Citation Codes

Equivalent Citations

citation codes

Case Number

I.T Rs. Nos. 85 and 88 of 1994

Judges

Mrs. K.K Usha
G. Sivarajan, JJ.

Acts

section 37(4) of the Income-tax Act, 1961.
sub-sections (4) and (5) of section 37.
sub-section (1) or subsection (3),(i)
sub-section (4) of section 37
provisions of section 37(4).

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Smart Summary

Structured Summary of the Opinion — Bench: Mrs. K.K. Usha, J.

Factual and Procedural Background

This opinion arises from two references made by the Income-tax Appellate Tribunal, Cochin Bench, in respect of appeals relating to the assessment year 1984-85 (I.T.A. No. 654 of 1988). The Tribunal referred questions to this Court in two matters designated I.T.R. No. 85 of 1994 (at the instance of the assessee) and I.T.R. No. 88 of 1994 (at the instance of the Revenue).

The factual matrix, as set out in the opinion, is that the assessee-company (a manufacturer and seller of chemical catalysts) had claimed deductions which the assessing authority disallowed. Two principal disputed items were:

Expenditure amounting to Rs. 80,752 relating to rent and maintenance of an executive hostel (described as an accommodation for company executives during official tours) — disallowed under section 37(4) of the Income-tax Act, 1961.
Import duty of Rs. 52,248 paid to clear a memorial plaque (a memento) sent by a foreign collaborator in memory of the company's late managing director — disallowed by the assessing authority and sustained by the Commissioner (Appeals).

On second appeal, the Tribunal allowed the claim for the import duty (treating the plaques as incurred for commercial expediency and exhibited on company premises) and partially allowed the claim in respect of repairs to the guest house by holding repair expenditure should be ascertained by the Income-tax Officer. The Tribunal nevertheless disallowed the assessee's claim regarding the rent and general maintenance of the executive hostel under section 37(4). These findings led to the references for the opinion of this Court.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure on payment of rent and maintenance of an executive hostel meant for stay of company executives during their official tour is not allowable under section 37(4) read with section 37(5) of the Income-tax Act?
Whether the Tribunal ought to have found that expenditure on rent being allowable under section 30 of the Act is excluded from the purview of expenditure to be considered for allowance under section 37(1) and hence outside the purview of section 37(4)?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and fact in holding that the assessee was entitled to a deduction of Rs. 52,248 under section 37 of the Income-tax Act (relating to import duty paid for the memorial plaque)?
Whether the Tribunal was right in holding that the amount spent on repairs will not come within the ambit of section 37(4) and in deciding the point in favour of the assessee without giving reasons?

Arguments of the Parties

Assessee's Arguments

The rent paid for premises used for business purposes is an allowable deduction under section 30; therefore, such deduction should be excluded from the purview of section 37 by virtue of section 37(1), and consequently section 37(4) should not apply to the rent/maintenance of the executive hostel.
With respect to repairs to the guest house, it was contended that subsection (4) interdicted expenditure for "maintenance" in the sense of keeping a guest house, and that expenditure on repair would not fall within subsection (4).
Implicitly, the assessee relied on authorities (Bombay High Court and Gujarat High Court decisions) to support the position that rent allowable under section 30 cannot be excluded by section 37 provisions (discussed below).

Revenue's Arguments

For the import duty: the Revenue argued that the import duty paid was not an expenditure incidental to the business but was personal expenditure connected with the late managing director, and therefore not deductible under section 37.
For the repairs: the Revenue contended the Tribunal's finding that repair expenditure was allowable was erroneous because the maintenance of a guest house is expressly hit by section 37(4), and repair expenditure falls within that prohibition.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner Of Income-Tax v. Chase Bright Steel Ltd. (No. 1), [1989] 177 ITR 124 (Bom)	Relied upon by the assessee to support the proposition that rent allowable under section 30 should not be excluded by section 37 (decision considered a pre-subsections (4) and (5) case).	The Court noted this Bombay High Court decision pre-dated the introduction of subsections (4) and (5) and declined to follow it for the present case.
CIT v. Ahmedabad Mfg. and Calico Printing Co. Ltd., [1992] 197 ITR 538 (Guj)	Followed the Bombay High Court decision and was cited to support the assessee's contention regarding section 30 vis-à-vis section 37.	The Court observed that this Gujarat High Court decision followed the earlier Bombay decision despite the fact that subsection (4) had by then been introduced; the Court was not inclined to follow this authority in the present case.
Indian Aluminium Co. Ltd. v. CIT, West Bengal, Calcutta, [1972] 84 ITR 735	Supreme Court test for whether an expenditure is incidental to the carrying on of business (used to determine deductibility under general principles).	The Court applied the test from this authority and held that the import duty of Rs. 52,248 satisfied the test of being incidental to business and therefore was deductible.

Court's Reasoning and Analysis

The Court's analysis proceeded in two strands corresponding to the two broad categories of disputed items (guest-house/rent/repairs and import duty for the memorial plaque).

Interpretation of section 37(4) and (5) — guest-house, rent and repairs:

The Court closely examined the language of section 37(4) read with section 37(5). Subsection (5) defines "accommodation in the nature of a guest-house" to include any accommodation, by whatever name called, maintained, hired, reserved or otherwise arranged by the assessee for providing lodging (or boarding and lodging) to any person (including employees or directors) on tour or visit to the place where the accommodation is situated.
On that statutory reading the Court concluded that any such accommodation provided for persons on tour will be treated as a guest-house for the purposes of subsection (4), which expressly disallows any allowance in respect of expenditure incurred after 28 February 1970 on the maintenance of a guest-house.
The Court rejected the assessee's argument that an expenditure which would otherwise fall under section 30 (rent for business premises) could be excluded from section 37 by virtue of section 37(1). The Court held the specific provisions of section 37(4) — applied to guest-houses as defined by subsection (5) — prevail and the assessee could not rely on a general section 30 deduction to circumvent the specific exclusion of guest-house maintenance.
Regarding repairs to the guest-house, the Court considered the textual scope of subsection (4). It rejected the assessee's attempt to limit subsection (4) to exclude repair work, holding that "maintenance" in subsection (4) refers to the keeping of the guest-house, and expenses on repair naturally come within expenses for keeping the guest-house. Therefore, repair expenditure is hit by subsection (4) and is not allowable.

Import duty on memorial plaque — application of the test in Indian Aluminium:

The Court addressed Revenue's contention that the import duty was personal and not incidental to business. The Court considered the facts that the plaque was sent by a foreign collaborator in memory of the late managing director and that the assessee-company was engaged in business with foreign collaboration.
The Court accepted the Tribunal's view that it was necessary and even essential for the assessee to take delivery of the gift in order to maintain a friendly relationship with the foreign collaborator and to preserve the smooth development of continued business relations.
Applying the test laid down by the Supreme Court in Indian Aluminium Co. Ltd. v. CIT (that an expenditure incidental to carrying on of business is deductible), the Court found that the import duty of Rs. 52,248 was an expenditure incidental to the business and therefore allowable as a deduction under section 37.

Holding and Implications

The Court answered the referred questions and gave the following dispositive rulings:

In I.T.R. No. 85 of 1994:
- Question No. 1: answered in the affirmative — in favour of the Revenue and against the assessee.
- Question No. 2: answered in the negative — in favour of the Revenue and against the assessee.
In I.T.R. No. 88 of 1994:
- Question No. 1: answered in the affirmative — in favour of the assessee and against the Revenue (import duty of Rs. 52,248 held deductible).
- Question No. 2: answered in the negative — in favour of the Revenue and against the assessee (repair expenditure on the guest-house held not allowable under section 37(4)).

Implications (direct effect):

The assessee's claims in respect of rent and the general maintenance (including repair) of the executive hostel/guest-house stand disallowed under section 37(4) read with section 37(5), as the accommodation falls within the statutory definition of a guest-house and such expenditure on keeping/maintenance (including repairs) is expressly barred.
The import duty of Rs. 52,248 paid to clear a memorial plaque sent by the foreign collaborator is deductible as an expenditure incidental to the carrying on of the assessee's business under the test applied from Indian Aluminium Co. Ltd., and accordingly allowed.
The opinion does not purport to lay down any novel principle beyond the statutory interpretation of section 37(4)/(5) and the application of existing authority (Indian Aluminium) to the facts; the Court expressly declined to follow two earlier High Court decisions relied upon by the assessee because of their factual/procedural context relative to the introduction of subsections (4) and (5).

Direction: A copy of the judgment was to be forwarded under the seal of the Court and the Registrar's signature to the Income-tax Appellate Tribunal, Cochin Bench.

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United Catalysts India Ltd. v. Commissioner Of Income-Tax (And Vice Versa)

Mrs. K.K Usha, J.:— In I.T.R No. 85 of 1994, the Income-tax Appellate Tribunal, Cochin Bench (in short “the Tribunal”), has referred the following questions at the instance of the assessee for the opinion of this court:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal right in holding that the expenditure on payment of rent and maintenance of executive hostel meant for stay of the company executives during their official tour is not allowable as per section 37(4) read with section 37(5) of the Act?

2. Whether, on the facts and in the circumstances of the case, the Tribunal ought to have found that the expenditure on rent being allowable under section 30 of the Act is excluded from the purview of expenditure to be considered-for allowance under section 37(1) of the Act and as such from the purview of section 37(4) of the Act?”

2. In I.T.R No. 88 of 1994 at the instance of the Revenue, the 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 the 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 section 37 of the Income-tax 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 section 37(4) and in deciding the point in favour of the assessee without giving any reason in support of the decision?”

3. Both the references are from the order of the Tribunal in I.T.A No. 654 of 1988 filed by the assessee against the order of the Commissioner of Income-tax (Appeals), dated June 10, 1988, in respect of the assessment year 1984-85.

4. The assessee-company is engaged in the manufacture and sale of chemical catalysts used in chemical industries. For the assessment year 1984-85, the assessing authority disallowed the assessee's claim in respect of expenses relating to maintenance of its executive hostel amounting to Rs. 80,752 under section 37(4) of the Income-tax 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 the foreign collaborator in memory of the assessee's late managing director, Mr. A.H Lalljee, was disallowed by the assessing authority. On appeal, the Commissioner (Appeals) sus-tained disallowance in respect of both items. The 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 the guest house was concerned 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 section 37(4) of the Act. Question No. 2 referred in I.T.R No. 88 of 1994 is connected with the questions referred in I.T.R 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 section 30, the rent paid by the assessee in respect of premises for the purpose of its business is an allowable deduction. It has, therefore, to be taken that such deduction is to be excluded from the purview of section 37 in view of the provisions contained under section 37(1) and, therefore, section 37(4) has no application in this case.

5. 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 sections 37(4) and 37(5) which read as follows:

“(4) Notwithstanding anything contained in sub-section (1) or subsection (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;

(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).”

6. A reading of sub-section (4) and more clarified by sub-section (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 February 28, 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 section 30. Learned counsel for the assessee relied on the decisions in Commissioner Of Income-Tax v. Chase Bright Steel Ltd. (No. 1). (No. 1), [1989] 177 ITR 124 (Bom) and CIT v. Ahmedabad Mfg. and Calico Printing Co. Ltd., [1992] 197 ITR 538 (Guj) 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-sections (4) and (5) of section 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-section (4) of section 37 had been introduced. We are not inclined to follow the above decisions in the present case.

7. As mentioned earlier, the second question in I.T.R No. 88 of 1994 is connected with the claim of the assessee in respect of the guest-house. The Tribunal, while upholding the findings of the Commissioner of Income-tax (Appeals) 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 Income-tax Officer. Learned standing counsel for the Revenue submits that the above finding of the Tribunal is erroneous. We find merit in this contention. The very maintenance of a guest house in the nature of the one described in section 37(4) and (5) is hit by the provisions of section 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-section (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 subsection (4). We have no hesitation to reject this contention. The wording of sub-section (4) would make it clear that the expenditure referred to in sub-section (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 section 37(4).

8. On the first question referred in I.T.R 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, for a moment, be 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 personal expenditure relating to the late managing director. We find no merit in this contention. Admittedly, the assessee-com-pany 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 a 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. v. Cit, West Bengal, Calcutta ., [1972] 84 ITR 735. 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.

9. In the light of the above, in I.T.R 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 I.T.R 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.

10. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

United Catalysts India Ltd. v. Commissioner Of Income-Tax (And Vice Versa)

Structured Summary of the Opinion — Bench: Mrs. K.K. Usha, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

United Catalysts India Ltd. v. Commissioner Of Income-Tax (And Vice Versa)

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