Calcutta H.C : the transit flat for employees was a guest house and the expenditure in respect thereof was to be disallowed as expenditure on the maintenance of guest house within the meaning of the said provisions

High Court Of Calcutta

Goodricke Group Ltd. vs. CIT-II, Kolkata

Assessment Year : 1993-94

Section : 33AB, 37(4)

Bhaskar Bhattacharya And Sambuddha Chakrabarti, JJ.

IT Appeal Nos. 537 And 538 Of 2004

April 29, 2011

JUDGMENT

Bhaskar Bhattacharya, J. – These two appeals were heard analogously as two of the points involved herein are common, whereas there is one additional point involved in the ITA No. 538 of 2004.

2. ITA No. 537 of 2004 is at the instance of an assessee and is directed against an order passed by the Income-tax Appellate Tribunal, “B” Bench, Kolkata, in ITA No. 324 (Kol.) of 2003 for the assessment year 1993-94 affirming the order passed by the Commissioner of Income-tax (Appeals).

3. A Division Bench of this Court at the time of admission of this appeal formulated the following substantial questions of law :

“(a) Whether on a proper interpretation of the provisions of sub-sections (4) and (5) of section 37 of the Income-tax Act, 1961 the Tribunal was justified in law in holding that the transit flat for employees was a guest house and the expenditure in respect thereof was to be disallowed as expenditure on the maintenance of guest house within the meaning of the said provisions?

(b) Whether on a true and proper interpretation of section 33AB of the Act, the Tribunal was justified in law in holding that the activities of sale of tea manufactured out of bought green leaves and sale of purchased tea after blending with the tea manufactured by the appellant were other business activities or were not part and parcel of the business of growing and manufacturing tea and the profits arising out of such activities were to be excluded for the purpose of computation of the quantum of deduction under section 33AB?”

4. ITA No. 538 of 2004 is also at the instance of the self-same assessee and is, however, directed against order dated 19-3-2004, passed by the Income-tax Appellate Tribunal, “B” Bench, Kolkata in ITA No. 723 (Kol.) of 2003 for the assessment year 1994-95 by which the Tribunal affirmed the order passed by the Commissioner of Income-tax (Appeals).

5. A Division Bench of this Court at the time of admission of the appeal formulated the following substantial questions of law :

“(a) Whether on a proper interpretation of the provisions of sub-sections (4) and (5) of section 37 of the Income-tax Act, 1961 the Tribunal was justified in law in holding that the transit flat for employees was a guest house and the expenditure in respect thereof was to be disallowed as expenditure on the maintenance of guest house within the meaning of the said provisions?

(b) Whether on a true and proper interpretation of section 33AB of the Act, the Tribunal was justified in law in holding that the activities of sale of tea manufactured out of bought green leaves and sale of purchased tea after blending with the tea manufactured by the appellant were other business activities or were not part and parcel of the business of growing and manufacturing tea and the profits arising out of such activities were to be excluded for the purpose of computation of the quantum of deduction under section 33AB?

(c) Whether the Tribunal was justified in law in upholding the disallowance under sub-section (4) of the section 37 of the expenditure incurred by the appellant in respect of the holiday home maintained by it for the exclusive use of its whole time employees numbering more than one hundred while on leave without taking into consideration the second proviso to the sub-section according to which the sub-section did not apply to the holiday home?”

6. Therefore, the first two questions formulated above in both the appeals are common while there is an additional question in ITA No. 538 of 2004.

7. The facts giving rise to filing of these appeals may be summed up thus:

(a) The assessee is a public limited liability company within the meaning of the Companies Act, 1956 and is regularly assessed to tax under the Income-tax Act, 1961 (hereinafter referred to as the Act).

(b) The assessee carries on the business of growing and manufacturing tea. As part and parcel of the said business, the assessee purchases a small quantity of tea manufactured by other tea estates and blends the same with the tea grown and manufactured by it.

(c) The assessee also purchases a small quantity of green tea leaves from other tea estates and manufactures black tea out of the same.

(d) In respect of profit of the said business of growing and manufacturing tea, the assessee is entitled to deduction under section 33AB of the Act and such deduction is available to the extent of 20 per cent of the profits of such business or the amount deposited by the assessee with the National Bank for Agricultural and Rural Development, whichever is less.

(e) The assessee has 17 tea gardens and its employees, from time to time, come from the gardens to the headquarters in Calcutta for the purpose of the assessee’s business. If the employees were put up in hotels during their stay in Calcutta, the assessee would have incurred a huge expense for such hotel-stay and consequently, the assessee maintains a transit flat in Calcutta for the garden employees who come to the headquarters for official work.

(f) The transit flat is exclusively used by the employees of the assessee and the assessee also does not pay any allowance to such employees and no recovery is also made from them for their stay in the transit flat.

(g) Section 37(4) of the Act, at the relevant point of time, provided for disallowance of expenditure incurred on maintenance of any residential accommodation in the nature of a guest house and the depreciation of any building used as a guest house or on any asset in a guest house. Sub-section (5) of the said section provided as to the nature of accommodation which are to be treated as guest house within the meaning of sub-section (4).

(h) The Assessing Officer, for the assessment year 1988-89 to 1992-93, treated the transit flat as a guest house within the meaning of sub-sections (4) and (5) of section 37 and disallowed the expenditure relating thereto.

(i) The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) for the assessment year 1988-89 and succeeded but in subsequent years, the disallowances were upheld.

(j) On further appeal, the Tribunal upheld the treatment of transit flat as guest house within the meaning of sub-sections (4) and (5) of section 37. The Tribunal, however, limited the nature of expenses which could be subjected to disallowance and according to the Tribunal, the disallowance could be made only in respect of depreciation and rent and any other expenditure which was covered by the provisions of sections 32 to 36 of the Act, could not be disallowed under section 37(4).

(k) During the previous year relevant to the assessment year 1994-95, the assessee deposited a sum of Rs. 2, 10, 00,000 under section 33AB. As per return of income, 20 per cent of the profit of business of growing and manufacturing tea which included the profit in respect of tea manufactured out of “bought leaves” and the profit in respect of purchased tea sold after blending with the tea grown and manufactured by the assessee amounted to Rs. 2,03,81,242.

(l) Accordingly, in the return of income the assessee claimed deduction in respect of the said sum of Rs. 2,03,81,242 which was lower than the amount deposited.

(m) In the order of assessment dated 29-3-1996 the Assessing Officer treated the expenditure on transit flat as falling within the purview of sub-sections (4) and (5) of section 37 and disallowed a sum of Rs. 3,41,607. The Assessing Office also disallowed deduction under section 33AB of Rs. 2,03,81,242.

(n) Being aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) and also filed an application under section 154 of the Act before the Assessing Officer contending, inter alia, that the deduction under section 33AB should be computed on the basis of assessee’s business income and since the amount of Rs. 2,10,00,000 deposited by it was lower than 20 per cent of the assessee’s business income. The entire amount deposited namely Rs. 2,10,00,000 should have been allowed as deduction.

(o) The Income-tax Officer, however, in the order dated 29-8-1997 under section 154 of the Act for the first time sought to exclude the profit for sale of tea manufactured by the assessee out of “bought green leaves” as also the profit from purchased tea sold by the assessee after blending with the tea grown and manufactured by it in computing the deduction under section 33AB of the Act and thereby, reduced the amount of deduction of Rs. 1,95,84,766.

(p) Being dissatisfied, the assessee preferred a separate appeal against order dated 29-8-1997 under section 154 of the Act before the Commissioner of Income-tax (Appeals).

(q) The Commissioner of Income-tax (Appeals) decided the assessee’s appeal against order dated 29-8-1997 under section 154 by an order dated 9-12-2002 by which he upheld the computation of deduction under section 33AB made by the Assessing Officer in the order dated 29-8-1997.

(r) The assessee filed an application under section 154 of the Act before the Commissioner of Income-tax Appeal for rectification of the order dated 9-12-2002 inter alia on the ground that the assessee’s alternative contention as to the order dated 29-8-1997 as having been passed without jurisdiction was not dealt with. The Commissioner of Income-tax (Appeals), however, by order dated 10-3-2003 rejected the said rectification application.

(s) The Commissioner of Income-tax (Appeals) decided the appeal of the assessee against order under section 143(3) dated 29-3-1996 by another order dated 9-12-2002 and upheld the order of the Assessing Officer in respect of the transit flat expenditure.

(t) With regard to the assessee’s claim for deduction of Rs. 2.10 crore under section 33AB, the Commissioner of Income-tax Appeals referred to his order dated 9-12-2002 passed in respect of the order dated 29-8-1997 under section 154 and directed the Assessing Officer to regulate the admissible deduction while giving effect to his appellate order by taking 20 per cent of the revised profit out of composite activity of growing and manufacturing tea or Rs. 2.10 crore whichever is less.

(u) Against the order dated 9-12-2002 passed by the Commissioner of Income-tax (Appeals) in appeal arising out of the order of assessment dated 29-3-1996, the assessee preferred an appeal before the Income-tax Appellate Tribunal and the Tribunal by an order dated 19-3-2004 upheld the disallowance of the transit flat expenditure under section 37(4) read with section 37(5). With regard to the assessee’s claim under section 33AB of the Act, the Tribunal held that the profit arising out of sale of tea manufactured out of “bought green leaves” and the profit from purchased tea sold after blending with the tea grown and manufactured by the assessee was to be excluded for computing 20 per cent of the profit from the business of growing and manufacturing tea for the purposes of section 33AB.

(v) The assessee also maintains a holiday home for the exclusive use of its whole-time employees numbering more than one hundred while on leave and during the previous year ending on 31-3-1994 the assessee incurred a sum of Rs. 1,24,500 in respect of the said holiday home. The Assessing Officer in the order of assessment dated 17-3-1997 treated the said expenditure of Rs. 1,24,500 in respect of the holiday home as capital in nature.

(w) Being aggrieved, the assessee preferred an appeal before the Income-tax Appellate Tribunal and the Tribunal by order dated 19-3-2004 upheld the disallowance of expenditure on holiday home under section 37(4) of the Act.

(x) Being dissatisfied, these two appeals have been preferred by the assessee in respect of the aforesaid three disputes i.e., (i) disallowance of expenditure on holiday home, (ii) disallowance of maintenance of transit flat, and (iii) deduction of part of benefit of section 33AB of the Act in respect of tea bought from outside and blended with the grown and manufactured tea of the assessee.

8. Mr. Khaitan, the learned senior counsel appearing on behalf of the appellant, has, at the very outset, fairly conceded that so far the first question formulated by the Court in both the appeals is concerned, in view of the decision of this Court in the case of Kesoram Industries & Cotton Mills Ltd. v. CIT [1991] 191 ITR 518 holding against his client, he does not press the first question as regard transit flat for the employee.

9. As regards the second question formulated above, Mr. Khaitan contends that in order to attract the provision contained in section 33AB of the Act, all those are necessary are that the assessee must have a business of growing and manufacturing tea and the amount of deposit in the concerned bank and the profit arising out of such business of the assessee are the relevant factors in granting benefit under the said provision because the smaller of the above two amounts should be deducted as the benefit. According to Mr. Khaitan, if an assessee has his own garden where he grows tea and in the process of manufacturing such tea, in order to bring it to a final product mixes some other tea grown in different gardens for the purpose of blending, the profit arising out of the additional tea for blending acquired from other gardens cannot be excluded. According to Mr. Khaitan, blending is an important part of manufacturing of tea and in order to have maximum profit by selling the manufactured tea of good quality, different types of tea are required to be blended and for that purpose, blending of tea from other gardens are also required to be added to the tea grown by the assessee. In such circumstances, according to Mr. Khaitan, the profit arising out of the purchased tea from outside cannot be excluded. Mr. Khaitan, therefore, prays for setting aside the order passed by the authorities below and for giving deduction of 20 per cent of the profit earned by his client out of the business of manufactured and grown tea including the tea bought from outside for blending.

10. In support of his contention Mr. Khaitan has placed strong reliance upon the following decisions :

1.D.D. Shah & Bros. v. Union of India [2006] 283 ITR 486 1 (Raj.);

2.Broach Distt. Co-operative Cotton Sales, Ginning & Pressing Society Ltd. v. CIT [1989] 177 ITR 4182 (SC);

3.Union of India v. J.G. Glass Industries Ltd. [1998] 96 Taxman 29 (SC).

11. Mr. Bhowmick, the learned counsel appearing on behalf of the revenue, on the other hand, has opposed the aforesaid contention of Mr. Khaitan and has contended that in order to get the benefit of section 33AB of the Act, the profit arising out of the business of growing and manufacturing of tea “grown in the garden of the assessee” can only be taken into consideration and not the purchased tea from other gardens. According to Mr. Bhowmick, it was the intention of Legislature to give benefit only to the extent of tea grown in the garden of the assessee and not to any amount of tea purchased from outside and blended with the tea grown in the garden of the assessee. He, therefore, prays for dismissing the appeal and affirming the order passed by the Tribunal. Mr. Bhowmick, in support of his contention, places reliance upon the decision of the Division Bench of this Court in the case of Brooke Bond India Ltd. v. CIT [2004] 269 ITR 2323 .

12. As regards point No. III, according to Mr. Khaitan, the Tribunal below, although held that section 37(4) of the Act was attracted, did not consider the second proviso to the said provision as it is the specific case of the assessee that the holiday home is maintained for the exclusive use of its employees numbering more than one hundred. Mr. Khaitan submits that the Assessing Officer as well as the Commissioner of Income-tax (Appeals) disallowed the claim on a different ground and thus, the Tribunal for the first time having applied section 37(4) of the Act, it was its duty to consider whether the second proviso to the said section is attracted. He, therefore, prays for remanding the matter back to the Tribunal for deciding the said question.

13. Mr. Bhowmick fairly conceded that he has no objection if the matter is remanded for considering the effect of the second proviso to section 37 of the Act on the question of the applicability of section 37(4) of the Act as regards the holiday home maintained by the assessee.

14. Therefore, in order to appreciate the question of applicability of section 33AB of the Act, it will be profitable to refer to the said provision as it stood at the relevant point of time and the same is quoted below :

“33AB. (1) Where an assessee carrying on business of growing and manufacturing tea in India has, before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier, deposited with the National Bank any amount or amounts in an account (hereafter in this section referred to as the special account) maintained by the assessee with the Bank in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) approved in this behalf by the Tea Board, the assessee shall, subject to the provisions of this section, be allowed a deduction (such deduction being allowed before the loss, if any, brought from earlier years is set off under section 72) of—

(a) a sum equal to the amount or the aggregate of the amounts so deposited; or

(b) a sum equal to twenty per cent of the profits of such business (computed under the head “Profits and gains of business or profession” before making any deduction under this section),

whichever is less :

Provided that where such assessee is a firm, or any association of persons or any body of individuals, the deduction under this section shall not be allowed in the computation of the income of any partner, or as the case may be, any member of such firm, association of persons or body of individuals :

Provided further that where any deduction, in respect of any amount deposited in the special account or in the Tea Deposit Account, has been allowed under this sub-section in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

(2) The deduction under sub-section (1) shall not be admissible unless the accounts of such business of the assessee for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant :

Provided that in a case where the assessee is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this sub-section if such assessee gets the accounts of such business audited under such law and furnishes the report of the audit as required under such other law and a further report in the form prescribed under this sub-section.

(3) Any amount standing to the credit of the assessee in the special account shall not be allowed to be withdrawn except for the purposes specified in the scheme or in the circumstances specified below :—

(a) closure of business;

(b) death of an assessee;

(c) partition of a Hindu undivided family;

(d) dissolution of a firm;

(e) liquidation of a company.

(4) Notwithstanding anything contained in sub-section (3), no deduction under sub-section (1) shall be allowed in respect of any amount utilised for the purpose of—

(a) any machinery or plant to be installed in any office premises or residential accommodation, including any accommodation in the nature of a guest-house;

(b) any office appliances (not being computers);

(c) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year;

(d) any new machinery or plant to be installed in an industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.

(5) Where any amount, standing to the credit of the assessee in the special account or in the Tea Deposit Account, is withdrawn during any previous year by the assessee in the circumstances specified in clause (a) or clause (d) of sub-section (3), the whole of such amount shall be deemed to be the profits and gains of business or profession of that previous year and shall accordingly be chargeable to income-tax as the income of that previous year, as if the business had not closed or, as the case may be, the firm had not been dissolved.

(6) Where any amount standing to the credit of the assessee in the special account or in the Tea Deposit Account is utilised by the assessee for the purposes of any expenditure in connection with such business in accordance with the scheme or the deposit scheme, such expenditure shall not be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

(7) Where any amount, standing to the credit of the assessee in the special account or in the Tea Deposit Account, which is released during any previous year by the National Bank or which is withdrawn by the assessee from the Tea Deposit Account for being utilised by the assessee for the purposes of such business in accordance with the scheme or the deposit scheme is not so utilised, either wholly or in part, within that previous year, the whole of such amount or, as the case may be, part thereof which is not so utilised shall be deemed to be profits and gains of business and accordingly chargeable to income-tax as the income of that previous year :

Provided that this sub-section shall not apply in a case where such amount is released during any previous year at the closure of the account in circumstances specified in clauses (b), (c ) and (e) of sub-section (3).

(8) Where any asset acquired in accordance with the scheme or the deposit scheme is sold or otherwise transferred in any previous year by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired, such part of the cost of such asset as is relatable to the deduction allowed under sub-section (1) shall be deemed to be the profits and gains of business or profession of the previous year in which the asset is sold or otherwise transferred and shall accordingly be chargeable to income-tax as the income of that previous year :

Provided that nothing in this sub-section shall apply—

(i) where the asset is sold or otherwise transferred by the assessee to Government, a local authority, a corporation established by or under a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956); or

(ii) where the sale or transfer of the asset is made in connection with the succession of a firm by a company in the business or profession carried on by the firm as a result of which the firm sells or otherwise transfers to the company any asset and the scheme or the deposit scheme continues to apply to the company in the manner applicable to the firm.

Explanation.—The provisions of clause (ii) of the proviso shall apply only where—

(i) all the properties of the firm relating to the business or profession immediately before the succession become the properties of the company;

(ii) all the liabilities of the firm relating to the business or profession immediately before the succession become the liabilities of the company; and

(iii) all the shareholders of the company were partners of the firm immediately before the succession.

(9) The Central Government, if it considers necessary or expedient so to do, may, by notification in the Official Gazette, direct that the deduction allowable under this section shall not be allowed after such date as may be specified therein.

Explanation.—In this section,—

(a) “National Bank” means the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981).

(b) “Tea Board” means the Tea Board established under section 4 of the Tea Act, 1953 (29 of 1953).”

15. So far as the second question formulated in these appeals is concerned, in our opinion, the answer to the same depends upon the interpretation of the following phrase appearing in section 33AB of the Act :

“a sum equal to twenty per cent of the profits of such business (computed under the head “Profits and gains of business or profession” before making any deduction under this section), whichever is less:”

16. In our view the phrase “profits of such business” means the profit arising out of the business of growing and manufacturing tea as appearing in the first part of the said section.

17. Therefore, the question is whether the profit arising out of any amount of tea purchased by the assessee from outside which was required for the purpose of blending with the tea grown in his own garden, should be deducted for the purpose of arriving at the figure of profit of such business of growing and manufacturing tea. In the case before us, according to the assessment order, the profit of the assessee on tea manufactured out of “bought tea” is Rs. 32,347 whereas the profit on sale of processed tea is Rs. 2,68,04,887.

18. It is an admitted position that for the purpose of manufacturing tea of good qualities, the process of blending is an important factor as the taste of the final product and consequently, the market value of the same depends upon not only the flavour but also the colour and the quality of liquor contained in such final product. Thus, in a particular garden, the tea grown may contain sufficient amount of flavour but may be lacking in colour or liquor contents. Similarly, some gardens grow tea where liquor content is good but is lacking in flavour. It is impossible to conceive of a final product of tea of excellent quality without the blend of different types of tea.

19. Therefore, if the assessee’s garden grows tea enriched with flavour but lacking in liquor contents, the assessee in order to manufacture good quality of final product of tea will be required to blend some other type of tea enriched with liquor content to have a good quality of the said final product.

20. Section 33AB of the Act does not say that the profit from such business must be restricted to the tea grown only in the garden of the assessee and that if any insignificant amount of tea in comparison to the amount grown in the garden is purchased from outside for blending, the final product would not be treated to be the tea “grown and manufactured” by the assessee. The question is whether the final product manufactured by the assessee contains the tea substantially grown in the garden of the assessee. If in the final product marketed by the assessee, it contains tea substantially purchased from outside and only an trivial amount grown by him, in such a case, the final product cannot be said to be the outcome of the business of tea “grown and manufactured” by the assessee because he basically is found to be dealing with the “tea manufactured by others”.

21. The requirement of the section 33AB is that the assessee must grow tea leaves and will also convert those leaves into final product by way of processing. Therefore, the moment the substantial amount of tea, thus, manufactured in the form of final product is grown in the garden of the assessee and such amount of “grown tea” is converted into the final form by blending with insignificant amount of other tea purchased from outside, such purchased tea from outside for the purpose of blending forms part of the process of manufacture of the final product of tea grown and manufactured by the assessee and thus, the requirement of the section is fully complied with. But if in the final product, there is very insignificant amount of tea grown by the assessee in its garden whereas the substantial amount is purchased from outside, the requirement of the section will not be satisfied. Similarly, if the assessee after growing huge amount of tea in his garden sells those to others for blending but he does not manufacture any tea in final form, he will not get the benefit of the section as he is only the grower of tea but not the manufacturer. Likewise, if the assessee after growing tea sells part of such grown tea to others without bringing those in the final form but retains the other part and transforms the retained part after blending with tea purchased from other gardens, he will get benefit of deduction only to that part of profit which he earned by selling the final form of tea after blending provided the final product contains substantial amount of tea grown by the assessee in comparison to the amount purchased from outside; but the profit arising out of the portion of the grown tea sold to others before converting into the form of tea by way of processing will not get the benefit of the section 33AB. Thus, the profit arising out of selling its grown tea to others without processing and bringing it into final form of “manufactured tea” will not be eligible for deduction under the section 33AB of the Act.

22. In the case before us, the assessee has utilized his entire tea grown by it in its garden and by blending the same with some other amount of tea purchased from outside has manufactured the final product and thus, the entire profit arising out of such manufacture will get the benefit of section 33AB notwithstanding the fact that for the purpose of blending, some small amount was purchased from outside. It appears that the purchased amount is very trifling in comparison to the amount grown by the assessee and thus, it is not a case where it can be alleged that the purpose of maintenance of the garden by growing insignificant amount of tea in comparison to the final product is only a device to get the benefit of the section. In our opinion, a purposive interpretation of the aforesaid provision should be made instead of literal construction of the same otherwise, the legislative purpose will be frustrated and in rare cases, where a very few fortunate assessees who grow and manufacture different varieties of tea and consequently, do not require purchase of any tea for blending with the final product, can only get the benefit of section 33AB of the Act.

23. In the case of Brooke Bond India Ltd. (supra), relied upon by Mr. Bhowmick, the assessee made a claim for investment allowance in respect of a new machinery purchased put to use and its contention was that it was not merely a blender of tea but it produced a new and distinct type of tea having a predetermined quality in terms of taste, liquor and aroma and hygienically packed through mechanical contrivances which the assessee marketed in packets and under different brand names and therefore, the assessee should be treated to be not only a blender but also a manufacturer or at least the producer of tea in packed condition. The Assessing Officer held that at best the assessee could be considered to be engaged in “processing” for which deduction for investment allowance under section 32A of the Act would not be available. The Division Bench of this Court approved the views of the Assessing Officer. We fail to appreciate how the said decision can be of any help to the revenue for interpretation of section 33AB of the Act where the question is whether the fact that some amount of tea has been blended with the tea grown by the assessee would bring the final product out of the purview of the said section. We, thus, find that the said decision is not relevant for our purpose.

24. We, therefore, answer the second question formulated in both the appeals in the negative against the revenue subject to our aforesaid observations.

25. Before entering into the third question formulated in ITA No. 538 of 2004, it will be apposite to refer to the provisions contained in section 37 of the Act which is quoted below :

“37. (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 or business or profession”.

(2) Notwithstanding anything contained in sub-section (1), any expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year commencing on or after the 1st day of April, 1992 shall be allowed as follows :

(a) where the amount of such expenditure does not exceed ten thousand rupees, the whole of such amount;

(b) in any other case, ten thousand rupees as increased by a sum equal to fifty per cent of such expenditure in excess of ten thousand rupees.

Explanation.—For the purposes of this sub-section, “entertainment expenditure” includes—

(i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person;

(ii) the amount of any expenditure in the nature of entertainment expenditure not being expenditure incurred out of an allowance of the nature referred to in clause (i) incurred for the purposes of the business or profession of the assessee by any employee or other person;

(iii) expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work.

(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.

(3) Notwithstanding anything contained in sub-section (1), any expenditure incurred by an assessee after the 31st day of March, 1964, on advertisement or on maintenance of any residential accommodation including any accommodation in the nature of a guest-house or in connection with travelling by an employee or any other person (including hotel expenses or allowances paid in connection with such travelling) shall be allowed only to the extent, and subject to such conditions, if any, as may be prescribed.

(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 a 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 :

Provided that the aggregate of the expenditure referred to in clause (i) and the amount of any depreciation referred to in clause (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 an assessee who has throughout the previous year employed not less than one hundred whole-time 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 accommodation in the nature of a guest-house shall include accommodation 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 accommodation has been hired by the assessee, include also the rent paid in respect of such accommodation.

(5) For the removal of doubts, it is hereby declared that any accommodation, by whatever name called, maintained, hired, reserved or otherwise arranged by the assessee for the purpose of providing lodging or boarding and lodging to any person (including any employee or, where the assessee is a company, also any director of, or the holder of any other office in, the company), on tour or visit to the place at which such accommodation is situated, is accommodation in the nature of a guest-house within the meaning of sub-section (4).”

26. So far as the third question formulated in ITA No. 538 of 2004 is concerned, we find substance in the contention of Mr. Khaitan, the learned Senior Advocate appearing on behalf of the appellant that the Tribunal below, although held that section 37(4) of the Act was attracted, did not consider the second proviso to the said provision as it is the specific case of the assessee that the holiday home is maintained for the exclusive use for his employee numbering more than one hundred. It appears that the Assessing Officer and the Commissioner of Income-tax (Appeals) disallowed the claim of the assessee on a different ground but the Tribunal for the first time having applied section 37(4) of the Act, it was its duty to consider whether the second proviso to the said section quoted above is attracted. If the second proviso is attracted section 37(4) will have no application and the appellant should be entitled to the claim.

27. We, thus, answer the third point formulated in the ITA No. 538 of 2004 in the negative and in favour of the assessee and remand the matter to the Tribunal to consider whether the second proviso to section 37(4) of the Act is attracted in this case and to act accordingly.

28. We, therefore, partly allow ITA No. 537 of 2004 by answering the first point in the affirmative against the assessee by following the Division Bench decision of this Court in the case of Kesoram Industries & Cotton Mills Ltd. (supra), and the second point in the negative against the revenue by setting aside the part of the finding of the authorities below on the second question and hold that the assessee is entitled to the benefit of the entire profit arising out of the business of growing and manufacturing the tea and the amount of tea purchased from outside for blending should not be deducted as the said amount is insignificant in comparison to the amount of tea grown and manufactured by the assessee. However, profit arising out of the sale of the tea leaves purchased from other gardens for manufacture of black-tea would not get the benefit of the section as the entire amount of such black-tea is not grown by the assessee but it has only processed those tea leaves for bringing those to the form of black-tea.

29. As regards the ITA No. 338 of 2004, we similarly allow the appeal in part by affirming the order of the Tribunal on the first question and setting aside the finding on the second question in the light of our above observations. So far the third question is concerned, we remand the matter to the Tribunal to consider the question of applicability of the second proviso to section 37(4) of the Act and to pass the final order accordingly on such point.

30. The appeals are, accordingly, disposed of.

31. In the facts and circumstances there will be, however, no order as to costs.

Sambuddha Chakrabarti, J. – I agree.

[Citation : 338 ITR 97]