1989 (3) TMI 155 - AT - Income Tax

Summary

Issues:
Interpretation of sec. 37(4) disallowance for expenditure on maintenance of Guest House under Rule 6D(2) of IT Rules.

Analysis:
The appeals by the revenue were against the CIT(A) orders for the assessment years 1982-83 to 1984-85, all involving a common issue regarding the disallowance of expenditure incurred on the maintenance of a Guest House under sec. 37(4) and Rule 6D(2) of the IT Rules.

The assessee had reimbursed amounts to its associate concern for common facilities like office premises, consultancy, transit home, and telex/telephone facilities. The ITO disallowed the claim under sec. 37(4) read with sub-sec. (5). The CIT(A) directed the ITO to recompute the disallowance under Rule 6D(2) after adjustments, following the previous year's order.

The Departmental Representative argued that sec. 37(4) overrides other provisions, including Rule 6D(2), and the CIT(A) erred in allowing the claim. The assessee contended that the expenses were not for maintaining a Guest House, but for traveling expenses under sec. 37(3), justifying the CIT(A)'s direction to recompute under Rule 6D(2).

The Tribunal analyzed that the transit home was maintained by the associate concern, not the assessee, and expenses were shared based on employee visits, not room occupation. As no rooms were reserved exclusively for the assessee and no obligation existed for room availability, the arrangement did not fall under sec. 37(5). Therefore, sec. 37(4) was inapplicable, and sec. 37(3) applied, justifying the CIT(A)'s direction under Rule 6D(2).

The Tribunal confirmed the CIT(A)'s order, dismissing the appeal as the provisions of sec. 37(4) were deemed inapplicable to the case, and sec. 37(3) was considered relevant, leading to the direction for recomputation under Rule 6D(2) being upheld.