INCOME TAX

Expenditure on food or beverages provided to the employees by an employer--Section 37(2) of the Income-tax Act, 1961--Clarification

Circular No. 644

Dated 15/3/1993

Section 37(2) of the Income-tax Act, 1961, as it is substituted with effect from April 1, 1993, places restrictions on the quantum of deduction permissible on account of entertainment expenditure. The expression "entertainment expenditure" has been defined to include, inter alia, expenditure on provision of hospitality of every kind by the assessee to any person whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but "entertainment expenditure" does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.

2. The Board has received a number of representations from various trade associations that the restriction that food or beverages to the employees should be provided in office, factory or other place of their work, has adversely affected small and medium sized establishments which are unable to provide canteen services within their own premises for want of space and infrastructure, but provide such facility under contract with nearby eating places.

3. The issue whether the provision of food or beverages in places other than the place of work in respect of the low-paid employees can be treated as expenditure on provision of hospitality has been considered by the Board.

4. It can be argued that food or beverages provided to low-paid employees are more on account of their low salary than as a measure of hospitality. Hence, the Board has decided that the expenditure on provision of food or beverages by an employer to such employees as are not hit by the provisions of section 17(2)(iii) need not be treated as entertainment expenditure within the meaning of the Explanation under section 37(2) substituted with effect from April 1, 1993, if such food or beverages are provided during working hours even in places other than the place of work, provided the expenditure is genuine and reasonable. Accordingly such expenditure on the following classes of employees will get the benefit of this circular:

"employees whose income under the head "Salaries" (whether due from or paid or allowed by one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment does not exceed Rs.24,000; provided that, in the case of such employees of a company, they should be neither directors nor persons having substantial interest in the company."

In respect of other high-paid employees, i.e., those mentioned in section 17(2)(iii), however, such expenditure will continue to be treated as entertainment expenditure.

5. You are requested to bring the contents of this circular to the notice of all the officers working under your region.

6. This circular will be applicable for assessment year 1993-94 and onwards.

Yours faithfully,

(Sd.) G. Muthuramakrishnan

Director (ITA. II)

Central Board of Direct Taxes.