1979 (7) TMI 41 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of expenditure on the maintenance of a guest house.
2. Entitlement to development rebate considering the adequacy of reserve from earlier years.

Summary:

Issue 1: Deductibility of Expenditure on the Maintenance of a Guest House

The assessee, engaged in the manufacture of sugar, claimed deductions for expenditures incurred on maintaining a guest house at the factory premises for the assessment years 1968-69 and 1969-70. The Income Tax Officer (ITO) disallowed these claims, citing non-compliance with r. 6(c) which mandates maintaining a register for guest house usage. The Appellate Assistant Commissioner (AAC) upheld this disallowance. However, the Tribunal concluded that the building was not a guest house and thus the expenditure did not fall within the scope of s. 37(3) of the I.T. Act, 1961.

The High Court analyzed s. 37(3) and r. 6(c), noting that the rule prescribes conditions for allowing expenditures on guest houses. The Court emphasized that the term "guest house" implies accommodation for strangers, not employees or directors. Given the lack of evidence showing exclusive use by employees or directors, the Court inferred that the guest house was used by strangers as well, thus falling within s. 37(3). Consequently, the expenditure was disallowed due to non-compliance with the prescribed rules. The question was answered in the negative, favoring the revenue.

Issue 2: Entitlement to Development Rebate Considering the Adequacy of Reserve from Earlier Years

For the assessment year 1969-70, the assessee claimed a development rebate of Rs. 8,251 for new machinery. The ITO rejected this claim due to the absence of a reserve in the relevant year's accounts. The assessee argued that the surplus reserve from earlier years should suffice. The Tribunal supported this view, suggesting that accounting adjustments could meet the statutory requirements.

The High Court referred to s. 34(3), which mandates creating a reserve from the profits of the relevant previous year. The Court found that the Tribunal erred in its interpretation, as the statute requires a specific debit to the profit and loss account of the relevant year. The presence of a surplus from earlier years does not fulfill this requirement. Therefore, the question was answered in the negative, against the assessee.

The Commissioner was awarded costs, with counsel's fee set at Rs. 500.