2011 (4) TMI 863 - HC - Income Tax

Disallowance u/s 37 - The transit flat is exclusively used by the employees of the assessee and the assessee also does not pay any allowance to such employees and no recovery is also made from them for their stay in the transit flat - Held that - AO in the order of assessment dated March 17, 1997 treated the said expenditure in respect of the holiday home as capital in nature - in the case of Keshoram Industries and Cotton Mills Limited Vs. C. I. T (1989 (6) TMI 10 - CALCUTTA High Court) holding against his client, he does not press the first question as regard transit flat for the employee Deduction u/s 33AB - whether the profit arising out of any amount of tea purchased by the assessee from outside which was required for the purpose of blending with the tea grown in his own garden, should be deducted for the purpose of arriving at the figure of profit of such business of growing and manufacturing tea? - Held that - If the assessee s garden grows tea enriched with flavour but lacking in liquor contents, the assessee in order to manufacture good quality of final product of tea will be required to blend some other type of tea enriched with liquor content to have a good quality of the said final product - The requirement of the Section 33AB is that the assessee must grow tea leaves and will also convert those leaves into final product by way of processing - Thus, the profit arising out of selling its grown tea to others without processing and bringing it into final form of manufactured tea will not be eligible for deduction under the Section 33AB of the Act - It appears that the purchased amount is very trifling in comparison to the amount grown by the assessee and thus, it is not a case where it can be alleged that the purpose of maintenance of the garden by growing insignificant amount of tea in comparison to the final product is only a device to get the benefit of the Section - Held that assessees who grow and manufacture different varieties of tea and consequently, do not require purchase of any tea for blending with the final product, can only get the benefit of Section 33AB - Decided in favor of the assessee

Issues Involved:
1. Disallowance of expenditure on the maintenance of a transit flat for employees.
2. Deduction under Section 33AB of the Income Tax Act for profits from the sale of tea manufactured out of bought green leaves and purchased tea blended with the tea grown by the assessee.
3. Disallowance of expenditure incurred on maintaining a holiday home for employees.

Detailed Analysis:

1. Disallowance of Expenditure on the Maintenance of a Transit Flat for Employees:
The first issue questions whether the transit flat for employees qualifies as a guest house under sub-sections (4) and (5) of Section 37 of the Income Tax Act, 1961, thereby disallowing the expenditure incurred on its maintenance. The court noted that the assessee conceded this point based on a prior decision in Keshoram Industries and Cotton Mills Limited Vs. C.I.T, which held against the assessee. Thus, the court affirmed the Tribunal's decision that the transit flat is a guest house, and the expenditure on its maintenance is disallowed.

2. Deduction under Section 33AB for Profits from Tea Activities:
The second issue involves the interpretation of Section 33AB of the Income Tax Act, which allows a deduction for profits from the business of growing and manufacturing tea. The assessee argued that the profits from blending bought tea with the tea grown by them should be included in the deduction calculation. The court examined the phrase "profits of such business" and concluded that the profit from the business of growing and manufacturing tea includes profits from blending a small quantity of bought tea, provided the majority of the tea in the final product is grown by the assessee. The court emphasized a purposive interpretation of the provision, allowing the inclusion of profits from blending bought tea as part of the business profits eligible for deduction under Section 33AB. The court set aside the Tribunal's decision on this point, ruling in favor of the assessee.

3. Disallowance of Expenditure on Holiday Home:
The third issue pertains to whether the expenditure on maintaining a holiday home for employees is disallowed under Section 37(4) of the Income Tax Act. The court noted that the Tribunal did not consider the second proviso to Section 37(4), which exempts holiday homes maintained for the exclusive use of employees if the assessee employs more than one hundred whole-time employees. The court remanded the matter to the Tribunal to determine the applicability of the second proviso, which, if applicable, would exempt the holiday home expenditure from disallowance under Section 37(4).

Conclusion:
1. Transit Flat: The court affirmed the disallowance of expenditure on the maintenance of the transit flat as it qualifies as a guest house.
2. Section 33AB Deduction: The court ruled in favor of the assessee, allowing the inclusion of profits from blending bought tea with the tea grown by the assessee for the purpose of deduction under Section 33AB.
3. Holiday Home: The court remanded the matter to the Tribunal to consider the applicability of the second proviso to Section 37(4), which could exempt the holiday home expenditure from disallowance.

Final Orders:
The appeals were partly allowed. The court affirmed the disallowance of the transit flat expenditure, ruled in favor of the assessee on the Section 33AB deduction, and remanded the holiday home expenditure issue to the Tribunal for further consideration. No order as to costs was made.

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