AI Structured Summary
Not yet generated for this judgment
Judgment
Balasubrahmanyan, J.—These references relate to ""entertainment expenditure"" under the I.T. Act, 1961, a topic which is not very
entertaining to deal with. Even to trace its legislative history is rather a bore. Right from the beginning of Income Tax in this country, till very
recently, there was nothing in the statue against the allowance of entertainment expenditure. Just like any other expenditure, entertainment
expenditure too had to satisfy the test of ""wholly and exclusively"" for the purposes of the business. That was all. But in 1961, Parliament came
down with an elaborate provision for disallowance. It was not a wholesale ban on the claim for deduction under this head. Nor did the provision
apply to every taxpayer. It applied only to the company assessments, to start with. It was extended later to other assessees. In 1970, Parliament
tightened its grip. From 1970 onwards, no expenditure was allowed at all to anybody if it was spent in business entertainment in India. This ban
continued right up to 1977. In that year, Parliament went back to square one. How long this is going to last is anybody''s guess. All we can say is
that Parliament has not been pursuing a clearheaded policy about making this expenditure a non-deductible item. Perhaps we ought not to blame
Parliament for begin in two minds about how to legislate in this matter. Perhaps, the nature of the expenditure itself accounts for the shifts and
changes in legislative policy. For, as in most other things, there is both good and bad in entertainment expenditure. It certainly pays a trader to
speak money for making his customers happy. He would do more business that way combining it with pleasure. In this sense, entertainment
expenditure is quite a legitimate allowance or charge against profits from the point of view of commercial expediency, if not, from any other view-
point, But there is another side to this picture. At current high rates of Income Tax, which leave pretty little in the hands of upper bracket
taxpayers, entertainment expenditure, allowed without any questions asked, opened a new vista. Since business entertainment as an item of
outgoing is closer to consumption than to production, taxpayers could easily smuggle in their own private expense accounts into this head of
outgoing in their business. Thus, conspicuous consumption of the rich and the super-rich became tax deductible as entertainment expenditure. This
was particularly so because of the difficulty in the way of dissecting the expenditure as so much for the purpose of the business and so much for the
personal purposes of the proprietor. Like charity, entertainment began at home and, in a few cases, entertainment, like charity, not only at home,
but it ended there.
This was the trend almost everywhere in the world, wherever, it is they had an Income Tax on trades and professions. Only very recently,
sovereign legislatures woke up to this scandal of taxpayers who could not afford deductible entertainment expenditure having to pay the price of
higher rates of Income Tax just so that prosperous businessmen might indulge their Bacchanalia at the exchequer''s expense. Out amendments did
not come too soon when they came in 1961. Britain was late by four years, if that it is a matter of comparative pride. But the amendments in the
United Kingdom law were unlike ours. They banned the allowance whose business entertainment, save those necessarily incurred by people
whose business it was to provide entertainment. Entertainment business, in short, could claim allowance for business entertainment, but not other
business. The House of Lords decided, for instance, that the cost of entertainment on food and drink to correspondents, reporters and informers of
the Daily Mail and the Evening Standard which was debited in the accounts of the newspaper organization were not deductible. They said that the
business was to publish newspapers and not to prove entertainment.
Our Parliament preferred to work without a definition. And, as we pointed out earlier, without a steadfast sense or direction. These produced a
happy hunting ground for tax litigation. Those with moneys to spare not only indulged in entertainment during the previous years but entered into
mettlesome argument about it with the Department during the assessment years that followed. In this manner, every other case ultimately reached
the courts.
Part of the endeavour of counsel on both sides was to feed us with reported cases of different High Courts including one of our own. But we are
inclined to regard them all as so many illustration of the problem and no more. All of them had, more or less, a common theme to consider. The
assessees who figured in the references had provided at their own cost food and drink to their customers and claimed the expenditure as
deductible. And the question in each case was whether this was entertainment expenditure or something else. The Allahabad, the Kerala and the
Punjab and Haryana High Courts held that it was entertainment expenditure and hence was subject to the statutory ban or restriction. The Gujarat
and the Madras High Courts took the opposite view.
In one or two reported cases, an attempt was made at understanding what the expression ""entertainment expenditure"" meant as employed by
Parliament in s. 37 of the I.T. Act. They proceeded on the footing that since Parliament had not bothered to define the phrase, it was the religious
duty of courts to become animated dictionaries themselves. One or two decisions took the line that Parliament had given an indication that
entertainment expenditure"" must be given a fairly wide berth to cover even ordinary hospitality. They though than they had the cue from the words
in the nature of"" occurring in the statutory expression ""any expenditure in the nature of entertainment expenditure"".
We think, with respect, that entertainment expenditure does not become a word with an expansive meaning because of the prefix ""in the nature
of"". We can understand a case where the legislative draftsman first defines entertainment expenditure and then proceeds to use the word ""in the
nature of entertainment expenditure"". In that case, we can say that anything which is akin to, but not quite the same thing as, entertainment
expenditure is also covered by the disallowing provision. That is not the case in s. 37. If Parliament intended to include ""non-entertainment
expenditure"" also within the statutory bar, this was not the drafting method to bring about the result.
Nor can we appreciate learned judges scurrying to the dictionaries to get at the meaning of a word like ""entertainment"" merely because the
statue does not favour us with a select definition. It is now more than a 100 years since Macaulay thrust this language of the courts, at least the
superior ones. Most of the judicial prose in this country, barring a conspicuous exception or perhaps two, can be got on without having to look into
a dictionary. Even our legislative draftsman is endowed only with a limited vocabulary. His composition is basic English of a kind which is full of
ordinary words in common speech, excepting where he has to refer to scientific or technological terms as in the Central Excise Act and the
Customs Tariff Act. Entertainment is a word or ordinary speech. Even those who know very little English can understand what entertainment,
entertainment tax, variety entertainment and other cognate expressions indicate. This being so, the only reason why anyone of us should at all look
up the word in the dictionary is that we would be interested in finding out whether entertainment also holds a peripheral or a distant thought. This is
quite a wrong use of the dictionary for statutory construction. If the word is in common speech and there is no special definition in the Act, then it
must be understood in the way it is understood in common speech. People do not speak to each other through dictionaries. If, on the contrary, a
special meaning were intended, an indication would or must be there in the statute itself, in which event a reference to the dictionary would be
uncalled for. In either case, the dictionary is useless as an aid to the construction of words in common usage. It is often a downright hindrance.
In Britain, as we said, Parliament expressly enacted that business entertainment included hospitality. Why ? Because in ordinary parlance
entertainment does not include hospitality and they in Britain wanted to disallow even hospitality expenditure by including it within the disallowing
provision. Our Parliament did not use a similar drafting device. It is, therefore, a just inference that the intention is not to disallows hospitality
expenditure. In most of the repeated cases the argument advanced was that this or that object of expenditure was not entertainment, but
hospitality. In one case which came before this court it was found that soft drinks were served ; it was regarded as business hospitality. In another
case, an assessee served his customers both soft and hard drinks. The assessing authority drew a line at soft drinks. This court, however, regarded
even alcoholic drinks as falling within the scope of hospitality, having regard to the circumstances of the case.
In one or two reported cases it was said that expenditure must be lavish in order to be regarded as entertainment expenditure. The meaning is
not quite clear. We are not any the better for knowing that lavish expenditure is entertainment and not lavish expenditure is non-entertainment. How
lavish is lavish anyway ? Nobody can say. This concept has obviously been adopted by the learned judges from the Notes on Clauses which were
distributed along with the printed Bill in 1961. We like to imagine that if Parliament had though fit to use the epithet ""lavish"" as a condition for
disallowance it would have been worse that even in the absence of such an epithet, we should be disposed to read it in the Act as a matter of
construction.
What then are we to do with the expression entertainment ? We have said it is not out function to rush in with out definition where Parliament
has feared to tread. For, our function, as a court of construction, is not to define, but to explain, elucidate, and expound, all for the purpose of
seeing whether the section in question applies or not to the facts on hand. To such an exercise of the judicial function definition is unnecessary. It is
enough that we understood how the Legislature looks at things and what it is that the Legislature is driving at. We should not mind if this process is
called ""purposive"" or ""activist"". We do not consider them as words of abuse any way.
It is, we think, reasonable to assume that Parliament had picked out entertainment as a non-deductible item not because it is a personal
expenditure of the taxpayer, but precisely because it is a business expenditure. Personal expenditure of a taxpayer, paid for from his business
funds, does not need any specific section for disallowance. For that kind of spending is an application of the profits and not a charge on the
business. Since only business entertainment is to be subject to disallowance, it is reasonable to understand the word to bear a meaning which no
businessman is likely to misunderstand. A businessman does not go out of the way in offering to his customer a cup of tea or coffee, or, for that
matter, any cup that cheers, any more than we should regard a smiling welcome or a pretty girl at the counter as entertainment. We ought not to
see things from the point of view of a resistant consumer having a conscientious objection to accept a cup of coffee at the shop from the hands of a
shopkeeper because he excepts that its cost would go into the price tag. A puritanical or kill-joy approach to this provision must, in our judgment,
be ruled out as contrary to the intentions of Parliament. We respectfully agree, therefore, with the views expressed in some of the judgments that
hospitality cannot be confused with entertainment. A customer is not entertained, in the real sense of the term, by being offered a cup of coffee in
the shop any more than a guest is entertained is not the word for it. What you extend is only hospitality.
But it is altogether different if the trader wishes to provide amusement or entertainment to a customer or to any one with whom he wishes to
transact business. Under modern business conditions expenditure of this kind may easily reach a point of no return. It is not easy to get a business
party sign on the dotted line merely by providing him with entertainment whether it takes place at a board room or an apartment or at the Riviera.
Customers, for the most part, are cool customers and for all the entertainment to which they are treated, they may yet strike a hard bargain.
Catering to the instincts of the customers, rather than their good humour cannot, therefore, be productive of results, particularly when everybody
knows the ways of everybody else, which is the world of modern business. Entertainment expenditure is thus mostly a waste and paradoxically
enough, it is sought after precisely because most of it goes down the drain. Its chief attraction only lies in the opportunity it gives to the proprietor
or the company director or the executive to have, at the cost of the business, his own expense account vouchsafed for eating, drinking, dancing,
going places and God knows what else. It is, therefore, a proper caution that expenditure of this sort must be put to the most searching scrutiny in
order to find out whether it falls outside the disallowing provisions. In order to be able to do that, the authority concerned, be it the ITO or a higher
appellate authority or the Tribunal must consider all the attendant facts and circumstances, including the nature and object of the expenditure,
similar practice in the particular line of business carried on by the assessee, the size of the expenditure in the earlier years, the business trends and
prospects as a whole, the cross section of society from which the customers come, and any other relevant factors of commerce and business life
that may be present in the case.
It might be thought that this way of explaining the statutory provisions, leaving matters to be decided by the fact-finding Tribunal in each and
every case, as it arises is not quite a satisfactory solution to the problem. But this is how very many questions have got to be decided which arise
under the I. T. Acts. After all, taxation takes note of the business realities as it finds them and only makes such inroads as are absolutely necessary
for the purpose of disallowance and against the accepted postulates of commerce and accountancy. As we earlier indicated, Parliament did not set
its face completely against entertainment expenditure even if the entertainment is one which we may not entirely approve of as a method of
advancing the interests of the business. Again, as we indicated, there is clearly discernible an area of business hospitality which stands clearly
outside the concept of business expenditure. It is, therefore, in this context that the statutory provisions disallowing entertainment expenditure, in
whole or in part, have to be given effect to.
The assessee in the present reference are carrying on business of printing and publishing printed material. The question relating to entertainment
expenditure cropped up in connection with the assessee''s assessments for the years 1972-73 to 1974-75. The provision relating to entertainment
expenditure which was in force during the material time was s. 37(2B) as enacted by s. 10 of the Finance Act, 1970, with effect from April 1,
1970. The provision so enacted wholly disallowed any expenditure in the nature of entertainment expenditure incurred within India by any assessee
after February 28, 1970. None of the authorities in this case had gone into the nature of the expenditure in question on the lines we have indicated
earlier. The assessee claimed certain expenditure as ""business promotion expenses"". The ITO disallowed the entire claim under s. 37(2B) without
going into the details. The AAC held that the amounts spent towards alcoholic drinks, trips to Tirupathi and marriage presentations could alone be
brought within s. 37(2B). He did not, however, advert to the other items of expenditure. This order of the AAC was confirmed in appeal by the
Tribunal which again dealt with the matter in the following passage :
The overall expenses under this head were claimed by the assessee as expenses connected with the pushing of sales, canvassing new business,
arranging to see that the existing customers are satisfied so as to stick on to the clientele, etc. This includes hotel expenses, accommodation, etc.
This includes hotel expenses, accomodation, etc. The Appellate Assistant Commissioner has already disallowed expenses included under this head
on account of alcoholic drinks, trips to places of interest, marriage presents, etc., and allowed the balance of expenditure which does not involve
any concept of entertainment in the light of the decision in Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., . As against
the decisions of the other High Courts in Commissioner of Income Tax Vs. Veeriah Reddiar, and Commissioner of Income Tax, Bombay City-III
Vs. Devkaran Nanjee Insurance Company Ltd., , the Appellate Tribunal has in several cases found the tests laid down by the Gujarat High Court
in Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., , as the acceptable criterion. Following that decision the Appellate
Assistant Commissioner''s orders are upheld on this point.
It is clear that the Tribunal has not given a proper consideration to the issue before them. Neither the reference to the case law on the subject
nor the broad reference to the nature of the expenditure really meets with the requirement of an inquiry under the statute. In the absence of
materials and a discussion of those materials by the Tribunal, we cannot answer the references in any satisfactory manner. The question of law
which the Tribunal has referred to us is an under :
Whether, on the facts and in the circumstances of the case, the sums of Rs. 22,666, Rs. 37,175 and Rs. 54,097 represent entertainment
expenditure not allowable prior to its amendment by the Finance Act, 1976, u/s 37(2B) of the Income Tax Act, 1961 ?
For the reasons we have stated above, we cannot answer this question but must return the reference unanswered. The implication, however, is
that the Tribunal should take up the appeal and consider the matter de novo in the light of our observations in the foregoing paragraphs.
The references are accordingly returned. There will be no order as to costs.