The entertainment expenditure allowable under section 20 of the Income-tax Act, 1961, is not to be considered for the allowance of entertainment expenses while applying the provisions of section 37(2) of the Act.

SETHURAMAN J.

T.C. No. 67 of 1975 and T.C. No. 71 of 1977 arise out of the same order of the Tribunal for the assessment year 1965-66. Originally three questions of law had been raised and only two of them were considered by the Tribunal to arise out of the Tribunal's order and, therefore, the Tribunal referred the following two questions under s. 256(1) of the I.T. Act, 1961 :

"1. Whether, on the facts and in the circumstances of the case, it has been rightly held that in computing the admissible deduction under section 37(2) of the Income-tax Act, 1961, the interest on securities should also be considered as business income ?

2. Whether, on the facts and in the circumstances of the case, it has been rightly held that the entertainment expenditure to be considered for application of section 37(2) should only be that after deduction of the amount allowable under section 20 of the Income-tax Act, 1961 ?"

As the Tribunal had not referred the other question, the Addl. Commissioner obtained a direction from this court for reference of the following question :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right and had jurisdiction to permit the assessee to raise by way of additional ground issues which were not raised before the Income-tax Officer and the Appellate Assistant Commissioner ?" *

We would refer to this as the third question referred by the Tribunal for this year.

For the assessment years 1967-68 and 1969-70, the Tribunal has referred, under s. 256(1) of the Act, the following question :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the amounts allowed as deduction under section 20 in determining the income from interest on securities should not be taken into consideration for the allowance of entertainment expenses while applying the provisions of section 37(2) of the Income-tax Act, 1961 ?" *

It may thus be seen that the questions referred for all the three years raise more or less common issues. We are first setting out the facts relating to the assessment year 1965-66 as stated in T.C. No. 67 of 1975, and consider the questions in their background.

The assessee was a scheduled bank, licensed to do banking business in India and abroad. In making the assessment for the assessment year 1965-66, the total income determined was Rs. 38, 91, 952. The assessee derived income by way of interest on securities amounting to Rs. 35, 94, 385. The assessee incurred, inter alia, entertainment expenditure of Rs. 80, 427 and claimed only Rs. 28, 252 as admissible under s. 37(2) of the I.T. Act. There is a restriction on allowance of the expenditure incurred on entertainment under that provision. The amount that may be allowed as entertainment expenditure is not to exceed 1% of the profits on the first Rs. 10, 00, 000, 1/2% of the profits on the next Rs. 40, 00, 000, 1/4% on the next Rs. 1, 20, 00, 000, and on the balance of the profits and gains nil. Having regard to this provision, the ITO had to consider the allowability of entertainment expenditure out of the said sum of Rs. 80, 427 to the extent admissible under s. 37(2). He determined the admissible entertainment expenditure at Rs. 24, 763 and allowed it as against the assessee's claim of Rs. 28, 252.

The assessee appealed to the AAC who confirmed the assessment of the ITO with reference to this aspect. There was a further appeal to the Tribunal by the assessee and the Tribunal accepting the assessee's contentions held that the expenditure as claimed by the assessee was to be allowed. During the pendency of the appeal before the Tribunal, the assessee raised a point that it would be entitled to an allowance of Rs. 8, 565 as entertainment expenses under the head "Interest on securities" instead of Rs. 3, 489, being the difference between Rs. 28, 252 and Rs. 24, 763 which was originally the subject-matter of the claim by the assessee. The Tribunal accepted the assessee's