1995 (7) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure of Rs. 9,974 on the salary and bonus of employees working in a guest house is disallowable under section 37(4) of the Income-tax Act, 1961.
2. Whether the expenditure of Rs. 5,141 on lighting charges of the guest house is disallowable under section 37(4) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of Expenditure on Salary and Bonus of Guest House Employees
The assessee, a company engaged in processing and exporting tobacco, claimed an expenditure of Rs. 9,974 on the salary and bonus of employees working in a guest house. This expenditure was disallowed by the Income-tax Officer. The Commissioner of Income-tax (Appeals) upheld this disallowance, but the Income-tax Appellate Tribunal allowed the deduction, referencing its earlier decisions and a High Court judgment in Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514 (AP). However, the High Court clarified that the judgment in Maddi Venkataratnam did not consider the provisions of sub-section (4) of section 37, which came into effect from April 1, 1970.

Sub-section (4) of section 37 explicitly states that "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." Since the guest house was maintained for foreign customers and not for employees during their holidays, the expenditure on salary and bonus of guest house employees falls within the prohibition of sub-section (4) and is not an allowable deduction.

Issue 2: Disallowance of Expenditure on Lighting Charges of Guest House
Similarly, the assessee claimed an expenditure of Rs. 5,141 on lighting charges of the guest house, which was also disallowed by the Income-tax Officer and upheld by the Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal allowed this deduction based on its earlier decisions. However, the High Court reiterated that sub-section (4) of section 37 prohibits any allowance for expenditure on the maintenance of a guest house incurred after February 28, 1970.

The High Court referenced CIT v. Ocean Carriers Pvt. Ltd. [1995] 211 ITR 357 (Bom), where it was held that expenditures on guest houses not maintained exclusively as holiday homes for employees are not allowable. The court also discussed CIT v. Parshva Properties Ltd. [1987] 164 ITR 673 (Cal) and CIT v. Orient Paper Mills Ltd. [1988] 171 ITR 181 (Cal), distinguishing those cases based on their specific facts.

In the present case, since the guest house was used by foreign customers and not exclusively by employees, the expenditure on lighting charges is also disallowed under sub-section (4) of section 37.

Conclusion:
Both expenditures, Rs. 9,974 on the salary and bonus of guest house employees and Rs. 5,141 on lighting charges of the guest house, are disallowed under section 37(4) of the Income-tax Act, 1961. The High Court answered both questions in the negative, in favor of the Revenue and against the assessee.