Circular No. 727 — 372. Instructions regarding extent of expenditure incurred on food or beverages provided t

What this is

Circular No. 727 was issued by the Central Board of Direct Taxes on 27 October 1995. Its subject is 372. Instructions regarding extent of expenditure incurred on food or beverages provided to employees by employers to be treated as entertainment expenditure under section 37(2).

This fixes the monetary limits below which the department will not appeal. It binds the department only: it is not a rule about the merits, and an assessee cannot draw an inference from a withdrawn appeal.

What it does

Amends Circular No. 708 dated 18 July 1995 so that the concession on food and beverages is worked in money terms rather than by the pay of the employee. Circular No. 644 dated 15 March 1993 had kept such expenditure out of 'entertainment expenditure' under the Explanation to section 37(2) only for low-paid employees. As the two circulars now read together, expenditure up to Rs. 35 per day per employee on food or beverages, incurred during working hours even outside the place of work, is not entertainment in nature, subject to proof of genuineness; where the spend is higher, only the excess over Rs. 35 per day per employee is treated as entertainment. In the employee's own hands the amount up to Rs. 35 per day is not income, provided the employer pays the caterer, restaurant, eating place or canteen directly. It applies to expenditure of the financial year 1995-96, relevant to assessment year 1996-97, and later years.

Why it was issued

Representations asked that the earlier benefit, confined to low-paid employees, be extended to all employees regardless of salary, subject to a ceiling on the amount.

Who it reaches

Employers claiming canteen and meal expenditure as business expenditure
Employees receiving meals or meal coupons at work
Assessing Officers applying the Explanation to section 37(2)
Employers reworking salary deduction on meal benefits

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.37	s.34

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

372. Instructions regarding extent of expenditure incurred on food or beverages provided to employees by employers to be treated as entertainment expenditure under section 37(2)
1. Reference is invited to the Board’s Circular No. 644, dated 15-3-1993 (see Sl. No. 371) wherein it was clarified that the expenditure on provision of food or beverages by an employer to the low-paid employees will not be treated as entertainment expenditure within the meaning of the Explanation under section 37(2) of the Income-tax Act, 1961 even if the facility is provided in places other than the place of work provided the same is provided during the working hours and the expenditure is genuine and reasonable. Representations have since been received for extending the benefit of the circular to all the employees irrespective of salary limits, subject to monetary limits on the expenditure.
2. The Board has since considered the matter and has decided that expenditure up to Rs. 35 per day per employee shall not be treated as in the nature of entertainment if the same is incurred on food or beverages even outside the place of work, but during working hours subject to proof of genuineness of the expenditure. In case the expenditure exceeds the above limit, only the excess over Rs. 35 per day per employee shall be treated as entertainment in nature within the meaning of Explanation under section 37(2) of the Act. In the hands of the employee, the amount up to Rs. 35 per day will not be treated as income, provided the amount is paid by the employer directly to the caterer, restaurant, eating place, canteen, etc.
3. This circular shall apply with reference to the expenditure incurred during the financial year 1995-96 relevant to the assessment year 1996-97 and subsequent years.
Circular : No 708, dated 18-7-1995 as amended by Circular No. 727, dated 27-10-1995.

What to watch

Only the excess over Rs. 35 per day per employee is hit; the Assessing Officer cannot treat the whole spend as entertainment once the limit is crossed.
The meal must be during working hours, and genuineness of the expenditure has to be proved on the file.
The employee's own exemption depends on the employer paying the caterer directly; cash reimbursed to the employee is outside the concession.
The concession runs from the financial year 1995-96 and is written against the entertainment expenditure disallowance in section 37(2) as it then stood, which is the provision the text itself construes.
The text before you is Circular No. 708 as amended by this circular, so the two read as one.

Where you meet it

In a scrutiny assessment disallowing canteen or restaurant expenditure as entertainment, and in the perquisite working behind an employee's Form No. 16.

An example

Ours, not the Board’s: a worked case built from the rule the instrument sets, to show how it falls out.

An employer spends Rs. 50 per day per employee on lunch bought from a restaurant near the office and pays the restaurant directly. Rs. 35 per day per employee stays outside the Explanation to section 37(2), and only Rs. 15 per day per employee is treated as entertainment in nature. In the employee's hands nothing up to Rs. 35 per day is charged as income, the payment having gone straight to the restaurant.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 38/2025 [F. No 370142/11/2025-TPL] / SO 1838(E) — 2 the Gazette of INDIA : Extraordinary [Part Ii—sec. 3(ii)] 23 April 2025
Circular No. 05/2012 — Inadmissibility of expenses incurred in providing freebees to Medical Practitioner by pharmaceutical and allied health s 1 August 2012
Circular No. 708 — 372. Instructions regarding extent of expenditure incurred on food or beverages provided to employees by employers to be 18 July 1995
Circular No. 671 — 368. Whether, where deposit made by an assessee for obtaining new telephone connection under ‘Tatkal Telephone Deposit S 27 October 1993
Circular No. 644 — 371. Whether provision of food or beverages in places other than place of work in respect of low-paid employees can be t 15 March 1993
Circular No. 578 — 295. Effect of withdrawal of tax concession under section 35C in a case where expenditure has been incurred by sugar fac 12 September 1990

← Circular No. 728 · Circular No. 726 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.