UNITED CATALYSTS INDIA LTD VS COMMISSIONER OF INCOME-TAX
1999 P T D 3316
[229 I T R 233]
[Kerala High Court (India)]
Before Mrs. K.K. Usha and G. Sivarajan, JJ
UNITED CATALYSTS INDIA LTD
Versus
COMMISSIONER OF INCOME-TAX
I.T.Rs. Nos. 85 and 88 of 1994, decided on 09/12/1996.
(a) Income-tax---
----Business expenditure---Guest house---Expenditure on, maintenance of guest house and on payment of rent for stay of company executives---Claim for deduction not allowable under general provisions of S.30---Expenditure referred to in S.37(4) is riot for "maintenance work" of guest house but on the very maintenance of a guest house meaning, for "keeping" guest house-- Expenses incurred for repair comes within expenses for keeping guest house---Comes within the ambit of S.37(4)---Indian Income Tax Act, 1961, Ss.30 & 37(1), (4), (5).
(b) Income-tax---
----Business expenditure--Assessee doing business with foreign collaborator- Memento presented by foreign collaborator in memory of assessee's late managing director---Essential for friendly relationship and business interest of assessee to take delivery of gift---Payment of import duty in respect of memento---Expenditure incidental to carrying on of business of assessee-- Entitled to deduction---Indian Income Tax Act, 1961, S.37.
For the assessment year 1984-85, the Assessing Officer disallowed the assessee's claim for deduction in respect of expenses relating to the maintenance of its executive hostel amounting to Rs.80,752 under section 37(4) of the Income Tax Act, 1961. The Assessing Officer also disallowed an amount of Rs.52,248 claimed by the assessee being import duty paid in respect of a memento presented by the foreign collaborator in memory of the assessee's late managing director. The Commissioner (Appeals) sustained the disallowance in respect of both the items. The Tribunal held that the import duty paid for clearing the memorial plaques given by the foreign collaborator was incurred for commercial expediency and for the purpose of business, since the plaques were exhibited only in the assessee-company's premises. The Tribunal also held that the amount spent on repair of the guest house had to be excluded in considering the amount disallowable under section 37(4) of the Act. On a reference:
Held, (i) that a reading of subsection (4) and more clarified by subsection (5) would clearly show that any accommodation by whatever name called, maintained, hired, reserved or arranged by the assessee for providing boarding or lodging to any person on tour or visit to the place at which such accommodation was situated, would be treated as accommodation in the nature of a guest-house and that no allowance should be made in respect of any expenditure incurred by the assessee after February 28, 1970, on the maintenance of any such guest-house. It could not be contended that in spite of the above provisions specifically relating to guest-house, the assessee could still clam deduction under the general provisions of section 50. The very maintenance of a guest house in the nature of the one described in sections 37(4) and 37(5) is hit by the provisions of section 37(4). Any expense incurred for repair of such guest-house would not be allowable. The wording of subsection (4) of section 37 would make it clear that the expenditure referred to in subsection (4) of section 37 was not for the "maintenance work" of the guest-house, but on the very maintenance of a guest-house meaning for "keeping" the guest-house. Expenses incurred for repair would come within expenses for keeping a guest-house. Therefore, the Tribunal was in error in holing that the amount spent on repairs would not come within the ambit of section 37(4).
(ii) That the assessee was doing business with foreign collaboration and the plaque was sent by its foreign collaborator in memory of the assessee's late managing director. It was necessary and essential for the business interests of the assessee to take delivery of the gift sent from the foreign collaborator in order to maintain a friendly relationship with the foreign collaborator. If the company had not taken delivery of the same, it would have certainly offended the feelings of the foreign collaborators, which might, in turn, have adversely affected the smooth development of their further business relationship. Therefore, there was no option for the assessee but to take delivery of the gift in the best interests of promotion of its business. Therefore, the payment of import duty to the extent of Rs.52,248 by the assessee was an expenditure which was really incidental to the carrying of the business of tire assessee and was an allowable deduction.
CIT v. Ahmedabad Mfg. and Calico Printing Co. Ltd. (1992) 197 ITR 538 (Guj.) and CIT v. Chase Bright Steel Ltd. (No.l) (1989) 177 ITR 124 (Bom.) and Indian Aluminium Co. Ltd. v. CIT (1972) 84 ITR 735 (SC) ref.
C.N. Ramachandran Nair for the Assessee.
P.K.R. Menon and N.R.K. Nair for the Commissioner.
JUDGMENT
MRS. K.K. USHA, J.---In I.T.R. No.85 of 1994, the Income-tax Appellate Tribunal, Cochin Bench (in short "the Tribunal"), has referred the following questions at the instance of the assessee for the opinion of this Court:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure on payment of rent and maintenance of executive hostel meant for stay of the company executives during their official tour is not allowable as per section 37(4) read with section 37(5) of the Act.
(2) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have found that the expenditure on rent being allowable under section 30 of the Act is excluded from the purview of expenditure to be considered for allowance under section 37(1) of the Act and as such from the purview of section 37(4) of the Act?"
In I.T.R. No.88 of 1994 at the instance of the Revenue,, the Tribunal has referred the following questions , for opinion of this Court:
"(1) Whether, on the facts and in the circumstances of the case and also for the reasons stated in the enclosure to the reference application, the Tribunal is right in law and fact in holding that the assessee is entitled to get deduction in respect of Rs.52,248 under section 37 of the Income-tax Act?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the amount spent on repairs will not come within the ambit of section 37(4) and in deciding the point in favour of the assessee without giving, any reason in support of the decision?"
Both the references are from the order of the Tribunal in I.T.A. No.654 of 1988 filed by the assessee against the order of the Commissioner of Income-tax (Appeals), dated June 10, 19-88, in respect of the assessment year 1984-85.
The assessee company is engaged in the manufacture and sale of chemical catalysis used in chemical industries. For the assessment year 1984-85, the assessing authority disallowed the assessee's claim in respect of expenses relating to maintenance of its executive hostel amounting to Rs.80,752 under section 37(4) of the Income Tax Act, 1961. So also, a further amount of Rs.52,248 claimed by the assessee being import duty paid in respect of a memento presented by the foreign collaborator in memory of the assessee's late managing director, Mr. A.H. Lalljee, was disallowed by the assessing authority. On appeal, the Commissioner (Appeals) sustained disallowance in respect of both items. The assessee filed second appeal before the Tribunal, which held that the duty for clearing memorial plaques given by the foreign collaborator in the memory of the assessee's late managing director, can be considered as having been incurred for commercial expediency and for the purpose of business since the plaques were exhibited only in the company's premises. As far as the maintenance of the guest house was concerned the Tribunal took the view that the amount spent on repair of the guest-house has to be excluded in considering the amount disallowable under section 37(4) of the Act.'
Question No.2 referred in I.T.R. No.88 of 1994 is connected with the question referred in I.T.R. No.85 of 1994. Learned counsel for the assessee contended that the Tribunal has committed an error in disallowing its claim regarding the expenditure incurred for, payment of rent and maintenance of the executive hostel meant for the stay of company executives during their official tour. According to the assessee, by virtue of the provisions contained under section 30, the rent paid by the assessee in respect of premises for the purpose of its business is an allowable deduction. It has, therefore, to be taken that such deduction is to be excluded from the purview of section 37 in view of the provisions contained under section 37(1) and, therefore, section 37(4) has no application in this case.
We find no merit in the above contention. We are of the view that the claim put forward by the assessee would directly come under sections 37(4) and 47(5) which read as follows:
"(4) Notwithstanding anything contained in subsection (1) or subsection (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 subsection 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;
(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 subsection (4). "
A reading of subsection (4) and more clarified by subsection (5) would clearly show that any accommodation by whatever name called, maintained, hired, reserved or arranged by the assessee .for providing boarding or lodging to any person on tour or visit to the place at which such accommodation is situated, will be treated as accommodation in the nature of a guest-house and that no allowance shall be made in respect of any expenditure incurred by the assessee after February 28. 1970, on the maintenance of any such guest-house. It cannot be contended that in spite of the above provisions specifically relating to guest-house, the assessee can still put forward a claim under the general provisions of section 30. Learned counsel for the assessee relied on the decisions in CIT v. Chase Bright Steel Ltd. (No. 1) (1989) 177 ITR 124 (Bom.) and CIT v. Ahmedabad Mfg. and Calico Printing Co. Ltd. (1992) 197 ITR 538 (Guj.) in support of its contention. On examining these decisions, eve find the first decision, which is rendered by the Bombay High Court, considered a case prior to the introduction of subsections (4) and (5) of section 37. The second decision, which was rendered by the High Court of Gujarat, just followed the Bombay High Court's decision even though, by that time, subsection (4) of section 37 had been introduced. We are not inclined to follow the above decisions in the present case.
As mentioned earlier, the second question in I.T.R. No.88 of 1994 is connected with the claim of the assessee in respect of the guest-house. The Tribunal, while upholding the findings of the Commissioner of Income-tax (Appeals) on the above claim of the assessee, took the view that the assessee is entitled to claim deduction in respect of repairs to the guest-house and that the amount spent on such repairs has to be ascertained by the Income-tax Officer. Learned standing counsel for the Revenue submits that the above finding of the Tribunal is erroneous. We find merit in this contention. The very maintenance of a guest-house in the nature of the one described in sections 37(4) and (5) is hit by the provisions of section 37(4). Any expense incurred for repair of such guest-house would not be allowable. An attempt was made by learned counsel for the assessee to contend that what has been interdicted under subsection (4) is expenditure for maintenance of the guest-house and, therefore, the expenditure for repair of the guest house would not come within the purview of subsection (4). We have no hesitation to reject this contention. The wording of subsection (4) would make it clear that the expenditure referred to in subsection (4) is not for the "maintenance work" of the guest-house, but on the very maintenance of a guest-house meaning for "keeping" the guest-house. Expenses incurred for repair would naturally come within expenses for keeping a guest-house. We are, therefore, of the view that the Tribunal was in error in holding that, the amount spent on repairs will not come within the ambit of section 37(4).
On the first question referred in I.T.R. No.88 of 1994, learned counsel for the Revenue submitted that the assessee is not entitled to put forward a claim in respect of the import duty paid since it cannot, for a moment, be considered as an expenditure laid out by the assessee as a trader and as incidental to his business. According to learned counsel, the expenditure was more in the nature of personal expenditure relating to the late managing director.
We find no merit in this contention. Admittedly; the assessee- company is doing business with foreign collaboration and the plaque was sent by their foreign collaborator in memory of their late managing director. It was necessary and even essential for the business interest of the assessee to take delivery of the gift sent from the foreign collaborator in order to maintain a friendly relationship with the foreign collaborators. The Tribunal was fully justified in holding that if the company had not taken delivery of the same it would have certainly offended the feelings of the foreign collaborators which might, in turn, adversely affect the smooth development of their further business relationship. Therefore, there was no option for the assessee but to take delivery of the gift in the best interest of promotion of its business. If that be so, we are of the view that the expenditure incurred by the assessee on this account would satisfy the test laid down by the Supreme Court in Indian Aluminium Co. Ltd. v. CIT (1972) 84 ITR 735. Payment of import duty to the extent of Rs.52,248 by the assessee is an expenditure which was really incidental to the carrying on of the business of the assessee and, therefore, entitled to deduction.
In the light of the above, in I.T.R. No.85 of 1994, we answer question No.l in the affirmative, in favour of the Revenue and against the assessee and question ko.2 in the negative in favour of the Revenue and against the assessee. In I.T.R. No.88 of 1994, we answer question No.l in the affirmative in favour of the assessee and against the Revenue and question No.2 in the negative, in favour of the Revenue and against the assessee.
A copy of this judgment under the seal of this Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.
M.B.A./3082/FC Order accordingly