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Issues:
Interpretation of section 37(3) of the Income-tax Act, 1961 regarding the allowance of guest house expenditure as an item of allowable expenditure. Analysis: The case involved a limited company claiming exemption for guest house expenditure in their returns for the assessment year 1969-70. The Income Tax Officer (ITO) disallowed the deduction, stating that only customers of the company stayed in the guest house, not employees, making it impermissible under section 37(3) of the Income-tax Act. The Appellate Assistant Commissioner (AAC) allowed the appeal, considering the expenditure as wholly and exclusively for the business. However, the Income-tax Appellate Tribunal disallowed the claim, emphasizing that expenses incurred only for accommodation fall under section 37(3) and not other expenses, contrary to the AAC's view that it falls under section 37(1). The main issue was whether the guest house expenditure claimed by the assessee falls within the purview of section 37(3) of the Act. Section 37(1) allows any expenditure laid out exclusively for business, while section 37(3) specifies conditions for expenses incurred after March 31, 1964, on residential accommodation, including guest houses. Rule 6C imposes conditions and restrictions under section 37(3), requiring the maintenance of a register for employees staying in the guest house. The Tribunal held that the register requirement does not apply to guests using the guest house under clauses (a), (b), and (c) of Rule 6C(1). The court analyzed the language of section 37(3) and the meaning of "guest house," concluding that the allowances permitted cover not only residential accommodation but also accommodation in the nature of a guest house, including expenses for food and amenities. The court rejected the revenue's argument that the provision only covers residential accommodation, citing the redundancy of mentioning "guest house" separately if it were not intended to include related expenses. The interpretation was supported by Rule 6C, which includes lodging and boarding expenses in the definition of a guest house. Ultimately, the court ruled in favor of the assessee, affirming that the allowances under section 37(3) extend to expenses for accommodation in the nature of a guest house, encompassing food and amenities provided to guests. The judgment clarified the scope of allowable guest house expenditure under the Income-tax Act, emphasizing the broader interpretation of the term "guest house" in line with the legislative intent and rule provisions.
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