(a) Income-tax---

----Property---Other sources---Income from property or from other sources-- Letting out of part of factory building---Income derived is assessable as income from property---Indian Income Tax Act, 1961, Ss. 22 & 56.

The income derived by the.' assessee from letting out part of its factory building was assessable under the head "Income from house property".

CIT v. New India Industries Ltd. (1993) 201 ITR 208. (Guj.) fol.

(b) Income-tax--

----Business expenditure---Disallowance---Expenditure on tea and messing-- Finding that there was no extravagance---Expenditure not entertainment expenditure---Could not be disallowed---Indian Income Tax Act, 1961, S.37/(2B).

Looking to the nature and magnitude of the business of the assessee and keeping in mind the amount spent by the assessee towards tea and messing expenses, the amount spent by the assessee could- not be said to be lavish, extravagant, wasteful or unreasonable. The expenses could not be treated as entertainment expenses within the meaning of section 37(2B) of the Income Tax Act, 1961, and could not be disallowed.

CIT v. Patel Bros. & Co. Ltd. and Gautamkumar Rejendrakumar (1977) 106 ITR 424 (Guj.) fol.

Brij Raman Dass and Sons v. CIT (1976) 104 ITR 541 (All.) ref.

B.J. Shelat, instructed by M.R. Bhatt for R.P. Bhatt & Co. for the Commissioner.

D.A. Mehta, R.K. Patel and K.C. Patel for the Assessee;

JUDGMENT

S.D. SHAH, J.---The Income-tax Appellate Tribunal has referred the following question No. 1 for the assessment years 1969-70 and 1970-71 and question No. 2 for the assessment years 1971-72 and 1972-73. From the original papers received from the Income-tax Appellate Tribunal, it also transpires that the Tribunal has also referred question No. 3 which is omitted to be excluded in the paper book, and, therefore, the questions referred to us for our reference are as under:

For the assessment years 1969-70 and 1970-71:

"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the income derived by the assessee from letting out part of its factory building to Messrs Jamnagar Foundry Works at an annual rent of Rs.12,000 was assessable under the head `Income from house property' and not as `Income from other sources'?.

For the assessment years 1971-72 and 1972-73:

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the income derived by the assessee from letting out part of its factory building to Messrs Jamnagar Foundary Works at an annual rent of Rs.12,000 was assessable under the head `Income from house property' and not as `Income from other sources'?

(3) Whether, on the facts and in the circumstances of the case, the Income-taxAppellate Tribunal has been right in law in holding that the tea expenses were not in the nature of entertainment expenditure which could be disallowed under section 37(2B) of the Income Tax Act, 1961?"

It appears that four appeals were preferred by the assessee being Income-tax Appeals Nos. 1571 to 1574/(Ahd) of 1975-76 before the Income -tax Appellate Tribunal against the consolidated order passed by the Appellate Assistant Commissioner, dated September 2, 1975, and, therefore, four separate Reference Applications Nos. 690 to 693/(Ahd) of 1976-77 were preferred to the Tribunal for making references of questions of law to this Court for its opinion. The Tribunal has granted the said request, and, therefore, the registry of this Court was required to register these references separately, but it has however, consolidated all the references into one. In view of the fact that there were four separate references received from the Tribunal, four references were required to be registered and we accordingly direct the registry of this Court to renumber the aforesaid reference as Income-tax Reference No. 178 of 1978 and further References Numbers of Income-tax as 178/A to 178/C of 1978.

Questions Nos. 1 and 2 relate to the question as to under which head the income derived by the assessee from letting out part of its factory building to Messrs Jamnagar Foundry Works at an annual rent of Rs. 12,000 for the relevant assessment years, namely, 1969-70 and 1970-71, would fall, i.e. as to whether it would fall under the head "Income from house property" or under the head "Income from other sources". The Tribunal has held that such income of rent derived by the assessee would be assessable under the head "Income from house property" and not under the head "Income from other sources" following its own decision, dated August 31, 1976, in Income-tax Applications Nos.1069 and 1070 and 1308 to 1311/(Ahd) of 1975-76 in the case of New India Industries Limited, Against the said judgment of the Tribunal, questions of law were referred to this Court in Income-tax Reference No. 199 of 1978 (CIT v. New India Industries Ltd. (1993) 201 ITR 208) and, by our judgment and order dated August 24, 1992, we have held that the rental income from letting out A part of the factory premises in the facts and circumstances of that case would fall under the head "Income from house property" and not under the head "Income from other sources". In the said case, we have answered the reference in favour of the Revenue and against the assessee.

However, in the present case, it is the case of the assessee that the income derived by the assessee from letting out part of its factory building to Messrs Jamnagar Foundry Works at an annual rent of Rs. 12,000 was assessable under the head "Income from house property" while it was the case of the Revenue that it would fall under the head "Income from other sources".

Following our decision rendered by us on August 24, 1992, in Income-tax Reference No. 199 of 1978, and for the reasons stated therein, we answer questions No.s- 1 and 2 in the affirmative, i.e., in favour of the assessee and against the Revenue.

Question No.3 relates to the entitlement of the petitioner to deduct the expenditure of Rs.2,473 being in the nature of entertainment expenditure incurred during the assessment year 1971-72, and further, expenditure amounting to Rs. 4,691 being refreshment expenses and Rs.3,558 being messing expenses for the assessment year 1972-73. The deduction of the said expenses was not allowed by the Income-tax Officer. The Appellate Assistant Commissioner confirmed the order passed by the income-tax officer and added the aforesaid expenditure under section 37(2B) of the Act by placing reliance upon the decision of the Allahabad High Court in the case of Brij Raman Dass and Sons v. CIT (1976) 104 ITR 541.

In the appeal preferred to the Tribunal, by following the decision of the Division Bench of this Court in the case of CIT v. Gautamkumar Rajendrakumar and Patel Bros. & Co. Ltd. (1977) 106 ITR 424, the Tribunal held that the provisions made by the assessee for tea and messing could not be said to be levish, extravagant or unreasonable and it held that the said provisions were made by the assessee on account of long-standing practice or custom of trade. The Tribunal also took into account the nature and magnitude of the business of the assessee and found that the amount spent by the assessee towards tea and messing can, by no stretch of imagination, be said to be lavish, extravagant, wasteful or unreasonable and, therefore, it held that the said expenses could not be treated as entertainment expenses within the meaning of section 37(2B) of the Income Tax Act, 1961. The Tribunal, therefore, delete the disallowance of the aforesaid amount in the assessment year s 1971-72: and 1972-73. Looking to the nature and magnitude of the business of the assessee and keeping in mind the amount spent by the assessee towards tea and messing expenses, we are of the opinion that the amount spent by the assessee towards tea and messing cannot be said to be lavish extravagant, wasteful or unreasonable and, following the decision of our owe High Curt in the case of Patel Bros. (1977) 106 ITR 424, we hold that the Tribunal was right in holding that the aforesaid expenses, could not be treated as entertainment expenses within the meaning of section 37(2B) and in deleting their disallowance. We, accordingly, answer the third question in the affirmative i.e., in favour of the assessee and against the Revenue. No costs.

M.B.A./198/T.F.Reference answered