Madras High Court
Govardhan Cement Agencies (P.) Ltd. vs Income-Tax Officer. on 20 December, 1989
Equivalent citations: (1990)37TTJ(MAD)195
ORDER
Per Shri T. N. C. Rangarajan (Judicial Member) - This appeal is directed against the disallowance made under section 37(4) of the Income-tax Act, 1961.
2. The assessee is a company. It had taken on rent a residential premises at Madras for the stay of visiting officers of the assessee-company. It is stated that only the employees of the Bangalore branch, the auditor from Tirupati and the Managing Director used to stay in the premises and at no time was it occupied by any stranger. The assessee had however called it a guest house. In computing the income of the previous year ended 31-3-1984, corresponding to the assessment year 1984-85, the ITO disallowed the rent of Rs. 5,400 paid for this accommodation u/s. 37(4) of the Act. This was confirmed on appeal.
3. In the further appeal before us it was contended on behalf of the assessee that though it was called a guest house it was not a guest house at all since no stranger was allowed to stay in it as that is the characteristic of the guest house as held by the Madras High Court in the case of CIT v. Aruna Sugars Ltd. [1980] 123 ITR 619. It was submitted that the rent was an admissible deduction u/s. 30 and, therefore, no disallowance could be made u/s. 37(4) as held by the Bombay High Court in the case of CIT v. Chase Bright Steel Ltd. (No. 1) [1989] 177 ITR 124 and CIT v. Chase Bright Steel Ltd. (No. 2) [1989] ITR 177 ITR 128 (Bom.). On the other hand, it was contended on behalf of the revenue that since it was a residential accommodation it could not be regarded as premised used for the purpose of the business falling u/s. 30 and that in view of the Explanation added to sec. 37(4) with respective effect from 1-4-1979 the expenditure claimed could not be allowed as a deduction.
4. On a consideration of the rival submissions, we are of the opinion that the assessee is entitled to succeed. We find, as a matter of fact, that the premises taken on rent was used only for the stay of the employees and persons visiting the assessee in connection with the assessees work who cannot be treated as strangers. The Madras High Court has held in the case of Aruna Sugars Ltd. (supra) that the meaning of the term guest house as a place for reception of strangers has been accepted by the Department and, therefore, the premises in question cannot be regarded as a guest house at all.
5. The premises which is used for accommodating the employees or persons visiting the assessee for companys business is used for the purposes of the business of the assessee and the rent payable is allowable as an admissible deduction u/s. 30. The revenue cannot dispute this fact because the premises owned by the assessee and used for accommodating its employees are allowed depreciation u/s. 32. (See in-structions given by the CBDT to its officers by Letter F. No. 9/26/TT/60 dated 21-3-1960, quoted in Sampath Iyengars Law of Income-tax, 7th Edition, Vol. 2, page 1265). It has now been held by the Bombay High Court in the case of Chase Bright Steel Ltd. (No. 1) (supra) that the disallowance u/s. 37(4) can be made only with reference to the expenditure falling within the provisions of section 37 and not with reference to the expenditure admissible under section 30.
6. The revenue, therefore, relies on the sub-section (5) of section 37 which states that for the removal of doubts it is declared that any accommodation by whatever name called, hired for the purpose of providing lodging or boarding and lodging to any person including any employee or director on tour, is accommodation in the nature of guest house within the meaning of sub-section (4). The question is whether this section can large the scope of sub-section (4) to apply to premises which do not fall within that section. The Notes on Clauses (140 ITR St. 124) and the Memorandum explaining the provisions (140 ITR St. 156) do not throw any light on the reason for the introduction of sub-section (5) except to say that it is a clarificatory amendment. It is also strange that when sub-section (4) came into the statue book with effect from 1-4-1970 sub-section (5) should be introduced by Finance Act, 1983 with retrospective effect from 1-4-1979. It was suggested by the revenue that this was to get over the decision of the Madras High Court in Aruna Sugars Ltd.s case (supra) which was rendered in 1979. But no mention of this has been made either in the Notes on Clauses or in the Memorandum explaining the provision and, therefore, the suggestion is mere speculation
7. The question, therefore, is whether this amendment which is in the nature of an explanation could enlarge the meaning of a guest house, the acceptation of which is that it applies only to accommodation for receiving strangers to include accommodation for employees which is recognised as a premises held for the purpose of the business.
In this context it is well to remember that when sub-section (4) was introduced the stated purpose was to curb the expenditure on guest houses which were allowed to be maintained within the conditions prescribed in Rule 6C of the Income-tax Rules. The Finance Minister has state :
"Those who enjoy the hospitality of their business friends should now no longer find their sense of gratitude diminished by the thought that a part of the hospitality is really paid for by the Exchequer."
(75 ITR St. 25) If we follow the purposive approach given in the case of CIT v. K. S. Vaidyanathan [1985] 153 ITR 11 (Mad.) (FB), we must confine the scope of sub-section (4) to the guest houses to which Rule 6C applied earlier. Since those guest houses did not fall within section 30 but were governed only by section 37 the embargo clearly applied. The sub-section (5) however appears to extend on a literal reading of the section to the expenditure which falls u/s. 30 and goes beyond the opening words of sub-section (4) which is a non obstinate clause referring only to sub-sections (1) and (3) of section 37. It has been held by the Supreme Court in the case of S. Sundaram Pillai v. VR. Pattabiraman AIR 1985 SC 582 that the Explanation is not substantive in charter and the object of an Explanation is, where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve and make it meaningful and purposeful. It has been further stated that the Explanation cannot, however, take away a statutory right with which any person under a statue has been clothed or set at naught the working of an Act by becoming an hindrance in the interpretation of the same. In the present case if it is understood as clarifying the meaning we should have expected the sub-section to take effect from the inception, viz. 1-4-1970 when sub-section (4) was introduced. If on the other hand it were to be a substantive provision it could take effect only from 1-4-1983 being introduced by the Finance Act, 1983. The fact that it has been given retrospective effect from a date in the middle, viz. 1-4-1979 is inexplicable, In this situation the only harmonious construction of this section is to understand it to say that the guest house as is understood to be a place for reception of visitors would not cease to be one merely because it is also used for the stay of the employees or directors and not that a residential premises exclusively used for the employees and directors which is not a guest house at all would also be included within the scope of the dominant provisions of sub-section (4). In the circumstances we cannot but follow the decision of the Bombay High Court in the case of Chase Bright Steel Ltd. and hold that this expenditure being rent paid for accommodation for employees which is not a guest house is an admissible expenditure u/s. 30 and cannot, therefore, be disallowed u/s. 37(4) of the Act. The ITO is accordingly directed to allow this deduction and complete the assessment.
8. The appeal is allowed.