N.V. Balasubramanian, J - (1.) .
(2.) PURSUANT to the directions of this Court in TCP No. 170 of 1984, dt. 4th December, 1984, the Tribunal has referred the following question of law under s. 256(2) of the IT Act, 1961 (hereinafter referred to as the 'Act'), for our consideration : "Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the expenses incurred on the maintenance of the guest house accommodation at the mill premises were not in the nature of guest house expenses and as such the same are allowable as a deduction ?" The assessee is a co-operative society and during the course of the assessment proceedings, for the asst. yr. 1977-78, claimed a deduction of a sum of Rs. 17,940 incurred by it on the maintenance of its guest house, provision of lunch, etc. to the visiting officials. The break-up sum of Rs. 17,940 comprises of the following items : JUDGEMENT_817_ITR241_2000Html1.htm The ITO rejected the claim of the assessee on the ground that the entire sum of Rs. 17,940 should be treated as guest house expenditure and not allowable under the provisions of sub-s. (4) of s. 37 of the Act. The CIT(A), on appeal, preferred by the assessee accepted the claim of the assessee and held that the expenditure could neither be regarded as guest house expenditure nor entertainment expenditure. Therefore, the entire amount was held to be liable to be deducted in the computation of the business income of the assessee. The Tribunal in the appeal preferred by the Revenue, following its earlier order in the case of New Horizon Sugar Mills (P) Ltd. in ITA Nos. 1496 to 1498/Mad/1977-78 dt. 20th September, 1978, held that the expenditure could not be regarded as either guest house expenditure or entertainment expenditure, and in this view of the matter, the Tribunal dismissed the appeal preferred by the Revenue. Mr. C. V. Rajan, learned counsel for the Revenue, submitted that the view of the Tribunal is erroneous in point of law and the entire expenditure should be regarded as an expenditure incurred on the maintenance of guest house and it is not allowable under the provisions of sub-s. (4) of s. 37 of the Act.
(3.) MR. P. P. S. Janarthana Raja, learned counsel for the assessee, on the other hand, submitted that a close study of the various items of expenditure incurred by the assessee would show that the first item of expenditure cannot be regarded as a guest house expenditure as there is no finding that it was incurred in the guest house. As regards the other three items, learned counsel for the assessee submitted that they cannot be regarded as having been incurred by the assessee on the maintenance of guest house and they were incurred only on the guests, and not for the maintenance of the guest house. We have carefully considered the submissions made by learned counsel for the parties. The issue that arises in this case relates to the interpretation of the provisions of s. 37(4) of the Act and the said provision in so far as it is relevant for the purpose of the case reads as under : 37(4) "Notwithstanding anything contained in sub-s. (1) or sub-s. (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 in a guest house". The crucial words found in sub-s. (4) of s. 37 are "on the maintenance of any residential accommodation in the nature of a guest house". The question that arises is whether the said expression would include only the maintenance expenditure of the guest house or will it include the expenditure incurred towards the purchase of provisions for supply of refreshment to the guests staying in the guest house. The object behind the introduction of the provisions of s. 37(4) of the Act is to curb the lavish expenditure incurred by the assessee on the maintenance of the guest house. In the absence of any such provisions like of s. 37(4) of the Act, the expenditure incurred on the guest house was allowable as a normal business expenditure. Yet the legislature has stepped in and declared that the expenditure incurred on the maintenance of guest house in not allowable as a business expenditure. The mandate of the provisions of s. 37(4) of the Act is very clear. It desires to curb the expenditure incurred on the guest house. Viewed in the light of the object behind the introduction of the provisions of sub-s. (4) of s. 37 of the Act, we are of the view that the expression "on the maintenance of any residential accommodation in the nature of a guest-house" should be given a wider meaning and it cannot be construed in a narrow or restricted manner. We are of the view that if such a wider meaning is given, the said expression would encompass not only the expenditure incurred on the maintenance of guest house like whitewashing of the walls, employment of watchman, repairs, etc. but it would include other expenditure also which are essential for the proper functioning of the guest house and the said expression in our opinion, should include the expenditure incurred on the purchase of the provisions or other essential items for giving refreshment or meals to the guests staying in the guest house. ;