Meaning of “Entertainment”

The meaning of entertainment 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.

Meaning of entertainment defined by court

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

1. Hon’ble Gujarat High Court explained the meaning of ‘entertainment’ while delivering judgment in CIT vs. Patel Bros. & Co. Ltd. [1977] 106 ITR 424 (Guj.) as under :

Meaning : The dictionary meaning of the term ‘entertainment’ is to receive and treat with hospitality, which broadly means receiving and entertaining guests in a friendly, generous and liberal way. The term ‘entertainment’ in the context of section 37(2a) and (2b) of the income-tax act, 1961, on its true construction and meaning, would include the acts or practice of receiving and entertaining strangers and friends in a friendly, generous and liberal way.

These acts may consist of providing, inter alia, a formal or elegant meal, a banquet and being hospitable in providing for the wants of a guest in a liberal and generous manner. If the act of entertaining is on a lavish and a grand scale involving wasteful expenditure, it would, no doubt, amount to entertainment. On the other hand, if the acts or practice of being hospitable in the sense of providing meals, drinks or other wants of the persons entertained, whether they may be employees, workmen or officers, servants or agents in the service of an assessee, are an express or implied condition of service, they would not amount to acts of entertainment.

Similarly, if the acts or practice of being hospitable in the sense of providing meals, drinks or satisfying any other wants of guests, whether they are friends, strangers or customers, are a part and parcel of the express or implied terms and conditions of business, trade or profession or on account of long standing custom in such trade, business or profession, they would not amount to acts of entertainment.

In the area lying between these two terminii, the broad dictionary meaning of the term ‘entertainment’ indicated above should be adopted. No doubt, entertainment is hospitable treatment of guests and every act of entertainment includes hospitality.

But that would not warrant the converse position that every act of hospitality would constitute entertainment. Hospitality shown on account of obligation of business arising as a result of express or implied contract or arising on account of long standing custom of a trade, business or profession cannot amount to entertainment, and acts done in discharge of such obligation cannot be included and covered in the term ‘entertainment’.

Though ultimately in each case it would be a question of fact depending on many factors, the following broad tests will provide a guideline to determine the nature of entertainment expenses :

(a) if the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish and extravagant scale, or is of wasteful nature, it is entertainment per se.

(B) if the provision of food or drinks to client, constituent or customer is in the nature of bare necessity or by way of ordinary courtesy, or as an express or implied term of the contract of employment spelled out from long-sanding practice or custom of trade or business, it will not amount to entertainment.

(C) if the provision of food or drinks to a client, customer, or constituent is in a liberal and friendly way, it may amount to entertainment having regard to the place, item and cost of such provision.

(D) the provision of amusement to a client, customer, or constituent by way of hospitality or otherwise will always be entertainment.

2. Hon’ble Karnataka High Court explained the meaning of ‘entertainment’ while delivering judgment in ACIT vs. Bangalore TURF Club Ltd. [1980] 126 ITR 430 (Kar.) as under :

Meaning : The word ‘entertainment’ not having been defined, that meaning which is most appropriate in the context in which it is used should be given. The meaning of the words ‘entertain’ and ‘entertainment’ is given in webster’s third new international dictionary at page 757.

Out of the various shades of meanings of the words given therein, the meanings which are relevant in the context of section 37(2a) of the act are : ‘entertain’ – to give reception to (a person); to show hospitality to; to provide for the needs of a guest; to cause time to pass pleasantly for (someone); amuse; to provide entertainment especially for guests.

‘Entertainment’ – the act of entertaining; the act of receiving as a guest; hospitable reception; the act of diverting, amusement or causing someone’s time to pass agreeably; amusement; something that diverts, amuses or occupies the attention agreeably; provide for guests whimsical as well as culinary; a social gathering or reception; a public purpose designed to divert or amuse.

Therefore, in order that an expenditure should constitute an expenditure in the nature of entertainment, it should have been expended for entertaining persons whether they are customers or guests, either by way of providing food, drinks, refreshments or in providing any type of pleasure or amusement or an expenditure of a like nature incurred by the assessee for the purpose of entertainment, pleasure or amusement for himself or for his employees.

Whatever be the case, the dominant purpose of incurring the expenditure for the purpose of food, drinks, refreshments and amusements, must be for deriving or providing pleasure.

3. Hon’ble Punjab & Hariyana High Court explained the meaning of ‘entertainment’ while delivering judgment in CIT vs. Nadh Shah Kapur & Sons [1980] 122 ITR 972 (Punj. & Har.) as under :

Meaning : No doubt, entertainment is hospitable treatment of guests and every act of entertainment includes hospitality. But that would not warrant the converse position to be correct and every hospitality would not constitute entertainment.

4. Hon’ble Andhra Pradesh High Court explained the meaning of ‘entertainment’ while delivering judgment in Nava Bharat Enterprises (P.) Ltd. V. CIT [1983] 143 ITR 804 (AP) as under :

Meaning : If the expenditure is incurred on providing food and drink only to a client, constituent or customer, which is the nature of bare necessity or by way of ordinary courtesy, it would not amount to entertainment expenditure. But if a party is arranged or a banquet is given or some amusement is provided to or in connection with the visit of such a client, constituent or customer, as the case may be, it would fall within the ambit of the said expression.

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 under section 37(2)/(2a) of the Income Tax Act.

Updated up to Finance Act 2021