1. In this case the assessee is a private limited company which carries on the business of manufature and sale of agricultural implements. The assessee has made construction of residential quarters for its employees. During the assessment years 1949-1950 and 1950-1951 the company spent a sum of Rs. 6,005/- and Rs. 5,542/-, respectively, for repairs and maintenance of these residential quarters. For the same period the company received sums of Rs. 5,692/- and Rs. 6,268/- on account of conservancy and maintenance charges from the employees of occupying the residential quarters.

2. In the course of assessment proceedings the company claimed that the amounts spent for maintenance of the residential quarters should be deducted from the texable income of the company under Section 10(2)(v) and Section 10(2)(xv) of the Income-tax Act. The claim was rejected by the Income-tax Officer on the ground that the amount realised by the company for the occupation of these residential quarters was assessable to income tax as under Section 9, and the company was entitled to claim a sum equivalent to one-sixth of the rent realised on account of the cost of maintenance.

3. The Income tax Officer accordingly allowed a deduction of one-sixth of the amount realised by the company from the employee under Section 9 of the Income-tax Act. The company took an appeal to the appellate Assistant Commissioner from the decision of the Income tax Officer. The appeal was dismissed by the appellate Assistant Commissioner, who expressed the same view as the Income-tax Officer with regard to the claim made by the company. The Company then preferred an appeal to the Income-tax Appellate Tribunal, but the appeal was unsuccessful. In these circumstances the appellate Tribunal was directed by the High Court to state a case on the following questions of law.

“1. Whether in the circumstances of the case the expenditure of Rs. 6,005/- incurred by the assessee in repairing quarters should be allowed as business expenditure under Section 10(2)(v) of the Indian Income-tax Act?

2. Whether in the circumstances of the case the expenditure of Rs. 5,542/- incurred by the asses see in repairing quarters should be allowed as business expenditure under Section 10(2)(v) of the Indian Income-tax Act?”

4. When the reference came up before us in the first instance we found that it was not possible to funrish a satisfactory answer to the question, referred to the High Court unless the Appellate Tribunal made a supplementary statement of the case. Accordingly we directed that the Appellate Tribunal should give a hearing to both the parties and submit a supplementary statement of the case under Section 66(4) of the Income-tax Act.

5. We directed that the Appellate Tribunal should take into consideration certain material documents, namely, the award of the Industrial tribunal dated the 16th September, 1947, the Memorandum of Association of the Company, especially paragraph 49-A, and also the letter of the Government of Bihar No. H. 101(f) L/593, dated the 28th February, 1950, on the subject of Industrial Housing Programme, and also award of the Industrial Tribunal, dated the 22nd October, 1947. In accordance with our direction the Appellate Tribunal has now submitted a further statement of the case under Section 66(4) of the Indian Income-tax Act.

6. After hearing learned counsel for both the parties we consider that the questions referred by the Income-tax Appellate Tribunal should be reframed in the following manner so as to bring out the point actually in controversy between the parties:—

“1. Whether in the circumstances of the case the expenditure of Rs. 6,005/- incurred by the assessee in repairing quarters should be allowed as business expenditure under Section 10(2)(xv) of the Indian Income-tax Act?

2. Whether in the circumstances of the case the expenditure of Rs. 5,542/- incurred by the assessee in repairing quarters should be allowed as business expenditure under Section 10(2)(xv) of the Indian Income-tax Act?”.

7. On behalf of the assessee Mr. S.N Dutt put forward the argument that the quarters had been built for the occupation of the employees in order to promote the assessee's business. Counsel referred in this connection to the award of the Industrial Tribunal (Ext. B) where the Industrial Tribunal has examined the question whether the housing provided by the assessee to its employees was adequate, and, if not what steps should be taken to make it adequate. Another question was also referred to the Industrial Tribunal by the State Government, namely, whether the guards and sweepers employed by the assessee were entitled to free quarters. The relevant portion of the award dated the 16th September, 1947, is to the following effect:—

“Question No. 12(a): What is called Babu line contains 12 A type quarters each of which consists of 2 living rooms, a kitchen and a latrine. About one furlong to the east there is what is called a Mistry line containing 40 quarters. There is no approach road leading from the factory or the Babu line to the Mistry line. The intervening ground is very uneven. In between the Babu line and Mistry line there is a tank which had dirty water but in which people were found bathing at the time of my visit. Each quarter in the mistry line consists of one living room, one store room and a small verandah which is used as a kitchen.

To the east of the Mistry line there are one three-seated latrine for women and another three seated latrine for men. There is no light in the latrines. Plaster of the walls of the quarters was very old and was falling off. There is one Potory Bailor in which there were 4 taps of which two were working. It was stated on behalf of the employees that water is supplied from 5 to 7 in the morning and from 5 to 7 in evening and for one hour at noon. They complain that supply of water was not regular as all the taps did not work at one and the same time.

At the eastern end of the Mistry line there was a drain which was emitting a very bad smell I visited the cooly line which consists of 20 quarters, each quarter having one living room with one door & a window facing the inner court yard. There is a drain running in front of the quarters. The labourers complain that in the rainy season the drain water enters the inner court-yard as its level is lower. Near the general office there is a set of three old quarters which were occupied by the work guard. An approach road should be built by the company in order to connect the factory with the Mistry line and the drain should be cleansed regularly. Some of the employees of this company live in rented houses belonging to Sir Indra Singh.

The total number of the company's employees including the monthly rated staff is 545 out of whom 58 have been newly appointed 220 of the Employees are local people and live in villages about few miles from the works, leaving a balance of about 267 of whom 109 have been accommodated in the company's quarters or in the rented houses belonging to Sir Indra Singh. Thus only 40 per cent of the employees have provided with housing accommodation. It is obvious that more houses are receded. On behalf of the trade union it has been urged, that the company should prepare a building programme and start by constructing a certain number of houses every year.

The company contends that the exorbitant prices of raw materials and their scarcity are the factors which stand in the way of its giving, undertaking. The Company, however, hopes to build 10 to 12 quarters every year. The trade union's leaders have stated that though the demand for houses is great, they would be satisfied if a beginning is made by the company. I recommend that the company may build 10 to 12 quarters every year during the next five years.

Question No. 12(b):— The company has 18 works guards and one Havildar. Of them 15 works guards and the Havildar have accommodation in the company's quarters and have not to pay rent. Some quarters are shared by more than one works guard. There are 7 or 8 sweepers but none of them has got quarters. The sweepers will be able to render better service if they are accommodated on the company's premises. I would, therefore, recommend that the company should provide houses for them as early as possible but in the meantime it should pay them house rent allowance at the rate of Rs. 2/8/- each as it is usual to provide rent free house to the sweepers.”

8. The standing order (Ext. D), dated the 22nd October, 1947 is also relevant in this connection. Paragraph 22 of the standing order states as follows:—

Various types of quarters are provided. These are allotted at the entire discretion of the management. In allotting quarters the management shall take into consideration the length of service salary and priority of application of the candidate. The employees shall observe all the rules and conditions made by the Company for occupation of the quarters as per rules in the prescribed form to be signed by the employee at the time of allotment and shall live in hygenic conditions under the control of the Medical Officer.”

9. Counsel on behalf of the assessee referred also to the Government letter (Ext. A) dated the 28th February, 1950 on the question of the Industrial Housing Programme. Reference was also made to paragraph 49-A of the memorandum of Association (Ext. C) which reads as follows:—

“49-A. ‘To let out houses already in existence and construct hire or otherwise acquire houses in future to provide the employees of the company with residential quarters at rental, as shall from time to time be fixed by the company and the repair and maintain the same, reserving the right of occupation by the company as and such necessity arises.”

10. The permit which is usually granted by the company for the occupation of the premises is in the form mentioned in Ext. E. Paragraph 2 of the permit clearly states that the question of the issue of the permit is dependent upon the service of the licensee with the company which forms the sole consideration for its grant. There is also a stipulation that the payment of the fee as provided in the permit shall not operate to create a tenancy of the premises of any nature whatsoever, and the licensee shall not claim or set up to claim any right to the occupation of the premises, save and except those expressly conferred by the document.

11. There is also a further stipulation in the permit that if a licensee quits the services of the company. The permit shall stand cancelled immediately. On the basis of these documents the submission made by Mr. S.N Dutt on behalf of the assessee is that the residential quarters are incidental to the business of the assessee and the letting out of the quarters to the employees of the assessee was necessary for the proper performance of the business carried on by the assessee. It was, therefore, contended that the assessment should not be made under Section 9 of the Income tax Act. In our opinion, the submission made by learned Counsel on behalf of the assessee is well founded.

12. We think that the case does not fall within the purview of Section 9 of the Income tax Act. On the contrary we are of the opinion that the claim for repairs made by the assessee is a proper deduction to be made from the profits of the business of the assessee under Section 10(2)(xv) of the Income-tax Act, “Under this sub-section the assessee is entitled to claim that the profits and gains of the business should be computed after making allowance for any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive & not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.”

13. The view that we have expressed is borne out by two English authorities, Russell (Surveyor of Taxes) v. Aberdeen Town and County Bank, (1888) 2 Tax Cas. 321 (A) and Usher's Wilshire Brewery Ltd. v. Bruce (Surveyor of Taxes(1915) 6 Tax Cas. 393 (B). In the first case, (1888) 2 Tax Cas. 321 (A), the assessee Bank owned buildings in which the business of the Bank was carried on and portions of the buildings were occupied as residences by the Bank managers and agents. It was held, in these circumstances by the House of Lords that the assessee was entitled to deduct the annual value of the whole premises in calculating the profits under schedule D.

14. The same principle was applied in the later case, (1915) 6 Tax Cas 399 (B) The question which was debated in that case was whether a Brewery Company, who were the owners or occupiers or lessees of a number of licenced premises, were entitled to claim deduction of cost of repairs in the computation of their profits for assessment under schedule D. It was found in that case that the Brewery Company had acquired the premises solely in the course of and for the purpose of their business as brewers.

15. It was true that the licensed premises were let out to tenants who were bound under a contract to purchase beer etc., from the company. In such circumstances it was held that the cost of repairs to the houses could be properly claimed as deduction in the computation of the profits of the assessee as being money wholly and exclusively laid out or expended for the purposes of the trade of the assessee. The matter has been very clearly put by Lord Sumner at page 437-33 of the report:—

“Next as to rent. A trader who utilises, for the purposes of his trade, something belonging to him be it chattel or real property, which he could otherwise let for money, seems to me to put himself to an expense for the purposes of his trade. He does so equally if he hires or rents for that purposes properly belonging to another. The amount of his expense in prima facie what he could have for it by letting it in the one case, and what he pays for it when hiring it in the other. Where he get something back for it while employing it in his trade, by receiving rent or hire for it in connection with that trade, the true amount of his expense can only be arrived at by giving credit for such receipt.

In principle, therefore, I think that in the present case rent forgone, either by letting houses, which the brewers own, to tied tenants at a low rent instead of to free tenants at a full rack-rent in the open market, or by letting houses in the same way, which they hire and then ??? at a loss is money expended within the first rule applying to both of the first two cases of Schedule D, and that upon the findings of the Special Case, which are conclusive, it is wholly and exclusively expended for the purposes of such irade.’

16. It is said that such expenditure is not ‘wholly and exclusively expended.’ In so far as any questions of law arise here and it is not clear that there are any-I think that the decision in Smith v. Lion Brewery Co., 1911 A.C 150 (C) disposes of them. Where the whole and exclusive purpose of the expenditure is the purposes of the expender's trade and the object which the expenditure serves is the same, the mere fact that to some extent the expenditure enures to a third party's benefit, say that of the publican, or that the brewer incidentally obtain some advantage, say in his character of landlord, cannot in law defeat the effect of the finding as to the whole and exclusive purpose.

17. A similar answer may be made to the contention that this deduction is expressly prohibited by the words ‘nor for the rent……. of any dwelling house……. except such parts thereof as may be used for the purposes of such trade. On the findings here the brewer is a brewer first and a landlord only afterwards. His rule as landlord is subsidiary, an incident of his trade as brewer. If the “dwelling-house” here is the tax payer's own dwelling house, cedit quaestio. It is not this case.

18. If the deduction is a proper one in arriving at the ‘balance of profit or gains’, as it clearly, is, and is not prohibited by any construction of the words' expenses, not being money wholly and exclusively laid out…….for the purposes of such trade, as I think it equally clearly is not, there is nothing to prohibit it in the words in question. The prohibition does not say “used by the tax payer who claims the deduction, ‘and I do not see why this restriction should be implied. Further, the fact that the publican sleeps over the bar does not in itself preclude the possibility that his bedroom when so used is used for the brewer's trade, if, as here, the brewer, in order to get the outlet for his beer which a tied house gives must find a tenant who sleeps as well as sells on the premises.”

19. We may also refer in this connection to British Insulated and Hersby Cables Ltd. v. Atherton, 1926 A.C 205 (D) in which it was pointed out that for the purpose of claiming deduction it was enough to show that the money was expended “not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business.”

20. On behalf of the Income tax Department Mr. Bahadur relied in the course of his argument upon two cases, Ballygunge Bank Ltd. Calcutta v. Commissioner of Income tax, Bengal, 1946-14 ITR 409 : (AIR 1947 Cal 159) (E) and Salisbury House Estates Ltd. v. Fry, (1930) 15 Tax Cas, 266 (F). We do not consider that these two decisions have any bearing on the question presented for determination in this case. In the first case, 1946-14 I.T.R 409 : (AIR 1947 Cal 159) (E), it was held that income derived from the ownership of buildings was chargeable to tax under Section 9 of the Indian Income tax Act irrespective of the question whether an individual or a company was the owner and also respective of the question whether one of the company's objects, or its sole object, was to acquire and let out buildings on rent.

21. That was a case of a company the sole object of which was to acquire and let out buildings on rent. There was no other business carried on by the assessee in that case, and therefore, it was held that the income derived from the ownership of the buildings was chargeable under Section 9 of the Indian Income tax Act. In the present case the assessee is no doubt the owner of the residential buildings let out to its employees, but the main business of the assessee is the business of manufacture and sale of agricultural implements, and upon the facts stated in the case it is manifest that the letting out of residential quarters is subservient to and incidental to the main business of the assessee, namely the business of manufacture and sale of agricultural implements.

22. In such a case we are of opinion that the proper section to be applied for assessment is not Section 9 but Section 10(2)(xv) of the Income tax Act. In the other case, (1930) 15 Tax Cas, 266 (F), also the business of the assessee was the letting out and management of house property and the assessee had no other business.

23. It was, therefore, held by the House of Lords in that case that the company was not assessable under schedule D, but the liability to tax was covered by schedule A assessments. The argument of the Crown that the company was carrying on trade, namely, the letting of accomodation and provision of various services, was rejected. We are of opinion that ratio decidendi of these cases, namely. 1946-14 ITR 409 : (AIR 1947 Cal 159) (E) and (1930) 15 Tax Cas 266 (F) has no application to the present case.

24. For these reasons we hold that the expenditure of Rs. 6005/- and Rs. 5,542/- incurred by the assessee for the repairs and maintenance of residential quarters in the assessment year 1949-1950 and 1950-1951 should be allowed as business expenditure to the assessee under Section 10(2)(xv) of the Indian Income Tax Act. We accordingly answer the question of law referred to the High Court and as amended by us in favour of the assessee and against the Income) tax Department. The assessee is entitled to cost of these references.

25. We assess the hearing fee at Rs. 250/- for both the references.

D.H.Z

26. Reference answered accordingly.