Meaning of “Entertainment expenditure”

The meaning of entertainment expenditure under section 37(2)/(2a) of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble High Court tried to explain the meaning of entertainment expenditure.

Meaning of entertainment expenditure

The phrase ‘entertainment expenditure’ used in 37(2)/(2a) of the Income Tax Act came up before various high courts as detailed under :

1. Hon’ble Karnataka High Court explained the meaning of ‘entertainment expenditure’ while delivering judgment in CIT v. Mysore Minerals Ltd. [1986] 29 Taxman 141/162 ITR 562 (Kar.) as under :

Meaning: The sweep of the words ‘entertainment expenditure’ found in the explanation 2 to section 37(2a) is wide and broad enough to cover every expenditure on provision of hospitality of every kind to any person other than the employees.

2. Hon’ble ITAT-Hyderabad explained the meaning of ‘entertainment expenditure’ while delivering judgment in Anarkali Chit Fund (P.) Ltd. Vs. ITO [1988] 32 TTJ (hyd. – Trib.) 134 as under :

Meaning: The expression ‘entertainment’ would include two types of entertainments. One is looking after bodily comforts of a guest. This would include providing food, drinks and lodging. The second is providing amusement or diversion, in which dramas, plays, cinemas, etc., Will come. In both the types, the guest is entertained.

The expression ‘entertainment‘ in section 37(2a) would not include both the types and has to be confined only to the first type, i.E., Providing food and drinks only. The expression ‘entertainment’ found in the section has to be confined to provision of refreshments, etc., And should not be extended to include amusements and diversions.

3. Hon’ble Kolkata High Court explained the meaning of ‘entertainment expenditure’ while delivering judgment in CIT vs. Agarpara co. Ltd. [1987] 30 Taxman 359 (Cal.) as under :

Meaning: The meaning of the expression ‘expenditure in the nature of entertainment’ cannot be stretched to include expenditure incurred for hospitality or expenditure in the nature of hospitality. The two concepts are different and their nature are also necessarily different.

4. Hon’ble Punjab & Hariyana High Court explained the meaning of ‘entertainment expenditure’ while delivering judgment in CIT vs. Khem Chand Bahadur Chand [1981] 131 ITR 336 (Punj. & Har.) (Fb) as under :

Meaning: The phrase deliberately employed is ‘in the nature of entertainment expenditure’. It is not merely ‘entertainment expenditure’ or ‘business entertainment’ simpliciter. It is a sound canon of construction that the legislature does not waste its words and every word employed in a statute has to be given a meaning. Undoubtedly, therefore, whilst using the larger and compendious expression ‘in the nature of entertainment expenditure’, the parliament had an obvious behind it.

This expression is much wide in its connotation inasmuch as it would take within its ambit not merely what may stricto sensuo be regarded as entertainment expenditure proper but also all other expenditures of allied nature partaking of some, if not all, of the characteristics of entertainment expenditure.

The phrase has indeed a wide amplitude and its use leaves little doubt that the intention of the legislature in employing it was to cast the net sufficiently wide so as to bring within its field all types of hospitality. Even on behalf of the respondents, it could not be denied that any lavish hospitality expended for business purposes would amount to ‘entertainment expenditure’. If that be so all hospitality, even though frugal, would be well within the ambit of the larger phrase ‘in the nature of the entertainment expenditure’.

5. Hon’ble Andhra Pradesh High Court explained the meaning of ‘entertainment expenditure’ while delivering judgment in CIT vs. Navabharat Enterprises [1987] 31 taxman 173 (AP) as under :

Meaning: The phrase ‘in the nature of entertainment expenditure’ encompasses in its ambit entertainment expenditure proper as well as expenditure akin to it or expenditure partaking of some, if not all the characteristics of entertainment expenditure.

Section 37(2)/(2a) of Income Tax Act

General.

37.(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.

(2) [***]

(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.

(3) [***]

(3A) [***]

(3B) [***]

(3C) [***]

(3D) [***]

(4) [***]

(5) [***]

In this article, you can get guidance from high courts on the meaning of entertainment expenditure under section 37(2)/(2a) of the Income Tax Act.

Updated up to Finance Act 2021