Expenditure incurred by an assessee in providing tea, coffee, soft drinks, etc., and giving parties to customers and guests is of the nature of "entertainment expenditure" within the meaning of section 37(2A) of the I.T. Act, 1961, and is not excludible under section 37(1) of the Act.

1. - The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, has referred the following question of law to this court for its opinion:

" Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that sum of Rs. 62,222, Rs. 28,673 and Rs. 17,162 for the assessment years 1976-77, 1977-78 and 1978-79, respectively, incurred by the assessee on providing tea, coffee, soft drinks, etc., to the customers was not in the nature of entertainment expenditure within the meaning of section 37(2A) of the I.T. Act? "

2. The assessee, Green Roadways, Udaipur, claimed sums of Rs. 62,222, Rs. 28,673 and Rs. 17,162, during the assessment years 1976-77, 1977-78 and 1978-79, respectively, as expenditure incurred by the assessee in providing tea, coffee, cold drinks, etc., to the customers. The aforesaid expenditure was claimed by the assessee to be a permissible deduction on the ground that it was obligatory in the trade of transport to provide such facilities to the customers in the interest of business promotion. According to the assessee, the expenses were incurred for the stability, procurement and promotion of business and for maintaining the relations with the customers and as such it was claimed that they were not in the nature of entertainment expenses and that they should be allowed as revenue expenditure.

3. The ITO disallowed the claim of the assessee during all the three years holding that the amount represented the expenditure incurred by the assessee in providing tea, coffee, cold drinks and parties, etc., to the customers and guests was of the nature of entertainment expenditure and was not deductible. On appeal, the AAC of Income-tax agreed with the view taken by the ITO and held that the expenditure in question was incurred on the entertainment of customers and other persons and as such the same could not be allowed as revenue expenditure. On further appeal, the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, by its order dated March 11, 1981, agreed with the view taken by the ITO that the aforesaid expenditure was incurred in providing tea, coffee, cold drinks and parties to the customers and guests, but the Tribunal held that since the said expenditure was not lavish in nature and it is customary in the nature of the trade, the same could not be held to have been spent by way of entertainment and was allowable expenditure, being incurred by the assessee in the interest of business. The Commissioner of Income-tax filed an application for making a reference under section 256(1) of the I.T. Act, 1961, as in his view the expenditure allowed by the Tribunal was of the nature of entertainment expenditure, which was not allowable in view of the provisions of section 37(2A) of the I.T. Act, 1961. On the application of the Commissioner, the Tribunal has referred the aforesaid question to this court for its opinion.

4. Now, the question which requires to be determined in this reference is as to whether the expenditure incurred by an assessee in providing tea, coffee, soft drinks, etc., and giving parties to the customers and guests is of the nature of expenditure falling within the expression " laid out or expended wholly and exclusively for the purposes of the business of the assessee", occurring in section 37(1) of the I.T. Act, 1961. After the insertion of Explanation (2) in sub-section (2A) of section 37, the legal position on this question has been set out clearly by Parliament and it is no longer open to doubt that providing hospitality in the nature of supplying tea, coffee, soft drinks, etc., to the customers would fall within the term " entertainment expenditure ", occurring in section 37(2A), and which is not excludible under the provisions of section 37(1) of the Act.

5. Section 37(1) allows an assessee, while computing his income chargeable under the head " Profits and gains of business ", a deduction of expenditure laid out and expended wholly and exclusively for the