Bombay H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of Rs. 10,029 as maintenance expenses and Rs. 11,375 depreciation allowance, for the asst. yr. 1977-78 in relation to the flats at Jupiter Apartments and Sunita Apartments, was not expenditure incurred on the maintenance of residential accomodation in the nature of the guest house, and was, therefore, an admissible deduction ?

High Court Of Bombay

CIT vs. Ocean Carriers Pvt. Limited

Sections 32, 37(4)

Asst. Year 1977-78

Dr. B.P. Saraf & S.M. Jhunjhunuwala, JJ.

IT Ref. No. 355 of 1983

15th November, 1994

Counsel Appeared

Dr. V. Balasubramaniam with J.P. Devadhar i/b Mrs. S. Bhattacharya, for the Applicant : None, for the Respondent

S.M. JHUNJHUNUWALA, J.:

The following question has been referred for the opinion of this Court by the Tribunal, under s. 256 (1) of the IT Act, 1961, at the instance of the Revenue :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of Rs. 10,029 as maintenance expenses and Rs. 11,375 depreciation allowance, for the asst. yr. 1977-78 in relation to the flats at Jupiter Apartments and Sunita Apartments, was not expenditure incurred on the maintenance of residential accomodation in the nature of the guest house, and was, therefore, an admissible deduction ?”

The assessee is a private limited company. In the asst. yr. 1977-78, the assessee claimed maintenance expenses of Rs. 10,029 and depreciation of Rs. 11,375 on flats bearing Nos. 163 and 164 in the Jupiter Apartments and one flat in Sunita Apartments at Cuffe Parade, Bombay. The ITO allowed these claims treating these flats not in the nature of guest houses. According to the CIT (A), these flats were purchased by the assessee to provide accomodation to the representatives and crew members of non-resident companies of which the assessee-company was freight and shipping agent. According to the CIT(A), these flats should have been treated as guest houses and in view of s. 37(4) of the IT Act, 1961, the expenses should have been disallowed by the ITO. The Commissioner initiated proceedings under s. 263 of the IT Act. The assessee contended before the Commissioner that these flats were purchased to provide facilities to representatives of principal non-resident shipping companies in order to improve their mutual relationship. It was further contended that it was never an intention of the assessee to maintain or run a guest house in defiance of s. 37(4) of the Act. The CIT(A) held that the bar under s. 37(4) of the IT Act was absolute and these flats could only be treated as guest houses. The Commissioner directed the ITO to make fresh assessment by disallowing maintenance expenses and depreciation claimed by the assessee. the Tribunal upheld the action of the ITO, reversed the order of the CIT(A) and allowed the appeal of the assessee and held that these flats could not be treated as guest houses. This finding of the Tribunal has been challenged by the Revenue since according to Dr. Balasubramaniam, these flats belonging to the assessee should have been treated as guest houses of the assessee-company.

The facts not in dispute are as follows : (i) the assessee-company owned these flats in the relevant assessment year; (ii) the assessee-company incurred expenditure on maintenance of these flats which amount alongwith the depreciation was claimed as allowance by the assessee company during the asst. yr. 1977-78; (iii) in the course of assessee’s business, the shipping crew and representatives of non-resident shipping companies having dealings with the assessee-company were put up in these flats; and (iv) the assessee-company’s own directors or employees had not used these flats as their residence. Sec. 37(4) of the Act which is relevant to consider the controversy involved, reads as under : “37(4) Notwithstanding anything contained in sub-s. (1) or sub-s. (3),— (i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of Feb., 1970, on the maintenance of any residential accomodation in the nature of a guest-house (such residential accomodation 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 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; Provided that the agregate of the expenditure referred to in cl. (i) and the amount of any depreciation referred to in cl. (ii) shall, for the purposes of this sub-section be reduced by the amount, if any, received from persons using the guest house; Provided further that nothing in this sub-section shall apply in relation to any guest house maintained as a holiday home if such guest-house— (a) is maintained by the assessee who has throughout the previous year employed not less than one hundred wholetime employees in a business or profession carried on by him; and (b) is intended for the exclusive use of such employees while on leave. Explanation : for the purposes of this sub-section : (i) residential accomodation in the nature of a guest-house shall include accomodation hired or reserved by the assessee in a hotel for a period exceeding one hundred and eighty two days during the previous year and; (ii) the expenditure incurred on the maintenance of a guest-house shall, in a case where the residential accomodation has been hired by the assessee, include also the rent paid in respect of such accomodation”.

This sub-section was inserted by the Finance Act, 1970 w.e.f. 1st April, 1970 which prohibits totally any allowance under this section in respect of any expenditure on the maintenance of a guesthouse incurred after 28th Feb., 1970 and further prohibits any depreciation allowance in respect of any building used as guest-house unless the guest house is maintained exclusively as a holiday home for the employees and the assessee has at least a 100 wholetime employees.

The term “guest-house” has not been defined in the Act. `Guest-house’ is a house for housing guests, either gratituously or at concessional rate. Though while considering the scope of s. 37(3) of the Act, the Madras High Court in the case of CIT vs. Arun Sugars Limited (1980) 123 ITR 619 (Mad), did take the view that unless the guest-house is intended for use by a complete stranger it cannot be called a guest-house, it is not possible to subscribe to the views taken therein while construing the provisions of sub-s. (4) of s. 37 of the Act. The representatives of the principal nonresident shipping companies of the assessee-company were received and entertained at these flats who though not complete strangers to the assessee company were even not directors or employees of the assessee-company. There is nothing to show that these representatives of the non-resident shipping companies were not received and entertained gratituously. Even the Karnataka High Court in the case of Sri Durga Enterprises (Vrindavan Hotel) vs. ITO & Anr. (1976) 102 ITR 745 (Kar), has not taken the extreme view that the guest-house refers to a place where the guests of assessee are received and entertained only gratituously. On the contrary, it has been held therein that the guest-house refers to a place where the guests of an assessee are received and entertained gratituously or at concessional rate. Moreover, sub-s. (5) to s. 37 of the Act which has been inserted by the Finance Act, 1983 with retrospective effect from 1st April, 1979, has clarified that accomodation maintained by the assessee to provide lodging and boarding and lodging to any person including any employee or a director or the holder of any office in the assessee-company would be in the nature of a guest- house within the meaning of sub-s. (4) of s. 37 of the Act. This supports the submission made by Dr. Balasubramaniam to the effect that these flats were in the nature of guest-houses of the assessee-company. Taking totality of circumstances into consideration, in our view, by providing accomodation to the members of crew as also to representatives of assessee’s principal non-resident shipping companies in these flats, the assessee- company had treated these flats as its own guest-houses and since these guests-houses were not maintained exclusively as a holiday home for employees of the assessee company, the assessee-company was not entitled to allowance under s. 37(4) in respect of any expenditure on maintenance thereof incurred after 28th Feb., 1970 nor to any depreciation allowance. The Tribunal was wrong in setting aside the order of the CIT(A) and upholding the action of the ITO. Hence, we answer the question referred in the negative and in favour of the Revenue.

In the circumstances of the case, there shall, however, be no order as to costs.

[Citation :211 ITR 357]

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