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Issues:
1. Whether the flats at Bombay qualify as a guest house under section 37(4) of the Income-tax Act, 1961. Analysis: The judgment dealt with the issue of whether residential flats at Bombay, used by directors and employees on business tours, qualify as a guest house under section 37(4) of the Income-tax Act, 1961. The assessee, a public limited company, claimed a deduction for maintenance expenses of these flats. The Income Tax Officer disallowed the claim citing section 37(4). However, the Commissioner (Appeals) allowed the claim based on previous Tribunal decisions. The Tribunal found that the flats were not located at the principal place of business or factory premises, but did not establish they were intended for use by customers or strangers. The Tribunal held that the maintenance expenditure on these flats cannot be allowed as a deduction, leading to the appeal before a Special Bench. The judgment discussed the legislative history of section 37(4) and highlighted that prior to 1970, maintenance expenditure on residential accommodation, including guest houses, was allowed subject to conditions. However, after the enactment of section 37(4) in 1970, no expenditure on the maintenance of a residential accommodation in the nature of a guest house was allowed. The judgment referenced case law to define a guest house as a place for the reception of strangers, emphasizing that employees cannot be considered strangers. The judgment concluded that the flats at Bombay did not meet the criteria of a guest house as they were primarily used by directors and employees on genuine business tours, rather than for strangers. The judgment also addressed the argument by the department that maintaining residential accommodation for friends, relatives, customers, and strangers under the guise of business interest was a common practice among prosperous business houses. The Tribunal rejected this argument, stating that the intention behind the term "guest house" was to curb abuse where residential accommodation meant for employees was used for others. The judgment emphasized that until the retrospective amendment in 1979, such residential accommodation maintained for directors and employees could not be classified as a guest house. In conclusion, the Tribunal held that the residential flats at Bombay, established for employees on tour, did not qualify as a guest house under section 37(4) of the Income-tax Act, 1961. The judgment disagreed with the previous Tribunal decision regarding a sister concern and emphasized that the designation of a guest house depends on the intended use for others, rather than the location of the accommodation.
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