2007 (11) TMI 243 - HC - Income Tax

Amount paid on account of rent of guest house maintained by the assessee - there is specific provision for disallowance u/s 37(4) hence Tribunal was not right in law in allowing a sum of Rs. 67, 237 paid on account of rent - Tribunal was right in law in directing the Assessing Officer not to reduce the amount of subsidy to arrive at the actual cost of assets u/s 43(1) for allowing depreciation appeal partly allowed

Summary

Issues:
1. Interpretation of provisions under section 37(4) of the Income-tax Act, 1961 regarding the allowance of rent paid for a guest house.
2. Application of section 43(1) of the Income-tax Act, 1961 in determining the actual cost of assets by considering the subsidy received.

Issue 1: Interpretation of Section 37(4) - Rent for Guest House
The court referred to a judgment in Britannia Industries Ltd. v. CIT, where it was held that the expenses towards rents, repairs, and maintenance of premises/accommodation used for a guest house specified in sub-section (4) of section 37 cannot be allowed as a deduction. The court emphasized interpreting the statute in its literal sense when the language is clear and unambiguous. Consequently, the court answered question No. 1 in favor of the Revenue, stating that the rent paid for a guest house as specified under section 37(4) cannot be allowed as a deduction.

Issue 2: Application of Section 43(1) - Treatment of Subsidy
In addressing the second question, the court relied on a judgment in CIT v. P. J. Chemicals Ltd., where it was established that government subsidies granted to industries do not form part of the 'actual cost' of assets. The court interpreted the expression 'actual cost' liberally, stating that government subsidies are incentives and do not directly or indirectly meet the actual cost of assets. Citing a previous decision, the court ruled in favor of the assessee, stating that the subsidy received should not be reduced from the actual cost of assets under section 43(1). Therefore, question No. 2 was answered in favor of the assessee and against the Revenue.

Conclusion
The judgment clarified the non-deductibility of rent for a guest house under section 37(4) and the treatment of government subsidies in determining the actual cost of assets under section 43(1). The court's decisions were based on precedent set by the apex court and previous rulings, ensuring consistency and adherence to legal principles.