2013 (1) TMI 511 - HC - Income Tax

Daily allowance paid to the employees - whether would partake the character of hotel expenses for the purpose of disallowance under Section 37(3- A) to (3D)? - treatment of daily allowances as falling in the same category as payments to hotels - Held that - Considering Sub Rule (2) of Rule 6 D of the Income Tax Rules 1962 dealing with expenditure incurred by an assessee in connection with traveling by an employee or any other person within India clearly treats hotel expenses and allowances paid to the employees similarly and does not treat them distinctly. Therefore the contention of the assessee that daily allowances paid to the employees under section 37(3A) to (3D) should be treated separately as distinct from payments to hotels cannot be accepted. Therefore the Tribunal was correct in treating the daily allowance paid to employees of the assessee as having the same character as hotel expenses for the purpose of disallowance under section 37(3A) to (3D) - against assessee.

Summary

Issues:
Interpretation of Section 37(3A) to (3D) of the Income Tax Act, 1961 regarding treatment of daily allowances paid to employees in relation to hotel expenses.

The High Court of Andhra Pradesh was presented with a reference by the Income Tax Appellate Tribunal to provide an opinion on the treatment of daily allowances paid to employees by an assessee under Section 37(3A) to (3D) of the Income Tax Act, 1961. The primary question was whether the daily allowances should be considered similar to hotel expenses for the purpose of disallowance. The assessee, engaged in the manufacture and sale of particle boards, had its daily allowance disallowed by the assessing officer during the assessment year 1985-86. The CIT (Appeals) upheld the disallowance but adjusted the total hotel expenses to exclude the daily allowance component. The Tribunal affirmed this decision, leading to the reference to the High Court.

The Court analyzed the provisions of Section 37(3A) to (3D) of the Income Tax Act, which specify that if certain expenditures exceed a threshold, a portion of the excess amount shall not be allowed as a deduction. The Court noted that the law treats various expenses, including those related to advertisement, motor cars, and hotels, under this provision. The Court highlighted Rule 6-D (2) of the Income Tax Rules, which equates hotel expenses and allowances paid to employees in connection with travel within India. Based on this, the Court rejected the assessee's argument that daily allowances should be treated separately from hotel expenses under Section 37(3A) to (3D).

The Court addressed the assessee's argument that the daily allowance was incurred for business purposes, wholly and exclusively, and should be disallowed under Section 37(3A) to (3D) due to its direct connection with the business. However, the Court held that this specific issue was not part of the reference and thus declined to express an opinion on it. Ultimately, the Court answered the reference by affirming the Tribunal's decision to treat the daily allowance as akin to hotel expenses for the purpose of disallowance under Section 37(3A) to (3D) of the Income Tax Act, 1961.