The Appellant is a manufacturer and wholesale supplier of detergents. For the respective years of 1989, 1990 and 1991, the Appellant incurred additional expenses in the purchase in bulk of some items of goods to be offered to its customers along with its own detergent product not for free but at the discounted price of the bulk purchase of those items of goods purchased for the purpose of promoting the sales of its own detergent product. These items of goods that went along with the products, known as the consumer premium items, were not forced upon its customers but they were given a choice of either to buy the products alone or the products with these consumer premium items. The consumer premium items were items such as glass tumblers, glass bowls, dinner plates, laundry baskets, flint bowls and plastic pails. Of attraction to the customers in respect of the premium items is that the price of these items is cheaper than their actual market price as the Appellant bought them in bulk from the suppliers of those items. In the circumstances, the net selling price of the products with consumer premium items to be paid by the customers to the Appellant was higher than the net selling price of the products without these premium items.

Being expenses incurred in the purchase of the consumer premium items intended to be sold together with its own products, the Appellant regarded that as being deductible from its gross income of the business under section 33 (1) of the Income Tax Act 1967 (hereinafter referred to as "the 1967 Act") as outgoings and expenses wholly and exclusively incurred during the relevant period in the production of its gross income. The Respondent disagreed and issued additional assessments on 16th February 1994 for the years of assessment 1990, 1991 and 1992 respectively for RM195,000.00; RM166,661.92 and RM148,022.94 in respect of these expenses. The Appellant being dissatisfied with the decision of the Respondent filed an appeal with the Special Commissioners of Income Tax. The Special Commissioners heard the appeal and by a deciding order of 26th April 1997 dismissed the appeal and affirmed the decision of the Respondent on the ground that those expenses were in fact entertainment expenses under section 39 (1) (l) of the 1967 Act which is not allowable deduction from the Appellant's gross income for the relevant periods. This is a further appeal by the Appellant by case stated against the said decision of the Special Commissioners dismissing its appeal. The single issue for the decision of this Court is whether such expenses incurred by the Appellant in the purchase of the consumer premium items which is to be sold together with its own products to the wholesalers and retailers constitute entertainment within the contemplation of section 39 (1) (l) of the 1967 Act. If it is then the decision of the Special Commissioners is correct. The relevant part of section 39 (1) as relates to the facts of the case before the Court states:

"39.(1)

Subject to any express provision of this Act, in ascertaining the adjusted income of any person from any source for the basis period for a year of assessment no deduction from the gross income from that source for that period shall be allowed in respect of -

(l) any expenses incurred in the provision of entertainment including any sums paid to an employee of that person for the purpose of defraying expenses incurred by that employee in the provision of entertainment:

Provided that this paragraph shall not apply to the following expenses:

the provision of entertainment to his employees except where such provision is incidental to the provision of entertainment for others;

(ii) the provision of entertainment by a person who carries on a business which consists of or includes the provision for payment of entertainment to clients or customers of that business and that entertainment is provided for payment by the clients or customers in the ordinary course of that business;