Kerala H.C : the expenditure on payment of rent and maintenance of executive hostel meant for stay of company executives during their official tour is not allowable as per s. 37(4) r/w s. 37(5) of the Act

Counsel Appeared

C.N. Ramachandran Nair, for the Assessee : P.K.R. Menon & N.R.K. Nair, for the Revenue

Mrs. K.K. USHA, J.:

In IT Ref. No. 85 of 1994 the Income-tax Appellate Tribunal, Cochin Bench (in short the Tribunal) has referred the following questions at the instance of assessee for opinion of this Court:

“1. Whether on the facts and circumstances of the case the Hon’ble Tribunal is right in holding that the expenditure on payment of rent and maintenance of executive hostel meant for stay of company executives during their official tour is not allowable as per s. 37(4) r/w s. 37(5) of the Act?

2. Whether on the facts and circumstances of the case the Hon’ble Tribunal ought to have found that the expenditure on rent being allowable under s. 30 of the Act is excluded from the purview of expenditure to be considered for allowable under s. 37(1) of the Act and as such from the purview of s. 37(4) of the Act.”

In IT Ref. No. 88 of 1994 at the instance of the Revenue, Tribunal has referred the following questions for opinion of this Court:

“1. Whether, on the facts and in the circumstances of the case and also for the reasons stated in the enclosure to reference application, the Tribunal is right in law and fact in holding that the assessee is entitled to get deduction in respect of Rs. 52,248 under s. 37 of the IT Act?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the amount spent on repairs will not come within the ambit of s. 37(4) and in deciding the point in favour of the assessee without giving any reason in support of the decision?”

Both the references are from the order of the Tribunal in ITA 654/88 filed by the assessee against the order of CIT(A) dt. 10th June, 1988 in respect of asst. yr. 1984-85.

The assessee-company is engaged in the manufacture and sale of chemical catalysts used in chemical industries. For the asst. yr. 1984-85, the assessing authority disallowed assessee’s claim in respect of expenses relating to maintenance of its executive hostel amounting to Rs. 80,752 under s. 37(4) of the IT Act, 1961. So also, a further amount of Rs. 52,248 claimed by the assessee being import duty paid in respect of a memento presented by foreign collaborator in memory of the assessee’s late managing director Mr. A.H. Lalljee, was disallowed by the assessing authority. On appeal, the CIT(A) sustained disallowance in respect of both items. Assessee filed second appeal before the Tribunal, which held that the duty for clearing memorial plaques given by the foreign collaborator in the memory of the assessee’s late managing director can be considered as having been incurred for commercial expediency and for the purpose of business since the plaques were exhibited only in the company’s premises. As far as the maintenance of guest house, the Tribunal took the view that the amount spent on repair of the guest house has to be excluded in considering the amount disallowable under s. 37(4) of the Act.

Question No. 2 referred in IT Ref. No. 88 of 1994 is connected with the questions referred in IT Ref. No. 85 of 1994. Learned counsel for the assessee contended that the Tribunal has committed an error in disallowing its claim regarding the expenditure incurred for payment of rent and maintenance of the executive hostel meant for the stay of company executives during their official tour. According to the assessee, by virtue of the provisions contained under s. 30, the rent paid by the assessee in respect of premises for the purpose of its business is an allowable reduction. It has therefore, to be taken that such deduction is to be excluded from the purview of s. 37 in view of the provisions contained under s. 37(1) and, therefore, s. 37(4) has no application in this case.

We find no merit in the above contention. We are of the view that the claim put forward by the assessee would directly come under s. 37(4) and 37(5) which read as follows: “(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 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; (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-s. (4).” A reading of sub-s. (4) and more clarified by sub-s. (5) would clearly show that any accommodation by whatever name called, maintained, hired, reserved or arranged by the assessee for providing boarding or lodging to any person on tour or visit to the place at which such accommodation is situated, will be treated as accommodation in the nature of a guest-house and that no allowance shall be made in respect of any expenditure incurred by the assessee after 28th Feb., 1970 on the maintenance of any such guest house. It cannot be contended that in spite of the above provisions specifically relating to guest house, the assessee can still put forward a claim under the general provisions of s. 30. Learned counsel for the assessee relied on the decisions in CIT vs. Chase Bright Steel Ltd. (1989) 75 CTR (Bom) 60 : (1989) 177 ITR 124 (Bom) : TC 17R.1465 and CIT vs. Ahmedabad Mfg. & Calico Printing Co. Ltd. (1992) 105 CTR (Guj) 322 : (1992) 197 ITR 538 (Guj) : TC 17R.1477 in support of its contention. On examining these decisions, we find the first decision, which is rendered by the Bombay High Court, considered a case prior to the introduction of sub-ss. (4) and (5) of s. 37. The second decision which was rendered by the High Court of Gujarat, just followed the Bombay High Court’s decision even though, by that time, sub- s. (4) of s. 37 had been introduced. We are not inclined to follow the above decisions in the present case.

6. As mentioned earlier, the second question in IT Ref. No. 88 of 1994 is connected with the claim of the assessee in respect of the guest house. Tribunal, while upholding the findings of the CIT(A) on the above claim of the assessee, took the view that the assessee is entitled to claim deduction in respect of repairs to the guest house and that the amount spent on such repairs has to be ascertained by the ITO. Learned standing counsel for the Revenue submits that the above finding of the Tribunal is erroneous. We find merit in this contention. The verymaintenance of a guest house in the nature of the one described in s. 37(4) and (5) is hit by the provisions of s. 37(4). Any expense incurred for repair of such guest house would not be allowable. An attempt was made by learned counsel for the assessee to contend that what has been interdicted under sub-s. (4) is expenditure for maintenance of the guest house and, therefore, the expenditure for repair of the guest house would not come within the purview of sub-s. (4). We have no hesitation to reject this contention. The wording of sub-s. (4) would make it clear that the expenditure referred in sub-s. (4) is not for the `maintenance work’ of the guest house, but on the very maintenance of a guest house meaning for `keeping’ the guest house. Expenses incurred for repair would naturally come within expenses for keeping a guest house. We are, therefore, of the view that the Tribunal was in error in holding that the amount spent on repairs will not come within the ambit of s. 37(4).

On the first question referred in IT Ref. No. 88 of 1994, learned counsel for the Revenue submitted that the assessee is not entitled to put forward a claim in respect of the import duty paid since it cannot be, for a moment, considered as an expenditure laid out by the assessee as a trader and as incidental to his business. According to learned counsel, the expenditure was more in the nature of a personal expenditure relating to late managing director.

We find no merit in this contention. Admittedly the assessee-company is doing business with foreign collaboration and the plaque was sent by their foreign collaborator in memory of their late managing director. It was necessary and even essential for the business interest of the assessee to take delivery of the gift sent from the foreign collaborator in order to maintain friendly relationship with the foreign collaborators. The Tribunal was fully justified in holding that if the company had not taken delivery of the same, it would have certainly offended the feelings of the foreign collaborators which might, in turn, adversely affect the smooth development of their further business relationship. Therefore, there was no option for the assessee but to take delivery of the gift in the best interest of promotion of its business. If that be so, we are of the view that the expenditure incurred by the assessee on this account would satisfy the test laid down by the Supreme Court in Indian Aluminium Co. Ltd. vs. CIT 1972 CTR (SC) 51 : (1972) 84 ITR 735 (SC) : TC 17R.831. Payment of import duty to the extent of Rs. 52,248 by the assessee is an expenditure which was really incidental to the carrying on of the business of the assessee and therefore entitled to deduction.

In the light of the above, in IT Ref. No. 85 of 1994, we answer question No. 1 in the affirmative in favour of the Revenue and against the assessee and question No. 2 in the negative in favour of the Revenue and against the assessee. In IT Ref. No. 88 of 1994 we answer question No. 1 in the affirmative in favour of the assessee and against the Revenue and question No. 2 in the negative, in favour of the Revenue and against the assessee.

[Citation:229 ITR 233]