaining to expenditure on hot drinks served on race days to stewards, secretary, donors of cups, other VIPs and officials by treating it as expenditure not wholly and exclusively laid out for business purposes. HELD Whether a particular expenditure is a revenue expenditure incurred for the purpose of the business must be determined on consideration of all the facts and circumstances and by the application of the principle of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of, the business that it may be regarded as an integral part of the profit-earning process and not acquisition of an asset or a right of a permanent character the position of which is a condition of carrying on the business, the expenditure should be regarded as a revenue expenditure incurred wholly and exclusively for the purpose of the business. In view of the admitted position that serving of hot drinks to stewards, etc., by the race clubs on race days is an age-long custom in the field of racing and such drinks are served in order to enable the employees to put forth…

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