2017 (1) TMI 725 - HC - Income Tax

Disallowance under Section 37(5) - payments made to Welcome Group of hotels under the executive holiday plan whereunder the assessee booked accommodation for 366 days for use of its employee while on leave - Held that - The insertion of sub-section (5) into section 37 was only to restrict the application of sub-section (4) of section 37 to lodging or boarding provided to any person when he is on a tour or a visit to a place. It does not cover use of the guest house used by employees while on leave which are considered to be holiday home. Therefore, sub-section 5 of section 37 of the Act would have no application when the guest house is being used as holiday home i.e. for exclusive use of employees on leave. The words while on leave is absent in sub-section 5 of section 37 and restricts the use of accommodation to be considered as a guest house when used by the employees on a tour or a visit to a place where such accommodation is situated. Therefore, sub-section 5 of Section 37 of the Act can have no application when the guest house is used as a holiday home as defined in second proviso to section 37(4) of the Act. Tribunal was not correct in invoking sub-section 5 of Section 37 to deny the benefit of the second proviso to section 37(4) of the Act available to the applicant assessee. This is so as section 37(5) of the Act will not apply to the cases covered by the second proviso to section 37(4) of the Act. - Decided in favour of assessee and against the respondent Revenue.

Summary

Issues:
1. Interpretation of Section 37(4) and Section 37(5) of the Income Tax Act.
2. Disallowance under Section 37(5) for payments made to hotels under executive holiday plan.
3. Application of second proviso to Section 37(4) for maintenance of holiday home.

Analysis:
1. The case involved questions of law regarding the disallowance under Section 37(5) of the Income Tax Act for payments made to hotels under an executive holiday plan. The Tribunal upheld the disallowance made by the Assessing Officer, leading to the references before the High Court.

2. The Applicant, a body corporate, had paid amounts to reserve accommodation for employees on leave, seeking deduction under Section 37(4) of the Act. The Tribunal invoked Section 37(5) and denied the benefit of the second proviso to Section 37(4), leading to the dispute.

3. The Applicant argued that the payments made for accommodation fell under the provisions of Section 37(4) as a guest house, not Section 37(5) for lodging and boarding. They contended that the accommodation was maintained as a holiday home for exclusive use by employees on leave, meeting the conditions of the second proviso to Section 37(4).

4. The High Court analyzed the provisions of Section 37(4) and Section 37(5) in detail. It emphasized that Section 37(5) does not render the second proviso to Section 37(4) ineffective. The court clarified that Section 37(5) applies to lodging or boarding for persons on tour or visit, not for employees on leave using the accommodation as a holiday home.

5. Relying on precedents and legal interpretations, the court concluded that the Tribunal erred in applying Section 37(5) to deny the benefit of the second proviso to Section 37(4) to the Applicant. It held that Section 37(5) does not apply when the guest house is used as a holiday home for employees on leave.

6. Accordingly, the High Court answered the questions referred in the negative, favoring the Applicant and ruling against the Revenue. The court disposed of the reference in favor of the Applicant, emphasizing the distinction between the application of Section 37(4) and Section 37(5) in such cases.