1987-VIL-498-AP-DT
Equivalent Citation: [1988] 170 ITR 332, 63 CTR 187, 31 TAXMANN 173
ANDHRA PRADESH HIGH COURT
Date: 23.01.1987
COMMISSIONER OF INCOME-TAX
Vs
NAVABHARAT ENTERPRISES PVT. LIMITED
BENCH
Judge(s) : Y. V. ANJANEYULU., K. RAMASWAMY
JUDGMENT
K. RAMASWAMY J.-The Revenue sought reference under section 256(1) of the Income-tax Act, 1961 (43 of 1961), for short, " the Act of six questions of law as follows :
"(1) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 17,056 spent by the assessee for hosting dinners to foreign delegation members in order to entertain them in an appropriate and befitting manner is not disallowable under section 37(2B) of the Income-tax Act, 1961, though it may be for purposes of business ?
(2) Whether, on the facts and in the circumstances of the case, the amount of Rs. 2,668 spent by Delhi branch of the assessee for providing lunch and dinners to customers is not to be treated as entertainment expenditure and disallowed under section 37(2B) of the Income-tax Act 1961 ?
(3) Whether, on the facts and in the circumstances of the case, sum of Rs. 1,79,155 debited under the head " Business promotion expenses " was not rightly disallowable as expenditure in the nature of entertainment expenditure and also partly as expenditure for maintenance of a guest house, for the stay of foreign guests (and not meant as holiday home for low-paid employees of assessee), under section 37(2B) and under section 37(4) of the Income-tax Act ?
(4) Whether, on the facts and in the circumstances of this case, the expenditure of Rs. 893 paid to various clubs by the assessee for the purpose of entertaining foreign guests is not to be disallowed under section 37(2B) of the Act ?
(5) Whether, on the facts and in the circumstances of the case, the amount of Rs. 22,722 debited by the assessee under the head " Entertainment expenditure " spent by it for providing coffee, tea and snacks to customers is not to be treated as expenditure in the nature of entertainment expenditure and disallowed under section 37(2B) of the Act?
(6) Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,49,965 spent on agmark, charges, Rs. 2,14,860 spent on export licences fee and inspection charges, Rs. 1,09,587 paid as premium for export credit guarantee insurance, Rs. 11,746 paid as subscription to export promotion council and trade associations, and Rs. 1,732 spent on translation charges are to be treated as items of expenditure eligible for weighted deduction either under sub-clause (ii) or sub-clause (vi) or sub-clause (vii) of section 35B(1)(b) and the assessee held to be eligible for weighted deduction on these amounts particularly on account of the fact that the services were performed by the payees in India and not outside India? "
The material facts, relating thereto, are as follows: The assessee, Navabharat Enterprises (Private) Limited, for short " the Company ", is having its head office at Hyderabad and branches at Guntur, New Delhi, Bombay, Calcutta and Cochin, and submitted its return for the assessment year 1973-74, ending the accounting year with June, 30, 1972, of an income of Rs. 53,04,333 from ready-business and Rs. 8,060 from forward business. The Income-tax Officer found that a sum of Rs. 17,05.6 was incurred on account of "special dinners arranged for trade delegations from U.S.S.R. and G.D.R. " and disallowed it on the ground that it represented entertainment expenditure, disallowable under section 37(2B) of the Act. On appeal by the company, the Appellate Assistant Commissioner held that the expenditure did not partake of the character of business expenditure, so he confirmed the disallowance. On second appeal, the Appellate Tribunal held that trade delegations had come to India from G.D.R. and U.S.S.R., that the company had close business relationship with those countries and that with a view to promote the business interests of the company, it had incurred the expenditure only to entertain the delegates in an " appropriate and befitting manner ". Therefore, it is business expenditure allowable under section 37(1) of the Act.
The Income-tax Officer found that a sum of Rs. 2,668 incurred by the Delhi branch was in connection with arranging of lunch and dinner to " trade customers " which represented entertainment expenditure. Therefore, he disallowed the entire sum and the disallowance was confirmed on appeal by the Appellate Assistant Commissioner. On second appeal, the Appellate Tribunal found that there was nothing on record to show that the expenditure was " extravagant or lavish ". It was incurred only for providing normal lunch and dinner to various " trade constituents ". So, it allowed the entire claim of Rs. 2,668.
In respect of the Guntur branch office, the company claimed a sum of Rs. 72,887 towards mess expenditure and Rs. 50,691 mess expenditure at the Madras guest house, totalling Rs. 1,23,578. The Income-tax Officer disallowed the entire claim. On appeal before the Appellate Assistant Commissioner, it was contended that the accommodation maintained is not in the nature of guest house but it is only a transit accommodation for the purpose of accommodating the employees and business associates while, at the above two places (Madras and Guntur) for the purpose of the appellant's business. Therefore, it cannot be said that it is maintained as a matter of hospitality and it should be taken as one maintained wholly and exclusively for the purpose of business and it is not covered by section 37(4). In support thereof, reliance was placed on a decision of the Income-tax Appellate Tribunal, Ahmedabad Bench, in Navasari v. A. D. P. P. Billimoria (ITA No. 48 (Ahd)/75-76 dated 30-1-1976). While acceding to this contention, the Appellate Assistant Commissioner held thus:
" In this view of the matter, the appellant's contention that the expenditure on guest house has got to be allowed, has to be accepted. But, at the same time, in view of the fact that the entire expenditure cannot be treated as fully representing the elementary amenities, even though they are foreign visitors and in the absence of full details, I feel it would be fair to disallow 1/8th of the expenditure as representing entertainment ........" (vide paragraphs 8.6 and 8.7 of the AAC's order in annexure-B in the material papers).
On second appeal by the company, the Tribunal proceeded on the footing that the Appellate Assistant Commissioner was of the view that most of the expenditure was incurred wholly and exclusively for the purpose of business and as such it would not be covered under section 37(4) and held thus :
" We find that the Appellate Assistant Commissioner in this case has clearly given a finding that no part of the expenditure could be considered as lavish or extravagant and the assessees had to incur such expenditure only for the provision of boarding and lodging for the business constituents. In the background of this finding given by the Appellate Assistant Commissioner, we are of the view that no part of the expenditure claimed by the assessee should be held as disallowable. In any case, there is no evidence brought on record to show that any part of the expenditure incurred by the assessee-company was for the purpose of providing entertainment to the clients of the company."
Thus, it held that the Appellate Assistant Commissioner was not justified in disallowing even a part of the claim made by the assessee in that regard. On that basis, the Tribunal allowed the entire amount claimed by the company (vide paragraphs 8 and 8.1 of the order of the Appellate Tribunal, annexure-C).
From the statement of the case, it would appear that the Tribunal proceeded on the footing that the Appellate Assistant Commissioner recorded a categorical finding that the expenditure was not lavish or extravagant, which is not correct as a fact. Without making any independent investigation into the point on the basis of the material on record, he recorded the above-quoted finding. The Appellate Assistant Commissioner categorically found that there is no definite evidence in that regard. Since the statement of the case is to stem from the finding recorded by the Appellate Tribunal in its order, it was so stated. Though normally we have to look to the statement of the case, since the Appellate Tribunal appears to have committed an obvious mistake apparent from the record, we have referred to the Appellate Assistant Commissioner's order (annexure-B) and the Tribunal's order (annexure-C), which are part of the record, only with a view to straighten the record and to bring out the correct position on findings.
The Income-tax Officer disallowed a sum of Rs. 2,16,215 out of Rs. 2,21,515 from " business promotion expenses " on the ground that they are purely expenses on entertainment and hence they are not a lowable. On appeal by the company, the Appellate Assistant Commissioner gave relief of Rs. 1,79,155. The Revenue carried the matter in appeal. The Appellate Tribunal found that the same issue was considered by the Tribunal for the assessment year 1972-73 and, for the reasons mentioned therein, it upheld the order of the Appellate Assistant Commissioner that the expenditure incurred on foreign customers for their food, lodging and other expenses should be allowed. As regards the guest house expenses also, it was held that the guest house was maintained only as a place of lodging mainly for the foreign customers and as such it cannot be held that there was any element of entertainment in the expenditure incurred for the purpose of maintaining such guest house.
The Income-tax Officer disallowed the claim of the company for sum of Rs. 893 being the expenditure incurred on payment made to clubs for entertainment of foreign guests. The Appellate Assistant Commissioner accorded disallowance. On further appeal by the Revenue, the Appellate Tribunal held that the expenditure was incurred only on account of subscriptions to various clubs and it was necessary for the purpose of entertaining foreign guests. So, the expenditure was allowed under section 37(1) of the Act.
The Income-tax Officer disallowed a sum of Rs. 22,722 being the expenditure incurred on account of provision of coffee, tea and snacks to customers as it was considered as entertainment expenditure disallowable under section 37(2B) of the Act. On appeal, the Appellate Assistant Commissioner allowed the entire claim and, on further appeal by the Revenue, the Appellate Tribunal upheld the decision of the Appellate Assistant Commissioner.
The company claimed before the Appellate Assistant Commissioner the following items of expenditure under section 35B of the Act as being "export markets development allowance " ;
Rs. P.
(1) Agmark charges 1,40,265.01
(2) Export licence fee and inspection charges 2,14,860.25
(3) Export credit guarantee insurance 1,09,587.08
(4) Salaries of chief buyers for exports 96,670.00
(5) Subscription to export promotion councils
and trade associations 11,746.00
(6) Translation charges 1,737.32
(7) Travelling conveyance and stay expenses
of foreign delegates. 54,193.93
The Appellate Assistant Commissioner held that items Nos. 1, 2, 3, 5 and 6 are allowable under sub-clauses (ii), (vi) and (vii) of sub-section (1)(d) of section 35B. As regards items Nos. 4 and 7, it was held that, since the expenditure was not incurred wholly and exclusively for the purpose of. export business, it was restricted to 50% of the expenditure and allowed accordingly. On further appeal, at the instance of the Revenue, the Appellate Tribunal confirmed those findings. On those facts, the above questions of law have been referred to this court for advice.
Sri Suryanarayana Murthy, learned standing counsel for the Revenue, has contended that though the company has business connections with U.S.S.R. and G.D.R. and the trade delegates from those countries have visited India in connection with the purchase of tobacco, the expenditure incurred on them by the company is " in the nature of entertainment expenditure ". Therefore, by operation of sub-sections (2) and (2B) of section 37 of the Act, the entire amount pertaining to questions Nos. (1), (2), (3) and (5) cannot be allowed as business expenditure under section 37(1) of the Act but is to be circumscribed within the slab prescribed in sub-section (2) of section 37. In support thereof, he placed strong reliance on CIT v. Veeriah Reddiar [1977] 106 ITR 610 (Ker) [FB]. He also further contends that though a Division Bench of this court in Addl. CIT v. Maddi Venkataratnam & Co. Ltd. [1979] 119 ITR 514, held that the entire expenditure is to be disallowed, it defeats the very object of sub-sections (2), (2A) and (2B) of section 37 and, therefore, the entire amount cannot be allowed. The Appellate Tribunal found that the hosting of lunch or dinner to the foreign delegates was arranged in an appropriate and befitting manner. This finding is " delightfully vague ". The terms " appropriate and befitting " jettisons legal setting drawn in section 37(2), (2A) and (2B) affording carte blanche to an assessee to expend any expenditure to woo a client, customer, constituent, at great cost to the exchequer defeating the object of sub-section (2) of section 317 of the Act. Alternatively, it is contended that even if that finding is to be accepted, it is a matter for remittance to the Tribunal for verification, with reference to the evidence on record, whether the expenditure was incurred extravagantly or lavishly in arranging lunch or dinner to foreign delegates and slash it to a frugal one, as was done between the parties in Nava Bharat Enterprises (P.) Ltd. v. CIT [1983] 143 ITR 804 by this court for the previous assessment year.
Sri Parvatha Rao, learned counsel for the company, has refuted these contentions. He contends that the company has close business relations with the USSR and the GDR; when the delegates from those countries visited India, it is elementary that the company should provide, consistent with the dignity of the foreign delegates, lunch or dinner ; and, therefore, it is a bare necessity in connection with the business. Unless it is shown that it is extravagant or lavish, as stated by the Appellate Tribunal, the finding is to be accepted and it is in consonance with the law laid down in Maddi Venkataratnam's case [1979] 119 ITR 514 (AP). Therefore, they are to be answered in favour of the company. It is further contended that, whether the expenditure expended by the company to arrange lunch or dinner for foreign delegates is extravagant or lavish is a question of fact and it cannot be gone into in a reference under section 256(1) of the Act.
Questions Nos. (1), (2), (3) and (5) can be disposed of together. The point that arises for consideration is whether the expenditure incurred by the company is business expenditure laid out or expended wholly and exclusively for the purpose of the business of the company deductible under section 37(1) of the Act, or in the nature of entertainment expenditure, coming within sub-section (2) thereof, and allowable in the manner laid down thereunder on the basis of the slab system. With a view to understand the scope and to appreciate the same, it is necessary to wade through section 37 operative during the assessment year 1973-74. Section 37 reads thus :
" (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'.
(2) Notwithstanding anything contained in sub-section (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company, which exceeds the aggregate amount computed as hereunder :
(i) on the first Rs. 10,00,000 of the profits at the rate of 1% or
and gains of the business (computed before Rs. 5,000, whichever is
making any allowance under section 33 or higher ;
section 33A or in respect of entertainment
expenditure)
(ii) on the next Rs. 40,00,000 of the profits at the rate of 1/2% ;
and gains of the business (computed in
the manner aforesaid)
(iii) on the next Rs. 1,20,00,000 of the profits at the rate of 1/4% ;
and gains of the business (computed in the
manner aforesaid)
(iv) on the balance of the profits and gains Nil.
of the business (computed in the manner
aforesaid)
(2A) Notwithstanding anything contained in sub-section (1) or subsection (2), no allowance shall be made in respect of so much of the expenditure in the mature of entertainment expenditure incurred by any assessee during any previous year which expires after the 30th day of September, 1967, as is in excess of the aggregate amount computed as hereunder :--(emphasis supplied)
(i) on the first Rs. 10,00,000 of the profits at the rate of 1/2% or
fits and gains of the business or profession Rs. 5,000, whichever is
(computed before making any allowance higher ;
under section 33 or section 33A or in respect
of entertainment expenditure)
(ii) on the next Rs. 40,00,000 of the profits at the rate of 1/4% ;
and gains of the business or profession
(computed in the manner aforesaid)
(iii) on the next Rs. 1,20,00,000 of the profits at the rate of 1/8%
and gains of the business or profession
(computed in the manner aforesaid)
(iv) on the balance of the profits and gains Nil
of the business or profession (computed in the
manner aforesaid)
Provided that where the previous year of any assessee falls partly before and partly after the 30th day of September, 1967, the allowance in respect of such expenditure incurred during the previous year shall not exceed (a) in the case of a company (i) in respect of such expenditure incurred before the 1st day of October, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in sub-section (2), the same proportion as the number of days comprised in the period commencing on the first day of such previous year, and ending with the 30th day of September, 1967, bears to the total number of days in the previous year;
(ii) in respect of such expenditure incurred after the 30th day of September, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in this sub-section, the same' proportion as the number of days comprised in the period commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to the total number of days in the previous year;
(b) in any other case (i) in respect of such expenditure incurred before the 1st day of October, 1967, the amount admissible under sub-section (1) ;
(ii) in respect of such expenditure incurred after the 30th day of September, 1967, the sum which bears to the aggregate amount computed at the rate or rates specified in this sub-section, the same proportion as the number of days comprised in the period commencing on the 1st day of October, 1967, and ending with the last day of the previous year bears to the total number of days in the previous year.
Explanation.-For the purposes of this sub-section and sub-section (2B), 'entertainment expenditure' includes (i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person after the 29th day of February, 1968 ;
(ii) the amount of any expenditure in the nature of entertainment expenditure (not being expenditure incurred out of an allowance of the nature referred to in clause (i)) incurred after the 29th day of February, 1968, for the purposes of the business or profession of the assessee by any employee or other person.
(2B) Notwithstanding anything contained in this section, no allowance shall be made in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessee after the 28th day of February, 1970."
(Other sub-sections are not necessary. Hence omitted.)
The question at issue is whether the amount laid out or expended by the company on the foreign delegates in arranging dinner or lunch at various branches is " in the nature of entertainment expenditure " within the meaning of sub-section (2) of section 37. If the finding is positive by operation of the non obstante clause in sub-section (2), it is to be allowed as per its slab system and takes out from section 37(1). To understand its scope and sweep, it is now well-settled that recourse to the legislative history of sub-sections (1), (2), (2A) and (2B) can be sought so that it could dispel the seeming doubt from judicial dicta and the necessity the Legislature felt to undertake the amendments to section 37 by introducing sub-sections (2), (2A) and (2B) and the march of law thereby made. In CIT v. Shahzada Nand & Sons [1966] 60 ITR 392, their Lordships of the Supreme Court have traced the legislative history to section 34 of the Indian Income-tax Act, 1922, to find the legislative intent. So it is an authority for the proposition that considerations stemming from legislative history are relevant material for the court to get at the legislative intent in using the compendious phrase " in the nature of entertainment expenditure " in sub-sections (2), (2A) and (2B) of section 37.
Chapter IV of the Act deals with the computation of total income under different heads of income. Part A deals With salaries; Part relates to interest on securities ; Part C deals with income from house property; Part D deals with " profits and gains of business or profession " which is material for the purpose of this case. Section 28 provides for income which shall be chargeable to income-tax under the head " Profits and gains of business or profession ". Section 29 prescribes that the taxable income is to, be computed in accordance with the provisions contained in sections 30 to 43A of the Act of which section 37 is relevant. As seen, section 37(1), as the marginal note indicates, is the general provision prescribing that any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of " capital expenditure " or " personal expenses " of the assessee laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head " Profits and gains of business or profession ". But, however, this generality of sub-section (1) is circumscribed by employing the non obstante clause in sub-sections (2), (2A) and (2B), where it specified that " no expenditure in the nature of entertainment expenditure " shall be allowed in the case of a company which exceeds the aggregate amount computed in the manner prescribed in clauses (i) to (iv). Explanation 2 was made to remove the doubts in operating sub-sections (2) and (2A). Therefore, the question is : What is the meaning of the compendious expression " in the nature of entertainment expenditure ", couched in sub-sections (2), (2A) and 2(B) of section 37. Preceding the Act, under section 10(2)(xv) of the Indian Income-tax Act, 1922, in computing the income chargeable under the head " Profits or gains of any business or vocation carried on ", necessary allowance was being given in respect of any non-capital expenditure incurred solely for the purposes of earning such profits or gains. The Legislature enlarged its scope by the amendment brought to section 10(2)(xv) by the Amendment Act, 1939, introducing a proviso. Thereby, any expenditure, not being in the nature of " capital expenditure or personal expenses " of the assessee laid out or expended wholly and exclusively for the purposes of such business, profession or vocation, was to be allowed. All amounts expended by the assessee for the entertainment of his business constituents, clients or customers were being deducted under this head on the ground that such hospitality or entertainment was extended wholly for the purpose of business promotion or profession or vocation of the assessee. When the Legislature found that this facility is being abused, intended to quench the thirst of the assessee in unduly expending or laying out entertainment expenditure, to further their business prospects and the exchequer to defray it, by gradual and deliberate legislative amendments restricted and curbed their claim for allowance. The initial step was section 6 of the Finance Act of 1961 which came into effect from April 1, 1962, by which the scope of the proviso to section 10(2)(xv) of the 1922 Act was curtailed by imposing a ceiling limit on all business expenditure in the nature of entertainment expenditure which could be allowed to companies. The maximum of such deductions was prescribed on a slab basis depending upon the profits and gains of the business of such company in the relevant accounting year. When the Act was brought on the statute book replacing the predecessor 1922 Act, the same provision was retained intact in sub-section (2) of section 37 of the Act.
But when the avoidance was persisted with by assessees other than companies, Parliament further amended through section 4 of the Taxation Laws (Amendment) Act, 1967, introducing sub-section (2A) placing restrictions or ceiling limit on allowance of " entertainment expenditure ", allowance on other categories of assessees other than companies. It was further amplified by the Explanation to sub-sections (2) and (2A) introduced by the Finance Act of 1968 expanding the scope of the restriction imposed by sub-section (2A) so as to take in any expenditure incurred by an assessee in expending entertainment allowance to its employees or other persons from February 29, 1968, and also the amount of any expenditure in the nature of entertainment expenditure incurred by any employee or other person for the purpose of the business or profession of the assessee other than, out of an entertainment allowance paid to him by the assessee. Then, by the Finance Act, 1970, Parliament further introduced sub-section (2B) in section 37 removing the last vestige. While introducing the Finance Bill, the Finance Minister stated on the floor of the House thus :
" Those, who enjoy the hospitality of their business friends should now no longer find their sense of gratitude diminished by the thought that a part of the hospitality is really paid for by the exchequer."
Section 37(2B) has been already extracted and needs no repetition. Section 37(2B) was omitted by the Finance Act, 1976, with effect from April 1, 1977, and it was again reintroduced by further amendment with effect from April 1, 1979, through the Taxation Laws (Amendment) Act, 1978. The later amendments are not relevant for the purpose of this case. Hence, the need to extract them is obviated.
Maxwell on " The Interpretation of Statutes ", 12th edition, at page 137, in Chapter 6, under the caption " Construction to prevent evasion or abuse ", stated thus :
" '.. . ...... the office of the judge is, to make such construction as will suppress the mischief, and advance the remedy, and to suppress all evasions for the continuance of the mischief. To carry out effectually the object of a statute, it must be so construed as to defeat all attempts to do, or avoid doing, in an indirect or circuitous mariner that which it has prohibited or enjoined: quando a liquid prohibetur, prohibetur et omne per quod devenitur ad illud.
This manner of construction has two aspects. One is that the courts, mindful of the mischief rule, will not be astute to narrow the language of a statute so as to allow persons within its purview to escape its net. The other is that the statute may be applied to the substance rather than the mere form of transactions, thus defeating any shifts and contrivances which parties may have devised in the hope of thereby falling outside the Act. When the courts find an attempt at concealment, they will, in the words of Wilmot C.J., 'brush away the cobweb varnish, and shew the transactions in their true light' (Collins v. Blantern [1767] 2 Wils KB 347 at 852)".
It was further stated at page 141 in the context of Taxing Act on the "substance rule " thus :
"The language used is not to be either stretched, in favour of the Crown or narrowed in favour or the taxpayer. So where the court has to consider a provision expressly designed to prevent tax evasion which uses unnecessarily wide language to achieve its purpose, that language will be given effect to even though the section is thereby made to apply to cases which it was probably never intended to catch." (Emphasis supplied.)
In Craies on Statute Law, seventh edition, under Chapter 5, " Construction where the meaning is plain", it was stated at page 65 thus:
" Where the language of an Act is clear and explicit, we must give effect to it, whatever may be the consequences, for in that case the words of the statute speak the intention of the Legislature."
In Shahzada Nand's case [1966] 60 ITR 392 (SC), while construing the provision of section 34 of the predecessor Income-tax Act, 1922, their Lordships of the Supreme Court, speaking through Subba Rao J. (as he then was), at para. 8 stated that where the words of the section are clear but its scope is sought to be curtailed by construction, the approach suggested by Lord Coke in In re Heydon's case [1584] 3 Co. Rep. 7a, was applied thus (p. 400 of 60 ITR):
"To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act; to consider, according to Lord Coke: (1) What was the law before the Act was passed; (2) What was the mischief or defect for which the law had not provided; (3) What remedy Parliament has appointed; and (4) The reason of the remedy."
The scope of the limitation provided under section 34(1A) of the Amendment Act fell for consideration before the Supreme Court. In that context, the rule of statutory construction of Mischief Rule was applied to a taxing statute.
In Poppatlal Shah v. State of Madras, AIR 1953 SC 274; 4 STC 188, 193 (SC), Mukherjea J. (as-he then was) held at page 276, para. (7), thus:
" It is a settled rule of construction that to ascertain the legislative intent, all the constituent parts of a statute are to be taken together and each word, phrase or sentence is to be considered in the light of the general purpose and object of the Act itself."
In that case, the question was whether the title in the goods has passed under the Madras Sales Tax Act at the time when the transaction was entered into within the State of Madras or when the title in the goods passed to the buyer who is outside the State, on its receipt for assessment to sales tax of the sales effected outside the State. In that context, the preamble, the purpose and the operation of the Act were considered.
In CST v. Parson Tools & Plants, AIR 1975 SC 1039; 35 STC 413 (SC), Sarkaria J. has held that (AIR headnote):
" Where the Legislature clearly declares its intent in the scheme and language of a statute, it is the duty of the court to give full effect to the same without scanning its wisdom or policy, and without engrafting, adding or implying anything which is not congenial to or consistent with such expressed intent of the law-giver ; more so if the statute is a taxing statute."
The facts in that case were that under the U.P. Sales Tax Act, the limitation has been prescribed for filing a revision before the authorities constituted thereunder. The Full Bench of the Allahabad High Court in CST v. Parson Tools & Plants [1971] 27 STC 73 (All) held that sections 5 and 14 of the Limitation Act would apply to the revisions filed thereunder. While holding that the Limitation Act does not apply, the above law was laid down.
Thus it is settled law that in order to ascertain the intention of the Legislature, the court has to gather from all admissible evidence including legislative history and the language in which the statute is couched, the purpose of the statute, its aim, scope, object and setting of the Act, giving effect to the context of every word, phrase or sentence employed therein by harmonious construction so as, as far as possible, to make a consistent enactment of the whole statute. In that process, the court has to keep in the forefront, what was the state of law before the Act was passed, what was the mischief or defect which the law had not prevented, what remedy the Legislature has provided and the reason for the remedy. The construction would be to suppress the mischief and advance the remedy and to suppress all evasions for the continuance of the mischief which the statute intends to prevent. The statute must be applied to the substance rather than to the mere form of the transaction, thereby defeating any, mischief of contraventions which the parties may have devised to wriggle out of the Act, if necessary to brush away the cobwebs and consider the transactions in their true light.
In the light of the above law, the question is, as stated earlier, whether the expenditure incurred on dinner or lunch provided to the foreign trade delegates by the company is in the nature of entertainment expenditure within the meaning of sub-section (2) or sub-section (2B) of section 37.
In this regard, there is a cleavage in judicial thought on the scope of "entertainment expenditure "one torch-bearer being CIT v. Patel Brothers & Co. Ltd. [1977] 106 ITR 424 (Guj), followed by this court in Maddi Venkataratnam's case [1979] 119 ITR 514, the connecting link being Divan C. J., being a party to both the judgments; and the contra is CIT v. Veeriah Reddiar [1977] 106 ITR 610 (Ker) [FB], speaking through Balakrishna Eradi J. (as he then was), followed in CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336 (P & H) [FB]. At the cost of repetition, it may be necessary to recapitulate that section 37(1) gives right to an assessee to an allowance of business expenditure laid out or expended wholly or exclusively for the purposes of the business and profession (the expenditure not being in the nature of capital expenditure or personal expenses of the assessee) in computing the income chargeable to tax under the head " Profits and gains of business or profession ". But its width and sweep are sought to be curtailed by sub-sections (2), (2A), (2B) and (4) of section 37, by employing the non obstante clause stating that de no expenditure in the nature of entertainment expenditure shall be allowed " exceeding the aggregate amount computed on the basis of the slab system provided thereunder as in the case of a company and individual assessees under sub-sections (2) and (2A) respectively and putting total prohibition at the relevant assessment year under sub-section (2B). after February 28, 1970, and under sub-section (4), from the same period, allowance of expenditure incurred on the maintenance of a guest house or a guest house maintained as a holiday home for employees. The scope of the non obstante clause was considered by the Supreme Court in South Indian Corporation (P) Ltd. v. Secretary, Board of Revenue, AIR 1964 SC 207; 15 STC 74, 89(SC). Subba Raoj.(as he then was), speaking for the Constitution Bench, held at page 215, paragraph 19 (of AIR), thus:
"... Article 278 opens out with a non obstante clause. The phrase 'notwithstanding anything in the Constitution' is equivalent to saying that in spite of the other articles of the Constitution, or that the other articles shall not be an impediment to the operation of article 278. While article 372 is subject to article 278, article 278 operates in its own sphere in spite of article 372. The result is that article 278 overrides article 372 ; that is to say, notwithstanding the fact that a pre-Constitution taxation law continues in force under article 372, the Union and the State Governments can enter into an agreement in terms of article 278 in respect of Part B State depriving the State law of its efficacy. "
The contention raised in that case was that article 277 of the Constitution would save only the levy of tax that was being lawfully levied by State immediately before the commencement of the Constitution and since the Travancore and Cochin General Sales Tax Act came into force after the Constitution, the levy made thereunder does not satisfy the conditions laid down in article 277. So, the tax under the Act was not saved. While considering the scope of and upholding that contention, it was held that article 277 excludes the operation of article 372 or an agreement in terms of article 278 overrides article 372. A Division Bench of this court in Parasuramaiah v. Lakshmamma, AIR 1965 AP 220, was also called upon to consider the effect of the non obstante clause in section 10(3)(c) of the Andhra Pradesh Buildings (Lease, Rent and Eviction) Control Act (15 of 1960). The contention therein was that by virtue of the non obstante clause in section 10(3)(c), it must be confined to find whether the landlord owns a residential or non-residential building of his own in the city, town or village concerned and nothing more. While meeting that contention, Gopal Rao Ekbote J. (as he then was), speaking for the Bench, held thus (p. 223):
" It must be understood that a non obstante clause is usually used in a provision to indicate that that provision should prevail despite anything to the contrary in the provision mentioned in such non obstante clause. In case there is any inconsistency or departure between the non obstante clause and another provision, one of the objects of such clause is to indicate that it is the non obstante clause which would prevail over the other clause. It does not, however, necessarily mean that there must be repugnancy between the two provisions in all such cases. "
It was held that the purpose of the non obstante clause was that the entire clause (a) would not apply to a case falling within the ambit of clause (c). Any other meaning would amount to ignoring the express non obstante clause appearing in clause (c). In sub-section (1) of section 37, any expenditure in the nature of capital expenditure or personal expenses of the assessee or expenditure in the nature described in sections 30 to 36 are not allowable in computing the income chargeable under the head " Profits and gains of business or profession ". But the other business expenditure laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowable. But the width of its net again is cut down by the non obstante clause in other provisions-the expenditure in the nature of entertainment expenditure shall not be allowed except at the rates on the basis of the slab prescribed thereunder. Therefore, despite the operation of sub-section (1) of section 37, sub-sections (2), (2A), (2B) and (4) have independent operation and an assessee is not entitled to deduction of the whole entertainment expenditure if it falls under the latter sub-section. The term " in the nature of entertainment expenditure " was not defined under the Act. The question, therefore, is, what is the meaning of the general phrase " in the nature of entertainment expenditure ". A reading of this compendious clause appears to be couched in wide language spreading its net widely to engulf in its ambit all the " entertainment expenditure" stricto sensu or otherwise so as to bring within its net all the expenditure laid out or expended as entertainment expenditure. The meaning of this phrase was considered in Veeriah Reddiar's case [1977] 106 ITR 610 (Ker) [FB]. Balakrishna Eradi J. (as he then was) has considered it with reference to the standard dictionaries and held at page 617 thus:
" A reference to the leading dictionaries would show that the word 'entertainment' has several different shades of meaning such as, diversion or amusement: something affording a diversion or amusement, esp. a performance: hospitable provision for guests: maintenance in service: reception of and provision for guests: hospitality at table: that which entertains : a performance or show intended to give pleasure: hospitality given or received: the consideration of an idea : reception, admission, etc., etc. The exact content of the word has, therefore, to be gathered from the context and setting in which it has been used. "
It was held that in interpreting the expression " entertainment expenditure " occurring in sub-sections (2A) and (2B) of section 37 of the Act, the word " entertainment " should be taken to mean " hospitality of any kind extended by the assessee directly in connection with his business or profession." (emphasis supplied). In that case, the question was whether the expenditure for supplying cigarettes, coffee or meals to customers and constituents of the assessee would fall within the sweep of sub-sections (2A) and (2B) of section 37. The Full Bench has held against the assessee and in favour of the Revenue.
In Khem Chand Bahadur Chand's case [1981] 131 ITR 336 (P & H) [FB], Sandhawalia Chief justice, at page 347, held thus :
" In construing the aforesaid provisions (section 37(1), (2), (2A)), what first meets the eye and deserves highlighting is the designed and considered use of the phraseology by Parliament in sub-sections (2) and (2A) aforesaid. The phrase deliberately employed is-'in the nature of entertainment expenditure'. It is not merely 'entertainment expenditure' or 'business entertainment simpliciter'. It is a sound canon of construction that the Legislature does not waste its words and every word employed in a statute has to be given a meaning. Undoubtedly, therefore, whilst using the larger and compendious expression 'in the nature of entertainment expenditure', Parliament had an obvious purpose behind it. This expression is much wider in its connotation, inasmuch as it would take within its ambit not merely what may stricto sensu be regarded as entertainment expenditure proper but also all other expenditure of allied nature partaking of some, if not all, of the characteristics of entertainment expenditure. The phrase has indeed a wide amplitude and its use leaves little doubt that the intention of the Legislature in employing it was to cast the net sufficiently wide so as to bring within its field all types of hospitality. Even on behalf of the respondents, it could not be denied that any lavish hospitality expended for business purposes would amount to 'entertainment expenditure'...What, however, calls for pointed notice is the fact that both sub-sections (2) and (2A) of section 37 begin with a non obstante clause, namely, 'Notwithstanding anything contained in sub-section (1) thereof'. Plainly, therefore, it would mean that whatever the amount of business entertainment expenses may be, they are subject to the stringent rule and limits provided in subsections (2) and (2A) for companies and other assessees, respectively. Therefore, reading sub-sections (1), (2) and (2A) together-and doing so is a wholesome rule of construction--the larger scheme appears to be that the law recognises the incidence of business entertainment expenses but does not allow any sky-high deductions thereof and curbs them within the slab limits provided in clauses (i), (ii), (iii) and (iv) of sub-sections (2) and (2A) of section 37 of the Act. To put it in other words, the statute is alive to the fact that business entertainment expenses may sometimes have to be incurred at inordinately high levels. That by itself would not give the businessmen carte blanche to incur any amount of entertainment expenses and claim a total deduction thereof. The Legislature has followed the golden mean by allowing a reasonable rein and also put a plausible leash thereon in the shape of maximum slabs therefor in subsections (2) and (2A). To construe the provision otherwise and to hold that hospitality which is not lavish may be expended without any financial limits would in effect be frustrating the very purpose of the Legislature in enacting sub-sections (2) and (2A) and defeating the larger legislative intent of curbing excessive business entertainment, at the cost of the public exchequer. Beyond the prescribed limits, business entertainment is left to the discretion and the personal cost of businessmen themselves, and is not to be defrayed by public revenue."
However, at page 355, a note of caution was administered by the Full Bench thus:
".. ...... an overly doctrinaire approach must be avoided. We are inclined to the view that all hospitality extended wholly and exclusively for the purposes of the business is within the net of the phrase 'in the nature of entertainment expenditure'. However, it is elementary that, in the first instance, such an expense must be a hospitality expense and that which, in ordinary parlance, cannot be even termed hospitality cannot by any stretch of imagination be either deemed to be entertainment or in the nature of entertainment. To reiterate, for an expense to come within the ambit of being in the nature of entertainment, it must first partake of all the appellations of being hospitable. If it does not even satisfy the broad concept of being hospitable stricto sensu, then it cannot be elongated into either entertainment expenditure or even in the nature of entertainment expenditure."
We find compatibility to respectfully make common journey. In that case, the assessee claimed deduction of kitchen expenses expended towards cigarettes, pan, tea, etc., treating them as expenditure in the nature of entertainment expenditure. Ultimately, the Tribunal took the view that they are not in the nature of entertainment expenses and accepting the stand of the assessee, deleted the amount of Rs. 4,500 under this head. The Full Bench answered the question against the assessee. In the application of the principle, we express our regrets to part our ways. Equally too of Veeriah Reddiar's case [1977] 106 ITR 610 (Ker) [FB].
As against this view, in Patel Brothers' case [1977] 106 ITR 424, Division Bench of the Gujarat High Court was called upon to consider the question whether the supply of food, drinks or any amusement to client, constituent or customer was in the nature of entertainment expenditure in law. The facts therein were that the assessee was a limited company. It provides meals to its workers as well as workers and customers of its associate firm carrying on business, viz., Patel Brothers Oil Mills. Farmers come to the factory to offer goods such as cotton, groundnut, rice and pulses to the assessee. It was customary and out of commercial expediency for the company to provide meals to its farmer customers. Therefore, the company claimed allowance of kitchen expenses for the relevant assessment years from chargeability to tax. The Income-tax Officer disallowed the expenditure. On appeal, the Appellate Assistant Commissioner held that it is not an entertainment expenditure Covered by section 37(2) as the expenditure was to provide meals which is a bare necessity having regard to the nature of the business and, therefore, it is not an entertainment or amusement. On second appeal, the Tribunal confirmed it. On reference, the learned judges considered the word " entertainment " They did not consider the scope of the phrase " in the nature of entertainment expenditure ". After considering the connotation and meaning of the word " entertainment " with reference to leading dictionaries, they laid down four propositions thus (p. 441 of 106 ITR):
" (a) If the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish or extravagant scale, or is of wasteful nature, it is entertainment per se.
(b) If the provision of food or drinks to a client, constituent or customer is in the nature of bare necessity, or by way of ordinary courtesy, or as an express or implied term of contract or employment spelled out from longstanding practice or custom of trade or business, it will not amount to entertainment.
(c) If the provision of food or drinks 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.
(d) The provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment."
It was held that, having regard to the nature and magnitude of the business of the assessee, it would be necessary for the assessee to make arrangements for providing meals to its up country constituents who visit it. Accordingly, the point was held in favour of the assessee. The Punjab and Haryana High Court in Khem Chand Bahadur. Chand's case [1981] 131 ITR 336 [FBI dissented from this view and stated several reasons for their inability to agree with the ratio laid down in Patel Brothers' case [1977] 106 ITR 424 (Guj). It held that the Achillies' heel of Patel Brothers' case missed the purpose, the import and the significance of the deliberate use by Parliament of the compendious phrase " in the nature of entertainment expenditure " and other reasons. In Veeriah Reddiar's case [1977] 106 ITR 610, the Full Bench of the Kerala High Court also disagreed with the ratio in Patel Brothers' case [1977] 106 ITR 424 (Guj).
In Maddi Venkataratnam's case [1979] 119 ITR 514 (AP), the assessee is a private limited company. The assessee maintained two guest houses intended for foreign buyers. It claimed entertainment expenses at the guest houses arranged as lodging to the customers coming from foreign countries in connection with the export business of tobacco. The assessee claimed before the Income-tax Officer that the expenses of providing lodging facilities to the foreign customers were in the nature of entertainment expenses in connection with the business of purchasing tobacco. Therefore, it was an expenditure necessary for the business and did not constitute entertainment. The Income-tax Officer disallowed part of it. On appeal, the Appellate Assistant Commissioner allowed the appeal. On further appeal by the Revenue, the Tribunal confirmed the order of the Appellate Assistant Commissioner. Thus, the reference by the Revenue. The Division Bench did not make any independent consideration except following the ratio in Patel Brothers' case [1977] 106 ITR 424 (Guj).
In Associated Newspapers Group Ltd. v. Flemimg (Inspector of Taxes) [1973] AC 628 (HL), the question was whether the expenses laid out for the provision of hospitality by a newspaper publisher to informants and contributors is deductible in computing the profits under section 15 of the Finance Act, 1965, to the newspapers published in the United Kingdom. The word " anything " in section 15(9) was pressed into service to claim deduction. It was disallowed and, on appeal, the House of Lords confirmed it. While considering the same, at page 643, Lord Morris of Borthy-Gest has held thus:
" My Lords, the questions that are raised must find their solution in a fair and reasonable interpretation of the words by which the Legislature has expressed its intention. In particular, must the wording in sub-section (9) be considered."
At page 644 it was held:
" The word 'anything' in sub-section (9) meant business entertainment so that sub-section (9) related to the deduction of expenses incurred in the provision by any person of business entertainment which it is his trade to provide. I cannot agree. There is no trade or business of giving free hospitality. I see no reason why the word 'anything' should not be given its ordinary and natural meaning."
Lord Simon of Glaisdale held at page 646 thus:
"But a mere reading of section 15 of the Act, 1965, against the background of the preceding law, can leave no doubt that it was Parliament's ,conception that expenditure on business entertainment charged as a deduction against gross trading income was being fiscally abused, or that Parliament in section 15 was seeking to provide a remedy for what it conceived as such abuse.
Nor can there be any doubt about the method which the draftsman chose to adopt in order to provide the remedy. Experience must have taught him that if a fiscal abuse is too precisely remedied, taxpayers with expert advice will find a means of evading the fiscal control. To counter this, the draftsman may spread his net very wide at first, in order to make sure that nothing gets by which should not; and he will then re-examine to ensure that nothing has been caught in the net contrary to fiscal equity, and readjust accordingly. That seems to have been the draftsman's method with section 15."
This case is an authority for the proposition that entertainment expenditure is to be allowed only to an assessee whose business is to provide entertainment. The word " anything " is to be construed in that context. Though entertainment expenditure is necessary for getting news items, it is not to be allowed. The same appears to be the method adopted by Parliament in using appropriate language in section 37(1), (2), (2A) and (2B).
In De Vigier v. IRC [1964] 1 WLR 1073 (HL), Lord Reid, while considering the transaction of loan and repayment of loan, and the meaning of " loan " tinder section 408 of the Income-tax Act, 1952, held at page 1077 thus:
" I realise that if legislation is to be effective to forestall attempts at evasion, it must often be drafted in terms so wide that it can apply to variety of quite innocent transactions."
Lord Pearce at page 1079 held thus:
" One, therefore, approaches this case with an inclination to limit, if one can properly do so, the application of section 408 to the cases which it was primarily intended to catch, and to exclude cases like the present where its application creates unfairness. But how can one do that without drawing some technical and artificial line which would defeat the whole intention of the section?
If one excludes the operation of the section simply because this was a nebulous and casual transaction or because the trustees had no power to borrow, then every person wishing to drive through the section, whether to secure the forbidden benefit or not, may do so by making his transaction nebulous and casual or by lending to a settlement which had no power to borrow. In my opinion, the section was not intended to have so limited an application."
The wife of the assessee lent loan from trust monies to purchase shares. On the facts, it was held that it was loan and repayment of the loan and the profits realised are chargeable to tax. This case is an authority for the proposition that it is the substance and not the form of the transaction that governs the case. Entertainment involves hospitality of any kind which an assessee extends to a customer, client or a constituent for furtherance of his business or profession. It must be wholly and exclusively necessary for the purpose of his business or profession. The primary motive behind laying out or expending entertainment expenditure is commercial or professional expediency. The phrase " in the nature of entertainment expenditure " encompasses in its ambit entertainment expenditure proper as well as expenditure akin to it partaking of some, if not all, of the characteristics of entertainment expenditure. Even lavish or frugal hospitality is none the less a hospitality. So any entertainment expenditure would be in the nature of entertainment expenditure, but may not strictly business expenditure. Equally, every hospitality does not necessarily constitute Per se entertainment expenditure. It would appear to us that the Legislature treated entertainment expenditure as part of business expenditure claimable for allowance under section 37(1) from chargeability to tax. The businessman abused the facility given thereunder. Amendments by gradual process were made in sub-sections (2), (2A) and (2B) of section 37 taking out "entertainment expenditure" from the purview of section 37(1) and transplanted it in later sub-sections by appropriate phraseology; widened its sweep employing " in the nature of entertainment expenditure " with non obstante clause giving exclusive operation thereof, that notwithstanding the operation of sub-section (1) of section 37, the latter would operate. Entertainment expenditure, whether would come stricto sensu or of its allied nature, partaking of some, if not all, of the characteristics of entertainment expenditure to be operated within the ambit of sub-sections (2), (2A) or (2B). This view gains support from the latest amendment introduced in 1978 to sub-section (2B) of section 37, treating advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party as a separate item. To get at the substance of the transaction, doctrinaire angulation is to be eschewed, and it is to be pragmatically broached from work-a-day basis. It may be illustrated on the basis of some hypothetical questions :
(1) Take a case where a company calls for a general body meeting of its shareholders or board of directors. While transacting its business, it hosts a lunch to all its shareholders or board of directors.. The question is whether the expenditure incurred in connection therewith is wholly and exclusively necessary for the purpose of the business of the company. When the board of directors or shareholders met to transact the business of the company and the lunch was hosted, necessarily the expenditure incurred in connection therewith was wholly and exclusively for the purpose of the business of the company. The primary motive is the transaction of business. Though there is an element of hospitality in hosting a lunch, it cannot be said that the company is extending hospitality for itself for pleasure. Therefore, it comes squarely within the ambit of business expenditure under section 37(1).
(2) Take a case where an advocate or an attorney has been engaged by a managing director or chief executive of a business house and requests time for consultation in his pending cases. Counsel or attorney extends an invitation to the client to discuss the problem over a lunch or dinner and the same is arranged in a hotel. After having the lunch or dinner, the problem was discussed and the matter was settled. The question is whether the expenditure incurred by the advocate or attorney or company is wholly and exclusively for the purpose of the profession or business ? Nobody except the host and guest attended. The primary object of arranging the lunch or dinner is to discuss and finalise the problem and incidentally lunch or dinner, as an act of hospitality, has been provided. An element of hospitality, undoubtedly, is involved in it. But the primary purpose is wholly professional or business and the expenditure is exclusively incurred in connection therewith. The consideration of hospitality is secondary. The entertainment expenditure stemmed from professional or business expediency and hospitality is integrally connected. It would thereby appear to be wholly coming under section 37(1) of the Act.
(3) Take another case where a senior counsel of the Supreme Court is engaged on behalf of a company to argue a case in the High Court of Andhra Pradesh at Hyderabad. Counsel has been provided with lodging as an implied term of the contract. Though it is not necessary for the company to provide lunch and dinner to counsel, to make counsel comfortable, as an incident thereof, hospitality has been extended. Therefore, providing boarding to counsel, though it involves the element of hospitality, is incidentally connected with the business purpose which is wholly and exclusively extended in connection with the business of the company. So, it is business expenditure under section 37(1) of the Act.
(4) Take the case that, during the course of the transaction of the business during the business hours, a company like the case on hand, as an act of business courtesy or civility, supplies coffee, tea, snacks, etc., to the clientele or customers that visited the company for the purpose of business. Though there is an element of hospitality involved in it, the primary motivating factor is business courtesy or civility. Therefore, the amount expended on that account would come as an incident of business expenditure. The concept of entertainment or pleasure is absent. It attracts section 37(1) of the Act.
(5) Take yet another case where an old client of a counsel or attorney visits the office of his former counsel or attorney but, by that time, there is no relationship of client and counsel. As a courtesy, counsel or attorney invites the old client and extends hospitality by entertaining him over a dinner or lunch and met the expenditure in that regard. Though, there is an element of hospitality involved in this case also, it is not wholly and exclusively for the purpose of profession. The primary motive or wish is to extend hospitality and the relationship is that of a host and a guest. Though it is in the nature of entertainment expenditure counsel is not entitled to claim deduction. It would be personal expenditure excluded by section 37(1) itself. The reason is that there must be independent and deliberate business or professional purpose to host a dinner or a lunch. An element of private hospitality pervades the case.
(6) Take another case where the managing director or chief executive of a company is involved in a case, not necessarily connected with the company. But, out of consideration for the meritorious or faithful service rendered by him, the company may agree to bear the expenditure of a counsel and the company hosts lunch and dinner to counsel, at the expense of the company. The question is whether the expenditure incurred by the company can be claimed and is allowable ? Though there is an element of hospitality involved, it is not wholly and exclusively for the purpose of the business of the company. Therefore, it would neither fall under sub-section (1)--business expenditure--nor under subsection (2) nor (2B) of section 37 and is to be disallowed.
(7) Take the case of a trade delegation, like the present case on hand, from USSR and GDR who visited India and the assessee entertains them extending hospitality and arranges residential accommodation, lunch and dinner during their stay in India. The question is whether it is wholly and exclusively necessary for the purpose of the business. The motivating factor may be for immediate benefit to the trade. But, there is no relationship as customers. It is only a prospective order to be placed by the trade delegates with the assessee-company. Though hosting a dinner or lunch and arranging residential accommodation may be due to commercial expediency and indirectly facilitates trade prospects, yet it does not attract in stricto sensu business expenditure but it is certainly entertainment expenditure. Under those circumstances, it is in the nature of entertainment though it is for the purpose of trade, attracting section 37(2) or (2B) of the Act.
(8) Take the case where a race club arranges a meeting of its stewards and office-bearers of the club to transact its business on a day when races are to be conducted. Without inviting any third parties, if the expenditure is incurred in connection with the lunch while transacting business, the expenditure is in connection therewith and it is wholly and exclusively for the purpose of the business. It is a business expenditure. Take, for instance, a case where only a few important dignitaries that visited the races are also invited to join them over dinner. Though there is an element of hospitality to a few guests and part of their expenditure is expended, yet the element of hospitality is subordinate and small in degree as host and guest. So, it cannot be said that the expenditure is in the nature of entertainment expenditure. The predominant purpose is business transaction and entertaining guests is incidental.
(9) Take, for instance, a case where without any meeting of the stewards or the office-bearers, they invited a number of invitees to visit the races and hosted a dinner for them along with stewards and office-bearers. The object of the invitation is to promote races and the motivating factor for the stewards or office-bearers appears to be to lure a large gathering to attend the races and the expenditure, though not wholly necessary for business, 'would come within the net of sub-sections (2A) and (2B) of section 37 and not tinder section 37(1) of the Act.
The above discussion leads us to conclude that the Legislature administered a caveat to an assessee thus: " Look here, assessee, you are free to lay out or expend entertainment expenditure as an incident of your business expenditure. But you must be astute as a frugal businessman that the 'entertainment expenditure' is wholly and exclusively necessary absolutely for the purpose of the business and that it is a reasonable one. You are also free to be lavish or extravagant, having commercial expediency in view in expending entertainment expenditure, though of necessity, for your direct and immediate benefit to the trade indirectly facilitating the carrying of the business and you may feel that it is expended wholly and exclusively for the purpose of the trade. Yet it being within the wide net of 'in the nature of entertainment expenditure', the non obstante clause in sub-sections (2), (2A) and (2B), i. e., notwithstanding that the expenditure is business expenditure, at once catches it and despite the applicability of section 37(1), it would be operated within the parameters of sub-sections (2), (2A) and (2B) and it would be slashed down as per the slab rates prescribed either under sub-section (2) or (2A) depending on your gains or profits during the accounting year. So beware that all entertainment expenditure laid out or expended would not be allowed. You are forewarned that the exchequer would not defray it. Oh you-the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal eschew adoption of lexicographic consideration and doctrinaire approach but be pragmatic to adopt work-a-day rule, lift the veil encircling the transaction in question, find the primary motive behind laying out or expending entertainment expenditure and put a question to yourself whether it is wholly and exclusively necessary for the purpose of the business or profession and then arrive at the substance of the transaction."
Therefore, the tax authority or the Appellate Assistant Commissioner or the Tribunal has to narrowly scrutinise the accounts in each case, itemwise, whether the expenditure expended or laid out by a company or an assessee is wholly and exclusively for the purpose of the business or profession and it is business or professional expenditure or whether it is in the nature of entertainment expenditure. The authorities while scrutinising the expenditure very narrowly ask the question whether it was laid out or expended for the purpose of the assessee's trade or profession and then ask the second question, was it laid out or expended not wholly or exclusively for the assessee's trade or profession. They should further ask the question whether it is a reasonable expenditure. If the angulation is made in that perspective and the answers are elicited, it would not only subserve the purpose of sub-section (1) of section 37 and, in an appropriate case, relief granted but also brings within the net of sub-sections (2), (2A) or (2B) of section 37 preventing ostentation, needless, wasteful, extravagant or lavish expenditure and put a nail on evasion's coffin. Even if it comes under sections 37(1), 37(2) and (2A), it has still to be investigated whether it is reasonable expenditure. The reason is obvious. By a fastidious or lavish person, the act of hospitality with luxurious dishes and costly hot drinks may be regarded as an ordinary lunch or dinner, but, to a common man, it would be a lavish meal or staggering wasteful expenditure. Therefore, care must be taken to maintain the record of expenditure by the assessee and the authorities are to scrutinise the record very narrowly, whether the act of hospitality is an ordinary and frugal one and give allowance accordingly.
At this juncture, the contention of Sri Moorthy, learned standing counsel for the Revenue, merits acceptance. The finding of the Tribunal is that the company hosted dinners to foreign delegates in order to entertain them in " an appropriate and befitting manner ". The phrase " appropriate and befitting manner " is an elusive and ambiguous one. No attempt has been made by the Tribunal to find whether it is reasonable. As stated earlier, to a fastidious host, arranging varied dishes with costly items and costly hot drinks is an ordinary act of hospitality, but to a common man it is wasteful expenditure. Therefore, what is appropriate and befitting is always a big question mark affording carte blanche to an assessee to expend lavishly, exhibiting ostentation, with the belief that the public exchequer would defray the wasteful expenditure. If this consideration is allowed to prevail, sub-sections (2), (2A) and (2B) of section 37 would be rendered otiose and ineffectual, defeating the legislative animation. Therefore, the fact-finding authorities have to carefully scrutinise the record with circumspection and give the necessary allowance as per law.
With regard to question No. (4), it is conceded by the Revenue that it was covered by a decision of this court that the amount of Rs. 893 made for subscriptions to the club for entertainment of the foreign business delegation is allowable. Accordingly, it is answered in favour of the assessee.
With regard to question No. (6), the contention of Sri Moorthy is that no part of the expenditure is allowable, as it is not covered by section 35B(1)(b)(ii), (vi) or (vii) of the Act. He argues that the claim was not laid before the Income-tax Officer ; for the first time, it was made before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner is unjustified in coming to the conclusion that the expenditure claimed qualifies for weighted deduction under the above provisions. The resistance of Sri Parvatha Rao is that obtaining agmark from the Indian Standards Institution is necessary for export, which was accepted by the Appellate Assistant Commissioner. It is not disputed that it was required for the purpose of export. The expenditure was necessary for export credit guarantee insurance, inspection charges, salaries of chief buyers for export, etc. As such, items Nos. (1), (2), (3), (5) and (6) were allowed by the Appellate Assistant Commissioner under sub-clauses (ii), (vi) and (vii) of sub-section (1)(b) of section 35B and 50% was allowed as regards items Nos. (4) and (7). The Appellate Tribunal confirmed it and it is a finding of fact and does not warrant an adverse finding. Learned counsel also placed reliance on Union Carbide India Ltd. v. CIT [1987] 165 ITR 558 (Cal).
To appreciate the respective contentions, sub-clauses (ii), (vi) and (vii) of sub-section (1)(b) of section 35B need extraction. Section 35B reads as follows :
"Export markets development allowance.-(1)(a) ........
(b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on-...
(ii) obtaining information regarding markets outside India and for such goods, services or facilities ; ......
(vi) furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities ;
(vii) travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from, and return to, India ; ........"
A reading of the above provisions would adumbrate that, where domestic company or a person other than a company who is a resident of India has incurred after February 29, 1968, whether directly or in association with any other person any expenditure wholly or exclusively on obtaining information regarding markets outside India for such goods, services or facilities, the assessee is entitled to claim " weighted deduction ". Similarly, if it is required for furnishing to a person outside India samples of technical information for the promotion and sale of such goods, services or facilities or travelling expenses in connection therewith to and from India, weighted deduction is allowable. The question at issue is whether the company is entitled to weighted deduction in respect of the five items mentioned in question No. (6). Rs. 1,40,965.01 was expended for obtaining agmark from the Indian Standards Institution. We did not find any averment either in the order of the Appellate Assistant Commissioner or the Tribunal or the statement of the case that the agmark is wholly and exclusively necessary for the purpose of submitting technical information to the foreign buyers for the promotion of the sale of goods (tobacco) of the company. It is also not the case that the certification by the Indian Standards Institution as an agmark is a condition precedent to export of tobacco or a term of the contract. The decision in Union Carbide's case [1987] 165 ITR 558 (Cal) is of little assistance to the company. Therein, the facts were that obtaining a certificate from the export agency is necessary. Therefore, inspection has got to be made by the certifying officer regarding the quality of the goods. It was contended that it was technical information on the quality of the products for export. Therefore, weighted deduction has to be granted. But in this case, as stated earlier, it is not the case of the company nor any material has been placed nor a finding was recorded either by the Appellate Assistant Commissioner or the Tribunal in that regard. Equally, with regard to the alleged export licence fees and inspection charges, no material has been placed on record and nothing of it has been brought to our notice from record. Equally, with regard to items Nos. (5) and (6), viz. subscription to export promotion councils and trade associations and translation charges, no material has been placed that they are of any technical information required to be furnished by the company to foreign buyers for promotion of the sale of the goods of the company. Therefore, none of the items would be eligible for weighted deduction as sub-clauses (ii), (vi) and (vii) of sub-section (1)(b) of section 35B are not attracted. Considered from this perspective, the Tribunals below erred in law in allowing the above weighted deduction from the chargeable income.
Finding it difficult to sustain the claims, Sri Parvatha Rao made valiant efforts to persuade us to give an opportunity to the company to lead further evidence before the Appellate Tribunal. We are afraid, we cannot accede to this contention. It is now settled law that the Tribunals cannot take evidence afresh. It cannot take in evidence subsequently gathered after the decision by the Appellate Assistant Cornmissioner. It has to look into the evidence on record placed by the assessee before the Income-tax Officer. Whatever evidence is available on record, it alone has to be looked into and the company has to satisfy from the record with regard to the claims in respect of questions Nos. (1) to (3).
Thus considered, we decline to answer questions Nos. (1) to (3) and direct the Appellate Tribunal to examine the evidence on record afresh, whether the entertainment expenditure oil foreign delegates is lavish or extravagant in the light of the law above laid down and to find out what would be the reasonable expenditure and accord allowance according to law. We answer question No. (4) in favour of the assessee and against the Revenue. We answer question No. (5) in favour of the assessee and against the Revenue. We answer question No. (6) against the assessee and in favour of the Revenue except to the extent of allowing weighted deduction in respect of the sum of Rs. 1,09,587.
The reference is accordingly answered.
ANJANEYULU J.-I agree with the answers proposed by my learned brother to the six questions referred. I would however, like to make few observations.
As regards the sum of Rs. 893 which is the subject-matter of consideration in question No. (4), learned standing counsel for the Revenue fairly conceded that it is allowable as expenditure, as the sum in question represented subscription paid to the clubs for membership and not for entertainment. The amount paid, therefore, qualifies for deduction as business expenditure under section 37(1).
There can he no doubt that the sum of Rs. 22,722 claimed by way of entertainment expenditure, which is the subject-matter of consideration in question No. (5), should be allowed as the facts would indicate that this expenditure was incurred for providing coffee, tea and snacks to customers visiting the business premises of the assessee. The expenditure is clearly allowable as business expenditure under section 317(1) of the Act in terms of the decision of this court in Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514.
Questions Nos. (1), (2) and (3) go together. The sum of Rs. 17,056 specified in question No. (1) is claimed to have been spent on entertaining a foreign delegation. The sum of Rs. 2,668 referred to in question No. (2) is claimed to have been spent on providing lunch and dinner to customers. Finally, the sum of Rs. 1,79,154 in question No. (3) is described as business promotion expenses The last mentioned sum of Rs. 1,79,154 was part of the total claim of expenditure of Rs. 2,16,215 out of which the Appellate Assistant Commissioner disallowed Rs. 37,061. The balance amount of Rs. 1,79,154 was found to be expenditure incurred in the provision of food and other beverages to foreign buyers. At one stage, learned standing counsel for the Revenue sought to urge that the sum of Rs. 1,79,154 included expenditure incurred for the maintenance of guesthouse also and that such expenditure is wholly disallowable. It was, however, found that the expenditure on account of maintenance of guesthouse amounting to Rs. 14,999 was debited in the books of the head office at Guntur and was disallowed wholly by the Income-tax Officer. Learned standing counsel did not dispute, after noticing the disallowance, that the entire expenditure of Rs. 1,79,154 referred to in question No. (3) was incurred on food and beverages for the use of foreign buyers.
The basic question that falls for consideration is whether the three items of expenditure referred to above would qualify for deduction in terms of the tests laid down by the Gujarat High Court in CIT v. Patel Brothers & Co. Ltd. [1977] 106 ITR 424 which tests were referred to and followed by a Division Bench of this court in Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514, 517. The approved tests 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 customer is in the nature of bare necessity, or by way of ordinary courtesy, or as an express or implied term of the contract of employment spelled out from long-standing practice or custom of trade or business, it will not amount to entertainment.
(iii) If the provision of food or drinks 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.
(iv) The provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment."
The aforesaid decisions were within the knowledge of the assessee as well as the Tribunal, when the appeals were heard and disposed of on January 30, 1979. Yet, no effort was made by the assessee to furnish the full details of the expenditure and establish its case before the Tribunal that, in the light of the aforesaid tests enunciated, the expenditure qualifies for deduction as business expenditure and could not be treated as expenditure in the nature of entertainment expenditure; nor did the Tribunal make any endeavour to examine the details of the expenditure and record any specific finding whether the expenditure fulfilled the tests laid down by this court. The argument of the assessee regarding the nature of expenditure as well as the conclusions of the Tribunal in regard to the same proceeded on vague and uncertain considerations. In view of the decision of this court in Maddi Vewkataratnam's case [1979] 119 ITR 514, following the tests laid down in Patel Brothers'case [1977] 106 ITR 424 (Guj), the Tribunal should have specifically addressed itself to the question whether the expenditure incurred partook of the nature of entertainment expenditure or not if, on scrutiny, it is found that the expenditure was incurred in providing accommodation and meals in posh hotels for foreign trade representatives, it cannot be termed as " business promotion expenses ". It partakes of the nature of entertainment expenditure. (See the decision in Mysodet (Pvt.) Ltd. v. CIT [1987] 163 ITR 848 (Kar) ). There is hardly any material or information in the order of the Tribunal and the authorities below regarding the nature of expenditure incurred. The Tribunal did not refer to the approved tests and record a finding that the expenditure claimed by the assessee qualified for allowance interms of the approved tests. It must, therefore, be said that there is total non-application of mind by the Tribunal to the question before it. The situation is precisely the same as it was in the assessee's own case for an earlier assessment year which was considered by this court in Nava Bharat Enterprises (P.) Ltd. v. CIT [1983] 143 ITR 804.
Having regard to the above facts and circumstances, it is not possible for this court to answer the first three questions referred by the Tribunal, as relevant details of the expenditure are wanting and the Tribunal has failed to scrutinise the expenditure and record a categorical finding on the admissibility or otherwise of the expenditure based on the approved tests referred to above. Inasmuch as relevant legal principles are laid down, the Tribunal will be entitled while passing an order conformably to this judgment under section 260(1) of the Act, to go into the question and determine the allowability of the whole or any part of the expenditure. The Tribunal shall be entitled to proceed on the basis of the material on record without taking any additional evidence, but the parties may be allowed necessary opportunity to explain the matters to the Tribunal. I, therefore, agree with my learned brother that we should decline to answer questions Nos. (1), (2) and (3) and direct the Tribunal to re-examine the matter bearing in mind the scope of rehearing under section 260 of the Act, as set out by the Supreme Court in CIT v. Indian Molasses Co. P Ltd. [1970] 78 ITR 474 and Raghunath Parsed Poddar v. CIT [1973] 90 ITR 140.
As regards question No. (6) concerning the eligibility for weighted deduction under section 35B(1)(b) of the Act, learned standing counsel conceded, at the time of hearing, that the assessee is entitled to claim weighted deduction in respect of expenditure of Rs. 1,09,587 pursuant to the decision of this court in the assessee's own case in RC No. 108 of 1982 dated November 5, 1986 (CIT v. Navabharat Enterprises (P.) Ltd. (No. 1) [1988] 170 ITR 326). In view of the above representation made by learned standing counsel, the assessee's claim for weighted deduction in respect of the expenditure of Rs. 1,09,587 is in order and is rightly allowed.
As regards the expenditure of Rs. 1,49,965 on " Agmark charges" (paid to the Indian Standards Institution for certifying quality) and the sum of Rs. 2,14,860 incurred by way of export licence fee and inspection charges, it must be pointed out that there are absolutely no details in respect of these items of expenditure to support the assessee's claim for weighted deduction. No materials are placed before this court regarding the nexus between the expenditure incurred and the export promotion or development for purposes of section 35B. The Tribunal's order does not contain any useful discussion on this matter. All that the Tribunal did was to refer to the order of the Appellate Assistant Commissioner and to record the abrupt conclusion that weighted deduction is allowable. It is not possible to appreciate the reasoning adopted by the Tribunal. The claim for weighted deduction was indeed large and an endeavour should have been made by the Tribunal to ascertain the nature of the expenditure and examine if the expenditure was for the purposes of export promotion. For instance, fee is payable to the ISI for certification not only for the purpose of goods exported, but also for goods sold in the local market. The mere fact that some amount was paid to the ISI does not necessarily lead to the conclusion that the expenditure was incurred on export promotion. Similarly, the record does not contain the analysis of expenditure of Rs. 2,14,860 to show what part represented export licence fee and what part represented the inspection charges. There is also no guidance anywhere in the record to show for what purpose inspection charges were paid and to whom.
The Tribunal did not consider all these aspects. It must be borne in mind that the weighted deduction in respect of these items was not claimed initially by the assessee during the course of the assessment enquiry. The claim was made at the fag end of the assessment enquiry and after the draft assessment order was approved by the Inspecting Assistant Commissioner justifiably, the Income-tax Officer had no opportunity to scrutinise this expenditure. The claim for weighted deduction in respect of these items was reiterated by the assessee before the first appellate authority. Although the items of expenditure were not subjected to scrutiny by the Income-tax Officer, the Appellate Assistant Commissioner thought it expedient to consider the matter. If the first appellate authority thought it fit to consider the claim, it was imperative that the matter was referred back to the Income-tax Officer for proper scrutiny. Without doing that the Appellate Assistant Commissioner recorded some vague, uncertain and laconic findings and came to the abrupt conclusion that weighted deduction is allowable. The Tribunal did precious little when the Revenue came up in appeal; it merely referred to the observations of the Appellate Assistant Commissioner and held that the expenditure qualified for weighted deduction.
Learned counsel for the assessee, Sri Parvatha Rao, vehemently argued that it is not open to this court to interfere with the findings of fact recorded by the Tribunal, unless for the purpose of reference to this court a specific question is sought for by the applicant, the Revenue in this case. According to learned counsel, if a specific question is not sought for reference challenging the finding of fact, then , this court is helpless in setting right an erroneous finding of fact recorded by the Tribunal. Learned counsel urged that in holding that the expenditure fell within the terms of sub-clauses (ii), (vi) and (vii), the Tribunal must be held to have looked into the nature of the expenditure and satisfied itself that the expenditure was incurred for export promotion. Learned counsel, therefore, urged that this court shall not look into the matter further. It is not possible to accept the submission of learned counsel. It is quite clear from the order of the Tribunal that the nature of the expenditure and the purpose for which the expenditure was incurred were not gone into. Without knowing the nature of expenditure, it was inconceivable how the Tribunal has come to the conclusion that the expenditure was incurred for export development. A finding of fact can be regarded as such if the Tribunal refers to the relevant facts and after discussion, records a finding one way or the other. Where, however, the Tribunal totally misdirects itself by omitting to consider the facts, it cannot be said that there is any finding of fact recorded by the Tribunal. Having looked into the order of the Tribunal, it is impossible to escape the conclusion that the claim for weighted deduction in respect of these two items was allowed without any application of mind. The Tribunal was obviously in error in allowing the weighted deduction in respect of these two items. It must be held that the assessee is not entitled to claim weighted deduction in respect of the sums of Rs. 1,49,965 and Rs. 2,14,860.
As regards the remaining sums of Rs. 11,746 and Rs. 1,732 referred to in question No. (6), 1 do not wish to add anything further to what has already been stated by my learned brother.
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