Expenses incurred on entertainment of customers or directors, even during the course of business, are covered by Section 37(2A) of the Income-tax Act, 1961 and are not allowable except to the extent permitted by that provision.

Gokal Chand Mital, J.

1. Whether serving of tea, refreshment or lunch during meetings of the directors of the company or the corporation would be allowable as an expenditure under Section 37(1) or would be in the nature of entertainment expenditure covered by Section 37(2A) where ceiling has been placed in allowing the expenditure is the question to be resolved.

2. The Haryana Financial Corporation Ltd., Chandigarh, filed its return for the assessment year 1974-75 and therein claimed expenses of Rs. 16,745 for providing lunch and other refreshments to its directors and other persons during meetings. On scrutiny, the Income-tax Officer found that most of the items pertained to tea and lunch served on different occasions which, according to him, were expenses on entertainment. He further found that some expenses were not connected with the business of the assessee. He disallowed Rs. 10,000 on an estimate basis.

3. On appeal, the Appellate Assistant Commissioner came to the conclusion that the expenditure to the tune of Rs. 2,055 could be said to be spent on entertainment or refreshment/lunch to customers/loanees. Out of Rs. 10,000, he disallowed the addition of Rs. 7,500.

4. On further appeal, the Income-tax Appellate Tribunal maintained the order of the Appellate Assistant Commissioner.

5. One of the points which is included in the referred question, raised on behalf of the Revenue before the Tribunal, was that a director may be an employee of the Corporation (assessee), but when he was given tea, refreshment or lunch during a meeting of the directors, such expenditure could not be considered as having been spent on the employees of the Corporation in the course of the business and such an expenditure could not be taken out of the ambit of Section 37(2A) of the Income-tax Act, 1961 (for short "the Act"). This argument was rejected with the following observations :

"We, however, reject Shri Jains argument because the directors of the Corporation necessarily were its employees and here we should keep in view that the Corporation is a 100 per cent. subsidiary of the Haryana Government."

6. On these facts, the Tribunal has referred the following question for opinion :

"Whether the Income-tax Appellate Tribunal was in error in rejecting the Revenues contention that when the directors of the Corporation were holding meetings, they could not be considered as Corporation employees and, therefore, relief of Rs. 7,500 was rightly granted by the Appellate Assistant Commissioner ?"

7. The question of excluding the amount spent on entertainment of customers, etc., came up for consideration before a Full Bench of this court in CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336 and it was held that such expenses could not be allowed under Section 37(1) of the Act, and were covered by Section 37(2A) of the Act. In taking this view, this court dissented from the view taken by the Gujarat High Court in CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424. On behalf of the asses-see, learned counsel has cited Maharaja Shree Umaid Mills Ltd. (No. 1) v. CIT [1989] 175 ITR 70 (Raj) and CIT v. Agarpara Co. Ltd. [1987] 167 ITR 866. In these cases, the view of the Gujarat High Court in Patel Brothers case [1977] 106 ITR 424 has been followed. Since the Full Bench decision is binding, we are of the opinion that the expenses incurred by the assessee on the refreshment of its customers or its directors, even during the course of the business, would be expenses covered by Section 37(2A) and would not be allowable except to the limit permissible by that provision.

8. It was then sought to be argued on behalf of the assessee that if a director is also an employee of the Corporation or the company, refreshment expenses incurred on him during the course of the business would be allowable as deduction under Section 37(1) of the Act. If a business house makes a provision to provide tea, breakfast, lunch or any other eatables to the employees, such an ex