1. The assessee is a public limited company and the assessment year which is relevant for the purpose of this reference is 1971-72, the year of account having ended on December 31, 1970. The assessee maintained a "guest house" with a mess at the factory premises in Bilimora. Bilimora is a small town with no adequate hotel facilities. The assessee was, therefore, maintaining the "guest house" with mess for its staff members coming from Bombay and the merchants who came to the factory premises for the purpose of business. It was stated that auditors, technicians and other employees of the assessee came from Bombay to Bilimora and these employees were provided with lodging and boarding facilities in the incurred a total expenditure of Rs. 17,687 in providing messing facilities to its employees who came to Bilimora from Bombay. The assessee claimed deduction of the said expenditure as business expenditure. The Income-tax Officer held that the said expenditure which the assessee had incurred was expenditure was for the purpose of business. He, however, held that deduction of the said expenditure was not allowable in view of the specific provisions of sub-sections (2B) and (3) of section 37 of the Income-tax Act, 1961 ("the Act" for short). According to the Income-tax Officer, no expenditure for maintenance of "guest house" was allowable under section 37(3). He held that the entire expenditure of Rs. 17,687 was nothing but expenditure incurred for the maintenance of residential accommodation and, therefore, the assessee's claim for its deduction could not be allowed under section 37(3) of the Act. The Income-tax Officer further held that, under sub-section (4) of section 37, depreciation on the said residential accommodation was also not allowable. There was no separate written down value for the portion of the factory premises used as residential accommodation or "guest house". Therefore, the Income-tax Officer estimated the depreciation attributable to the said residential accommodation or "guest house" at Rs. 500 and disallowed the same from the depreciation of the building as claimed by the assessee.

2. Being aggrieved by the disallowance of the claim of expenditure of Rs. 17,687 and depreciation of Rs. 500 and other disallowances which are not relevant for the purpose of this reference, the assessee carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the assessee had provided messing facility in the interest of its business and, therefore, the expenditure incurred for providing such facility would be an allowable expenditure under section 37(1) as expenditure incurred wholly and exclusively for the purpose of the business. According to him, the expenditure incurred for the maintenance of "guest house" is to be allowed subject to the fulfilment of the conditions laid down in rules 6 (a) and (c). The Appellate Assistant Commissioner, therefore, held that the action of the Income-tax Officer in disallowing the said expenditure under section 37(3) was wrong. The Appellate Assistant Commissioner further held that the expenditure was not in the nature of entertainment expenditure and, therefore, it could not be disallowed under section 37(2B) of the Act. For the aforesaid reasons, the Appellate Assistant Commissioner deleted the addition of Rs. 17,867 and disallowance of depreciation on the residential accommodation or "guest house".

3. In the appeal, the Income-tax Appellate Tribunal ("the Tribunal" for short) held that no part of the expenditure of Rs. 17,687 incurred by the assessee in providing messing facility to its employees could be disallowed as expenditure in the nature of entertainment expenditure under section 37(2B) of the Act. It may be mentioned here that the expenditure in the nature of entertainment expenditure was not allowable after February 28, 1970, under section 37(2B) of the Act. It may be recalled that the year of account of the assessee relevant to the assessment year under reference ended on December 31, 1970. In order words, the relevant year of account is the calendar year 1970. The Tribunal further held that the expenditure incurred by the assessee for the "guest house" prior to February 28, 1970, was an allowable expenditure subject to fulfilment of certain conditions prescribed by the Rules. Since it was not the case of the Revenue that the conditions laid down by the rules were not fulfilled, the expenditure incurred by the assessee for the "guest house" up to February was allowable as deduction. So far as expenditure for "guest house" incurred after February 28, 1970, was concerned, the Tribunal held that, having regard to the dictionary meanings of "guest" and ""guest house"", the residential accommodation maintained by the assessee at Bilimora could not be termed as a "guest house". Therefore, in the opinion of the Tribunal, section 37(4) of the Act could not act as a bar to the allowance of the expenditure as claimed by the assessee. The Tribunal held that the deduction of the entire expenditure was allowable under section 37(1) of the Act. The Tribunal held that, as a consequence, depreciation also could not be disallowed because the provisions of section 37(4)(ii) would not be applicable to the instant case. In this view of the matter, the Tribunal confirmed the order of the Appellate Assistant Commissioner allowing the claim of the assessee.

4. Being aggrieved by the order of the Tribunal, the Revenue sought reference and, at its instance, the following questions have been referred to us, for our opinion, under section 256(1) of the Act :

"(1) Whether, on facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 17,687 or a part thereof cannot be treated as entertainment expenditure disallowable under section 37(2B) of the Act of 1961 ?

(2) Whether the Tribunal was right in law in holding that the sum of Rs. 17,687 or a part thereof was not liable to be disallowed as "guest house" expenditure under the provisions of section 37(3) or 37(4) of the Income-tax Act, 1961 ?

(3) Whether the Tribunal was right in law in holding that the disallowance of Rs. 500 as depreciation on "guest house" under section 37(4) of the Act was no justified ?"

5. Expenditure of Rs. 17,687 was incurred by the assessee in providing messing facilities to its employees who came to work in the factory premises at Bilimora in the discharge of their duties. It appears that the assessee had incurred expenses of Rs. 9,489 for providing vegetarian meals and see had incurred expenses non-vegetarian meals to its employees, such as auditors, technicians, etc. The question is whether the said expenditure could be disallowed under section 37(2B) of the Act. Section 37(2B), applicable in the assessment year under reference, read as follows :

"37 (2B) Notwithstanding anything contained in this section, no allowance shall be made in respect of expenditure in the nature of entertainment expenditure incurred within India by any assessee after the 28th day of February, 1970."

6. It is not the case of the Revenue that this expenditure, which the assessee had incurred, could be considered to be lavish or extravagant. Therefore applying the principles laid down by this court in CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424, the expenditure cannot be considered to be in the nature of entertainment expenditure which could be disallowed under section 37(2B) of the Act. In other words, that part of the expenditure, which the assessee had incurred in providing messing facilities to its employees from February 28, 1970, to December 31, 1970, could not be disallowed as entertainment expenditure.

7. The next question which we are called upon to consider is whether the above expenditure or any part thereof could be disallowed under sub-section (3) and clause (i) of sub-section (4) of section 37 of the Act. The further question which arises for our consideration is whether depreciation in respect of residential accommodation or "guest house" maintained by the assessee is disallowable under clause (ii) of section 37(4). Sub-sections (3) and (4) of section 37, as they stood at the relevant time, read as follows :

"37 (3). Notwithstanding anything contained in sub-section (1), any expenditure incurred by an assessee after the 31st day of March, 1954, 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 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 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."

8. It will be seen that, under sub-section (3), any expenditure incurred by an assessee after March 31, 1954, on maintenance of any residential accommodation including any accommodation in the nature of a "guest house" was allowable only to the extent and subject to such conditions, if any case may be prescribed. Since the "guest house" of the assessee was used also for the purpose of lodging, it cannot be gainsaid that it was residential accommodation. Sub-section (3) is applicable to any residential accommodation including any accommodation in the nature of a "guest house". The Tribunal has taken the view to the effect that expenditure incurred for the maintenance of any residential accommodation is allowable as deduction to the extent and subject to the conditions as may be prescribed in the rules and since it is not the case of the Revenue that the conditions laid down in the rules have not been fulfilled, no part of the expenditure which has been incurred prior to February 28, 1970, could be disallowed under sub-section (4) of section 37. In our opinion, so far as expenditure of Rs. 17,687 is concerned, it is not incurred for maintenance of any residential accommodation. This expenditure, as already indicated above, has been incurred for providing messing facilities to the employees of the assessee. No part of this expenditure having been incurred for maintenance of any residential accommodation, there is no question of disallowing any part thereof under sub-section (3) of section 37. The question of allowing deduction of expenditure to the expenditure is incurred for the maintenance of residential accommodation. It is, therefore, is incurred for the maintenance of residential accommodation. It is, therefore, not necessary to consider whether or not the conditions prescribed by the rules were fulfilled for the purpose of allowing the expenditure of Rs. 17,687. In our opinion, sub-section (3) of section 37 has no application to the facts of the instant case.

9. For the same reasons, since the said expenditure is not incurred for the maintenance of any residential accommodation, the question of disallowing the said expenditure of Rs. 17,687 or any part thereof under clause (i) of section 37(4) of the Act does not arise.

10. The expression "any residential accommodation in the nature of a "guest house"" used in clause (i) of section 37(4) is wide enough to take within its sweep the residential accommodation or "guest house" maintained by the assessee. The meaning of the expression ""guest house"" given in the Oxford English Dictionary, which is relevant for our purpose, is "a house or apartment for the reception or entertainment of strangers or guests". It would, therefore, appear that a house or apartment in which a stranger or guest is received or entertained is a "guest house". To entertain, in this context means to receive hospitably. There is, therefore, no doubt that the accommodation which is maintained by the assessee for providing boarding and lodging facilities to its employees and merchants is a "guest house". We, therefore, do not agree with the view of the Tribunal that the accommodation maintained by the assessee is not a "guest house". Again we have to remember that what clause (i) of section 37(4) refers to is not a "guest house", but any residential accommodation in the nature of a"guest house". The expression "any residential accommodation in the nature of a "guest house"" will have much wider meaning than ""guest house"". Having regard to the facts and circumstances of the case, it cannot be gain said that the accommodation in question maintained by the assessee is a residential accommodation in question maintained by the assessee is a residential accommodation in the nature of a "guest house" within the meaning of clause (i) of section 37(4). However, since the expenditure of Rs. 17,687 has not been incurred for the maintenance of the residential accommodation in the nature of a "guest house", no part thereof is disallowable under clause (i) of section 37(4) of the Act.

11. Since, in our view, the accommodation maintained by the assessee for giving lodging and boarding facilities to its employees and merchants is residential accommodation if the nature of a "guest house" within the meaning of clause (i) of section 37(4), depreciation on that part of the building of the assessee used as "guest house" is not allowable under clause (ii) of section 37(4). The Tribunal was, therefore, wrong in upholding the decision of the Appellate Assistant Commissioner setting aside disallowance of depreciation of Rs. 600 attributable to the said accommodation or "guest house" of the assessee.

12. In the light of the above discussion, we answer questions Nos. 1 and 2 in the affirmative and against the Revenue. Question No. 3 is answered in the negative and against the assessee. Reference answered accordingly with no order as to costs.