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Britannia Industries Ltd. v. Commissioner Of Income-Tax And Another
Structured Summary of the Opinion
Factual and Procedural Background
This is a petition of appeal filed under section 260A challenging a decision of the Tribunal dated 12 December 2001. The dispute concerns a claim by the assessee for Rs. 31,38,017 for the assessment year 1994–95, consisting of expenses claimed as rent, depreciation, repair and maintenance of a guest-house. At the stage of admission of the appeal, the Revenue opposed admission on two grounds: (i) that two Division Bench decisions of the Calcutta High Court (Commissioner of Income-Tax v. Upper Ganges Sugar Mills Ltd. and Kesoram Industries and Cotton Mills Ltd. v. CIT) squarely covered the issue in favour of disallowance; and (ii) that the wording of section 37(4) (as operative at the material time) clearly disallowed guest-house expenditure items. The assessee (represented by Dr. Pal) relied on a number of authorities to support admission of the appeal. The Court examined the statutory wording of section 37 and related provisions, analysed each category of claimed expense (depreciation, repairs, maintenance and rent) and ultimately rejected the petition of appeal and confirmed the Tribunal's order.
Legal Issues Presented
- “Whether on a true and proper interpretation of section 37(1) read with section 37(3) and section 37(4) of the Income-tax Act, 1961, the claim for depreciation, repairs and maintenance and rent of the guest-house can be disallowed as falling within the scope of the said provisions?” (This is the question as formulated in the petition of appeal.)
Arguments of the Parties
Revenue's Arguments (opposing admission)
- Two Division Bench decisions of the Calcutta High Court (Commissioner Of Income-Tax v. Upper Ganges Sugar Mills Ltd. and Kesoram Industries and Cotton Mills Ltd. v. CIT) already "squarely cover the issue" and support disallowance of the claimed guest-house expenditures.
- The wording of section 37(4), as it operated at the material time, is plain and clear and prohibits allowance of the guest-house expenditure items claimed by the assessee.
Assessee's Arguments (for admission of appeal)
- Dr. Pal's primary contention: because section 37(1) is a residuary provision allowing only certain types of expenditure (those not described in sections 30–36 and not capital or personal), disallowance under section 37(4) could operate against the assessee only if the claimed expenses fell within the residuary ambit of section 37(1). If rent, repairs and depreciation are already covered by specific sections (30 and 32), then section 37(4) should not adversely affect claims that do not fall within section 37(1).
- Dr. Pal relied on several Division Bench decisions supporting the view that disallowance under section 37 can be imposed only when the claim for expenditure could be made under the residuary item in section 37(1). Specific cases cited in support included: CIT v. Tungabhadra Industries Ltd., CIT v. Orient Paper and Industries Ltd., National Engineering Industries Ltd. v. Commissioner Of Income-Tax, Commissioner Of Income-Tax v. Coates Of India Limited, and other High Court decisions (including Bombay and Kerala authorities).
- Dr. Pal also pointed to the absence of a specific section expressly mentioning the word “maintenance” among sections 30–36 and argued for a particular interpretive approach based on that analysis.
Revenue's Reply (as summarized by the Court)
- Mr. Mullick (for Revenue) maintained that the Calcutta High Court decisions (Upper Ganges and Kesoram Industries) establish that where section 37(3) and section 37(4) contain specific disallowances for guest-houses, those specific disallowances must be given effect and deductions cannot be allowed contrary to the express words of those sub-sections.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax v. Upper Ganges Sugar Mills Ltd., [1994] 206 ITR 215 (Cal) | Held (as relied on by Revenue) to cover the issue of disallowance of guest-house expenditure under section 37 sub-sections. | The court treated this Division Bench decision as one that "squarely covers the issue" and followed it; it contributed to the court's conclusion that no open question of law remained. |
| Kesoram Industries and Cotton Mills Ltd. v. CIT, [1991] 191 ITR 518 (Cal) | Interprets section 37(3)/37(4) to disallow certain guest-house related deductions; regarded as authoritative by Revenue. | The court relied on and followed Kesoram Industries, stating it had already held that depreciation and other guest-house deductions are not allowable; the court declined to depart from that view. |
| CIT v. Tungabhadra Industries Ltd., [1994] 207 ITR 553 | One of the Division Bench decisions cited by the assessee to support the view that disallowance under section 37 requires that the claim fall within section 37(1). | The court recorded this authority as supporting the assessee's line of reasoning but explained that it would not follow that line because it considered itself bound by the Calcutta decisions (Kesoram/Upper Ganges). |
| CIT v. Orient Paper and Industries Ltd., [1995] 214 ITR 473 | Cited by the assessee as supporting the proposition that section 37 disallowance operates only where the claim falls under the residuary section 37(1). | The court listed this authority among those relied upon by Dr. Pal but did not adopt the resultant interpretive position, adhering instead to the Calcutta decisions. |
| National Engineering Industries Ltd. v. Commissioner Of Income-Tax, [1999] 236 ITR 577 | Cited by the assessee in support of the residuary-claim interpretation of section 37 disallowances. | The court noted this authority as part of the assessee’s supporting citations but ultimately did not treat it as displacing the Calcutta decisions. |
| Commissioner Of Income-Tax v. Coates Of India Limited, [2002] 254 ITR 232 | Another decision cited by the assessee supporting the residuary-section interpretation vis-à-vis disallowances. | Referenced by the court among the assessee’s authorities; the court maintained its conclusion consistent with the Calcutta decisions. |
| Commissioner Of Income-Tax v. Chase Bright Steel Ltd. (No. 1), [1989] 177 ITR 124 (Bombay) | Bombay High Court decision referenced by the assessee as adopting a similar line of reasoning to those Division Bench decisions favoring the assessee's view. | Noted by the court as part of the assessee’s supporting authorities; the court nevertheless adhered to the Calcutta High Court's approach in Kesoram and Upper Ganges. |
| CIT v. Travancore Cements Ltd., [1999] 240 ITR 816 (Kerala Full Bench) | Kerala Full Bench decision cited by the assessee in support of the residuary-section approach. | Listed among the authorities relied upon by Dr. Pal; the court acknowledged it but did not treat it as overruling or displacing the Calcutta decisions it followed. |
| CIT v. Ahmedabad Mfg. and Calico Printing Co. Ltd., [1992] 197 ITR 538 (Guj) | Gujarat High Court decision that took a different line of reasoning in relation to section 37(4). | The court expressly noted this different line of reasoning but stated that, with respect, it did not entertain any doubt about following the Calcutta decisions; it therefore did not adopt the Gujarat view. |
Court's Reasoning and Analysis
The court conducted a textual and statutory analysis focusing on the interplay between section 37(1) (the residuary provision) and the specific provisions dealing with buildings and guest-houses (sections 30, 32 and section 37(4)). The reasoning proceeded in stages:
- Statutory starting point: The court reproduced section 37(4) in full and highlighted that the sub-section begins with the non obstante phrase: "Notwithstanding anything contained in sub-section (1) or sub-section (3)". The court emphasised that the non obstante clause indicates the sub-section's specific provisions are intended to prevail.
- Characterisation of claimed items: The court identified the four claimed items — depreciation, repairs, maintenance and rent — as all relating to the assessee's guest-house.
- Depreciation: The court noted that depreciation generally falls under section 32 (the specific section for depreciation). It held that "No depreciation can ever be claimed under the residuary section which is section 37(1)." Section 37(4) expressly disallows depreciation in relation to buildings used as guest-houses, and the court found Kesoram Industries to be decisive on this point. Therefore no doubt remained that depreciation must be disallowed.
- Repairs: Repairs are mentioned in section 30 (a specific provision for rent, rates, taxes, repairs and insurance for premises). The court held that where a specific provision (section 30) deals with repairs generally, the residuary section 37(1) cannot negate that, and that section 37(4) (being a special provision for guest-houses) must be read together with section 30 and prevail in relation to guest-houses. The court reasoned that the non obstante clause in 37(4) serves to increase the effectiveness of the special provision, not to diminish it.
- Maintenance: The court observed that "maintenance" is not specifically mentioned among sections 30–36 and therefore would, by default, fall within the residuary ambit of section 37(1). However, because section 37(4) expressly refers to expenditure on the maintenance of residential accommodation in the nature of a guest-house and begins with a non obstante clause, the limitation in section 37(4) applies to maintenance as well.
- Rent: Rent, like repairs, is specifically covered by section 30 in relation to buildings generally. The court emphasised that rent for guest-houses is specifically excluded from deduction by section 37(4). The court held that reading section 30 (general) together with section 37(4) (special) compels application of the special provision, so rent for guest-houses cannot be claimed under the residuary section 37(1).
- Precedential and institutional considerations: The court noted that if it had any hesitation about following Kesoram Industries, it would admit the appeal and refer the matter to a larger Bench. The court stated that it was not in doubt and, despite other High Court decisions taking a different view (e.g., Gujarat), it would not depart from the Calcutta decisions. On that basis it concluded no open question of law remained that would justify admission and further hearing.
Holding and Implications
Holding: The petition of appeal is rejected and the order of the Tribunal is consequently confirmed.
Implications:
- Direct effect: The assessee's appeal under section 260A was not admitted; the Tribunal's decision disallowing the claimed guest-house expenditures (depreciation, repairs, maintenance and rent as analysed) stands as to these proceedings.
- Precedential impact: The court expressly followed the Calcutta High Court Division Bench decisions (notably Kesoram Industries and Upper Ganges) and declined to adopt the contrary line of reasoning found in some other High Court decisions. The opinion does not purport to establish a new legal principle beyond applying and following those authorities; it indicates no open question remained for admission of the appeal.
- Administrative direction: The court directed that authenticated copies of the order may be issued to the parties.
Note: This summary is strictly confined to the material and conclusions stated in the provided opinion. No facts, authorities or inferences beyond those appearing in the opinion text have been introduced.
JUDGMENT
1. This is a petition of appeal under section 260A seeking to challenge the decision of the Tribunal given on December 12, 2001.
2. The sum involved is Rs. 31,38,017 for the assessment year 1994–95, the said sum being claimed by the assessee as expenses for rent, depreciation, repair and maintenance of its guest-house. Although it is the stage of mere admission of appeal, the Revenue hotly resisted the admission itself on the twin argument, that—
(i) Two Division Bench decisions of the Calcutta High Court given in the cases of Commissioner Of Income-Tax v. Upper Ganges Sugar Mills Ltd., [1994] 206 ITR 215 and Kesoram Industries and Cotton Mills Ltd. v. CIT, [1991] 191 ITR 518 squarely cover the issue; and
(ii) The wording of section 37(4), as operative at the material time is too clear to permit any doubts being had as regards the disallowance of the guesthouse expenditure items.
3. Faced with the stiff opposition of the Revenue, Dr. Pal appearing for the assessee, had to place before us numerous authorities to support his case for admission of the appeal.
4. Before we go on to the authorities, let us discuss the basic point on the wording of the section itself, so that the legal issue, simple and ordinary as it is, is clearly seen from the very beginning.
5. The items claimed by the assessee are four in number, viz., depreciation, repairs, maintenance and rent.
6. These are all admittedly in respect of the assessee's guest-house.
7. Sub-section (4) of section 37 clearly states that “notwithstanding anything contained in sub-section (1) or sub-section (3), no allowance shall be made in respect of any expenditure… on the maintenance of…. a guest-house”.
8. The said sub-section further states that “no allowance shall be made in respect of depreciation of… a guest-house”.
9. For the purpose of completeness the said sub-section is reproduced below in full but the most important words are as above.
“37. (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 ‘guesthouse’);
(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.”
10. Dr. Pal's arguments were all run on the existence of the phrase “notwithstanding anything contained in sub-section (1) or sub-section (3)”, with which words, the sub-section starts.
11. He argued that under sub-section (1) of section 37, only certain types of expenses are envisaged, by way of residuary deduction, and if the assessee's claimed expenses did not come within the residuary ambit of section 37, subsection (4) could not have any adverse effect against the assessee's claims of deduction.
12. Sub-section (1) of section 37 states that “any expenditure (not being expenditure of the nature described in sections 30 to 36…) laid out… wholly…. for… business… shall be allowed.”
13. Now, under section 30 provision is made, amongst others, for rent and repairs of buildings in general.
14. Under section 32 provision is made, amongst other things, for depreciation of buildings in general. Amongst sections 30 to 36 there is no exact section mentioning the very word “maintenance” of building.
15. Dr. Pal argued that if rent, repairs and insurance of buildings were not within the ambit of section 37(1), the claims, and disallowances to be made, with regard to these items, by reason of section 37(4), could not go against the interest of his client in any manner at all.
16. Section 37(1) is quoted below:
“37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’.
Explanation.— For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”
17. The commencement of section 30 is in the following words:
“30. In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deduction shall be allowed.”
18. The beginning of section 32 is in the following terms:
“32. Depreciation.—(1) In respect of depreciation of—
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed.”
19. Under section 37(3), as existing in the Act before April 1, 1998, there were similar provisions in relation to residential accommodation including guesthouses, as are contained in section 37(4); and in section 37(3A) and section 37(3B) there were similar limiting provisions with regard to expenses on such items as hotel payments, sales promotion and running of motor cars.
20. Dr. Pal submitted that in relation to section 37(3A) no fewer than four Division Bench decisions of our court support Dr. Pal's contention that the disallowance under section 37 can be imposed only if the claim for expenditure could be made under the residuary item encompassed by section 37(1). His cases were those of CIT v. Tungabhadra Industries Ltd., [1994] 207 ITR 553; CIT v. Orient Paper and Industries Ltd., [1995] 214 ITR 473; National Engineering Industries Ltd. v. Commissioner Of Income-Tax., [1999] 236 ITR 577 and Commissioner Of Income-Tax v. Coates Of India Limited, [2002] 254 ITR 232. He said that a similar line of reasoning has been adopted in several cases in several of the other High Courts and he mentioned the Bombay decision in Commissioner Of Income-Tax v. Chase Bright Steel Ltd. (No. 1). (No. 1), [1989] 177 ITR 124 and the Kerala Full Bench decision, reported at CIT v. Travancore Cements Ltd., [1999] 240 ITR 816.
21. As against these authorities, Mr. Mullick submitted that the two cases mentioned above, viz., Upper Ganges and Kesoram Industries (to repeat, reported respectively at [1994] 206 ITR 215 (Cal) and [1991] 191 ITR 518 (Cal)), clearly laid down that in relation to section 37(3) and section 37(4), so to speak, the guest-house sub-sections, the specific disallowances prescribed have to be given effect, and deductions cannot be maintained contrary to the words of those very sub-sections.
22. If we were in any manner in doubt about this case, if we were in any sort of hesitation whether to follow the decision given in Kesoram Industries case, [1991] 191 ITR 518 (Cal), we would have to admit the appeal and refer the matter, through the auspices of the Chief Justice, to a larger Bench. But, notwithstanding a different line of reasoning given by the Gujarat High Court in CIT v. Ahmedabad Mfg. and Calico Printing Co. Ltd. in relation to section 37(4), reported in [1992] 197 ITR 538, we do not with all due respect, entertain any doubt about the matter.
23. We deal with the four items of the assessee separately.
24. Depreciation: The main section is section 32. No depreciation can ever be claimed under the residuary section which is section 37(1). Section 37(4) clearly states that depreciation for guest-houses is not allowed. Our court has also held so in Kesoram Industries' case, [1991] 191 ITR 518. We are at a loss to see how any doubt can exist in this matter or how an open question of law can still be said to remain in this regard.
25. Repairs: These are mentioned in section 30. Since these are mentioned in section 30 the general section 37(1) cannot have any operation. The phrase “notwithstanding anything contained in section 37(1)” cannot detract from the power, extent and validity of section 37(4). These non obstante clauses are added to increase the effectiveness of the section, or sub-section, and not for the reverse purpose. Thus, the court has to read section 30 along with section 37(4). Section 30 is the general section for all buildings. Section 37(4) is the special section for buildings which are guest-houses. The disallowance as per the special section is specially enacted and it prevails. This is the view in Keso-ram Industries' case, [1991] 191 ITR 518 (Cal) and, in our opinion, no two views are possible.
26. Maintenance: This is not specially mentioned in any of the sections 30 to 36. Thus maintenance is appropriately a subject-matter of section 37(1). If this is so, the limitation of section 37(4) operates without any arguments being available against it. This is because section 37(4) is clearly applicable, notwithstanding anything contained in section 37(1). Rent: The main general section is section 30. This is with regard to rent for all buildings of the assessee in general. Rent for guest-houses is specially excluded from claims of deduction by section 37(4). Rent can never be claimed under the residuary provision engrafted by way of section 37(1), when a special section already exists for it. Reading the general section 30 and the special section 37(4), there is no way but to allow the special section prevail. If that were not done, it would never have any operation and any assessee could claim deductions for rent of guest-houses notwithstanding the existence of specific contrary provisions in the Act prohibiting the same.
27. Thus, although various High Courts have spoken on section 37, and the several sub-sections of it, so far as we are concerned, in regard to the instant case, our clear opinion is, and has to be, that no open question of law remains for admission or further scrutiny by us. The question as formulated in the petition of appeal is as follows:
“Whether on a true and proper interpretation of section 37(1) read with section 37(3) and section 37(4) of the Income-tax Act, 1961, the claim for depreciation, repairs and maintenance and rent of the guest-house can be disallowed as falling within the scope of the said provisions?”
28. In view of our above discussion the further discussion of this question, in an appeal, later on, would be an exercise, involving, ourselves trying to go against the decision of our High Court. This is not proper. The petition of appeal is thus rejected. The order of the Tribunal is consequentially confirmed.
29. Authenticated copies of this order might issue to the parties.
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