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Commissioner Of Income-Tax v. Biswanath Tea Co. Ltd.
Structured Summary of the Opinion delivered by Altamas Kabir, J.
Factual and Procedural Background
This reference originates from an order of the Income-tax Appellate Tribunal (ITAT) in I.T.A. No. 1514 (Cal) of 1992 and was placed before this Court at the instance of the Commissioner of Income-tax, West Bengal-II, Calcutta. The Assessing Officer had disallowed Rs. 9,96,677 as expenditure on guest-house maintenance under section 37(4) of the Income-tax Act, 1961. The assessee appealed to the Commissioner of Income-tax (Appeals), contesting the disallowance on the basis that only part of the expenditure (Rs. 4,55,630) had been disallowed under section 37(4) and the remaining amount (Rs. 4,86,631) was allowable under sections 30 and 31 (and related provisions). The Commissioner (Appeals) upheld the Assessing Officer's disallowance and dismissed the appeal. The assessee then moved to the ITAT which, following earlier decisions (including the assessee's own earlier assessment-year decision and CIT v. Tungabhadra Industries Ltd.), held certain items of expenditure (repairs and rates & taxes) to be allowable as business expenditure, and deleted the disallowance. The present reference seeks this Court's view on whether the ITAT was justified in deleting the disallowance under section 37(4) without giving any specific finding.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in deleting the disallowance made under section 37(4) (guest-house expenditure) without giving any specific finding?
- Whether subsection (4) of section 37 — as introduced by the Finance Act, 1970 — operates to bar all allowance (including depreciation or benefits under sections 30 to 36) in respect of expenditure incurred after 28 February 1970 on the maintenance of guest-houses?
- Whether deductions otherwise available under specific provisions of the Act (for example sections 30, 31 and 32) can be claimed in respect of guest-house expenditure despite the non obstante clause in section 37(4)?
Arguments of the Parties
Revenue (Mr. Pradyush Mullick)
- Section 37 provides a special provision for expenditure not covered by sections 30 to 36; sub-section (4) contains a non obstante clause which specifically excludes the special provision in sub-section (1) and has an overriding effect.
- By analogy to the Supreme Court's observation about the non obstante clause in section 44 (cited in General Insurance Corporation of India v. CIT), the non obstante clause in section 37(4) must likewise have overriding effect over subsections (1) and (3) and over sections 30 to 36 when dealing with guest-house expenditure.
- Cited earlier decisions of this Court (including Upper Ganges Sugar Mills Ltd. and Kesoram Industries) holding that subsection (4) was emphatic and intended to disallow expenditure on guest-houses after 28.2.1970 and that no depreciation is permissible for such guest-houses.
- Relied on further High Court decisions and the legislative history (Finance Minister's Budget Speech and Finance Act, 1970) to demonstrate the legislative intent to curb lavish guest-house expenditure and to justify a prohibition on allowance for such expenditure.
- Submitted that the question before the Court had been answered by this Court in Britannia Industries Ltd.'s case and required no further scrutiny.
Respondent — Assessee (Dr. Debi Pal)
- Section 37 is of a general character and intended to cover expenditure not dealt with in sections 30 to 36; the non obstante clause in subsection (4) should be read as giving subsection (4) an overriding effect only in relation to subsections (1) and (3) of section 37, and not as excluding allowances that are specifically permissible under sections 30 to 36.
- Cited decisions where High Courts (notably the Bombay High Court in Chase Bright Steel (No. 1) and Century Spinning) held that where guest-house expenditure is covered by specific provisions like sections 30 and 31 (and where deductions under sections 30, 31 and 32 are otherwise allowable), such allowances cannot be denied by invoking the prohibitory language of section 37(4).
- Relied on Supreme Court authority (CIT v. Malayalam Plantations Ltd.) to argue that the phrase "for the purpose of business" is broad and can encompass maintenance of a guest-house as incidental to the carrying on of the business, thus attracting allowances under sections 30–32.
- Contended that earlier Calcutta Bench decisions relied upon by the Revenue (such as Kesoram) did not consider the full effect of the non obstante clause and therefore could not be taken as decisive against the assessee's position.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court in this Opinion |
|---|---|---|
| CIT v. Tungabhadra Industries Ltd., [1994] 207 ITR 553 | Relied upon by the ITAT and the assessee as an authority supporting the allowability of certain guest-house related expenditures (the Tribunal followed its earlier decision in the assessee's case and this authority). | The Court recorded that the Tribunal had followed this decision in allowing certain expenditures; it appears among the materials considered but the Court ultimately reached a conclusion based on its own view of s. 37(4). |
| General Insurance Corporation of India v. CIT, [1999] 240 ITR 139 | Illustrates that a non obstante clause (in that case, s.44) can have an overriding effect over other provisions of the Act. | The Court accepted the analogy advanced by the Revenue: the non obstante clause in s.37(4) should similarly be understood to have an overriding effect; this supported the Court's view that s.37(4) bars allowances for guest-house maintenance. |
| Commissioner Of Income-Tax v. Upper Ganges Sugar Mills Ltd., [1994] 206 ITR 215 | Held that the language of s.37(4) is emphatic: no allowance is intended for expenditure on guest-houses after 28.2.1970; also held that no depreciation for such guest-houses is permissible. | The Court treated this as a supporting jurisdictional High Court view and applied it in affirming that s.37(4) operates to take away allowances in respect of guest-houses. |
| Kesoram Industries and Cotton Mills Ltd. v. CIT, [1991] 191 ITR 518 | Observed that s.37(4), inserted by the Finance Act, 1970, disallows expenditure after 28.2.1970 on maintenance of guest-houses (other than holiday homes). | The Court relied on this decision as reinforcing the interpretation that s.37(4) effects an absolute bar on allowance for guest-house maintenance. |
| Britannia Industries Ltd. v. CIT, [2002] 257 ITR 681 | Referenced as a decision where the Court indicated that no open question of law remained on the point after consideration of the above authorities. | The Court noted that Britannia had observed the issue was already answered; this supported the Revenue's submission that the point did not require further scrutiny. |
| Commissioner Of Income-Tax v. Instrumentation Ltd., [2002] 258 ITR 513 (Rajasthan HC) | Cited by Revenue as a High Court view consistent with the prohibition in s.37(4). | The Court recorded that similar views had been expressed by that High Court; it formed part of the wider body of supportive High Court authorities considered in the analysis. |
| Hindustan Electro Graphites Ltd. v. CIT, [2002] 258 ITR 518 (Madhya Pradesh HC) | Cited by Revenue as a supporting High Court decision. | Noted among the High Court decisions expressing views consistent with the Revenue's position; contributed to the Court's assessment of the prevailing judicial stance. |
| United Catalysts India Ltd. v. CIT, [1998] 229 ITR 233 (Kerala HC) | Cited by Revenue as another High Court view relevant to the interpretation of s.37(4). | Recorded as one of the High Court decisions relied on by Revenue; considered in the contextual analysis of conflicting authorities. |
| Commissioner Of Income-Tax v. Ocean Carriers Pvt. Ltd., [1995] 211 ITR 357 (Bombay HC) | Cited by Revenue as a Bombay High Court decision consistent with a restrictive view on guest-house allowances. | Noted by the Court among authorities cited for the Revenue's position; the Court acknowledged differing High Court rulings and the resulting dichotomy. |
| CIT v. Malayalam Plantations Ltd., [1964] 53 ITR 140 (Supreme Court) | Explained the expression "for the purpose of the business" as being wider than "for the purpose of earning profits" — encompassing administration, modernization and acts incidental to carrying on the business. | The assessee relied upon this precedent to argue that guest-house maintenance could be incidental to business; the Court recorded the submission but concluded that the unambiguous bar in s.37(4) outweighed that interpretative aid in this context. |
| Commissioner Of Income-Tax v. Chase Bright Steel Ltd. (No.1), [1989] 177 ITR 124 (Bombay HC) | Held that where guest-house expenditure is covered by sections 30 and 31, subsections (1) and (3) of section 37 would not disallow such permitted deductions; took a permissive view for allowability under specific sections. | The Court recorded this as the contrary (Bombay High Court) view and considered it in the discussion of divergent authorities; ultimately the Court preferred its own earlier interpretation of s.37(4). |
| Century Spinning and Manufacturing Co. Ltd. v. CIT, [1991] 189 ITR 660 (Bombay HC) | Following Chase Bright Steel, observed that s.37(4) is a non obstante clause vis-a-vis subsections (1) and (3) only, and allowances under other sections of the Act cannot be denied by s.37(4). | Noted as supportive of the assessee's contention; the Court recorded the decision but did not follow that line, considering it part of the conflicting judicial approaches. |
| CIT v. Maharana Mills Ltd., [1994] 208 ITR 972 (Gujarat HC) | Expressed a view similar to the Bombay decisions, allowing certain guest-house related expenses where not lavish. | Recorded as another authority taking a permissive approach; considered among the decisions forming the "apparent dichotomy" of views. |
Court's Reasoning and Analysis
The Court reviewed the statutory language of subsection (4) of section 37 and the competing lines of judicial authority. It identified an "apparent dichotomy" in High Court decisions: one line (including decisions of this Court and particular High Courts such as the jurisdictional High Court) treated s.37(4) as an emphatic prohibition of allowance for guest-house maintenance after 28.2.1970; another line (notably some Bombay High Court decisions) treated s.37(4) as a non obstante clause limited in effect to subsections (1) and (3) of section 37 and therefore not cutting down allowances expressly provided under sections 30–36.
The Court's analysis proceeded as follows:
- Examined the plain language of clause (i) of subsection (4) of section 37, which states that "no allowance shall be made in respect of any expenditure incurred by the assessee after February 28, 1970, on the maintenance of guest-houses."
- Took the non obstante clause in subsection (4) to give subsection (4) an overriding effect over subsections (1) and (3) of section 37 — drawing an analogy to the Supreme Court's treatment of a non obstante clause in another provision (s.44) — thereby reinforcing the statutory bar.
- Considered the competing authorities: while acknowledging the Bombay High Court's line that allowances under sections 30–36 may survive s.37(4), the Court found the text of subsection (4) to be unambiguous and to support the view that allowances in respect of guest-houses are intended to be disallowed.
- Concluded that benefits under sections 30 to 36, though independent of section 37, cannot be related to a guest-house maintained by the assessee in light of the clear prohibition contained in subsection (4). The Court observed that this interpretation was consistent with the jurisdictional High Court decisions earlier cited (Upper Ganges and Kesoram) and that any contrary interpretation would negate the object of the prohibition introduced by the Finance Act, 1970.
The Court thus preferred the interpretation that subsection (4) effected an absolute bar on allowance for guest-house maintenance incurred after 28.2.1970 and that deductions otherwise available under sections 30–36 do not override that statutory prohibition for guest-houses.
Holding and Implications
Holding: The reference is answered in the affirmative. The Tribunal is to be informed accordingly.
Implications and direct effects as indicated by the opinion:
- The Court held that subsection (4) of section 37 of the Income-tax Act, 1961 contains an unambiguous prohibition: no allowance is to be made for expenditure incurred after 28.2.1970 on the maintenance of guest-houses (including the denial of depreciation for such guest-houses).
- Accordingly, deductions or benefits under sections 30 to 36 (though independent provisions) cannot be invoked to allow guest-house related expenditure that is otherwise barred by s.37(4) as interpreted by the Court.
- The Tribunal has been informed of the Court's answer to the reference (the opinion expressly states "The Tribunal be informed accordingly").
- There will be no order as to costs. Parties are directed to act on a xerox-signed copy of this judgment on the usual undertakings.
- The Court treated the matter as resolving the conflict in favour of the interpretation that s.37(4) operates as a bar; the opinion indicates that this is consistent with prior decisions of this Court and certain High Courts and that alternative interpretations would frustrate the legislative prohibition introduced by the Finance Act, 1970.
All statements in this summary are drawn exclusively from the provided opinion text and do not add or infer information beyond that contained therein.
The Judgment of the Court was delivered by
Altamas Kabir, J.:— This reference by the Income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax, West Bengal-II, Calcutta, arises out of the order of the Tribunal in I.T.A No. 1514 (Cal) of 1992, for this court's view on the following question of law:
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in deleting the disallowance made under section 37(4), the guest house expenditure without giving any specific finding?”
2. As will appear from the statement of the case, the Assessing Officer had disallowed a sum of Rs. 9,96,677 on account of guest-house maintenance under section 37(4) of the Income-tax Act, 1961. Aggrieved thereby, the asses-see preferred an appeal before the Commissioner of Income-tax (Appeals) on the ground that only a sum of Rs. 4,55,630, which had already been included in the return, had been disallowed under section 37(4) of the above Act and the amount of Rs. 4,86,631 had not been disallowed under section 37(4), inasmuch as, the same was allowable under sections 30 and 31. The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's view and dismissed the appeal. The assessee thereupon moved the Income-tax Appellate Tribunal which following its earlier decision in the assessee's own case for the assessment year 1985-86 and the decision of this court in the case of CIT v. Tunga-bhadra Industries Ltd., [1994] 207 ITR 553 held that the expenditure in respect of repairs amounting to Rs. 4,69,398 and the expenditure in respect of rates and taxes amounting to Rs. 16,133 were allowable as business expenditure. This reference arises out of the said order of the learned Tribunal.
3. Appearing for the Revenue, Mr. Pradyush Mullick, firstly urged that section 37 of the Income-tax Act, 1961, made a special provision for expenditure not covered by sections 30 to 36 and the non obstante clause in sub-section (4) of section 37 of the said Act specifically excluded the special provision made in sub-section (1) thereof.
4. Referring to the decision of the Supreme Court in the case of General Insurance Corporation of India v. CIT, [1999] 240 ITR 139 where the non obstante clause in section 44 of the Income-tax Act was noted to have an overriding effect over other provisions contained in the Act, Mr. Mullick urged that similarly in the case of sub-section (4) of section 37 the non obstante clause would have an overriding effect over both sub-sections (1) and (3).
5. Mr. Mullick submitted that the question involved in this reference had also fallen for the consideration of this court in Commissioner Of Income-Tax v. Upper Ganges Sugar Mills Ltd., [1994] 206 ITR 215 and this court had held that the language of sub-section (4) of section 37 was quite emphatic and provided that no allowance at all was intended in respect of any expenditure incurred after February 28, 1970, on the maintenance of any residential accommodation in the nature of a guesthouse. It was held further that no allowance of depreciation is also permissible for such guest-house or any assets in such guest-house.
6. Mr. Mullick also referred to an earlier decision in the case of Kesoram Industries and Cotton Mills Ltd. v. CIT, [1991] 191 ITR 518, wherein this court had similarly observed that section 37(4) had been inserted by the Finance Act, 1970, for disallowance altogether of expenditure incurred after February 28, 1970, on the maintenance of guest-houses other than “holiday homes” in computing the profits and gains of business or profession.
7. Mr. Mullick lastly referred to another decision of this court in Britannia Industries Ltd. v. CIT, [2002] 257 ITR 681, where on a reference to the two aforesaid decisions in the Upper Ganges Sugar Mills Ltd.'s case, [1994] 206 ITR 215 (Cal) and in Kesoram Industries and Cotton Mills Ltd.'s case, [1991] 191 ITR 518 (Cal), a Bench of this court had held that no open question of law remained for admission or further scrutiny.
8. Mr. Mullick urged that similar views had been expressed by the Rajasthan High Court in Commissioner Of Income-Tax v. Instrumentation Ltd., [2002] 258 ITR 513, by the Madhya Pradesh High Court in Hindustan Electro Graphites Ltd. v. CIT, [2002] 258 ITR 518 (Appendix), by the Kerala High Court in United Catalysts India Ltd. v. CIT, [1998] 229 ITR 233 and by the Bombay High Court in Commissioner Of Income-Tax v. Ocean Carriers Pvt. Ltd., [1995] 211 ITR 357.
9. Mr. Mullick urged that the intention of the Legislature to curb lavish expenditure in maintaining guest-houses was reflected in the Finance Minister's Budget Speech in Parliament on February 28, 1970, which culminated in the Finance Act, 1970, whereby sub-section (4) of section 37 was incorporated in the Income-tax Act, 1961.
10. Mr. Mullick submitted that as had been observed by this court in Britannia Industries Ltd.'s case, [2002] 257 ITR 681, the question of law involved in this reference has already been answered and does not require any further scrutiny.
11. Appearing for the respondent-assessee, Dr. Debi Pal, urged that the provisions of section 37 were general in nature and intended to cover situations not contemplated or covered by sections 30 to 36 of the Income-tax Act, 1961. Dr. Pal urged that by the use of the non obstante clause in sub-section (4) of section 37, the Legislature intended that sub-section (4) was to have an overriding effect over sub-sections (1) and (3) and was to relate to section 30 to 36 which had been excluded by sub-section (1).
12. Dr. Pal urged that certain deductions had been allowed under sections 30, 31 and 32 of the Act which would also apply in the case of guest-houses and had been held as much by different High Courts in the country.
13. Referring to the language of sub-section (1) of section 37 of the Income-tax Act, Dr. Pal submitted that by virtue of the non obstante clause used in subsection (4) any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, used for the purpose of the business, is to be allowed in computing the income chargeable under the head “Profits and gains of business or profession” and deduction under sections 30, 31 and 32 is to be allowed thereupon.
14. Dr. Pal submitted that the expression “for the purpose of the business” had been interpreted and explained by the Supreme-Court in CIT v. Malayalam Plantations Ltd., [1964] 53 ITR 140 to be wider in scope than the expression “for the purpose of earning profits”. It was, inter alia, observed that the range of the expression is wide and may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery and may comprehend many other acts incidental to the carrying on of the business. Dr. Pal urged that the same would also include” main-tenance of a guest-house which was incidental to the carrying on of the business.
15. Dr. Pal submitted that an identical question had fallen for consideration before the Bombay High Court in Commissioner Of Income-Tax v. Chase Bright Steel Ltd. (No. 1). (No. 1), [1989] 177 ITR 124, wherein it had been held that since the expenditure related to the maintenance of the guest-house covered by sections 30 and 31 of the Act, the provisions of sub-sections (1) and (3) of section 37 would not be attracted to disallow the permitted deductions.
16. Dr. Pal then referred to another decision of the Bombay High Court in the case of Century Spinning and Manufacturing Co. Ltd. v. CIT, [1991] 189 ITR 660, where following its decision in the case of Chase Bright Steel Ltd. (No. 1), [1989] 177 ITR 124 it was more explicitly observed that although sub-section (4) of section 37 is a non obstante clause, it is a non obstante clause vis-a-vis sub-section (1) and sub-section (3) of section 37 only, and if an expenditure or allowance is allowable under other sections of the Act, such allowance cannot be withdrawn or denied to the assessee because of the prohibitory provisions in section 37(4) of the Income-tax Act, 1961.
17. Reference was also made to a decision of the Gujarat High Court in CIT v. Maharana Mills Ltd., [1994] 208 ITR 972, wherein the same view as in the Bombay case was expressed and it was also held that the expenses incurred in the guest-house were in respect of modest meals supplied to staff, members and visitors which was not on a lavish scale.
18. Other decisions on this point were also cited which need not detain us.
19. Dr. Pal then submitted that in Kesoram Industries and Cotton Mills Ltd.'s case, [1991] 191 ITR 518 (Cal), relied upon by Mr. Mullick, the effect of a non obstante clause had not been considered and could not, therefore, be relied upon as an authority for the purposes of sub-section (4) of section 37 of the Act and the submission made on behalf of the Revenue that the same was independent of sections 30 to 36 of the Act.
20. Dr. Pal urged that in view of the non obstante clause in sub-section (4) of section 37 of the Income-tax Act, the deductions available under other sections, such as sections 30 to 36 would be allowable to an assessee, which having regard to sections 30, 31 and 32 would include guest-houses.
21. From the materials disclosed hereinabove there is an apparent dichotomy in the views expressed by the different High Courts on the question which is now before us in this reference. While this court has held the view that subsection (4) of section 37 of the Income-tax Act clearly provides that no allowance at all is intended in respect of any expenditure incurred on the maintenance of guest-houses after February 28, 1970, the Bombay High Court had held in Chase Bright Steel Ltd. (No. 1)'s case, [1989] 177 ITR 124 that the expenditure related to the maintenance of guest houses covered by sections 30 and 31 could not be disallowed on account of sub-sections (1) and (3) of section 37.
22. Of the two views expressed, the language of sub-section (4) of section 37 of the above Act appears to support the view expressed by this court. Clause (i) of sub-section (4) states in no uncertain terms that no allowance shall be made in respect of any expenditure incurred by the assessee after February 28, 1970, on the maintenance of guest-houses. The non obstante clause gives the provisions of sub-section (4) an overriding effect over sub-sections (1) and (3) i The benefit given to an assessee under sub-section (3) in relation to the maintenance of a guest-house was taken away by sub-section (4).
23. In our view, having regard to the unambiguous bar incorporated in subsection (4) of section 37, the benefits indicated in sections 30 to 36, although, independent of section 37, cannot be related to a guest-house maintained by the assessee. Apart from being the view of the jurisdictional High Court in the Upper Ganges Sugar Mills Ltd.'s case, [1994] 206 ITR 215 and in Kesoram Industries and Cotton Mills Ltd.'s case, [1991] 191 ITR 518, any other interpretation, in our view, would negate the object of the prohibition engrafted in sub-section (4).
24. The reference is, therefore, answered in the affirmative. The Tribunal be informed accordingly.
25. There will be no order as to costs. All parties to act on a xerox signed copy of this judgment on the usual undertakings.
Alok Kumar Basu, J.:— I agree.
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