The main legal point established in the judgment is that expenditure within the meaning of section 37(2B) of the Income Tax Act, 1961 must involve an element of hospitality, and the court upheld the Tribunal's finding based on similar facts for previous years.

Puttaswamy, J.—In this reference made under section 256 of Income Tax Act, 1961 (hereinafter referred to as "the Act"), the Income Tax Appellate Tribunal, Bangalore Bench, Bangalore ("Tribunal"), at the instance of the assessee, has referred the following question of law for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the expenditure amounting to Rs. 25,119 has been rightly disallowed under section 37(2B) of the Income Tax Act, 1961, as being in the nature of entertainment expenditure ?"

2. In order to appreciate the question referred to us, it is necessary to notice the facts as found by the Tribunal.

3. The assessee, a private limited company incorporated under the Companies Act, is, inter alia, engaged in the business of undertaking "Fumigation and Disinfection". For the assessment year 1975-76 relevant to the accounting year ending on March 31, 1975, the assessee before the Income Tax Officer, Company Circle I, Bangalore, inter alia, claimed a sum of Rs. 25,119 as "Business Promotion Expenses" allowable under section 37(1) of the Act. But, the Income Tax Officer in completing the assessment on December 19, 1977 (annexure-B), disallowed the same, holding that it was in the nature of entertainment expenditure and was not allowable under section 37(2B) of the Act. Aggrieved by the same, the assessee filed an appeal before the Appellate Assistant Commissioner of Income Tax, Bangalore Range III, Bangalore, who, by his order made on April 28, 1977 (annexure-C), dismissed the same. Aggrieved by the said orders of the Appellate Assistant Commissioner and the Income Tax Officer, the assessee filed a second appeal before the Tribunal, which by its order made on August 31, 1978 (annexure-D), dismissed the same following an earlier decision rendered by it on the very same question of the very same assessee for the year 1974-75. Hence, this reference.

4. Sri. G. Sarangan, learned counsel appearing for the assessee, strenuously contends that the Tribunal in holding that the expenditure incurred by the assessee was entertainment expenditure and was not business promotion expenditure, had not applied the correct legal principles. In support of his contention, Sri Sarangan strongly relies on a Division Bench ruling of this court in Commissioner of Income Tax, Karnataka Vs. Corporation Bank Ltd., (1979) 117 ITR 271 KAR and the Division Bench rulings of the High Courts of Gujarat, Andhra Pradesh and Madhya Pradesh in Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., (1977) 106 ITR 424 Guj , Addl. Commissioner of Income Tax Vs. Maddi Venkataratnam and Co. Ltd., (1979) 119 ITR 514 AP and CIT v. Lakhmichand Muchhal [1982] 134 ITR 234 (MP), respectively, and a Full Bench ruling of the Punjab and Haryana High Court in Commissioner of Income Tax Vs. Khem Chand Bahadur Chand, (1981) 131 ITR 336 P & H.

5. Sri K. Srinivasan, learned senior standing counsel for the Income Tax Department, appearing for the Revenue, contends that the Tribunal had correctly applied the legal principles and recorded a correct finding on the nature of the expenditure incurred by the assessee. In support of his contention, Sri Srinivasan relies on a Division Bench ruling of the High Court of Bombay in Acc-Vickers Babcock Ltd. Vs. Commissioner of Income Tax, Bombay City II, (1976) 103 ITR 321 Bom and a Full Bench ruling of the Kerala High Court in Commissioner of Income Tax Vs. Veeriah Reddiar, (1977) 106 ITR 610 Ker.

6. As noticed earlier, the Tribunal had examined the very same question in relation to the very same assessee on similar facts in its order made on August 17, 1976 in ITA Nos. 654 and 655 (Bang)/75-76. In that order, the Tribunal after critically examining the relevant provision of the Act and the ruling of the Gujarat High Court in Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., (1977) 106 ITR 424 Guj, which had found favour with the High Courts of Andhra Pradesh