2005 (7) TMI 82 - HC - Income Tax

Whether, the expenditure incurred on maintenance of the transit quarter at Car-michael Road, Bombay, for accommodating its employees visiting Bombay from outstations for the purposes of business could be disallowed under section 37(4) of the Income-tax Act, 1961, treating it as a guest house? - the claim for allowance of expenditure under section 37(1) is required to be allowed and the question reframed to read as expenditure allowable under section 37(1) and not section 37(4). Accordingly, the question is answered in favour of the assessee and against the Revenue.

Summary

Issues:
Interpretation of section 37(4) of the Income-tax Act, 1961 regarding the disallowance of expenditure incurred on maintenance of transit quarters for accommodating employees visiting Bombay for business purposes.

Analysis:
The case involved a dispute over whether the expenditure incurred on maintenance of transit quarters at Car-michael Road, Bombay, for accommodating employees visiting Bombay from outstations for business purposes could be disallowed under section 37(4) of the Income-tax Act, 1961, treating it as a guest house. The Income-tax Officer disallowed the expenditure, but the Commissioner of Income-tax (Appeals) allowed it. The Appellate Tribunal ruled that the expenditure was not allowable under section 37(4) and relied on a judgment of the Karnataka High Court. The Department argued that the expenditure should be disallowed based on a judgment of the Bombay High Court. However, the Tribunal's question referred to the High Court indicated that the transit quarters were meant for accommodating employees visiting for business purposes, suggesting the claim should fall under section 37(1) for expenses wholly and exclusively for business purposes.

The High Court analyzed the provisions of section 37(4) and section 37(1) of the Income-tax Act, 1961. While the authorities below rightly disallowed the expenditure under section 37(4), the High Court considered the specific circumstances of the case where the transit quarters were used for accommodating employees visiting Bombay for the business of the company. The Court noted that the assessee's case should be entertained under section 37(1) instead of section 37(4) as the employees were visiting Bombay for business purposes. The Court found that the employees were accommodated in the transit quarters exclusively for business-related visits, qualifying the expenditure for deduction under section 37(1) as it was laid out wholly and exclusively for business purposes.

Therefore, the High Court held in favor of the assessee, allowing the claim for the expenditure under section 37(1) and reframed the question to clarify that the deduction should be under section 37(1) and not section 37(4. The reference was disposed of accordingly, favoring the assessee and ruling against the Revenue.