ASSISTANT COMMISSIONER OF INCOME TAX Vs. TRADE LINKS LTD
LAWS(IT)-1994-12-13
INCOME TAX APPELLATE TRIBUNAL
Decided on December 16,1994

Appellant
VERSUS
Respondents

JUDGEMENT

Moksh Mahajan, Accountant Member - (1.) 1 to 27. These paras are not reproduced here, as they involve minor issues. 28. The next contention pertains to, disallowance of Rs. 60,984 made on account of guest house expenses. While the Assessing Officer disallowed the aforesaid expenses being covered under Section 37(5) of the Act, the learned CIT(A) after following the order of the ITAT Delhi Bench 'C' in the case of Purolalers India Ltd. v. IAC [1991 ] 34 ITD 287, deleted the addition. This was vehemently contested by the learned DR. It was submitted that the provisions of Section 37(4) read with Sub-clause (5) of Section 37 of the Act were not correctly appreciated by the learned CIT(A). The definition of 'guest house' as given in Sub-section (5) of Section 37 of the Act, leaves no scope for allowance of any expenditure incurred on maintenance of guest house. Specifically so, in respect of rent and depreciation which have been mentioned therein. The decision of CIT v. Chase Bright Stee lLtd. (No. 1) [ 1989] 177 ITR 124 as well 12 8 (Bom.) had since been differed from by their Lorships of Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd. v. C77[1991] 191 ITR518and CIT v. Upper Ganges Sugar Mills Ltd. [ 1994] 206 ITR 215 (Cal). Their Lordships of Bombay High Court while deciding the issue in the case of Chase Bright Steel Ltd. (supra) did not take into consideration the provisions of Section 37(5) of the Act. In case Sub-sections (4) and (5) are read with Sub-sections (1) and (3) of Section 37 of the Act, the only possible conclusion would be that the expenditure on guest house is not allowable. 29. Opposing the stand taken by the learned DR, the learned AR heavily relied on the decision of the Bombay High Court in the case of Chase Bright Steel Ltd. (supra) which according to him, has since been followed by the various Benches of the ITAT. It was submitted that this decision was also considered by their Lordships of Gujarat High Court in the case of CIT v. Kaira Distt. Co-operative Milk Producers Union Ltd[1991] 192ITR 608. They followed their earlier decision rendered in the case of CIT v. Patel Bros. & Co. Ltd. [1977] 106 ITR 424 (Guj.). In the aforesaid decision, their Lordships duly considered the provisions of Section 37(4) of the Act. The expenditure in respect of rent is covered under Section 30 of the Act and there being a specific provision in respect of the deduction, the same could not be disallowed under Section 37 of the Act which is general in nature. On the other hand, depreciation is not an expenditure as held by their Lordships of Supreme Court in the case of Pandyan Insurance Co. Ltd. v. CIT [ 1965] 55 ITR 716, the same could not be covered under Section 37 of the Act. Furthermore, the issue has since been decided in favour of the assessee by the ITAT in ITA No. 3226/Del/1984 for assessment year 1984-85. In using the expression 'rent' and 'depreciation' in Sub-section (4) of Section 37 a drafting error has crept in in the provision. It was thus stated that the relief was rightly allowed by the CIT(A). 30. We have carefully considered the rival submissions and have also gone through the decisions as cited before us. Admittedly the residential accommodation was used as a guest house by the assessee. As mentioned by the CIT(A) in her order the accommodation was used mainly for the employees coming from outside to the headquarter to Delhi. Thus on facts there is no dispute. As regards legal position, we find that there is no consensus amongst the High Courts regarding the allow ability of expenditure on Guest House. We, therefore, would first refer to these decisions. In the case of Chase Bright Steel Ltd. (supra) (at p. 124), the expenditure related to rent, salary of cook-cum-servant, curtains, repair of bathrooms, repair of furniture, polishing of furniture and other expenses on maintenance and provision. It was held by their Lordships of Bombay High Court that Sub-section (1) of Section 37 contemplates allowance of expenditure which is neither personal nor of capital nature nor is of the nature described in Sections 30 to 36 of the Act. The expenditure relating to rent is covered under Section 30 and that of repair under Section 31 of the Act. Sub-section (3) of Section 37 starts with a non-obstinate clause Notwithstanding anything contained in Sub-section (1),..." which of necessity must relate to expenditure allowable under Sub-section (1) of Section 37 of the Act and no other provision. This being so, and the assessee's case not falling to be considered under Section 37(1) of the Act, we are in agreement with the view taken by the Tribunal that the deduction in respect of rent for the guest house being allowable and allowed under Section 30 and the expenses on repairs and polishing of furniture being allowable and allowed under Section 31 of the Act would not be disallowed under the provision of Sub-section (3) of Section 37 of the Act or rules made thereunder. 31. "As regards the remaining expenses since the same falls to be considered under Section 37(1) only, the provisions of Section 37(3) are not attracted." This view was again reiterated in the case of Chase Bright Steel Ltd. (supra). The assessment years were 1968-69 and 1969-70. In case of Kaira Distt. Co-operative Milk Producers Union Ltd. (supra), their Lordships of Gujarat High Court reiterated the same view as taken by the Bombay High Court. It was held that the deduction in respect of rent which is covered under Section 30, cannot be disallowed under Section 37(4) of the Act. The Calcutta High Court in the case of Kesoramlndustries & Cotton Mills Ltd. (supra) on the other hand while considering the provisions of Section 37(4) of the Act, have held as under :- In order to place an effective check on lavish expenditure on maintenance of guest houses, Section 37(4) of the Income-tax Act; 1961, was 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. The provision covers not only the establishment and other charges for running the guest house but also depreciation on building where that is owned by the assessee, and rent paid for the accommodation where it is taken on hire or lease. A guest house is a guest house whatever may be the category of the guests to which it caters and whatever may be the standard of comforts and amenities provided and no matter whether the intention of the party is merely to provide them with shelter and food or to entertain and amuse or gratify the visitors. This view was subsequently reiterated in the case of Upper Ganges Sugar Mills Ltd. (supra). 32. Thus the main thrust of the decisions in the cases of Chase Bright Steel Ltd. (supra)and Kaira Distt. Co-operative Milk Producers Union Ltd. (supra) is that where there are specific provisions relating to deduction of expenditure, the same cannot be covered under the general provisions as is the case in Section 37 of the Act. Their Lordships of Calcutta High Court on the other hand interpreted the provisions in the light of intent of the Legislature for which the provisions were brought on the Statute. 33. In the background it has become necessary to refer to both the principles of interpretation of the statute and the intent of Legislature for which the provisions were brought on the statute. It is an established rule that the intention of the Legislature must be found by reading the statute as a whole as held by their Lordships of Bombay High Court in the case of Forbes Forbes Campbell & Co. Ltd. v. CIT[1994] 206 ITR 495 :- It is a well-settled principle of interpretation that a statute must be read as a whole and every provision must be construed with reference to the context and other clauses in the statute so as to make a consistent enactment of the whole statute. It is equally well-settled that the sub-sections or sub-clauses must be read as parts of an integral whole and as being interdependent and an attempt should be made in construing them to reconcile them if it is reasonably possible to do so, and to avoid repugnancy. If there are two conflicting provisions in the same section or clause, the courts should find out which of the two provisions is more general and which is more specific and construe the more general one as to exclude the more specific. The principle is expressed in the maxim generalia specialibus non derogant and generalibus specialia derogant. If a special provision is made on a certain subject-matter, that matter is excluded from the general provision. The intention of the Legislature on the other hand could be gathered from the history of the provisions of Sub-sections (3), (4) and (1) of Section 37 of the Act. Till 28th February, 1970, the expenditure incurred on the maintenance of guest house was allowed as a deduction in computing the profits and gains of business or profession. This was however subject to certain limits and conditions prescribed in Rule 6C of the Income-tax Rules, 1962. The rule covers expenditure on guest house maintained at the principal place of the business or profession in India, any place where the assessee had an establishment employingnot less than 50 whole-time employees throughout the year. There were certain conditions prescribed for allowance of expenditure in respect of Holiday Homes also. Rule 6C was however omitted by the Income-tax (Amendment) Rules, 1973 with effect from 1-4-1972. Subsequently, in order to place a check on lavish expenditure on maintenance of guest house, Section 37(4) was inserted by the Finance Act, 1970. This sub-section provided for disallowance of expenditure incurred after 28th February, 1970 on the maintenance of guest house other than Holiday Homes in computing the profits and gains of business or profession. Subsequently Section 37(5) was inserted by the Finance Act, 1983 with retrospective effect from 1 st April, 1979. The aforesaid section contained the definition of a guest house. The intention was explained in the departmental Circular No. 372 dated 8th December, 1983. This reads as under :- (xxv) Expenditure on maintenance of guest houses -34.1 A New Sub-section (5) has been inserted in Section 37 by way of a clarificatory amendment to provide that for the purposes of the existing provisions contained in Sub-section (4) of the said section relating to disallowance of expenditure on maintenance of guest houses, any accommodation maintained, hired or reserved or otherwise arranged by the assessee for providing lodging, or boarding and lodging, to any person (including any employee or, where the assessee is a company, also any director of, or the holders of any other office in, the company) on tour or visit to the place at which such accommodation is situated, will be regarded as accommodation in the nature of a guest house. As on today the provisions of Section 37(4) and (5) read as under :- 37(4) Notwithstanding anything contained in Sub-section (1) of Sub-section (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 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 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. (5) For the removal of doubts, it is hereby declared that any accommodation, by whatever name called, maintained, hired, reserved or otherwise arranged by the assessee for the purpose of providing lodging or boarding and lodging to any person (including any employee or, where the assessee is a company, also any director of, or the holder of any other office in, the company), on tour or visit to the place at which such accommodation is situated, is accommodation in the nature of a guest house within the meaning of Sub-section (4). 34. Thus there is an apparent conflict between the provisions as contained in Sections 30, 31 and 32 vis-a-vis Section 37(3), (4) and (5) of the Act. There are two provisions, one whereby the expenditure relating to rent and depreciation is allowable and the other where it has been specifically disallowed as is the case in Sub-section (4) and Sub-section (5) of Section 37 of the Act. Sub-section (4)(ii) of Section 37 clearly makes a reference to disallowance in respect of depreciation of any building used as a guest house or depreciation of any asset in a guest house. Explanation to the aforesaid sub-section makes a specific reference to rent paid in respect of accommodation which is to be disallowed. Reading these provisions conjointly with those of Section 30 and Section 32 of the Act it would show that the former is more specific than the one relating to the latter. Section 30 refers to rent paid by any tenant in respect of the premises used for the purposes of business or profession. Similar is the case in respect of Section 32 of the Act which makes a reference to depreciation in respect of any building, machinery, plant or furniture owned by the assessee. These sections are wide enough to cover any types of premises whereas it is not so in the case of Section 37(4) and (5) which is very specific and pertains to guest house alone. On comparison of two provisions, viz., 37(4) read with (5) of the Act with Sections 30 and 32, it would be clear that the former is more specific and latter more general. In clear and unambiguous terms the Legislature has used the words 'rent and depreciation', the latter though not covered in the expression 'expenditure' as held by their Lordships of Supreme Court in the case of Pandyan Insurance Co. Ltd. (supra), yet these expressions find place in Sub-section (4) of Section 37 of the Act which go to show that allowance relating to depreciation has been covered in the sub-section intentionally. 35. At this juncture we may also refer to the observation of Lord Ever shed, MR as given in 79' Eastbourne Corpn. v. Forbes Ltd. [1959] 2 All ER 102 (CA) p. 107 as appear in the book of Principles of Statutory Interpretation by Justice G.P. Singh (p. 88) that "It is no doubt true that if two sections of an Act of Parliament are in truth irreconciliable than prima facie, latter will be preferred. But these are arguments of the last resort. The duty of the Court must be, if the result is fairly possible, to give effect to the whole expression of the parliamentary intention". As stated earlier if viewed in the light of intention of the legislature the deduction in respect of rent and depreciation is not allowable as per provisions of Section 37(4) and (5) of the Act. In this context, we would also like to mention that in all the decisions, Sub-section (5) of Section 37 of the Act was never considered by the High Courts. As mentioned earlier in the case of Chase Bright Steel Ltd. (supra), the relevant assessment years were 1968-69 and 1969-70, wherein Rule 6C was also under consideration. In the case of Kaira Distt. Co-operative Milk Producers Union Ltd. (supra), though Sub-section (4) of Section 37 was discussed, Sub-section (5) was not referred to. In the case of Kesoram Industries & Cotton Mills Ltd. (supra), the assessment year involved was 1972-73 when Sub-section (5) of Section 37 was not brought on the Statute and hence the same was not under consideration. These decisions were also not cited before the ITAT while deciding the issue in favour of the assessee for assessment year 1984-85. In the circumstances, we are of the considered view that the expenditure relating to rent and allowance relating to depreciation pertaining to guest house are not allowable and therefore, we reverse the order of the learned CIT(A) on this issue and uphold that of the Assessing Officer. 36. As regards telephone charges at Rs. 23,567 we find that as the expenditure is relatable to the guest house which is not covered under any other specific provision of the Act. In view of the provisions of Sub-sections (4) and (5) of Section 37, the expenditure is not allowable. The arguments advanced by the learned AR that they are not relatable to the maintenance of the guest house, are devoid of any force. 37. In the result we hold that the expenditure as claimed in respect of rent, depreciation and telephone expenses is not allowable. We reverse the order of the learned CIT(A) on this issue. 38. The final contention raised pertains to an addition of Rs. 9,12,958 in respect of licence fee which was deleted by the learned CIT(A). The learned DR fairly conceded that the aforesaid ground of appeal is covered by the order of the ITAT in the case of the assessee for assessment year 1984-85. In this respect from the order of the learned CIT(A) we find that the assessee claimed expenses of Rs. 9,12,958 on account of licence fee in respect of Indian made foreign liquor. As per the Excise policy of the State Government licence is issued in each city to enable the licence-holder to import goods from centres and sell the same to the local hotels and other licencees. This fee is to be paid to the State Government concerned at the time of applying for liquor licence. As the licence fee is payable from year to year and the liability accrues in each year, the expenses were claimed as deduction by the assessee. The deduction was supported by the decision of Supreme Court in the case of Cooverjee B. Barucha v. Excise Commissioner [1954] 220 and Hindu Religious Endowments [1954] 1005 SCR. Thelearned CIT(A) after holding that the liability which has accrued in the year under consideration and has also been paid by the assessee, allowed the same as a deduction. 39. A similar issue arose in the case of the assessee before the ITAT in ITA No. 3162/Del/84 where the disallowance on account of licence fee of Rs. 9,81,199 was for their consideration. After examining the issue at great length, it was held that as the payment was made in the year in which it was claimed, the same was allowable. As the facts are identical, respectfully following the order of the ITAT in ITA No. 3162/Del/84 for assessment year 1984-85, the relief allowed by the learned CIT(A) being in order, is upheld. 40. In the result, both the appeals are partly allowed.;


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