Commissioner of Income Tax vs Chase Bright Steel Ltd. (No. 1)

T.D. Sugla, J.—This reference at the instance of the Department, the following three questions are raised:

"(i) Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to the deduction of the rent of Rs. 4,200 ?

(ii) Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to the deduction of Rs. 1,603.19 ?

(iii) Whether, on the facts and in the circumstance of the case, the assessee-company was entitled to the deduction of Rs. 9,156.90 ?"

The assessee paid rent of Rs. 8,400 in respect of a flat in Anita Apartments, Mount Pleasant Road, Bombay. Half the flat was used for the residence of the officers of the company and the remaining half was used as its guest house. The assessee had also incurred an expenditure of Rs. 10,760 on the maintenance of the guest house as per details hereunder:

The Income Tax Officer disallowed the expenditure both on rent and maintenance expenses pertaining to the quest house, i.e., Rs. 4,200 and Rs. 10,760. The Appellate Assistant Commissioner confirmed the disallowance. He did not accept the assessee''s submission that its claim for deduction in respect of rent was allowable u/s 30 and in respect of the maintenance expenses u/s 31, and, therefore, neither section 37(3) of the Income Tax Act, 1961, nor any rules made thereunder were applicable in this case. He also rejected the claim that even under rule 6C(3),no register was maintainable by the assessee in view of its claim that no director or employee had ever stayed in the guest house.

It was contended before the Tribunal that the expenditure on the first four items relating to the maintenance of the guest house amounting to Rs. 9,156.90 was covered by section 37(1) of the Act. 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) 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, i.e., Rs. 4,200 on rent and Rs. 1,603.19 on the repairs and polishing of the furniture also, the Tribunal accepted the sub-missioner that the expenditure in question was allowable under sections 30 and 31 of the Act and not u/s 37(1) and, therefore, the provisions of section 37(3) were not applicable.

Taking us though the provisions of section 37(3) of the Income Tax Act, Shri Jetley, learned counsel for the Department, reiterated that section 37(3) was in reality a substantive provision, which had an overriding effect on all the provisions in the Act pertaining to allowance of allowance of expenditure in computing the income from business and profession. It was stated that the provisions contained in section 37(3) specifically covered all kinds of expenses incurred in connection with the guest house maintained by an assessee for the purpose of its business and that if the view taken by the Tribunal was accepted, the provisions of section 37(3) will become otiose. Such a construction, it was argued, is to be avoided.

Before proceeding to consider Shri Jetley''s submission. It is pertinent to mention that there is no dispute between the parties about the facts that the expenditure has, in fact, been incurred and that the guest house has been maintained by the assessee for the purpose of its business. Under the circumstances, there cannot possibly be any dispute that, on the face of it, the expenditure on rent in respect of the guest is allowable u/s 30 and the expenses on repairs and polishing of the furniture in the guest house are allowable u/s 31 of the Act. Let us now examine the provisions of section 37(1) of the Income Tax Act, which read thus:

"37(1) Any expenditure (not being expenditure of the nature described in section 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head ''Profits and gains of business or profession."

It is evident that this sub-section contemplated allowance of expenditure, which is neither personal not of capital nature nor which is of the nature described in sections 30 to 36 of the Act. Obviously, rent which is allowable u/s 30 and expenditure relating to the repairs and polishing of furniture falling u/s 31 could not again fall for consideration under this sub-section.

Coming then to the provisions of sub-section (3) of section 37, it is seen that the provisions in that sub-section start with a non-obstante clause "Notwithstanding anything contained in sub-section (1)......" which of necessity must relate to expenditure allowable under sub-section (1) of section 37 of the Act and no other provision. This being so and the assessee''s case, as stated by us above, not falling to be considered u/s 37(1) of the Act, we are in agreement with 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 u/s 31 of the Act could not be disallowed under the provisions of sub-section (3) of section 37 of the Act or rules made thereunder.

The first two questions are, therefore, answered in the affirmative and in favour of the assessee.

The third question pertains to the assessee''s claim for deduction of Rs. 9,156.90. The nature of the expenditure being salary of cook-cum-servant curtains, repairs of bath room and other day to day expenditure, it could not possibly be denied that this type of expenditure falls to be considered u/s 37(1) only and, therefore, the provisions of section 37(3) would not be attracted. This part of the claims of deduction was disallowed by the departmental authorities not ground that the assessee had not maintained the register which was a condition for allowance in terms of rule 6C(3) of the Income Tax Rules, 1962, framed u/s 37(3). The assessee''s case, on the other hand, was that the guest house was never used by the directors or its employees and, therefore, there was no necessity for maintaining such register. The assessee''s submission has been accepted by the Tribunal. This amounts to a finding of fact which does not call for interference in reference jurisdiction.

The third question, therefore, need not be answered being related to the finding of fact only.

No order as to costs.