1. Expenditure incurred on tea, tiffin, and refreshments at a conference of salesmen and distributing agents is deductible as an expenditure incurred in the nature of hospitality and not entertainment. 2. Expenditure incurred in providing boarding and lodging facilities at a guest house is not deductible if the facilities are not provided for entertainment or relaxation and the charges cover almost the entire expenditure. 3. Provision for payment of gratuity is deductible as a liability in the year of assessment, even if there is no statutory liability to pay gratuity in that year.

DIPAK KUMAR SEN, J.

( 1 ) ORIENT Paper Mills Ltd. , the assessee, was assessed to income-tax in the assessment year 1971-72; the relevant accounting year ending on March 31, 1971. In its return and in the assessment, the assessee claimed deduction of Rs. 46,798 incurred on tea, tiffin and refreshments at a conference of the salesmen and distributing agents of the assessee at its mill. The Income-tax Officer held that 75 per cent. of the said expenditure was in the nature of entertainment and disallowed an amount of Rs. 34,100 out of the said Rs. 46,798 under Section 37 (2) of the Income-tax Act, 1961 ("the Act"), which was included in the total income of the assessee.

( 2 ) IN the said assessment year, the assessee at its mill premises provided boarding and lodging facilities to its employees and visitors who were charged for such facilities. In respect of the aforesaid, the assessee incurred an expenditure of Rs. 1,59,407 in the said assessment year and also recovered charges in respect thereof in a sum of Rs. 1,31,162. The difference of Rs. 28,245 was claimed by the assessee as a deductible expenditure. The Income-tax Officer disallowed the claim on the ground that the assessee maintained a guest house and was not entitled to claim deduction in respect of expenditure incurred for the same under Section 37 (4 ).

( 3 ) IN the assessment year involved, the assessee introduced a scheme for payment of gratuity to its employees, since an enactment on an all-India basis for payment of gratuity by employers to their employees was being contemplated by the Legislature. The assessee obtained an estimate of its liability on account of such gratuity as on March 31, 1971, from qualified actuaries which was ascertained at Rs. 1,16,57,966. A deduction of the said amount was claimed from the total income of the assessee. The Income-tax Officer in making the assessment allowed only the amount of Rs. 12,75,558 as liability pertaining to the assessment year involved. Deduction of the balance was not allowed on the ground that the same constituted liability pertaining to the years prior to the accounting year involved.

( 4 ) BEING aggrieved by the aforesaid, the assessee preferred an appeal from the order of assessment to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner upheld the decision of the Income-tax Officer in respect of the disallowance of Rs. 34,100 on account of expenditure incurred for supply of tea, tiffin and refreshments. He also upheld the decision of the Income-tax Officer disallowing the deduction of Rs. 28,244 claimed on account of expenditure incurred in providing boarding and lodging facilities at the guest house at the mill of the assessee on the grounds that the same was a guest house, that no register for such guest house was maintained and that no expenditure incurred on a guest house would be admissible for deduction.

( 5 ) THE Appellate Assistant Commissioner also upheld the decision of the Income-tax Officer in disallowing the balance of Rs. 1,03,82,408 of the provision made on account of gratuity, inter alia, on the ground that it was not permissible to debit the expenditure relating to earlier years or anticipated expenditure of later years as a liability for the year involved and that there was no legal necessity to make any provision for gratuity in the year involved as the Payment of Gratuity Act, 1972, came into force only in 1972. He held further that the assessee had not specifically earmarked or invested the amount provided for gratuity in its accounts as required under the Payment of Gratuity Act. He also held that the liability for payment of gratuity in the assessment year involved was only a contingent liability.

( 6 ) BEING aggrieved, the assessee preferred an appeal from the decision of the Appellate Assistant Commissioner to the Tribunal. It was contended on behalf of the assessee before the Tribunal that the provision for tea, tiffin and refreshments by the assessee wa

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