Commissioner of Income Tax vs Chemicals and Plastics India Ltd.

N.V. Balasubramanian, J.—In compliance with the directions of this court dated March 14, 1989, the Tribunal referred the following

question of law for our consideration u/s 256(2) of the Income Tax Act, 1961 :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the expenditure incurred on the

maintenance of the guest house and the depreciation on the building used as a guest house should be allowed as a deduction ?

The assessee is a public limited company. The assessment year involved is 1978-79. The assessee maintained a guest house at Mettur and

incurred certain expenditure amounting to Rs. 30,528 and also claimed depreciation of Rs. 8,999 in computing the income of the previous year

ended March 31, 1978, relevant to the assessment year 1978-79. The Income Tax Officer disallowed the claim of the assessee with reference to

both the amounts, namely, the expenditure as well as the claim of depreciation. The assessee appealed to the Commissioner of Income Tax

(Appeals). The Commissioner accepted the claim of the assessee and directed the allowance of the claims. The Appellate Tribunal, on appeal by

the Revenue, dismissed the appeal preferred by the Revenue holding that the assessee would be entitled to the claim of deduction of the

expenditure as well as the depreciation in computing the income of the assessee.

Mr. C. V. Rajan, learned counsel for the Revenue, submitted the Explanation (sic) introduced in Sub-section (5) of Section 37 of the Income

Tax Act is retrospective in nature and, therefore, the assessee is not entitled to deduction of the expenditure claimed or the depreciation claimed by

the assessee.

Mr. P. P. S. Janarthana Raja, learned counsel, undertakes to file vakalat for the respondent. He submitted that the Explanation (sic) was

introduced by the Finance Act, 1983, with retrospective effect from April 1, 1979, and since a limited retrospective effect is made by the above

amendment, Sub-section (5) of Section 37 would not apply to the assessment year in question.

We have carefully considered the submissions made by learned counsel for the parties. Sub-section (5) of Section 37 of the Act was introduced

by the Finance Act, 1983, with retrospective effect only from April 1, 1979. A mere look at Sub-section (5) of Section 37 of the Act shows that

only from April 1, 1979, if any accommodation maintained, hired or reserved or arranged by the assessee for the purpose of providing boarding or

lodging including any employee, director or the holder of office on tour or visit to the place, at which such accommodation is situated, the

accommodation will be treated as a guest house for the purpose of Sub-section (4) of Section 37 of the Act. Since the provisions have been

introduced only from April 1, 1979, by the Finance Act, 1983, it will not have any larger retrospective effect than that provided by the Legislature.

Since the provisions of Section 37(5) of the Act are not applicable to the facts of the case on the basis of the decision of this court in the case of

Commissioner of Income Tax Vs. Aruna Sugars Ltd., , we are of the view that the expenses incurred by the assessee are allowable in the

computation of the business income of the assessee as the guest house maintained by the assessee cannot be regarded as a ""guest house"" within the

meaning of Section 37(4) of the Act. We are, therefore, of the view that there is no infirmity in the order of the Appellate Tribunal in holding that

the assessee was entitled to deduction of expenditure incurred on the maintenance of the guest house and depreciation of the building used as the

guest house. Accordingly, we answer the question of law referred to us in the affirmative and against the Department.