Income-tax Reference No. 242 of 1979

Decided on July 12, 1988

The Judgment of the Court was delivered by

Ajit K. Sengupta, J.:— At the instance of the Commissioner of Income-tax, Central, three questions of law have been referred to this court under section 256(1) of the Income-tax Act, 1961. For the assessment year 1964-65, two questions have been referred which are as follows:

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessee's claim for deduction of Rs. 22,878?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessee's claim for deduction of Rs. 11,162?”

2. The facts relating to the said two questions are that for the assessment year 1964-65, the assessee claimed deduction of Rs. 22,878 in respect of maintenance and running of an accommodation at Renukoot where its aluminium industry is located. The assessee also claimed deduction of Rs. 11,162 in connection with the inauguration of its factory at Renukoot on January 7, 1963. The Income-tax Officer treated the total amount of Rs. 34,030 (Rs. 22,878 + Rs. 11,152) as entertainment expenses. He, therefore, allowed Rs. 10,000 as permissible deduction under section 37 of the Act and disallowed the balance of Rs. 24,030. Before the Appellate Assistant Commissioner, it was submitted on behalf of the assessee that Rs. 22,878 represented the excess expenditure incurred by the assessee over the recoveries made by it from its customers, clients and other visitors who visited Renukoot. It was further submitted that the Income-tax Officer was not justified in treating the aforesaid expenses as entertainment expenses. Agreeing with the submissions made on behalf of the assessee, the Appellate Assistant Commissioner deleted Rs. 24,030 from the total income of the assessee.

3. Before the Tribunal, learned representative for the Department submitted that since the aforesaid expenditure of Rs. 22,878 was incurred by the assessee for the maintenance of a guest house at Renukoot, the Income-tax Officer was justified in disallowing the same. As regards the expenditure of Rs. 11,162, it was submitted that since the same was incurred in connection with the inauguration of the factory at Renukoot, the Income-tax Officer had rightly treated it as entertainment expenditure. Learned counsel for the assessee, on the other hand, submitted that as the assessee was charging the visitors who stayed in the accommodation provided by the assessee at Renukoot, it is a misnomer to say that the accommodation so provided by the assessee was a “guest house” as contemplated under section 37(3) of the Act. He further submitted that by no stretch of imagination, could the expenditure so incurred by the assessee be treated as “entertainment” expenses as was held by the Income-tax Officer. As regards the expenses of Rs. 11,162 incurred on the occasion of the inauguration of the factory at Renukoot, learned counsel for the assessee submitted that the same was incurred for the purpose of the assessee's business.

4. The Tribunal held as follows:

“We have considered the rival submissions of the parties and are of the view that merely because the assessee had shown the aforesaid expenditure under the head ‘guest house expenses’, the assessee should not be shut out from urging that it was not maintaining any guest house at Renukoot. The expression ‘Guest house’ is not defined under the 1961 Act. However, from the decision of the Karnataka High Court in the case of Sri Durga Enterprises v. ITO, [1976] 102 ITR 745, we find that a guest house is a place where the guests of an assessee are received and entertained gratuitously. In the present case, as the assessee was realising expenses from the visitors who stayed in the accommodation provided by it, it is difficult to hold that the persons who occupied such accommodation could be called the guests of the assessee and the accommodation a ‘guest house’ as contemplated under section 37(3) of the 1961 Act. It is also pertinent to note that at the places where the assessee's factory premises are situated, there are no hotels or other accommodation available in which the visitors of the assessee could be housed during their visit to the factory premises. In other words, the accommodation provided by the assessee is part and parcel of the business assets of the assessee and the expenditure incurred thereon can, by no stretch of imagination, be termed as expenditure incurred on the maintenance of a guest house as contemplated under section 37(3) of the 1961 Act or entertainment expenses. In this view of the matter, we have no hesitation in upholding the order of the Appellate Assistant Commissioner in respect of the assessee's claim for deduction of Rs. 22,878. As regards the expenditure of Rs. 11,162, we entirely agree with the submissions made on behalf of the assessee that the same was incurred for the purpose of carrying on the business of the assessee. We, therefore, uphold the order of the Appellate Assistant Commissioner on this point.”

5. At the hearing, our attention has been drawn to the decision of this court in the case of Commissioner Of Income-Tax v. Orient Paper Mills Ltd., [1988] 171 ITR 181.

6. In that case, in its return for the assessment year 1971-72, the assessee claimed deduction of Rs. 46,798 incurred on tea, tiffin and refreshments at a conference of the salesmen and distributing agents of the assessee at its mill. The Income-tax Officer held that 75 per cent. of the said expenditure was in the nature of entertainment and disallowed an amount of Rs. 34,100 out of the said Rs. 46,798 under section 37(2). In the said assessment year, the assessee, at its mill premises, provided boarding and lodging facilities to its employees and visitors who were charged for such facilities. In respect of the aforesaid, the assessee incurred an expenditure of Rs. 1,59,407 in the said assessment year and also recovered charges in respect thereof in a sum of Rs. 1,31,168. The difference of Rs. 28,245 was claimed by the assessee as a deductible expenditure. The Income-tax Officer disallowed the claim on the ground that the assessee maintained a guest house and was not entitled to claim deduction in respect of the expenditure incurred for the same under section 37(4).

7. There, this court held that there was a difference between the expenditure in the nature of hospitality and the expenditure in the nature of entertainment. The expenditure incurred by the assessee for providing tea, cold drinks and other refreshments to its customers, salesmen and distributing agents was an expenditure in the nature of hospitality and, therefore, it is a deductible expenditure. The court also held that where the assessee was providing accommodation at places where no accommodation of any kind was available, the same obviously was not meant for entertainment or relaxation. The court also noted the fact found by the Tribunal in that case that the persons availing of the accommodation had been paying charges covering almost the entire expenditure. In our view, the decision-of this court in Orient Paper Mills Ltd., [1988] 171 ITR 181, covers the first question in this reference. We have already indicated the finding of the Tribunal that the assessee was realising expenses from the visitors who stayed in the accommodation provided by it. It is also the finding of the Tribunal that at the place where the assessee's factory premises are situated, there is no hotel or other accommodation available in which the visitors of the assessee can be housed during their visit to the factory premises. In that view of the matter, the first question is answered in the affirmative and in favour of the assessee.

8. The second question relates to the expenditure of Rs. 11,162 incurred in connection with the inauguration of the factory at Renukoot on January 7, 1963, by the then Prime Minister of India, Sri Jawaharlal Nehru. Any expenditure wholly and exclusively laid out for the purpose of the business shall be allowed as a deduction in computing the business income. It is nobody's case that the expenditure in question is a capital expenditure. The modern trend is to get a factory or a branch inaugurated by the Prime Minister or a Minister or V.I.P, as the case may be. It is the real nature and quality of the payment which would prove decisive. Any payment made in the course of and for the purpose of carrying on business or trading activity would be revenue expenditure. The expenditure in connection with the inauguration is intimately connected with the business of the assessee. It can be compared with the expenditure that may be incurred in opening a new branch of a going concern. It does not pertain to the commencement of new business. By this expenditure, advertisement is made to the public regarding the factory of the assessee and it is made for the purpose of extending the existing business. By that process, no new asset is required. In our view, the Tribunal was justified in allowing this expenditure as a revenue expenditure.

9. For the reasons aforesaid, we answer the second question also in the affirmative and in favour of the assessee.

10. For the assessment year 1966-67, the assessee claimed development rebate in respect of weather radar equipment owned by it. This equipment was purchased by the assessee. The assessee entered into a pooling arrangement with certain other companies for the use of the aeroplane. The other companies agreed to pay to the assessee hire charges amounting to Rs. 1,02,280 in respect of the user of the radar. The hire charges so received by the assessee were treated by the Income-tax Officer under the head “Income from other sources”. The Income-tax Officer, in his order of assessment, did not discuss anything about the assessee's claim for deduction of development rebate on the radar equipment.

11. In appeal before the Appellate Assistant Commissioner, the Appellate Assistant Commissioner allowed the assessee's claim for development rebate on the ground that the radar equipment was also used by the assessee for carrying on its business. He also highlighted the fact that once depreciation under section 32 of the Act was allowed on the radar equipment, there was no justification in disallowing the assessee's claim for development rebate under section 33 of the Act. He, therefore, directed the Income-tax Officer to allow development rebate on the radar equipment.

12. Before the Tribunal, the learned representative for the Revenue submitted that since the radar equipment was not wholly used by the assessee, the Appellate Assistant Commissioner was not justified in accepting the assessee's claim for development rebate under section 33 of the Act. Learned counsel for the assessee relied on the order of the Appellate Assistant Commissioner and justified his action. In this connection, he also relied on the decision of the Supreme Court in the case of Commissioner Of Income Tax, Madras v. Mir Mohammad Ali , [1964] 53 ITR 165.

13. The Tribunal accepted the submissions of the assessee and held as follows:

“We have considered the rival submissions of the parties and are of the view that the submissions made on behalf of the assessee are well-founded and should be accepted. It is no doubt true that in section 33(1) of the 1961 Act, the expression ‘wholly used for the purpose of the business’ is there. It is not in dispute that the radar equipment has been used by the assessee for the purpose of its business to the extent possible. As the assessee could spare the user of the radar equipment to certain other companies, it entered into a pooling arrangement with other companies whereby it hired out the radar equipment to the other companies for some consideration. By doing that, in our view, it cannot be said that the assessee was not wholly using the radar equipment for the purpose of its business. In this view of the matter, we uphold the order of the Appellate Assistant Commissioner on this point.”

14. On the aforesaid facts, the following question of law has been referred to this court:

“Whether, on the facts and in the circumstances of this case, the Tribunal was right in holding that the assessee would be entitled to claim development rebate under section 33 of the Income-tax Act, 1961, in respect of weather radar equipment owned by it?”

15. At the hearing, Mr. Bagchi, appearing for the Commissioner, has drawn our attention to the decision of the Andhra Pradesh High Court in the case of Commissioner Of Income-Tax v. Vinod Bhargava., [1988] 169 ITR 549. In that case, the assessee was carrying on the business of manufacturing and selling of optical lenses, prisms, etc. He leased out the entire plant and machinery to a private limited company on an annual rent of Rs. 48,000 with effect from February 1, 1972. However, he retained and continued his trading business. The assessee claimed development rebate in respect of the said machinery. The claim was negatived by the Income-tax Officer on the ground that since the machinery has been let out, it cannot be said that it is being used wholly for the purpose of the assessee's business. This view of the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner. The Tribunal held that once the leasing out of the machinery is treated as one mode of doing business with the result that the lease amount is treated as business income, then, no further question arises and development rebate must be allowed. In that case, the Andhra Pradesh High Court held as follows (at page 551):

“Once it is held that leasing out of the machinery is one mode of doing business by the assessee and the income derived from leasing out is treated as business income, it would be contradictory in terms to say that the machinery is not used wholly for the purpose of the assessee's business. It is true that section 33(1)(a) requires that for claiming development rebate, the machinery must be wholly used for the purpose of the business carried on by him, yet, for the reasons stated above, we hold that this requirement must be deemed to be satisfied inasmuch as all the three members of the Tribunal held uniformly that leasing out the machinery was one mode of doing business by the assessee. It must also be remembered that the assessee has continued his trading activity and had not leased out his entire business. Only the plant and machinery which he was using previously for his business was leased out. We are, therefore, of the opinion that the Tribunal was right in holding that the assessee is entitled to development rebate under section 33(1)(a) of the Act.”

16. Mr. Bagchi, relying on the said decision, has contended that in the instant case, it is not the finding of the Tribunal that leasing out of the machinery is one mode of doing business. In the case before us, the assessee itself used the radar and also allowed the other companies to use the equipment. Accordingly, the assessee has not wholly used the radar equipment for the purpose of its business and accordingly, the assessee is not entitled to any development rebate on the said equipment.

17. Dr. Pal, appearing for the assessee, contended that a commercial asset can be exploited by the assessee himself or through others. The nature and character of the asset has not changed. It is not his case that the assessee did not use the assets. The user by others of the same asset when the assessee does not require it, cannot deny the assessee the benefit of development rebate.

18. It is true that under section 33(1) of the Act, development rebate in respect of plant and machinery can be allowed only where such machinery or plant has been wholly used for the purpose of the business carried on by the assessee. The word “wholly” in the context in which it has been used means that the asset in its entirety must be used for the purpose of the business. So long as an asset is used by the assessee for the purpose of the business carried on by the assessee, even though such asset is allowed to be used by others, that cannot disentitle the assessee from claiming development rebate. The finding of the Tribunal is that the radar equipment in respect whereof development rebate has been claimed has been used by the assessee for the purpose of its business to the extent possible. As the assessee could spare the user of the radar equipment to certain other companies, it had entered into a pooling arrangement whereby it hired out the radar equipment to other companies for some consideration.

19. We have considered the rival contentions. In the context and setting of these facts, it cannot be said that the radar equipment was not wholly used by the assessee for the purpose of its business. An asset may be exploited by the owner to its best advantage and he may do so either by using it himself or by letting it to someone else. So far as the assessee in the instant case is concerned, it has used the radar equipment to the extent possible for its own use. Instead of keeping it idle when the assessee was not using the same, the assessee allowed the other companies to get the benefit and advantage of the radar equipment for some consideration. If the nature of the commercial asset is such that it is capable of being exploited by more than one, and if such an asset is temporarily put out of use or let out to another person for his use, such asset does not cease to be a commercial asset of the assessee's business. The yield of income through such asset is the profit of the business irrespective of the manner in which that asset is exploited by the assessee. In our view, the radar equipment, a commercial asset, was exploited by the assessee wholly for its business even though some benefit or advantage was extended to other companies for a consideration.

20. For the reasons aforesaid, we answer this question in the affirmative and in favour of the assessee. There will be no order as to costs.

K.M Yusuf, J.:— I agree.