(a) Income-tax---

----Business---Expenditure---Disallowance---Expenditure on maintenance of residential accommodation in the nature of a guest house---Effect bf S.37(4)---Section 37(4) would cover expenditure on purchase of provisions for giving refreshments or meals to guests staying in guest house---Indian Income Tax Act, 1961, S.37(4).

(b) Interpretation of statutes---

---- Object of provision is relevant.

The object behind the introduction of the provisions of section 37(4) of the Income Tax Act, 1961, is to curb the lavish expenditure incurred by the assessee on the maintenance of the guest house. The crucial words found in subsection (4) of section 37 are "on the maintenance of any residential accommodation-.in the nature of a guest house". In view of the object behind the introduction of subsection (4) of section 37, 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. The said expression would encompass not only the expenditure incurred on the maintenance of guest house like white washing 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. It would include the expenditure incurred on the purchase of provisions or other essential items for giving refreshment or meals to the guests staying in the guest house.

Kanoria Chemicals and Industries Ltd. v. CIT (1995) 78 Taxman 455 (Cal.); Karnataka Exports Ltd. v. CIT, (1980) 121 ITR 154 (Kar.) and S.araswati Industrial Syndicate Lid. v. CIT (1982) 136 ITR 361 (P & H) foi.

For the assessment year 1977-78, the assessee claimed 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 sum of Rs.17,940 comprised the following items: (1) Rs.5,716 on the purchase of coffee and tiftin for supply to the visitors to the factory; (2) Rs.7,973 on the purchase of the provisions obtained for supply for meals and tiffin prepared in the guest house; (3) Rs.782 as wages to the cook, etc.; (4) Rs.3,469 on the maintenance of the guest house accommodation like replacement of wiring etc. The Income-tax Officer rejected the claim of the assessee on the ground that the entire sum of Rs.17,940 should be treated as guest house expenditure. The Appellate Assistant Commissioner and the Tribunal, however, held that the entire amount was deductible. On a reference:

Held, that the necessary factual data whether the said expenditure was incurred on the visitors staying in the guest house or whether the assessee had incurred the expenditure when the inspectors came to the factory premises were lacking with regard to the first item of the expenditure. The mere fact that the Income-tax Officer had chosen to treat the expenditure as guest house expenditure or he had grouped all the items of expenditure under one common head, namely, "guest house expenditure" would not be sufficient. Therefore, the first item of expenditure could not be regarded as guest house expenditure. The second item of expenditure `was really gust house expenditure as it was incurred for the purchase of the provisions for supply of meals and tiffin for the guests staying in the guest house. The second item would squarely come within the mischief of section 37(4) of the Act. The third and fourth items actually related to the maintenance of guest house and they were not incurred on the purchase of provisions but for the maintenance of guest house itself. Therefore, the expenditure amounting to Rs.5,716 could not be regarded as guest house expenditure and the other items were liable to be treated as guest house expenditure and not allowable as deduction.

CIT v. Gaekwar Mills Ltd. (1992) 193 ITR 734 (Guj.) and Modi Spinning and Weaving Mills Co. Ltd. v. CIT (1993) 200 ITR 544 (Delhi) ref.

C.V. Rajan for the Commissioner.

P. P. S. Janarthana Raja for the Assessee.

JUDGMENT

N.V. BALASUBRAMANIAN, J.---Pursuant to the directions of this Court in T:C.P. No. 170 of 1984, dated December 4, 1984, the Income?tax Appellate Tribunal has referred the following question of law under section 256(2) of the Income Tax Act, 1961. (hereinafter referred to as the Act"), for our consideration:

"Whether, on the facts and in the circumstances of the case, the Appellate 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?"

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The assessee is a cooperative society and during the course of the assessment proceedings, for the assessment year 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 comprise the following items:

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The Income-tax Officer 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 subsection (4) of section 37 of the Act. The Commissioner of Income-tax (Appeals) 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 Income-tax Appellate Tribunal in the appeal preferred by the Revenue, following its earlier order in the case of New Horizen Sugar Mills (Private) Limited in I.T.A. Nos. 1496 to 1498 (Mds) of 1977-78, dated September 20, 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 Appellate 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 subsection (4) of section 37 of the Act.

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 section 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 subsection (1) or sub? section (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."

The crucial words found in subsection (4) of section 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 or supply, of re?freshments to the guests staying in the guest house. The object behind the introduction of the provisions of section 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 section 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 the guest house is not allowable as a business expenditure. The mandate of the, provisions of section 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 subsection (4), of section 37 of the Act, we are of he 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 wide meaning is given, the said expression would encompass not only the expenditure incurred on the maintenance of the guest house like white washing 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 provisions or other essential items for giving refreshment or meals to the guests staying in the guest house.

It is not as if there are no decisions on the question of interpretation of the expression. "on the maintenance of any residential accommodation in the nature of a guest house" and the study of case law shows there are conflicting views emerging from the various High Courts of the country on the interpretation of the said term. The earlier decision to which our attention was drawn is the decision of the Karnataka High Court, in the case of Karnatak Exports Ltd. v. CIT (1980) 121 ITR 154, wherein the Karnataka High Court held that the said expression would include expenditure incurred not only in the residential accommodation but also expenditure incurred on the food and other amenities provided in the guest house. The Karnataka High Court, no doubt, has considered the preceding section namely, section 37(3) of the Act, which employed the same expression and the Karnataka High Court held as under (page 158):

"In our opinion, the use of the words 'any residential accommodation including any accommodation in the nature of a guest house' on the other hand clearly indicates that the allowances permitted under subsection (3) of section 37 of the Act are not only in respect of residential accommodation provided, but also any accommodation in me nature of a 'guest house' because the meaning of the word 'guest house' as given in the Concise Oxford Dictionary is superior boarding house' which necessarily includes providing of food and other facilities required for staying there. If the contention urged for the Revenue is correct, the use of the words any accommodation in the nature of guest house' in subsection (3) of section 37 of the Act would be redundant, because' the words 'residential accommodation' take in any residential accommodation provided even in a guest house and separate mentioning of the words 'any accommodation in the nature of a 'guest, house' would have been unnecessary. Hence, it is not possible to accede to the submission made for the Revenue that subsection (3) of section 37 of the Act only covers any residential accommodation and not food ' and other amenities provided in a guest house."

The above decision, of the Karnataka High Court was followed by the Punjab and Haryana High Court in the case of Saraswati Industrial Syndicate Ltd. v. CI T- (1982) 136 ITR 361. The Punjab and Haryana High Court, following the decision of the Karnataka High Court cited above, held that it would be .quite logical and reasonable to hold that the expression "maintenance of a guest house" would comprehend not only the maintenance expenditure but also other expenditure incurred towards food and other amenities.

The Calcutta High Court had an occasion to consider the provisions of subsection (4) of section 37 of the Act in Kanoria Chemicals and Industries Ltd. v. CIT (1995) 78 Taxman 455. The learned Judge speaking for the Bench held that the term maintenance of a guest house will include the provisions for foods, drinks and also lodging and if the assessee provides residential accommodation to the guests and also food arid drinks and other amenities, the expenditure would come within the mischief of the phrase "maintenance of any residential accommodation in the nature of a guest house". The Calcutta High Court also noticed the various dictionary meanings of the expression "guest house" and they are as under (page 465);

?Guest House?, according to the Webster's New International English language, second edition, mean, 'A house for guests, as an inn'. When a person goes to an inn, he not only expects accommodation but also refreshment.

The word 'guest' has been defined to mean in the aforesaid dictionary: '

" 1. A stranger.

2. A person entertained in one's house or at one's table; .a visitor entertained without pay; hence, a person to whom the hospitality of a home, club, etc. is extended.

3. Any person who lodges, boards, or receives refreshment, for pay, at a hotel, boarding house, restaurant or the like, whether permanently or transiently; a patron.

4. Specific law, a traveller who as a visitor takes for pay refreshment for himself or his beats at an inn or hotel, without reference to the length of his stay so long as he retains his character of a traveller or transient visitor; distinguished head from a boarder."

Let us consider the decision of the Gujarat High Court in the case of CIT v. Gaekwar Mills Ltd. (1992) 193 ITR 734, wherein the Gujarat High Court has taken the view that the expenditure incurred in providing mess facilities to the employees who came to work in the factory premises cannot be regarded as having been incurred for the maintenance of a guest house.

The above view of the Gujarat High Court was followed by the Delhi High Court in Modi Spinning and Weaving Mills Co. Ltd..v. CIT (1993) 200 ITR 544 and the Delhi High Court observed as under (page 554):

"The expenses which are contemplated by subsection (3) of section 37 are those which have to be incurred by an assessee irrespective of the fact whether a guest stays or not, or are those types of expenses which, are necessary for the upkeep and running of the establishment. Provision for food and refreshment is something extra. Even though a facility for providing food is available, food is made available only if and when the guests -require the same. The expense which is so incurred is an expense on the guests directly and not an expense which is relatable to the maintenance of a residential accommodation."

It is seen on the facts of the decision of the Delhi High Court, the guest house only belonged to another company and the guests of the assessee-company used to stay in the guest house belonging to other company and half of the expenditure on its maintenance was reimbursed by the assessee. The Delhi High Court in that context held that the amount spent towards the cost of food and current repairs of the company cannot be regarded as the expenditure incurred on the maintenance of guest house.

We are of the view that the facts here are entirely different, as the assessee was maintaining a guesthouse of its own and there is no question of any expenditure incurred by it towards reimbursement of somebody's expenditure towards the maintenance of any guest house. It is no doubt true that the Delhi High Court has taken the view that the provisions for food and refreshment are expenditure incurred on the guests directly and cannot be regarded as expenditure relating to the maintenance of a guest house. However, we are of the view that if such an interpretation is given to the expression, "on the maintenance of any residential accommodation in the nature of a guest house" it will really defeat the object behind the provisions of section 37(4) of the Act. We are in complete agreement with the views expressed by the Karnataka High Court, Punjab and Haryana High Court and Calcutta High Court in the decisions cited supra. Therefore, we are not able to agree with the conclusion of the Appellate Tribunal that the expenditure incurred- on the guests staying in the guest house cannot be regarded as an expenditure on the maintenance of any residential accommodation in the nature of the guest house. is, already observed, it will include not only the maintenance expenditure of the guest house, but extend to the expenditure incurred towards the provisions for food, drinks and refreshment and other amenities, provided to the guests staying in the guest house.

It is in the light of the principles of law laid-down by us, we will examine the items of expenditure incurred by the assessee. In so far as the first item of expenditure namely Rs.5,716 is concerned, it is seen that it was the expenditure incurred on the purchase of coffee and tiffin for supply to the visitors of the factory. The order of the Income-tax Officer has not given any reason as to how he has treated the said expenditure as guest house expenditure. The Commissioner of Income-tax (Appeals) held that the expenditure can neither be regarded as guest house expenditure not entertainment expenditure, which view was confirmed by the Appellate Tribunal. The necessary factual data whether the said expenditure was incurred on the visitors staying in the guest house or whether the assessee had incurred the expenditure when the inspectors came to the factory premises are lacking with regard to the first item of the expenditure. The mere fact that he Income-tax Officer has chosen to treat the expenditure-as guest house expenditure or he has grouped all the items of expenditure under one common head, namely, "guest house expenditure would not be sufficient, particularly when the first appellate authority has held that the expenditure was allowable either as guest house expenditure or entertainment expenditure. It is duty of the Income-tax Officer to state with cogent reasons how he has treated the expenditure as guest house expenditure. Therefore, we are of the view that in so far as the first item of the expenditure is concerned, it cannot be regarded as guest house expenditure falling within the scope of section 37(4) of the Act. In so far as the second item of expenditure is concerned, it is really a guest house expenditure as it was incurred for the purchase of the provisions for supply of meals and tiffin for the guests staying in. the guest house. In the light of the principles of law laid down earlier, the second item would squarely come within the mischief of section 37(4) of the Act. The third and fourth items actually relate to the maintenance of guest house and they were not incurred on the purchase of the provision but for the maintenance of guest house itself. Therefore, we are of the view that the items covered in items Nos.3 and 4 would squarely come within the ambit of section 37(4) of the Act. Consequently, we uphold the order of the Appellate Tribunal as regards the first item of expenditure, namely, purchase of coffee and tiffin for supply to visitors to the factory, but we hold that the rest of the items are liable to be regarded as expenses incurred on the maintenance of guest house maintained by the assessee and they are not allowable in the computation of the business income of the assessee.

Accordingly, we answer the question of law asunder:

The Tribunal was correct in holding that the expenditure amounting to Rs. 5,716 cannot be regarded as guest house expenditure, and other items are liable to be treated as guest house expenditure and not allowable as deduction. We answer the question of law in the manner indicated above. However, there will be no order as to costs.

M.B.A./652/FC?????????????????????????????????????????????????????????????????????????????????? Reference answered.