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Judgment
R.C. Mankad, Actg.C.J.
The Income Tax Appellate Tribunal (""the Tribunal"" in short), has referred to us for our opinion the following question u/s 256(1) of the Income
Tax Act, 1961, (""the Act"" for short) :
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the sum of Rs. 40,651
was not liable to be disallowed u/s 37(2B) of the Income Tax Act ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the sum of Rs. 23,022
incurred as staff house expenses by the assessee was not liable to be disallowed ?
The assessee is a public limited company manufacturing different articles, namely, cotton textiles, carbide, calcium, caustic soda, P. V. C.
articles, etc., and the assessment year under reference is 1973-74, the year of account being the financial year ending on March 31, 1973. The
assessee incurred an expenditure of Rs. 40,651 in serving tea and cool drinks to its customers and claimed deduction of the same as ""business
expenditure"". The assessee relied on the decision of this court in the case of Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co.
Ltd., , in support of its claim for decision of this court on the ground that an appeal had been preferred before the Supreme Court against the said
decision and disallowed the claim of the assessee u/s 37(2B) of the Act. In the appeal, however, the Appellate Assistant Commissioner relying on
the decision of this court in the case of Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., , held that the expenditure
incurred by the assessee could not be considered to be an ""entertainment expenditure"" which could be disallowed u/s 37(2B) of the Act.
According to him, it was business expenditure and its deduction was allowable u/s 37(1) of the Act. The Tribunal having confirmed the view taken
by the Appellate Assistant Commissioner, question No. 1 is referred to us for our opinion at the instance of the Revenue. In our opinion, this
question is directly covered by the decision of this court in the case of Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., .
The expenditure incurred by the assessee is not an expenditure incurred for entertainment within the meaning of section 37(2B) of the Act. The
expenditure is a business expenditure deduction whereof is allowable u/s 37(1) of the Act. We, therefore, uphold the view taken by the Tribunal
and answer question No. 1 in the affirmative and against the Revenue.
So far as question No. 2 is concerned, the facts are as follows :
The assessee had incurred an expenditure of Rs. 23,022 for the guest house where staff members were permitted to stay whenever on duty. Out
of the said expenditure, expenditure of Rs. 19,200 was incurred in payment of rent for the premises used as guest-house for the employees and
Rs. 539 for obtaining water connection therein. No details were furnished for the balance of expenditure of Rs. 3,283. The assessee claimed
deduction of the said expenditure. The Income Tax Officer, however, without assigning any reasons disallowed deduction of the said expenditure.
In the appeal preferred by the assessee, the Appellate Assistant Commissioner held that the assessee was entitled to claim deduction of the said
expenditure. He, therefore, allowed the assessee''s claim. In further appeal, the Tribunal, following its earlier decision, confirmed the view taken by
the Appellate Assistant Commissioner. Therefore, at the instance of the Revenue, question No. 2 has been referred to us for our opinion.
The Income Tax Officer, it appears, disallowed deduction of the said expenditure of Rs. 23,022, as in his view, the expenditure was incurred for
maintenance of residential accommodation in the nature of guest house and deduction of such expenditure was not admissible u/s 37(4) of the Act.
Learned counsel for the Revenue submitted that the expenditure incurred would be hit by section 37(4) inasmuch as it was incurred for the
maintenance of the guest house.
It is not in dispute that the residential accommodation in respect of which expenditure is incurred is maintained for the purpose of the business of
the assessee. The residential accommodation is used for temporary stay of employees of the assessee of the assessee who are on duty. It is,
therefore, described as residential accommodation in the nature of guest house. According to the Revenue, deduction of expenditure incurred for
residential accommodation is not allowable inasmuch as it is an expenditure incurred for maintenance of residential accommodation in the nature of
guest house within the meaning of section 37(4) of the Act. According to the Revenue, any expenditure incurred by the assessee after February 28,
1970, for the maintenance of any residential accommodation in the nature of guest house is not an allowable deduction. Section 37(4), in so far as
it is relevant, reads as follows :
37 (4) Notwithstanding anything contained in sub-section (1) or sub-section (3), -
(i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of February 1970, on the maintenance of
any residential accommodation in the nature of guest house (such residential accommodation being hereafter in this sub-section referred to as
guest house"");
(ii) in relation to the assessment year commencing on the 1st day of April 1971, or any subsequent assessment year, no allowance shall be made in
respect of depreciation of any building used as a guest house or depreciation of any assets in a guest house.
The opening non obstante clause of sub-section (4) makes it clear that the expenditure which is referred to in clause (i) of sub-section (4) is one
which would be allowable as deduction u/s 37(1). In order to attract the provisions of sub-section (4), it must first be established that it is an
expenditure which is covered by section 37(1). Section 37(1) is as follows :
(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 of profession''.
Section 37(1) refers to expenditure (i) which is not an expenditure of the nature described in sections 30 to 36, (ii) which is not an expenditure
of capital nature, and (iii) which is not personal expenditure of the assessee. It is, therefore, evident that, if the expenditure in question is an
expenditure of the nature described in sections 30 to 36, it would not fall u/s 37(1). So far as the expenditure in question is concerned, according
to the assessee, it would covered by section 30. Section 30 reads as follows :
Section 30. - In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following
deductions shall be allowed :-
(a) where the premises are occupied by the assessee -
(i) as a tenant, the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on
account of such repairs;
(ii) otherwise than as a tenant, the amount paid by him on account of current repairs to the premises;
(b) any sums paid on account of land revenue, local rates or municipal taxes;
(c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the premises.
The assessee is, admittedly, a tenant of the premises which are described as residential accommodation in the nature of guest house and
employees of the assessee stay there for a temporary period. It is, therefore, obvious that the assessee would be entitled to deduction of rent paid
by it for such premises under sub-clause (i) of clause (a) of section 30. It would also be entitled to deduction of the cost of repairs to such
premises. It is the case of the assessee that an expenditure of Rs. 19,200 has been incurred in paying rent for the said premises described as guest
house and Rs. 539 for water connection. Both these items of expenditure, in our opinion, would be covered by sub-clause (i) of clause (a) of
section 30. Rs. 19,200 would be deductible as rent paid for the premises and Rs. 539 as cost of repairs to the premises. Since the said
expenditure is covered by section 30, there is no question of considering the assessee''s claim for deduction thereof u/s 37(1) of the Act. The
assessee not having claimed its deduction u/s 37(1), the question of disallowing any part of the said expenditure u/s 37(4) does not arise. In other
words, the said expenditure cannot be disallowed by invoking section 37(4) of the Act.
The view which we have taken is supported by the decision of the Bombay High Court in Commissioner of Income Tax Vs. Chase Bright Steel
Ltd. (No. 1), . That was a case in which the assessee-company had taken a flat on rent in Bombay. Half of the flat was used for residence of the
officers of the company and the remaining half was used as its guest house. The assessee claimed deduction of half of the sum paid as rent and also
the amount spent on repair of the furniture and on the maintenance of the guest house. The Income Tax Officer rejected the claims and this was
confirmed by the Appellate Assistant Commissioner. It was contended before the Tribunal that the expenditure relating to the maintenance of the
guest house amounting to Rs. 9,156.90 was covered by section 37(1) of the Income Tax Act, 1961. It was, however, reiterated that even that
expenditure was not disallowable as it was not really necessary for the assessee to maintain a register in terms of rule 6C (3) of the Income Tax
Rules, 1962, in view of the fact that no directors or employees of the company had ever stayed in the said guest house. The Tribunal accepted the
assessee''s claim and held that this amount could also not be disallowed. As regards the remaining expenditure of Rs. 4,200 on rent and Rs.
1,603.19 on the repairs and polishing of the furniture also, the Tribunal accepted the submission that the expenditure in question was allowable
under sections 30 and 31 and not u/s 37(1) and, therefore, the provisions of section 37(3) were not applicable. The Division Bench of the Bombay
High Court held that the provisions of sub-section (3) of section 37 start with a non obstante clause which of necessity must relate to expenditure
allowable under sub-section (1) of section 37 of the Act and no other provision. Thus, it is evident from sub-section (1) of section 37 that it
contemplates allowance of expenditure which is neither personal nor of capital nature nor of the nature describe in sections 30 to 36 of the Act.
The rent which is allowable u/s 30 and expenditure relating to the repairs and polishing of furniture u/s 31 could not again fall for consideration
under the said sub-section. The Division Bench, therefore, agreed that the view taken by the Tribunal that the deduction in respect of rent for the
guest house being allowable and allowed u/s 30 and the expenses on repairs and polishing of furniture amounting to Rs. 1,603 being allowable and
allowed u/s 31 of the Act could not be disallowed under the provisions of sub-section (3) of section 37 of the Act or the rules made thereunder.
The Bombay High Court has taken the same view which we have taken.
The assessee has not furnished details of the balance of expenditure of Rs. 3,283 deduction whereof is claimed by it. In the absence of details,
the said expenditure cannot be allowed as deduction.
In the light of the above discussion, question No. 2 which is referred to us is answered in the affirmative and against the Revenue to the extent
of Rs. 19,739 and in the negative and against the assessee to the extent of Rs. 3,283.
The reference is answered accordingly with no order as to costs.