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Saraswati Industrial Syndicate Ltd. v. Commissioner Of Income-Tax, Patiala-Ii. (And Vice Versa)
Concise Analytical Summary — Income-tax References Nos. 50 to 52 of 1976 (J.V. Gupta, J.)
Factual and Procedural Background
The matters arise from an order of reference dated 26 December 1975 made by the Income-tax Appellate Tribunal, Chandigarh Bench under section 256(1) of the Income-tax Act. Three questions of law were referred to this Court concerning (i) whether Rs. 9,859 was chargeable to tax under s.41(1) for assessment year 1966-67, (ii) whether Rs. 12,103 was chargeable to tax under s.41(1) for assessment year 1969-70, and (iii) whether the Tribunal was right in law in upholding the deletion by the Appellate Assistant Commissioner (AAC) of Rs. 29,237 out of guest house expenses for assessment year 1969-70.
Relevant factual background for the third question (assessment year 1969-70; previous year ended 31 August 1968): the assessee, a public limited company engaged in manufacture and sale of sugar and machinery, claimed deductions totalling Rs. 90,231 under three heads — Entertainment expenses (Rs. 28,757), Guest-house expenses (Rs. 58,474), and Sumptuary allowance (Rs. 3,000). The Rs. 58,474 guest-house claim was broken down into Rs. 34,082 for maintenance of three guest houses and Rs. 24,392 for kitchen expenses attached to one guest house (S.S. Mills).
At assessment: the Income-tax Officer (ITO) allowed Rs. 29,237 of the Rs. 34,082 under s.37(3). Overall, the ITO classified portions as entertainment under s.37(2A)(i) and allowed the maximum Rs. 5,000 deduction under that head. On appeal the AAC reduced the disallowance (from Rs. 55,994 to Rs. 26,757), relying on prior practice and rejecting the ITO's recharacterisation of some guest-house expenses as general entertainment. The revenue appealed to the Tribunal, which by order dated 24 July 1975 allowed the assessee in respect of the maintenance amounts and deleted the disallowance for the Rs. 24,392 kitchen expenses on the ground that the department had not discharged the onus of proving those amounts to be 'entertainment expenditure' attracting the s.37(2A) limit.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Rs. 9,859 was chargeable to tax under sub-section (1) of section 41 of the Income-tax Act for the assessment year 1966-67?
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Rs. 12,103 was chargeable to tax under sub-section (1) of section 41 of the Income-tax Act for the assessment year 1969-70?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the deletion of Rs. 29,237 by the Appellate Assistant Commissioner out of the guest-house expenses for the assessment year 1969-70?
Arguments of the Parties
Revenue's Arguments
- The revenue challenged the Tribunal's deletion (in relation to the kitchen/food expenses of Rs. 24,392) and contended that the Tribunal was not justified in holding that the department had failed to discharge the onus of proving the nature of that expenditure to be 'entertainment expenditure' subject to the limit in s.37(2A).
- In support, the revenue relied on the decision in CIT v. Aruna Sugars Ltd. [1980] 123 ITR 619 (Mad), which, as presented by the revenue, treated 'guest house' as meaning a place for reception of strangers and suggested that employees cannot be treated as strangers; thus, unless the accommodation is for complete strangers, it cannot fall within s.37(3).
Assessee's / Other Positions
- The learned counsel for the assessee conceded that the answers to the first two referred questions would follow the earlier decision in Commissioner of Income-tax v. Saraswati Industrial Syndicate Ltd. and therefore would be against the assessee.
- The assessee's case (as recorded by the Tribunal) was that the Rs. 24,392 kitchen expenses covered normal food for the assessee's directors, employees and customers, that no alcoholic or lavish items were included, and that the prescribed register required by rule 6C(3) had been duly kept — which, the assessee argued, supported allowability under s.37(3).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. Saraswati Industrial Syndicate Ltd. (Income-tax References Nos. 29 & 30 of 1971 and 14 of 1972; decision dated 15 April 1975) | The prior view of this Court on similar questions of law between the same parties concerning amounts charged under s.41 for earlier assessment years. | The Court treated the earlier decision as dispositive for the first two referred questions; the assessee's counsel conceded those answers would be the same (i.e., against the assessee), and the Court concluded those two questions accordingly. |
| CIT v. Aruna Sugars Ltd., [1980] 123 ITR 619 (Madras High Court) | Interpreted 'guest house' as a place for reception of strangers and, accepting the rule-making authority's approach, held employees cannot be treated as strangers; thus a guest house must be intended for use by strangers to fall within s.37(3). | The revenue relied upon this decision to argue that kitchen/food expenses could not be treated as falling under s.37(3). The Court considered the case but did not accept the revenue's reliance on it and did not adopt Aruna Sugars' reasoning as determinative in this matter. |
| Karnataka Exports Ltd. v. CIT, [1980] 121 ITR 154 (Karnataka High Court) | Held that the phrase 'any residential accommodation including any accommodation in the nature of a guest house' in s.37(3) covers not only lodging but also food and other amenities provided in a guest-house; noted supporting provisions in rule 6C (sub-rule (4) and definition in sub-rule (4) of rule 6C). | The Court described the Karnataka High Court's reasoning as logical, found itself in respectful agreement with that view, and relied on it to answer the third question in favour of the assessee (i.e., against the revenue). |
Court's Reasoning and Analysis
The Court proceeded in two stages corresponding to the questions referred:
- First two questions: The Court noted that those issues had been previously decided between the parties in Commissioner of Income-tax v. Saraswati Industrial Syndicate Ltd. (decided 15 April 1975). In view of that prior decision, and the assessee's concession, the Court concluded that the answers to the first two questions would be in the same terms — that is, against the assessee. The Court therefore disposed of those questions without further factual inquiry.
- Third question (deletion of Rs. 29,237 / treatment of Rs. 24,392 kitchen expenses): The Court set out the factual matrix (amounts claimed, breakdown, ITO/AAC determinations, Tribunal's findings). The Tribunal's central legal point was that the allowability of the Rs. 24,392 under s.37(1) was not disputed; therefore, if the revenue sought to subject that amount to the quantitative limit under s.37(2A) (as an 'entertainment expenditure'), the department bore the onus of proving that the expenditure was of the nature of entertainment. The Tribunal found the department had failed to discharge that onus and deleted the disallowance.
The revenue argued against the Tribunal's approach and relied on the Madras High Court's decision in Aruna Sugars Ltd. The Court examined Aruna Sugars and also considered the Karnataka High Court decision in Karnataka Exports Ltd. v. CIT, which construed s.37(3) to include not only residential accommodation but also food and other amenities provided in a guest-house, and noted that rule 6C(4) contemplates entries of amounts paid by a guest towards lodging and boarding (and defines 'guest house' for certain purposes).
The Court found the Karnataka High Court's reasoning "quite logical", and the revenue was unable to persuade the Court to adopt the view in Aruna Sugars over the Karnataka decision. Accordingly, the Court agreed with the Tribunal's allocation of the evidential onus to the department and with the Tribunal's conclusion that the department had failed to prove that the kitchen/food expenses were entertainment expenditure attracting the limit in s.37(2A). The Court therefore answered the third question in the assessee's favour (i.e., against the revenue).
Holding and Implications
Holding:
- The Court answered the first two questions in the same terms as its earlier decision in Commissioner of Income-tax v. Saraswati Industrial Syndicate Ltd.; as recorded in the opinion, those answers are against the assessee.
- On the third question, the Court answered in the affirmative in favour of the assessee — effectively holding that the Tribunal was right to uphold the deletion concerning the kitchen/food expenses because the department failed to discharge the onus of proving those payments to be entertainment expenditure within the meaning and limits of s.37(2A). This result is described in the opinion as being against the revenue.
- The references were answered accordingly and the Court awarded costs.
Implications: The direct consequences are (a) the first two referred questions are concluded in accordance with the Court's earlier decision between the parties, adverse to the assessee; (b) the Tribunal's deletion of the challenged portion of the guest-house/kitchen expenses (on evidential onus grounds) is upheld and decided against the revenue; and (c) the Court expressly aligned itself with the Karnataka High Court's interpretation that s.37(3) can cover accommodation "in the nature of a guest house" including food and amenities. The opinion does not state that it sets a novel precedent beyond applying existing authority; it resolves the references between the parties and records costs.
This summary is strictly limited to the content and reasoning contained within the provided opinion and does not add or infer facts or holdings not expressly stated therein.
J.V Gupta, J.:— Income-tax References Nos. 50 to 52 of 1976 will be disposed of by this order as they arise out of one order of reference dated December 26, 1975 of the Income-tax Appellate Tribunal, Chandigarh Bench (hereinafter called “the Tribunal”), in which the following questions of law have been referred for the opinion of this court under s. 256(1) of the I.T Act (hereinafter called “the Act”).
“(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified, in law, in holding that the amount of Rs. 9,859 was chargeable to tax under sub-section (1) of section 41 of the Income-tax Act for the assessment year 1966-67?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified, in law, in holding that the amount of Rs. 12,103 was chargeable to tax under sub-section (1) of section 41 of the Income-tax Act for the assessment year 1969-70?
(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right, in law, in upholding the deletion of Rs. 29,237 by the Appellate Assistant Commissioner out of the guest house expenses for the assessment year 1969-70?”
2. As regards the first two questions, they stand concluded because of the view taken by this court in Income-tax References Nos. 29 and 30 of 1971 and 14 of 1972 (Commissioner of Income-tax v. Saraswati Industrial Syndicate Ltd.) decided on April 15, 1975, a copy each of which is annexs. I and F of the Income-tax References (reported as Appendix: See p. 366 infra). The said cases related to the assessment years 1964-65 and 1965-66 in which similar questions of law between the parties had arisen and were decided. In view of that decision, the learned counsel for the assessee conceded that the answer to the first two questions will be in the same terms, that is, against the assessee. The facts relevant for the decision of question No. (iii) above are these. The assessee is a public limited company carrying on the business of manufacture and sale of sugar and machinery for sugar mills and other industries. For the assessment year 1969-70 of the assessee, the previous year ended on August 31, 1968. For that assessment year, the assessee claimed deductions in respect of, (i) Rs. 28,757 under the head “Entertainment expenses”, (ii) Rs. 58,474 under the head “Guesthouse Expenses”, and (iii) Rs. 3,000 under the head “Sumptuary Allowance” (as paid to the managing director). The total of these three amounts came to Rs. 90,231. The break-up of Rs. 58,474, under the head “Guest house Expenses”, was as under:
(a) Rs. 34,082 for maintenance of three guest houses; and
(b) Rs. 24,392 as expenses of the kitchen attached to one of the said guest houses, that is, the one at S.S Mills.
3. Out of the break-up of Rs. 34,082 relating to the expenses on the maintenance of the three guest houses, the amount of Rs. 29,237 was allowed by the ITO as permissible under s. 37(3). Thus, out of the total amount of Rs. 90,231 under the abovesaid three heads, the amount of Rs. 60,994 was treated as pertaining to entertainment expenses under s. 37(2A)(i) of the Act by the ITO and he allowed the highest limit of Rs. 5,000 as a deduction.
4. On appeal, the AAC reduced the disallowance from Rs. 55,994 to Rs. 26,757. He supported his action on the two grounds, firstly, that there had been no disallowance in this respect in the past and, secondly, that there was no warrant for the ITO to treat a part of the guest house expenses as general entertainment expenses.
5. The revenue came up in appeal before the Tribunal. Vide order dated July 24, 1975, it held:
“There is no finding of the Income-tax Officer that any portion of the expenditure covered by the assessee's total claim of Rs. 90,231 was either not incurred or was not of the nature of allowable expenditure under section 37(1). Again, section 37(3) laid down no outside limit as to the allowable extent of expenditure incurred on maintenance of guest house in the case of a non-firm assessee. Thus, in view of full compliance of the conditions laid down in rule 6C(3) of the Income-tax Rules, the full amount of Rs. 34,082 directly pertaining to maintenance of the three guest houses was clearly allowable.
So far as the expenses of kitchen attached to the S.S Mills' guest house is concerned, the amount claimed by the assessee was Rs. 24,392. The details of this expenditure are not available on the record. The assessee contended that it covered the cost of normal food served to the assessee's directors, employees and customers and that no alcoholic drinks or any other lavish item was covered. It was also argued that in view of the prescribed register having been duly kept by the assessee, the said expenditure was clearly allowable under s. 37(3). Our attention was particularly drawn to the requirements of rule 6C(3) that if any amount was paid by any employee or director of the assessee-company staying at the guest house, the particulars of such amount had to be entered in the prescribed register. From this, it was argued that the food expenses in question were covered by s. 37(3). We do not agree. Firstly, the particulars in the register maintained under r. 6C(3) were not to cover such passengers at the guest house as were not directors or employees of the company. Thus, the question of any payment by the assessee's customers for the facility of lodging or boarding at the guest house is, in our view, irrelevant. Secondly, in any case, rule 6C framed in exercise of the power under section 37(3) could not be pressed into service for interpreting the scope of the expression ‘on maintenance of any residential accommodation including any accommodation in the nature of a guest house’ occurring in section 37(3), Income-tax Act. Thus, it remains to be determined whether the kitchen or food expenses of Rs. 24,392 were of the nature of entertainment expenditure so as to attract the limit laid down in section 37(2A). We have mentioned the absence of detailed material in this regard. We are of the opinion that as the allowability of the said expenditure under section 37(1) is not disputed, it was for the department to prove its nature to be that of entertainment expenditure if the limit laid down in section 37(2A) was intended to be applied. The department has failed to discharge the said onus……”
6. The learned counsel for the revenue contended that the Tribunal was not justified, in law, in upholding the deletion of Rs. 24,392 as kitchen expenses by the AAC for the assessment year 1969-70. According to the learned counsel, it has been wrongly held by the Tribunal that the department had failed to discharge the onus of proving its nature to be that of an entertainment expenditure if the limit laid down in s. 37(2A) of the Act was intended to be applied. In support of his contention, he relied upon CIT v. Aruna Sugars Ltd., [1980] 123 ITR 619 (Mad).
7. After hearing the learned counsel for the parties, we do not find any force in the contention raised oh behalf of the revenue. In Aruna Sugars' case, it has been held that the meaning of the term “guest house” as a place for reception of strangers has been accepted by the rule-making authority as the rules envisage employees staying in the premises. Accordingly employees cannot be treated as strangers. Hence, unless the guest house is intended for use by a complete stranger, it cannot be called a guest house which falls within the scope of s. 37(3) of the Act. In Karnataka Exports Ltd. v. CIT, [1980] 121 ITR 154, the Karnataka High Court has also taken the following view (p. 158):
“In our opinion, the use of the words ‘any residential accommodation including any accommodation in the nature of a guest house’ on the other hand clearly indicates that the allowances permitted under sub-s. (3) of s. 37 of the Act are not only in respect of residential accommodation provided but also any accommodation in the nature of a ‘guest-house’ because the meaning of the word ‘guest-house’ as given in the Concise Oxford Dictionary is ‘superior boarding house’ which necessarily includes providing of food and other facilities required for staying there. If the contention urged for the revenue is correct, the use of the words ‘any accommodation in the nature of a guest house’ in sub-s. (3) of s. 37 of the Act would be redundant, because the words ‘residential accommodation’ take in any residential accommodation provided even in a guest-house and separate mentioning of the words ‘any accommodation’ in the nature of a ‘guest house’ would have been unnecessary. Hence, it is not possible to accede to the submission made for the revenue that sub-s. (3) of s. 37 of the Act only covers any residential accommodation and not food and other amenities provided in a guest house.
This view also receives support from the understanding of the provision by the rule-making authority. Sub-rule (4) of rule 6C provides that one of the items required to be entered in the register maintained under sub-rule (3) is the amount, if any, paid by the guest towards his lodging and boarding in the guest house. Sub-rule (4) of rule 6C of the Rules defines the words ‘guest house’ as including accommodation hired or reserved by the assessee in a hotel for a period exceeding one hundred and eighty-two days during the previous year. The above provisions also indicate that expenses towards food and other amenities are also included in the accommodation provided by an assessee in the nature of a guest house.”
8. The reasoning and the conclusions arrived at by the Karnataka High Court in the above said case seem to be quite logical and the learned counsel for the revenue has not been able to persuade us to take a different view. We, therefore, find overselves in respectful agreement with the said view, and that being so, we answer the question in the affirmative, that is, against the revenue.
9. The references stand answered accordingly with costs.
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