Expenditure incurred by an assessee in rendering acts of hospitality to its customers as a common courtesy by way of supply of ordinary items of refreshments and other items like cigarettes, etc. cannot be held to be entertainment and the expenditure incurred for the said purpose cannot be held to be expenditure in the nature of entertainment.

1. DIPAK KUMAR SEN, J. On an application of the Revenue under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following questions, as questions of law, arising out of its order, for the opinion of this Court :

" 1. Whether, on the facts and in the circumstances of the case, and on a correct interpretation of s. 37(2B) of the IT Act, 1961, the Tribunal was correct in holding that the expenditure of Rs. 53,487 was an allowable expenditure in computing the profits and gains of the assessee's business ? 2.Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 48,440 representing 'difference' paid for non-fulfilment of contract for supply of flour and cement bags was an allowable deduction in computing the total income for the asst. yr. 1972-73 ? "

2. SO far as question No. 2 is concerned, the controversy raised therein is covered by the two decisions of this Court in CIT vs. Pioneer Trading Company (P) Ltd. (1968) 70 ITR 347 (Cal) and CIT vs. Ramjeewan Sarawgee and SOns (1977) 107 ITR 845 (Cal). The decision of this Court in Pioneer Trading Co. (P) Ltd. (supra) has been approved by the Supreme Court subsequently in CIT vs. Shantilal (P) Ltd. (1983) 35 CTR (SC) 395 : (1983) 144 ITR 57 (SC). In view of the aforesaid, we answer question No. 2 in the affirmative and in favour of the assessee.

The facts relating to question No. 1 are, inter alia, that the Agarpara Co. Ltd., the assessee, was assessed to income- tax in the asst. yr. 1972-73, the accounting year ending on March 31, 1972. After the assessment was completed, the CIT, West Bengal-V, initiated proceedings under s. 263 of the IT Act, 1961. The CIT noted that in the said assessment year, the assessee had spent Rs. 53,487 on cigarettes and other items supplied to its customers and claimed deduction of the same under the head " general charges ". The said claim was allowed by the ITO in computing the total income of the assessee. It appeared to the CIT that the said amount was not allowable as deduction under s. 37(2B) of the IT Act, 1961, being expenditure on entertainment, and, therefore, the assessment was prejudicial to the interests of the Revenue.

3. ON a show-cause notice issued, the assessee appeared before the CIT and contended that the said expenditure on cigarettes and other items was incurred for its customers and such expenditure was incurred wholly and exclusively for the purpose of the business of the assessee. It was contended that the said expenditure was not on account of entertainment but to provide basic necessity or by way of ordinary courtesy according to the long-standing practice or custom of trade and business.

4. THE CIT did not accept the contention of the assessee. He held that the expenditure was incurred for the purpose of business, but the same was not allowable as a deduction by reason of s. 37(2B) of the Act, as the said expenditure was on account of entertainment. He held, following a decision of the Allahabad High Court in Brij Raman Dass and Sons vs. CIT 1975 CTR (All) 223 : (1976) 104 ITR 541 (All), that refreshment or gratification of all kinds supplied would come within the meaning of entertainment. THE CIT directed the ITO to disallow the said expenditure and modify the assessment accordingly. Being aggrieved, the assessee preferred an appeal to the Tribunal. THE Tribunal noted its earlier decision in the case of the same assessee for the subsequent asst. yr. 1973-74, where the Tribunal had followed a decision of the Gujarat High Court in CIT vs. Patel Brothers and Co. Ltd. (1977) 106 ITR 424 (Guj), and had held that the expenditure incurred by the assessee in providing cigarettes and other items to its customers was an expenditure incurred out of commercial expediency and to meet customary hospitality. THE Tribunal set aside the decision of the CIT and restored the original assessment by the ITO allowing deduction of the said amount. THE present reference w