COMMISSIONER OF INCOME-TAX VS CARBORANDUM UNIVERSAL LTD.
2001 P T D 1685
[241 I T R 407]
[Madras High Court (India)]
Before N. V Balasubramanian and P. Thangavel, JJ
COMMISSIONER OF INCOME‑TAX
versus
CARBORANDUM UNIVERSAL LTD.
Tax Case No.808 of )983 (Reference No.416 of 1983), decided on 20/10/1997.
(a) Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Depreciation‑‑‑Guest house‑‑‑Law applicable
Effect of introduction of subsection (5) of S.37 by Finance Act, 1983, with retrospective effect from 1‑4‑1979‑‑‑Subsection (5) of S.37 not applicable prior to 1‑4‑1979‑‑‑Maintenance of flat in accounting year relevant to assessment year 1973‑74‑‑‑Finding by Tribunal that flat could not be taken as a guest house because it was used mainly by assessee's employees‑‑ Expenditure on maintenance and depreciation allowable‑‑Indian Income Tax Act, 1961, Ss.32 & 37‑‑‑
(b) Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Provision for gratuity‑‑‑Allowable for assessment year 1975‑76 following the decision of the High Court in assessee's own case for assessment year 1973‑74‑‑‑Indian Income Tax Act, 1961, S.37.
The effect of the amendment made by the Finance Act, 1983, with retrospective effect from April 1, 1979, is to alter the law on the scope of the term, "guest house" and when there is an alteration in the law by the Finance Act, 1983, it cannot be said that the law has clarified the position. The provision and the object sought to be achieved by the provision also indicate that it was not given full retrospective effect. Hence, subsection (5) of section 37 of the Income Tax Act, 1961, would not apply before April 1, 1979.
CIT v. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC) applied.
Held, (i) that following the judgment in the assessee's own case for 1973‑74 (241 ITR 402 (Mad.) provision for gratuity should be allowed as a deduction for assessment year 1975‑76.
Carborandum Universal Ltd. v. CIT (2000) 241 ITR 402 (Mad.)fol.
(ii) That the Tribunal noticed that the guest house register clearly showed that only the assessee's employees occupied the flat primarily and the assessee also collected charges from other persons who occupied it and who were the employees of associated companies and sister concerns. From the above factual position, the Tribunal came to the conclusion that the said flat or apartment could not be considered as a guest house at all. For the assessment year 1975‑76, the Tribunal was right in holding that the expenditure incurred on the maintenance of the flat in Bombay and depreciation on the said building should be allowed.
CIT v. Aruna Sugars Ltd. (1980) 123 ITR 619 (Mad.) and CIT v. Ocean Carriers (Pvt.) Ltd. (1995) 211 ITR 357 (Bom.) ref.
C.V. Rajan for the Commissioner.
Balasubramanian for the Assessee.
JUDGMENT
N. V. BALASUBRAMANIAN, J.‑‑‑At the instance of the Revenue, the Appellate Tribunal has stated a case and referred the following questions of law for the assessment year 1975‑76 under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"):
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the expenditure incurred on the maintenance of the flat at Bombay and depreciation on the sued building should be allowed as a deduction even though it is a guest house within the meaning of section 37(3) of the Income Tax Act, 1961?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provision for gratuity should be allowed as a deduction even though there was no approved gratuity fund in existence during the previous year relevant to the assessment year 1975‑76?"
The answer to the second question need not detain us as the Tribunal has followed its earlier order for the assessment year 1973‑74 in the assessee's own case and by our judgment in Tax Cases Nos.220 and 221 of 1981 (Carborandum Universal Ltd. v. CIT (2000) 241 ITR 402 (Mad.)) of even date, we have upheld the order of the Tribunal for the assessment year 1973‑74. Following the judgment in Tax Cases Nos.220 and 221 of 1981 (Carborandum Universal Ltd. v. CIT (2000) 241 ITR 402 (Mad.)) of even date, we answer the second question of law referred to us in the affirmative and against the Revenue.
In so far as the first question is concerned it relates to the claim of the assessee for deduction of certain expenditure incurred on the maintenance of a flat to Bombay and claim for depreciation on the said building. The Income‑tax Officer disallowed the claim of the assessee on the ground that the said flat maintained by the assessee was a guest house and under the provisions of section 37(4) of the Act, the assessee was not eligible to get the allowance towards the expenditure incurred on the maintenance of the guest house and also the depreciation on the said building. The Appellate Assistant Commissioner, on appeal by the assessee, following an order of the Income tax Appellate Tribunal rendered in the assessee's own case for the assessment years 1971‑72. 1972‑73, 1973‑74 and 1974‑75 held that the expenditure should be allowed as a deduction. The Revenue has preferred an appeal before the Income‑tax Appellate Tribunal. The Appellate Tribunal also following its earlier order in I.T.A. .No.1555/Mds. of 1976‑77, dated December 21, 1978, for the assessment year 1973‑74 held that the guest house was maintained by the assessee for its employees, who were in tour in connection with the assessee's business to Bombay and, therefore, the said flat could not be regarded as a guest house and the assessee would be entitled to the maintenance expenditure as well as the depreciation on the said flat.
It is now necessary to notice the order of the Appellate Tribunal in I.T.A. No.1555/Mds. of 1976-77, dated December 21, 1978, rendered for the assessment year. 1973‑74. In the said order, the Appellate Tribunal noticed the findings of the Appellate Assistant Commissioner for the assessment years 1971‑72 and 1972‑73, dated February 13, 1978, and the Tribunal found that the log book showed that some non‑employees used the flat though the expenditure on such user was not substantial. It was clarified before the Appellate Tribunal that the said non‑employees were none other than the executives of the sister companies of the assessee and the assessee also charged from them. The Tribunal noticed that the guest house register clearly showed that only the assessee's employees occupied the flat primarily and the assessee also collected charges from other persons who occupied and who were the employees of associated companies and sister concerns. From the above factual position, the Appellate Tribunal came to the conclusion that the said flat or the apartment cannot be considered as a guest house at all and the case is not hit by the provisions of section 37(4) of the Act. The Revenue has come to this Court by way of reference for the assessment year 1975‑76.
Mr. C. V. Rajan, learned counsel for the Revenue, brought to our notice the provisions of sections 37(4) and 37(5) of‑the Act. He also brought to our notice the decision of the Bombay High Court in the case of CIT v. Ocean Carriers (Pvt.) Ltd. (1995) 211 ITR 357 and submitted that though subsection (5) of section 37 was inserted by the Finance Act, 1983, with retrospective effect from April 1, 1979, the said amendment has merely clarified the position and under the provision, any accommodation maintained by the assessee to provide lodging or boarding to any person including an employee or a director is liable to be regarded as a guest house within the meaning of subsection (4) of section 37 of the Act. According to learned counsel for the Revenue, subsection (5) of section 37 of the Act teas only retrospective in nature and would apply for the assessment year 1975‑76. His further submission is that the Appellate Tribunal overlooked the proviso to section 37(4) of the Act and under the proviso, if the assessee maintained the guest house as a holiday home and if the guest house is intended for the exclusive use or benefit of the employees while on leave only, that guest house maintained as a holiday home will not be regarded as a guest house within the meaning of subsection (4) of section 37 of the Act.
Mr. R. Balasubramanian, learned counsel for the assessee, on the other hand, submitted that the finding of the Tribunal is clear that the flat maintained by the assessee cannot be regarded as a guest house and as it is not a guest house, the question of applicability of the proviso to subsection (4) of section 37 of the Act does not arise. He also submitted that section 37(5) of the Act, by the nature cannot have full retrospective operation.
We have carefully considered the submissions of learned counsel for the Revenue as well as learned counsel for the assessee. It is no doubt true that the decision of the Bombay High Court in Ocean Carriers (Pvt.).Ltd.'s case (1995) 211 ITR 357, makes it clear that any accommodation maintained by the assessee to provide lodging or boarding to any person including an employee or a director of a company or the holder of any office of the company would be in the nature of a guest house and the amendment made by the Finance Act, 1983, to section 37(5) of the Act is only clarificatory in nature and would apply for the assessment year 1977‑78 as well. But the decision of the Bombay High Court has to be read in the light of the decision of this Court in the case of CIT v. Aruna Sugars Ltd. (1980) 123 ITR 619. This Court considered the expression, "guest house" occurring in section 37(3) of the Act and after considering the dictionary meaning and the relevant rules came to the conclusion that where a guest house 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 company who have to visit it for the purpose of the company's business, then any expenditure incurred for the maintenance of such accommodation cannot be brought within the scope of section 37(3) of the Act. This Court also held that the expression, "guest" did not comprehend the employees and the employees could not be regarded as strangers so as to be regarded as guests. Finally, this Court held that unless a guest house is intended for use by a complete stranger, it cannot be called a guest house which falls within the scope of section 37(3) of the Act.
We have already seen the finding of the Appellate Tribunal in the instant case that the apartment was made for the assessee's employees and the said finding was arrived at on the basis of the guest house register maintained by the assessee. In so far as other persons who have stayed in the said apartment were concerned, it was found that the assessee levied charges from them. We are of the view that the decision of this Court in Aruna Sugars Ltd.'s ease (1980) 123 ITR 619, though rendered under section 37(3) of the Act would equally apply to the provisions of section 37(4) of the Act to consider the meaning of expression "guest house" found in that subsection. The expression "guest house" is not specifically defined in subsection (4) of section 37 of the Act as in subsection (3) of section 37 of the Act and it is not a term of art and we have to construe the expression, "guest house" found in subsection (4) of section 37 of the Act and give the same meaning that was given by this Court to the expression, "guest house" found in subsection (3) of section 37 of the Act. It is clear, applying the ratio of Aruna Sugars Ltd.'s case (1980) 123 ITR 619 (Mad.), the apartment maintained by the assessee at Bombay cannot be regarded as a guest house at all and when it is not a guest house, the question of applicability of the proviso to subsection (4) of section 37 of the Act also does not arise. The proviso to subsection (4) of section 37 of the Act will apply only if it is established that a particular apartment is a guest house within the meaning of the main part of subsection (4) of section 37 of the Act, and when the apartment is not a quest house, the necessity of considering the applicability of the proviso to subsection (4) of section 37 of the Act does not arise.
In so far as the retrospective effect of subsection (5) of section 37 of the Act is concerned, it is relevant to notice that the said subsection was introduced by the Finance Act, 1983, with retrospective effect from April 1, 1979. It is no doubt true that the Bombay High Court in Ocean Carriers (Pvt.) Ltd. (1995) 211 ITR 357 came to the conclusion that the provisions of subsection (5) of section 37 of the Act are retrospective in nature and would apply even to the assessment year 1977‑78. Subsection (5) of section 37 provides 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, director or any holder of any other office in the company) would be regarded as an accommodation iii the nature of a guest house within the meaning of subsection (4) of section 37 of the Act. We have already noticed the decision of this Court in Aruna Sugars Ltd.'s case (1980) 123 ITR 619, wherein this Court has taken .a view that the employees cannot be regarded as strangers and only if the accommodation is maintained for strangers, that place and accommodation would be regarded as a guest house. .The effect of the amendment made by the Finance Act, 1983, with retrospective effect from April 1, 1979, is to alter the law on the scope the term, "guest house" and when there is an alteration in the law by the Finance Act, 1983, it cannot be said that the law has clarified the position.
A similar question came up for consideration before the Supreme Court in the case of construction of the expression, "entertainment expenditure" in section 37(2A) of the Act in CIT v.. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 wherein the Supreme Court found that ordinarily "entertainment" connotes something which may be beneficial for mental or physical well being, but it is not essential or indispensable for human existence, and that the law that existed prior to the amendment was sought to be modified by the Finance Act, 1983, with effect from April 1, 1976, by insertion of Explanation 2 to subsection (2A) of section 37 of the Act. The Supreme Court found that insertion of Explanation 2 though began with the expression for the removal of a doubt, the same expression as found in subsection (5) of section 37 of the Act, was not fully retrospective as the insertion was made with restricted retrospective operation with effect from April 1, 1976. The apex Court, therefore, held that partial retrospective effect was given to indicate that its application prior to April 1, 1976, was excluded. Applying the same ratio, when the Finance Act, 1983, inserted subsection (5) of section 37 of the Act with retrospective effect .from April 1, 1979,. its operation prior to April 1, 1979, would be excluded as it was necessary to restrict its retrospective operation. We have already held that by insertion of subsection (5) of section 37, the law laid down by the decision in Aruna Sugars Ltd.'s case (1980} 123 ITR 619 (Mad.) is altered and when there is an alteration in the law, it cannot be stated that subsection (5) of section 37 of the Act was inserted to clarify the position. Therefore, we. are of the view that the principles of the decision of the Supreme Court in Patel Bros. & Co. Ltd.'s case (1995) 215 ITR 165, though rendered with reference to subsection (2A) of section 37 of the Act, would apply to subsection (5) of section 37 of the Act also. The language of the provision and the. object sought to be achieved behind the provision also indicate that it was not given full retrospective effect. We have already seen that the flat was made only for the employees and not for strangers. The Tribunal has come to a correct conclusion by holding that the apartment maintained by the assessee in Bombay cannot be regarded as a guest house. We do not find any infirmity in the order of the Appellate Tribunal. Accordingly, we answer the first question of law referred to us also in the affirmative and against the Revenue. There will be no order as to costs.
M.B.D./539/FCQuestion answered