Expenditure incurred on tea, coffee, cold drinks, pan, cigarette, biscuits, crockery are not in the nature of entertainment and are allowable as business expenditure. Receipt of damages for non-performance of a contract, which was beyond the assessee's control, is not speculative in nature and is to be treated as normal business income.

1. - This income-tax reference is directed against the order dated 20th December, 1980 passed by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (in short 'Tribunal') for the asst. yr. 1974-75. The Tribunal referred following questions of law:

"(1) Whether on the facts and in the circumstance of the case, the Tribunal was justified in deleting the disallowance of Rs. 4,250 made by the ITO on account of entertainment expenditure?

(2) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the receipt of Rs. 1,67,189 is to be treated as 'business income' instead of income from speculation business.

2. The facts, necessary for disposal of this reference, are that the respondent-assessee a limited company was carrying on the business of production of vegetable ghee and oil and simultaneously also manufacturing its own commodities out of tin plates. A return was submitted by the respondent-assessee declaring a loss of Rs. 44,05,060 on 31st Aug., 1974 which was revised on 30th Oct., 1976 declaring a loss of Rs. 44,05,888. Notices were issued and during the course of hearing the AO required details on various issues on which the return was submitted.

Facts and decision on question No. 1:

3. Insofar as the question of disallowance of Rs. 4,250 out of office expenses is concerned it was claimed that it was spent on crockery, tea, coffee, dry fruits, snacks, cold drink, pan, cigarettes etc. and it was essentially a business expenditure spent for business expediency and customary in nature for the guests and customers coming at the factory as also office of the respondent-assessee and thus allowable. However, the AO was of the view it is in the nature of entertainment and thus disallowed the amount holding it by way of entertainment. In first appeal the learned AAC also did not accept the contention of the respondent-assessee, however, the Tribunal held the expenditure to be allowable by holding that the expenditure claimed was nominal, reasonable, routine and customary in nature and, therefore, it was allowable and is not in the nature of entertainment.

4. Mr. J.K. Singhi, learned senior advocate assisted by Mr. Anuroop Singhi learned counsel for the Revenue submitted that the Tribunal erred in holding the said expenditure in routine when the expenditure was purely in the nature of entertainment and entertainment expenditure was dis-allowable and accordingly submitted that the finding of the Tribunal on this deserves to be reversed.

5. Heard learned counsel of the petitioner-Revenue and in our view, the Tribunal has correctly come to the conclusion that the expenditure claimed by the respondent-assessee, namely; on tea, coffee, cold drinks, pan, cigarette, biscuits, crockery are not in the nature of entertainment and looking to the turnover of the assessee, the expenditure is routine expenditure and customary in nature. Expenditure incurred are for the business considerations and cannot be said to be in the nature of entertainment.

6. The Hon'ble Supreme Court had an occasion to consider the issue relating to providing ordinary meals and refreshment to outstation customers according to the customary hospitality and trade usage satisfying the general test of commercial expediency in the case of CIT v. Patel Brothers & Co. Ltd. Etc., (1995) 126 CTR (SC) 132 : (1995) 215 ITR 165 (SC) and after elaborate discussion came to the conclusion that expenditure for commercial and business expediency, which is normal and not lavish, cannot be said to be falling within the meaning of entertainment expenditure.

7. Accordingly, in our view the question of law has been correctly answered by the Tribunal in favour of the respondent-assessee and against the Revenue.

Facts and decision on question No. 2:

8. While the claim of the respondent-assessee was that the sellers committed the breach of the contracts and no delivery was made and therefore, for breach, damages were settled and the respondent-asses