C.I.T vs Arvind Mills Ltd.

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K.S. Jhaveri, J.—The following two questions have been referred by the Income Tax Appellate Tribunal, Ahmedabad under Section 256(1) of the Income Tax Act, 1961 arising out of the Tribunal's order dated 30.07.1997 in ITA No. 3687/1992:

"(1) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in allowing the claim of depreciation on guest house?

(2) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in holding that since the Octroi was paid to the Ahmedabad Municipal Corporation it was not hit by the provisions of section 40A(3)."

The assessee had filed appeal before CIT(A) against the order of DCIT(Asstt.) Spl., Ahmedabad under section 143(3) of the Act for the assessment years 1988-89 as the assessing office disallowed all the expenses on guest house including depreciation. CIT(A) allowed the claim of depreciation of Rs. 109180 and the disallowance of rent expenses was confirmed. The CIT(A) also held that since octroi was paid to Ahmedabad Municipal Corporation it was not hit by provisions of section 40A(3). The revenue appealed before the Tribunal. The Tribunal upheld both the findings of the CIT(A).

2.1 The Tribunal on an application made by the revenue drew up a statement of Case and referred the questions of law stated hereinabove to this Court and accordingly this reference has come before us for consideration.

Mr. M.R. Bhatt, learned Senior Counsel appearing with Ms. Mauna Bhatt for the revenue contended that question No. 1 is directly governed by the decision of the Apex Court in the case of Britannia Industries Ltd. Vs. Commissioner of Income Tax, West Bengal, Kolkata and Another, .

3.1 Mr. Bhatt has drawn the attention of this Court to section 40A(3) and Rule 6DD and contended that the payment of octroi duty to the Municipal Corporation would fall under the provisions of section 40A(3) in view of sub clause (b) of Rule 6DD. He submitted that both the authorities have committed an error in not upholding the disallowance made by the Assessing Officer.

Mr. Manish Shah, learned advocate appearing for Mr. J.P. Shah submitted that the Tribunal as well as the first appellate authority was justified in not allowing the disallowance made by the Assessing Officer so far as octroi is concerned. He submitted that the Tribunal has rightly upheld the order passed by CIT(A) so far as both the questions are concerned.

Having heard Mr. Bhatt, learned Counsel appearing on behalf of the revenue and Mr. Shah, learned advocate appearing on behalf of the assessee and the questions posed for consideration by us reproduced hereinabove and considering the decision of the Hon'ble the Supreme Court in the case of Britannia Industries (Supra), question No. 1, which is raised in the present reference is required to be answered in favour of the revenue.

5.1 The Apex Court in the case of Britannia Industries (supra) has held that while the expression "premises and buildings" in sections 30 and 32 of the Income Tax Act, 1961 and the expression "residential accommodation in the nature of guest house" in sub-sections (3), (4) and (5) of section 37 can be similarly interpreted, a distinction has been sought to be introduced for the purpose of section 37 by specifying the nature of the building to be a guest house. The intention of the Legislature is clear and unambiguous : the intention was to exclude from deduction the expenses towards rents, repairs and also maintenance of premises/ accommodation used for the purpose of a guest house of the nature indicated in Sub-section (4) of section 37. If the Legislature had intended that deduction would be allowable in respect of all types of buildings/accommodation used for the purpose of the business or profession, then the Legislature would not have felt the need to amend the provisions of section 37 so as to make a definite distinction with regard to buildings used as guest houses as defined in section 37(5) and the provisions of sections 31 and 32 would have been sufficient for that purpose.

5.2 In view of the above, we are of the opinion that the disallowance made by the Assessing Officer was right. We answer question No. 1 in the negative and accordingly answer the issue in favour of revenue and against the assessee.

However, so far as question No. 2 is concerned, we are of the view that the observations made by the Tribunal is justified. The Tribunal in para 10 has observed that the transporting company provided its services in the payment of octroi duty on the goods transported by it for the assessee company and recover the amount from the assessee and that the arrangement so made did not shift the obligation to pay octroi duty from assessee to the transport company. The Tribunal observed that the obligation in fact was on assessee to pay octroi duty to the Municipal Corporation on the goods transported within the municipal limits.

6.1 Section 40A(3) of Income Tax Act 1961 provides for disallowance of expenses in respect of which a payment or aggregate of payments is made to a person in a day, otherwise than by an account payee cheque drawn on bank or account payee bank draft, exceeds Rs. 20000 and Section 40A(3A) provides for the payment in excess of Rs. 20000 in a day made otherwise than account payee cheque or account payee bank draft, for an allowance made in the assessment for any year on the basis of incurred liability, to be treated as income of the year in which such payment is made. Rule 6DD(b) reads as under:

"(b) where the payment is made to Government and under the rules framed by it, such payment is required to be made in legal tender;"

We are in complete agreement with the reasonings adopted by the Tribunal so far as payment of octroi is concerned as the same is mandatory. The payment is made through an agency appointed by the assessee and therefore the payment does not come within the provisions of section 40A(3) read with Rule 6DD(b).

In the premises aforesaid, we answer question No. 1 in the negative and question No. 2 in the affirmative. Issue No. 1 is accordingly answered in favour of revenue whereas question No. 2 is answered in favour of assessee. The order passed by the Tribunal is modified accordingly. Reference is allowed to the aforesaid extent.