N.V. Balasubramanian, J. - (1.) THE following questions of law have been referred to us for our opinion with reference to the income of the assessee for various assessment years ranging from 1970-71 to 1979-80 : Tax Cases Nos. 789 to 795 of 1987 : "Whether, on the facts and in the circumstances of the case and having regard to the provisions of Section 37(4) of the Income-tax Act, 1961, the Appellate Tribunal was right in holding and had valid materials to hold that the circuit house maintained by the assessee was not a guest housB and that the expenditure on such house and depreciation could not be disallowed under Section 37(4)(i) of the Income-tax Act, 1961, in the assessment for the assessment years 1970-71 to 1976-77 ?" Tax Cases Nos. 590 and 591 of 1987 : "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to depreciation on roads inside the factory ?
(2.) WHETHER, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled for the allowance of expenditure incurred on maintenance of circuit house and depreciation thereon ?" Tax Case No. 632 of 1987 : "WHETHER, on the facts and in the circumstances of the case and having regard to the provisions of Section 37(4) of the Income-tax Act, 1961, the Appellate Tribunal was right in holding and had valid materials to hold that the circuit house maintained by the assessee was not a guest house and that the expenditure on such building and depreciation could not be disallowed under Section 37(4)(i) of the Act ?" 2. In this batch of tax cases referred at the instance of the Revenue, the common question that is involved is whether the circuit house maintained by the assessee cannot be regarded as a guest house within the meaning of section 37(4)(i) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"). In so far as the assessment years 1978-79 and 1979-80 are concerned, there is an additional question regarding the claim of the assessee for depreciation on roads inside the factory. In so far as that question is concerned, the question is concluded against the Revenue by the decision of the Supreme Court in the case of CIT v. Gwalior Rayon Silk Manufacturing Co. Ltd. [1992] 196 ITR 149 and following the said decision, we answer that question in the affirmative and against the Revenue. Then, what remains is the common question whether the circuit house of the assessee can be regarded as guest house or not. The assessee is a public sector undertaking at Neyveli and the assessee maintained a premises styled as circuit house and it is a residential accommodation. According to the assessee, it maintains the circuit house for its business purpose and it is occupied by those who come to Neyveli for business dealings with the assessee. The Income-tax Officer for all the assessment years in question held that the circuit house is nothing but a guest house within the meaning of Section 37(4) of the Act. The Appellate Assistant Commissioner confirmed the view of the Income-tax Officer. The Tribunal, after noticing the budget speech of the Finance Minister rendered when the particular provision was introduced and the memo explaining the provisions of the Act came to the conclusion that the circuit house maintained by the assessee was not a guest house. The Appellate Tribunal recorded a finding that the assessee maintained the premises for the persons coming to Neyveli for transacting business with the assessee-company and such facility was essential because the people coming from outside for transacting business with the assessee had no other place to stay. Therefore, the Tribunal came to the conclusion that the visit of the persons was for transacting business with the assessee and the persons had come to a place where no facility was available for accommodation, and the accommodation provided to the businessmen could not be regarded as coming within the purview of "guest house". According to the Tribunal, the accommodation provided by the assessee to a businessman, with whom the assessee generally transacts the business, when the visit was not for transacting the business, it would be in the nature of a guest house. In this view of the matter, the Tribunal held that the accommodation maintained by the assessee was not a guest house and, therefore, the prohibition imposed under Section 37(4) of the Act would not apply. The Tribunal, on the applications filed by the Revenue for various assessment years, stated a case and referred the common questions of law set out earlier. Mr. C.V. Rajan, learned counsel for the Revenue submitted that in view of the clear finding of the Appellate Tribunal, the accommodation is meant for strangers though they may visit Neyveli for business or non- business purposes, the accommodation should be regarded as guest house, Mr. S.A. Balasubramanian, learned counsel for the assessee, on the other hand, submitted that Neyveli is situate in a remote place in the State of Tamil Nadu and the assessee had to provide accommodation to those persons who come to transact business with the assessee and the accommodation provided cannot be regarded as guest house, in view of the remoteness of the place in which the industrial establishment is situate. He submitted that the assessee has also provided accommodation to its employees, and collected certain charges also from the persons who have come and stayed for the purpose of transacting business with the assessee. He, therefore, submitted that the accommodation cannot be regarded as guest house.
(3.) WE have carefully considered the submissions of learned counsel. This court in CIT v. Aruna Sugars Ltd, [1980] 123 ITR 619 considered the expression "guest house" under Section 37(3) of the Act and held that where any accommodation is maintained either in the principal place of business or in a place where the factory is located for the directors and other employees of the assessee-company who have to visit it for the purpose of the company's business, the accommodation cannot be regarded as guest house. Similarly, the stay by an official on a visit to the factory for the purpose of enforcing the laws applicable to the factory cannot be regarded as a visit by an outsider as the accommodation was used by him in connection with the company's work. This court held that it is only with reference to other categories like strangers, if the accommodation is provided, the accommodation can be called a guest house. This court held that guest house means a place for reception of strangers and the employees cannot be treated as strangers. This court also took the view that it is the duty of the assessee to maintain the register provided under Rule 6C of the Income-tax Rules, 1962, and unless it is established from the register that the guest house has not been exclusively used by the employees, the Income-tax Officer would not be justified in rejecting the claim for deduction on the expenditure. The Calcutta High Court in the case of CIT v. Parshva Properties Ltd. [1987] 164 ITR 673 held that the guest house as envisaged in Section 37(4) of the Act is a place where guests are received and entertained gratuitously or at a concessional rate. Learned counsel for the assessee submitted that the facts found by the Calcutta High Court are similar to the facts found in the assessee's case as the bungalow was situate in a remote place in the State of Bihar in the case considered by the Calcutta High Court. Learned counsel for the assessee, placing reliance on the decision of the Calcutta High Court submitted that since the assessee has maintained the circuit house not for gratuitous service, the accommodation cannot be regarded as guest house. We are of the opinion that the decision of the Calcutta High Court is not applicable to the facts of the case as on the facts it was found by the court that the accommodation was used by the employees, its auditors, its engineers and other Government officials who went there on duty and stayed there temporarily for doing duty. On the other hand, on the facts found by the Appellate Tribunal in the instant case, persons who are complete strangers came to occupy the accommodation at the time when they came to transact business with the assessee. A similar view were also taken by the Calcutta High Court in the case of CIT v. Orient Paper Mills Ltd. [1986] 171 ITR 181 and learned counsel for the assessee submitted that the facts are also similar as the accommodation was not maintained for entertainment or relaxation. We are of the opinion that the above decision of the Calcutta High Court is also not applicable as in the case before the Calcutta High Court the assessee had provided boarding and lodging facilities on payment of charges by the persons using the accommodation and the entire expenditure was recovered from the persons utilising the said accommodation. A similar view was also taken in another decision of the Calcutta High Court in the case of CIT v. Hindus-than Aluminium Corporation Ltd. [1989] 176 ITR 206. Learned counsel for the assessee also brought to our attention an order passed by the Supreme Court rejecting a special leave petition against the order of this court in T. C. P. No. 75 of 1983 dated July 18, 1983. We have perused the order in T. C. P. No. 75 of 1983. That order of this court clearly shows that 10 per cent. of the total expenditure was incurred on third parties and 90 per cent. was incurred in the guest house in connection with the stay of people having business connection with the assessee. This court held that the estimate made by the Tribunal was a question of fact. It is seen from the facts.of the case that the expenditure was incurred in connection with the employees or directors or persons who came to stay in the place in connection with the enforcement of the law, and it is not clear whether it related to the persons who stayed in the guest house in connection with the business dealings of the company. ;