Commissioner of Income Tax, Bombay City-I vs Ravalgaon Sugar Farm Ltd.

Desai, J.—In this reference four questions of law are referred to us by the Income Tax Appellate Tribunal (Bombay Bench "D"), the first three at the instance of the Commissioner and the fourth at the instance of the assessee. The said questions are as follows :

By the Commissioner of Income Tax :

"(1) Whether, on the facts and in the circumstance of the case, the Income Tax authorities were justified in disallowing a part of the "Head office expenses'' for the assessment years 1961-62, 1962-63 and 1963-64 as relatable to agricultural activity ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in allowing the expenses incurred for running the guest-house for assessment years 1961-62 and 1962-63 as a revenue expenditure ?

(3) Whether, on the fact and in the circumstances of the case, the Income Tax authorities were justified in disallowing a part of the guest-house expenses as relatable to agricultural activities for the periods relevant to the assessment years 1961-62, 1962-63 and 1963-64 ?

By the assessee :

(4) Whether, on the facts and in the circumstances of the case, the assessee was entitled to 50% of the full normal depreciation as depreciation for the second shift of the sugar factory for the accounting periods relevant to the assessment years 1961-62 and 1963-64, as the factory is a seasonal one and it works in two shifts in the manner indicated above ?"

As far as question No. 4 is concerned, it is the admitted position that the assessee had not preferred a reference application before the Tribunal but had raised the said question of law in its reply. Mr. Joshi drew our attention to the observations of the Supreme Court in Commissioner of Income Tax, Kerala Vs. V. Damodaran, , where it has been held that the Tribunal was not competent to refer such question at the instance of the respondent on an application filed by the department. The Supreme Court treated such reference as void. We are bound by the said decision and we must also proceed to treat the reference to the extent of question No. 4 as incompetent and void. We, accordingly, do not propose to answer the said question.

As far as questions Nos. 1 and 3 are concerned, they appear to be concluded against the Department and in favour of the assessee by the decision of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Maharashtra Sugar Mills Ltd., Bombay, . Counsel have accordingly asked us to answer these two questions (questions Nos. 1 and 3) in the negative and in favour of the assessee in accordance with the said decision.

As far as question No. 2 is concerned, it would appear that the ITO had held that the guest-house expenses of Rs. 24,008 should be treated as entertainment expenses. Treating the said expenses as entertainment expenses, the ITO had permitted the statutory deduction under s. 37(2) of the I.T. Act, 1961, and added back the balance. This approach of the ITO was upheld by the AAC but the Tribunal found the approach to be incorrect. In para. 10 of the order of the Tribunal (main order), the Tribunal has indicated the reasons for not treating the expense as entertainment expenses. According to the Tribunal, this expenditure was incidental to the business of the assessee and hence allowable as revenue expenditure. In our opinion, this is predominantly a conclusion of fact to be arrived at on an assessment of all available material, and it would not be proper for the High Court to reappraise the material and come to a different conclusion. The decision of the Tribunal is also in accordance with the approach indicated in Commissioner of Income Tax, Vidarbha And Marathwada Vs. Shah Nanji Nagsi, . Accordingly, the question will have to be answered in the affirmative and in favour of the assessee, upholding the view of the Tribunal.

In the result, the questions referred to us are answered as follows :

Question No. 1 : In the negative and in favour of the assessee.

Question No. 2 : In the affirmative and in favour of the assessee.

Question No. 3 : In the negative and in favour of the assessee.

Question No. 4 : Not answered for the reason already indicated, namely, that the reference itself is incompetent.

Parties are directed to bear their own costs of the reference.