1997 (2) TMI 494 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance u/s 37(4) related to guest-house expenses.
2. Allowability of rent, repairs, and taxes for guest-house maintenance.

Summary:

Disallowance u/s 37(4) - Guest-house expenses:

The assessee claimed guest-house expenses of Rs. 8,83,372, which were disallowed by the Assessing Officer u/s 37(4) of the Income-tax Act. The Commissioner of Income-tax (Appeals) deleted Rs. 7,41,305 of this disallowance. The Tribunal had to tread carefully between the decisions in CIT v. Chase Bright Steel Ltd. (No. 1) [1989] 177 ITR 124 and CIT v. Ocean Carriers Pvt. Ltd. [1995] 211 ITR 357. The Tribunal concluded that the occupancy charges and administration charges totaling Rs. 8,83,372 were disallowable as they partook the character of maintenance. Rent of Rs. 2,81,574 was allowable based on Chase Bright Steel Ltd., and depreciation of Rs. 1,02,701 was not allowable as per Ocean Carriers Pvt. Ltd. The additional ground for deduction of rent was allowed, but the first ground raised by the assessee and the ground raised by the Revenue were rejected.

Allowability of rent, repairs, and taxes for guest-house maintenance:

The Accountant Member (AM) opined that rent, repairs, and taxes should not be disallowed u/s 37(4) as they are allowable under sections 30 and 31 of the Act, supported by the decision in CIT v. Chase Bright Steel Ltd. (No. 1) [1989] 177 ITR 124. The Judicial Member (JM) disagreed, citing CIT v. Ocean Carriers Pvt. Ltd. [1995] 211 ITR 357 and Raja Bahadur Motilal Poona Mills Ltd. v. CIT [1995] 212 ITR 175, which held that guest-house expenses are disallowable under section 37(4). The matter was referred to a Third Member due to differing opinions.

Order of Third Member:

The Third Member (A. Kalyanasundhram) resolved the disagreement by favoring the view that rent, repairs, and taxes should not be disallowed u/s 37(4) based on the precedent set by the earlier decisions in Chase Bright Steel Ltd. and Century Spinning and Manufacturing Co. Ltd. The Third Member emphasized the ambiguity in the law and chose the interpretation favorable to the taxpayer, aligning with the Supreme Court decision in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. The matter was returned to the regular Bench for final disposal in accordance with the majority view.