1994 (12) TMI 118 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of guest house expenses.
2. Addition of telephone charges related to the guest house.
3. Addition of license fee for Indian made foreign liquor.

Summary:

1. Disallowance of Guest House Expenses:
The primary issue pertains to the disallowance of Rs. 60,984 on account of guest house expenses. The Assessing Officer disallowed these expenses u/s 37(5) of the Act. However, the CIT(A) deleted the addition, following the ITAT Delhi Bench 'C' decision in Purolaters India Ltd. v. IAC [1991] 34 ITD 287. The learned DR argued that the provisions of section 37(4) read with section 37(5) were not correctly appreciated by the CIT(A). The definition of 'guest house' in section 37(5) leaves no scope for allowance of any expenditure incurred on maintenance of a guest house, including rent and depreciation. The learned AR, opposing the DR, relied on the Bombay High Court decision in Chase Bright Steel Ltd., which was followed by various ITAT Benches and the Gujarat High Court in CIT v. Kaira Distt. Co-operative Milk Producers Union Ltd [1991] 192 ITR 608. The AR argued that rent is covered u/s 30 and cannot be disallowed u/s 37, and depreciation is not an expenditure as per the Supreme Court in Pandyan Insurance Co. Ltd v. CIT [1965] 55 ITR 716. The Tribunal, after considering the rival submissions and various High Court decisions, concluded that there is no consensus among High Courts regarding the allowability of guest house expenditure. They noted that section 37(4) and (5) specifically disallow such expenses, including rent and depreciation, making these provisions more specific than the general provisions of sections 30 and 32. Therefore, the Tribunal reversed the CIT(A)'s order and upheld the Assessing Officer's disallowance of guest house expenses.

2. Addition of Telephone Charges Related to the Guest House:
The Tribunal addressed the disallowance of Rs. 23,567 in telephone charges related to the guest house. They found that since the expenditure is related to the guest house and not covered under any specific provision of the Act, it is not allowable u/s 37(4) and (5). The Tribunal rejected the AR's argument that these expenses are not related to the maintenance of the guest house.

3. Addition of License Fee for Indian Made Foreign Liquor:
The final issue involved the addition of Rs. 9,12,958 in respect of the license fee, which was deleted by the CIT(A). The learned DR conceded that this ground is covered by the ITAT's order for the assessee's assessment year 1984-85. The CIT(A) allowed the deduction, holding that the liability accrued and was paid in the year under consideration. The Tribunal, following their earlier decision in ITA No. 3162/Del/84, upheld the CIT(A)'s order, allowing the deduction of the license fee.

Conclusion:
The Tribunal partly allowed both appeals, upholding the disallowance of guest house expenses and telephone charges while allowing the deduction of the license fee.