COMMISSIONER OF INCOME-TAX versus PATEL BROTHERS AND CO. LTD. ETC. ETC.

Citation: [1995] SUPP. 1 S.C.R. 235 · Decided: 09-05-1995 · Supreme Court of India · Bench: J.S. VERMA · Disposal: Dismissed

Judgment (excerpt)

COMMISSIONER OF INCOME-TAX 
A 
v. 
PATEL BROTHERS AND CO. LTD. ETC. ETC. 
MAY 9, 1995 
[J.S. VERMA, N.P. SINGH AND M.K. MUKHERJEE, JJ.] 
B 
Income Tax Act, 1961 : 
Section 37(2-A) (As it stood prior to insertion of Explanation 2 i.e. prior 
to 1.4.1976)-0bject and Interpretation of-'Entertainment Expenditure'- C 
Scope of-Assessee-Expenditure incumd in providing meals as a bare neces-
sity to outstation customers-Finding that meals were not lavish in any 
manner-Held expenditure incurred by assessee was not entertainment expen-
diture-Held such an expenditure was a permissible deduction-lnsertion of 
Explanation 2--Effect of-Explained. 
Words & Phrases-'Entertainment'-Meaning of-ln the context of In-
come tax Act, 1961: 
D 
The question involved in these appeals relates to the meaning of 
"E11tertainment Expenditure" in sub-section. (2-A) of Section 37 of the 
Income Tax Act, 1961 before insertion of Explanation 2. therein. The E 
respondent-Company had been incurring expenditure for providing meals 
to its employees and its customers in the ordinary course of its business 
as customary trade usage. For the assessment years 1969-70, 1970-71 and 
1971- 72 it claimed deduction of kitchen expenses of Rs. 22301, Rs. 25979 
and Rs. 28620 respectively. The Income Tax Officer partially disallowed F 
the claim i.e. 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. Against partial disallowance of the expenditure the asses-
see preferred appeal before the Appellate Assistant Commissioner who 
held that the meals were bare necessity having regard to the nature of G 
business and consequently granted that allowance. The Tribunal con-
firmed the order of the Appellate Assistant Commissioner. Two questions 
of law referred to the High Court viz. (1) whether the expenditure in 
question was in the natnre of entertainment expenditure in law and (ii) 
whether the expenditure in question would be allowable only to the limited 
extent of Rs. 5,000 under section 37(2-A) for each of the assessment years H 
235 
236 
SUPREME COURT REPORTS [1995] SUPP. 1 S.C.R. 
A under reference, were answered in the negative i.e. against the Revenue and 
in favour of the assessee. 
In appeals to this Court it was contended for the Revenue that (i) 
all kinds of hospitality would be entertainment and, therefore, the entire 
expenditure incurred under this head, even for serving ordinary meals as 
B a bare necessity falls under sub- section (2-A) of Section 37; and (ii) since 
Explanation 2 is merely clarificatory its insertion w.e.f. 1.4.1976 is im-
material and consequently the expression "entertainment expenditure" in 
sub-section (2-A) of Section 37 must be so construed even for the period 
prior to 1.4.1976. 
c 
On behalf of the assessee it was contended that (i) the purpose of 
the provision was to curb the tendency of incurring lavish expenditure and 
not customary hospitality extended by offering ordinary meals as a bare 
necessity since the traditional meaning of every hospitality is not enter-
tainment; and (ii) the finding in all these cases was that the allowance 
D claimed was only in respect of the expenditure incurred in providing 
ordinary meals as a bare necessity and not any lavish food. 
E 
Dismissing the appeals of the Revencue and allowing the appeals of 
the Assesses, this Court 
HELD : 1. The expenditure incurred by the assessee in providing 
ordinary meals to the outstation customers according to the established 
business practice, was a permissible deduction inspite of sub-section (2-A) 
of Section 37 of the Income Tax Act, 1961 to which the assessees were 
entitled in the computation of their total income for the pnrpose of 
F payment of tax under Income-Tax Act, 1961 during the relevant period 
prior to 1.4.1976. [246-C] 
2. The general provision in Section 37 is that any expenditure laid 
out or expended wholly or exclusively for the purposes of the business or 
profession shall be allowed but no expenditure in the nature of entertain-
G ment shall be allowed as stated in sub-sections (2) and (2-A) in excess of 
the amount specified. For claiming deduction of the business expenditure 
according to the general rule, the test of commercial expediency is applied 
but exclusion is made of any expenditure which is in the nature of "enter-
tainment expenditure", Without anything more, it means that an expendi-
H ture incurred for commercial e

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