The dominant purpose of incurring the expenditure for the purpose of food, drinks, refreshments, and amusements must be for deriving or providing pleasure, and expenditure incurred at business meetings, without the intention of extending entertainment to third parties, constitutes administrative or business expenditure.

Rama Jois, J.—Pursuant to the direction given by this court in C.P.Nos. 44 to 46 of 1975, the Income Tax Appellate Tribunal, Bangalore Bench, has referred the following question for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the expenses incurred by the assessee on refreshments, lunch, liquor, etc., served at the meetings of stewards, managing committee members and other office bearers and officials as well as general body meetings, do not constitute expenditure in the nature of entertainment expenditure within the meaning of section 37(2A) of the Income Tax Act, 1961, for the assessment years 1968-69, 1969-70 and 1970-71 ?"

2. The assessee is a company. Its business is to conduct horse races. It has 190 members. The assessment years are 1968-69, 1969-70 and 1970-71. During the previous years, relevant to the assessment years, the total expenditure for the three years are as follows :

Sl. No.

Assessment year

Amount Rs.

1.

1968-69

59,780

2.

1969-70

69,035

3.

1970-71

1,40,278

3. The break-up of the expenditure was also furnished. The figures included expenditure incurred for the supply of refreshments, lunch, liquors, etc., in the business meetings of the stewards, members of the managing committee as also of the general body. The assessee claimed deduction of the entire expenditure mentioned above. The ITO, however, was of the opinion that the entire expenditure was in the nature of entertainment expenditure and, therefore, the deduction should be restricted as provided in s. 37(2A) of the I.T. Act, 1961 (hereinafter referred to as "the Act").

4. Aggrieved by the said orders, the assessee appealed before the AAC. The AAC took the view that expenditure on liquors or hot drinks should be treated as entertainment expenditure. He was also of the view that the expenditure incurred on throwing parties including cocktail parties to outsiders was entertainment expenditure, and, therefore, subject to the limits laid down in s. 37(2A) of the Act. Rest of the expenditure was, considered by him as not in the nature of entertainment expenditure and was, therefore, deductible under sub-s. (1) of s. 37 of the Act on the ground that they were incurred for the purpose of the business.

5. Aggrieved by the orders of the AAC, both the assessee and the department appealed before the Tribunal. The Tribunal was of the view that only the expenses incurred towards refreshments, lunch including liquor served at the business meetings of the stewards, managing committee members and other office bearers and officials as well as similar expenses incurred in the general body meetings, did not partake the character of entertainment expenditure and all other expenses incurred by the assessee were in the nature of entertainment expenditure to which provisions of s. 37(2A) of the Act were attracted, and directed the ITO to work out afresh the amount of entertainment expenditure and to apply s. 37(2A) of the Act only to such expenditure. The effect of the order of the Tribunal was, except a smaller portion of the amount debited under the head "Refreshments", spent at the business meetings of stewards, managing committee and general body, major part of the amounts expended for cocktail parties and for providing lunch and short eats to members and guests during racing season and at joint turf meetings, etc., were treated as entertainment expenditure. The assessee did not pursues the matter. The Commissioner, however, applied to the Tribunal to refer the aforesaid question for the opinion of this court under s. 256(1) of the Act. As the Tribunal declined to make a reference, the Commissioner preferred civil petitions before this court and pursuant to the order made by this court on the civil petitions, the question mentioned earlier has been referred for the opinion of this court.

6. Sri Rajasekhara Murthy, learned counsel for the revenue, contended that as the expenses in question were admi