1985 (4) TMI 103 - AT - Income Tax

Summary

Issues Involved:
1. Retrospective application of sub-section (5) of section 37 of the Income-tax Act, 1961.
2. Rectification of the Tribunal's order based on the retrospective amendment.
3. Interpretation of the term "guest-house" under section 37(4) and (5).

Detailed Analysis:

1. Retrospective Application of Sub-section (5) of Section 37:
The primary issue revolves around whether sub-section (5) of section 37, inserted by the Finance Act, 1983 with retrospective effect from 1-4-1979, applies to the assessment year 1979-80. The Tribunal initially did not consider this provision in its order dated 24-5-1984. The revenue contended that this oversight constituted a "mistake apparent on record" and sought rectification.

The Tribunal acknowledged that sub-section (5) should be deemed to have been included in the Act from 1-4-1979, as per the Supreme Court's ruling in M.K. Venkatachalam, ITO v. Bombay Dyeing & Mfg. Co. Ltd. [1958] 34 ITR 143. However, the Tribunal also noted that the assessee's accounting period ended on 31-10-1978, before the effective date of the amendment, thus questioning the applicability of sub-section (5) to the assessee's case.

2. Rectification of the Tribunal's Order:
The Tribunal deliberated on whether the failure to consider sub-section (5) in its previous order constituted a rectifiable mistake. The revenue argued that rectification was warranted due to the retrospective effect of the amendment. The Tribunal referred to several judicial precedents, including CIT v. Smt. Eva Raha [1980] 121 ITR 293 and CIT v. Kelvin Jute Co. Ltd. [1980] 126 ITR 679, which supported the power of the Tribunal to rectify its final order.

However, the Tribunal ultimately concluded that no rectification was necessary, as the assessee's accounting year ended before the effective date of the amendment. The Tribunal emphasized that the term "expenditure" in section 37 implies that the expenditure must be genuine and lawful, and since sub-section (5) was effective from 1-4-1979, it could not apply to expenditures incurred before that date.

3. Interpretation of the Term "Guest-house":
The Tribunal considered the definition of "guest-house" under section 37(4) and (5). The Commissioner (Appeals) had allowed the assessee's claim for deduction of guest-house expenses, noting that the accommodation was used by the directors and employees and was located in a remote rural area. The Tribunal initially upheld this decision, following the Madras High Court's ruling in CIT v. Aruna Sugars Ltd. [1980] 123 ITR 619, which stated that accommodation used by employees and directors does not constitute a guest-house.

However, the revenue's miscellaneous application argued that sub-section (5) clarified that any accommodation maintained for lodging employees or directors is considered a guest-house. The Tribunal acknowledged this clarification but maintained that sub-section (5) was not applicable to the assessee's case, as it was effective from a date after the close of the assessee's accounts.

Separate Judgments:
The Judicial Member disagreed with the conclusion of the Accountant Member, arguing that the retrospective amendment should apply to the assessment year 1979-80, irrespective of the accounting period. The Judicial Member emphasized that the amendment was intended to clarify the Legislature's original intent and should be applied accordingly.

The Third Member, tasked with resolving the disagreement, sided with the Judicial Member. The Third Member cited the Delhi High Court's decision in Addl. CIT v. Delhi Cloth & General Mills Co. Ltd. [1983] 144 ITR 275 and the Supreme Court's rulings, asserting that the Act as amended on 1st April of a financial year applies to the assessment for that year, regardless of the previous year's accounting period.

The Third Member concluded that the failure to consider sub-section (5) was a mistake apparent on record, warranting rectification. Consequently, the guest-house expenses amounting to Rs. 10,798 were to be disallowed.

Conclusion:
The Tribunal's majority view held that sub-section (5) of section 37, inserted with retrospective effect from 1-4-1979, applied to the assessment year 1979-80, necessitating the disallowance of the guest-house expenses. The miscellaneous application by the revenue was thus allowed, and the Tribunal's original order was rectified to reflect this disallowance.