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Commissioner Of Income-Tax v. Upper Ganges Sugar Mills Ltd.
Structured Summary of the Opinion (Ajit K. Sengupta, J.)
Factual and Procedural Background
This reference arises under section 256(1) of the Income-tax Act, 1961. The Tribunal referred three questions to this Court concerning the assessment year 1978–79.
In brief, the assessee-company operated tour guest houses at Seohara and Marhourah and claimed deductions for (a) expenses for food, tea and tiffin provided to visitors/customers, (b) salaries paid to guest-house staff and (c) depreciation on fixed assets used in the guest houses. The Assessing Officer disallowed Rs. 30,649 (food etc.), Rs. 26,975 (salaries) — aggregate Rs. 57,628 — under section 37(4), and Rs. 993 as depreciation. The Commissioner of Income-tax (Appeals) deleted these additions, and the Tribunal upheld that deletion, following an earlier Tribunal order in the assessee's own 1977–78 case.
Separately, the Assessing Officer disallowed a deduction of Rs. 4,71,247 as a contribution to a “Molasses Storage Fund”; this disallowance was deleted by the CIT(A) and the Tribunal upheld the deletion, again following its earlier order in the assessee's prior year.
Finally, the assessee claimed relief under section 80G for a donation of Rs. 2,57,000 to Vishwa Mangal Trust; the Assessing Officer denied the relief, the CIT(A) allowed it, and the Tribunal affirmed the allowance following earlier decisions in the assessee's previous year.
Legal Issues Presented
- Whether the Tribunal was justified in allowing the expenses relating to food, tiffin and salary paid to guest house staff and depreciation on assets used in the assessee's guest houses (i.e., whether such expenditures and depreciation are allowable in view of section 37(4)).
- Whether the Tribunal was justified in treating the contribution to the Molasses Storage and Maintenance Reserve (Molasses Storage Fund) as a revenue expenditure deductible for tax purposes.
- Whether the Tribunal was justified in holding that the assessee was entitled to deduction under section 80G in respect of the donation to Vishwa Mangal Trust.
Arguments of the Parties
Revenue's Arguments
- For Question No. 1: The Revenue submitted that sub-section (4) of section 37, inserted by the Finance Act, 1970 (with effect from 1 April 1970), imposes a blanket prohibition on allowance of any expenditure incurred after 28 February 1970 on maintenance of residential accommodation in the nature of a guest house, and also prohibits depreciation on buildings or assets used as guest houses. Therefore, disallowances made by the Assessing Officer under s.37(4) were correct.
- For Question No. 3: The Assessing Officer's position (as advanced on behalf of the Revenue) was that the donee-trust (Vishwa Mangal Trust) did not satisfy the conditions necessary to qualify for deduction under section 80G.
Assessee's Position (as reflected in the record)
- The assessee claimed the questioned expenditures and depreciation as allowable deductions (Question No. 1) and contested the Assessing Officer's disallowances; the CIT(A) and the Tribunal allowed these claims following earlier Tribunal decisions in the assessee's own case.
- For the Molasses Storage Fund (Question No. 2), the assessee obtained deletion of the addition before the CIT(A) and the Tribunal upheld that deletion.
- For the donation (Question No. 3), the assessee claimed relief under section 80G and succeeded before the CIT(A) and the Tribunal (again following earlier orders in the assessee's prior year).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. New India Sugar Mills Ltd., [1994] 206 ITR 212 | Resolved the identical issue concerning the deductibility of a contribution to the Molasses Storage Fund. | The Court followed this earlier decision and held that the Tribunal was correct in allowing the deduction for the Molasses Storage Fund contribution; the Tribunal's order was therefore sustained. |
| CIT v. Upper Ganges Sugar Mills Ltd., [1985] 154 ITR 308 (Cal) | Concluded that one of the purposes of the donee-trust was to establish/maintain or grant aid to places of worship, i.e., a religious purpose attracting Explanation 3 to section 80G (which excludes charitable purposes that are wholly or substantially religious). | The Court applied that finding to the present donation to Vishwa Mangal Trust and held that section 80G relief was not allowable because the trust's purpose included religious activities; consequently the Tribunal's allowance was held to be wrong. |
Court's Reasoning and Analysis
Question No. 1 (guest-house maintenance expenses and depreciation): The Court examined the language of sub-section (4) of section 37 and found it emphatic and unambiguous. The sub-section provides that no allowance shall be made in respect of any expenditure incurred by the assessee after 28 February 1970 on the maintenance of any residential accommodation in the nature of a guest house, and, in relation to assessment years commencing on or after 1 April 1971, 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. The only statutory relaxations are (a) reduction of the disallowance by amounts received from persons using the guest house, and (b) an exclusion for holiday homes maintained for exclusive use of employees whole time where certain conditions (employment of not less than 100 whole-time employees and exclusive use by such employees while on leave) are satisfied.
Applying these statutory provisions to the admitted facts — that the accommodation was in the nature of guest houses, the assessee did not contend that the guest houses were holiday homes for employees, and there was no showing that boarder-receipts fully met the expenditure or depreciation — the Court concluded that the Tribunal erred in allowing maintenance expenses and depreciation. The Court further analyzed the components of the claimed expenditure and held that costs for food provided in the guest house and the salaries paid to guest-house staff fall within the statutory prohibition on maintenance expenditure, because the employees were employed to maintain and run the guest houses.
Question No. 2 (contribution to Molasses Storage Fund): The Court noted that the identical issue had previously been decided by this Court in CIT v. New India Sugar Mills Ltd. and, following that decision, held that the Tribunal's allowance of the claim for contribution to the Molasses Storage Fund was correct.
Question No. 3 (donation to Vishwa Mangal Trust and section 80G): The Court referred to its earlier decision in the assessee's own case (CIT v. Upper Ganges Sugar Mills Ltd.), which had found that one of the purposes of the trust was the establishment/maintenance/aiding of places of worship — a religious purpose. Explanation 3 to section 80G excludes from the meaning of "charitable purpose" any purpose the whole or substantially the whole of which is religious. Applying that precedent, the Court concluded that the Tribunal was wrong to allow the section 80G deduction for the donation to Vishwa Mangal Trust.
Holding and Implications
Final Answers to the Three Questions (seriatim):
- Question No. 1: Answered in the negative and in favour of the Revenue. The Tribunal was wrong to allow the guest-house maintenance expenses and depreciation; those amounts are not allowable under section 37(4) on the facts before the Court.
- Question No. 2: Answered in the affirmative and in favour of the assessee. The Tribunal was correct in allowing the deduction for the contribution to the Molasses Storage Fund (following CIT v. New India Sugar Mills Ltd.).
- Question No. 3: Answered in the negative and in favour of the Revenue. The Tribunal was wrong to allow the section 80G deduction for the donation to Vishwa Mangal Trust because the trust's objects included religious purposes, bringing Explanation 3 to section 80G into play.
The Court made no order as to costs. The decision applied and followed existing precedents rather than announcing a new legal principle; the direct practical consequences are that the guest-house related deductions and the section 80G deduction are to be disallowed (Questions 1 and 3), while the Molasses Storage Fund contribution deduction stands allowed (Question 2).
Judge concurrence: Shyamal Kumar Sen, J. agreed with the opinion.
Ajit K. Sengupta, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following three questions:
“1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in allowing the expenses relating to food, tiffin and salary paid to guest house staff and depreciation on assets used in the assessee's guest houses?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in treating the contribution to the Molasses Storage and Maintenance Reserve created under the Uttar Pradesh Sheera Niyatran (Sansodhan) Adesh, 1974, as a revenue expenditure?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the assessee-company was entitled to deduction under section 80G in respect of the donation to Vishwa Mangal Trust?”
2. Shortly stated, the facts are that the assessment year involved is 1978–79. The assessee-company claimed deduction for expenses incurred for providing food, tea, tiffin, etc., to visitors and customers who stayed in its tour guest houses at Seohara and Marhourah. The Income-tax Officer disallowed such expenses being the sum of Rs. 30,649. There was a further disallowance made by the Income-tax Officer of a sum of Rs. 26,975 being the salary paid to the guest house staff of the assessee. Thus the total aggregate disallowance on account of the guest houses was Rs. 57,628 made under section 37(4) of the Act. There was yet another disallowance of Rs. 993 being the depreciation claimed on the fixed assets used in the assessee's guest house. The Commissioner of Income-tax (Appeals) deleted the entire addition of Rs. 57,628 as also Rs. 993, the sum which the Assessing Officer disallowed out of the claim for depreciation. On further appeal by the Revenue, the Tribunal upheld the order of the Commissioner of Income-tax (Appeals) in this regard by following its earlier order in the assessee's own case for the assessment year 1977–78. The Revenue's case as urged before us is that sub-section (4) of section 37 inserted by the Finance Act, 1970, with effect from April 1, 1970, has imposed a blanket prohibition against the allowance of any expenditure incurred by the assessee after February 28, 1970, on the maintenance of any residential accommodation in the nature of a guest house as well as the allowance of depreciation in respect of any building used as a guest house or depreciation of any asset in the guest house. It is not the assessee's case that the expenses are not for guest houses maintained by the assessee. Therefore, it is urged by learned counsel appearing for the Revenue that the disallowances were correctly made by the Income-tax Officer.
3. We find that the submissions made on behalf of the Revenue have strong force. The assessment order clearly indicates that the disallowance is made by invoking sub-section (4) of section 37. The said provisions are extracted below:
“(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:
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 wholetime 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.”
4. The language of the sub-section is quite emphatic that no allowance at all is intended in respect of any expenditure incurred after February 28, 1970, on the maintenance of any residential accommodation in the nature of a guest house. No allowance of depreciation is also permissible for such guest house or any assets in such guest house. The prohibition against the allowance of maintenance expenditure of the guest house is unmitigated. The only relaxation is in respect of holiday homes meant for wholetime employees for their exclusive use while on leave; there is no other relaxation. Where, however, the assessee collects any charge from the boarders, such charges have to reduce the amount of disallowance.
5. This sub-section was inserted by the Finance Act, 1970, having effect from the assessment year 1970–71. The present case involves the assessment year 1978–79. Therefore, the provisions are clearly attracted. Next, it is not also denied that the accommodation in question is in the nature of guest houses. It is not the assessee's case that the guest houses are holiday homes for the use of the employees while on leave nor is it their case that the entire maintenance expenses including the depreciation allowance are made good by the boarders. In such situation, the Tribunal cannot be said to be correct in holding that the expenses incurred were allowable or the depreciation allowance was available in respect of the assets in the guest house.
6. We are also of the opinion that the cost of food provided to the employees in the guest house and the salary paid to them constitute the cost of maintenance of the guest houses because the object of employment of the said employees is the maintenance of the guest houses. It is these employees who maintain and run the guest houses. Therefore, we hold that the Tribunal wrongly allowed the claim.
7. The facts relating to the second question are that the Income-tax Officer disallowed the assessee's claim for deduction of Rs. 4,71,247 being contribution by the assessee towards the fund styled “Molasses Storage Fund”. The addition was deleted by the Commissioner of Income-tax (Appeals). On further appeal by the Revenue, the Tribunal upheld such deletion, following its earlier order in the assessee's own case for the assessment year 1977–78.
8. This identical issue was answered by us in Income-tax Reference No. 166 of 1985 in CIT v. New India, Sugar Mills Ltd., [1994] 206 ITR 212, decided on April 12, 1990. Following the said decision, we hold that the Tribunal's order is correct.
9. The facts that raise question No. 3 are that, during the relevant year, the assessee made a donation of Rs. 2,57,000 to Vishwa Mangal Trust and claimed relief under section 80G on the said sum. But the Income-tax Officer did not allow the relief on such donation on the ground that the said trust did not satisfy the condition to qualify for deduction under section 80G. The Commissioner of Income-tax (Appeals), however, allowed the relief as claimed by the assessee. On the Revenue's appeal, the Tribunal affirmed such allowance of the relief following its order in the assessee's case for the earlier assessment year. We find that this question was answered by this court in the assessee's own case for similar donation to the same donee-trust against the assessee (see CIT v. Upper Ganges Sugar Mills Ltd., [1985] 154 ITR 308 (Cal)). There this court found that one of the purposes of the trust was to establish, maintain and/or grant aid to places of worship. Thus one of its purposes; was clearly a religious purpose and it was open to the trustees to spend the entire income or the fund of the trust for this purpose alone. Thus this purpose clearly attracted the mischief of Explanation 3 to section 80G which mandatorily requires that charitable purpose for section 80G cannot include any purpose the whole or substantially the whole of which is of a religious nature. Following the said decision, we hold the Tribunal to be wrong. Therefore, the three questions are answered seriatim as follows:
Question No. 1 : Answered in the negative and in favour of the Revenue.
Question No. 2: Answered in the affirmative and in favour of the assessee.
Question No. 3: Answered in the negative and in favour of the Revenue.
10. There will be no order as to costs.
Shyamal Kumar Sen, J.:— I agree.
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