1. These two appeals, one each by the assessee and the ITO relate to the assessee's assessment for the assessment year 1978-79. The other two assessees are only interveners in support of the contention that an establishment for boarding and lodging of the employees, auditors, directors, etc., of an assessee on tour for the purpose of the business is not a guest house within the meaning of Section 37(4) of the Income-tax Act, 1961 ('the Act'). Accordingly, it is proposed to first dispose this ground, being ground No. 4 in the assessee's appeal, for which the Special Bench has been constituted.
For that on the facts and in the circumstances of the case, the Commissioner (Appeals) erred in upholding the disallowance of Rs. 1,24,788 being expenses incurred by the company on transit flats at Bombay and New Delhi.
The assessee-company maintained three guest houses, two at Delhi and one at Bombay. The two guest houses at Delhi are at Vasant Vihar and at Prithviraj Road. The guest house at Bombay is in the building known as 'Usha Kiran' on Altamount Road. There is no expenditure during the previous year so far as the guest house at Vasant Vihar at New Delhi is concerned. The total expenditure incurred for the remaining two guest houses coming to the assessee's share worked out to Rs. 1,29,788. The ITO has disallowed the claim for deduction following his order for the assessment years 1976-77 and 1977-78. The issue has been considered by the Commissioner (Appeals) in paragraph 5 of his order. Observing that his predecessor had confirmed the disallowance, under similar circumstances, he has confirmed the disallowance for this year also even though two orders of the Tribunal, one from Bombay and the other from Calcutta, were placed before him where a contrary view was taken.
3. Fairly admitting that the Tribunal has, for elaborate reasons given in paragraphs 18 to 34 of the order dated 23-1-1983 for the assessment years 1975-76 to 1977-78, confirmed the disallowance for the earlier years under Section 37, it is submitted by Shri Doshi, the learned counsel for the assessee, that the Tribunal has failed to apply the provisions of Section 37(4) correctly. In this context, he has invited our attention to the background in which Sub-section (5) was introduced in Section 37 by the Finance Act, 1983, with effect from 1-4-1979. It is pointed out that the Madras High Court in the case of CIT v. Aruna Sugars Ltd. [1980] 123 ITR 619 has held that guest house intended for use by employees, auditors, etc., cannot be called guest house which falls within the scope of sec tion 37(3). This decision, it is stated, has been quoted with approval by the Punjab and Haryana High Court in the case of Saraswati Industrial Syndicate Ltd. v. CIT [1982] 136 ITR 361. According to Shri Doshi, theinsertion of Sub-section (5) in Section 37 will be of no consequence for the assessment year 1978-79 and for the earlier proceedings. The Legislature has, in its wisdom, made the provision retrospectively applicable with effect from 1-4-1979 only. It is stated that the second proviso to Section 37(4) does not also go against the claim of the assessec. At best, it can be contended on behalf of the revenue that the assessee's case is not excluded from the provisions of Section 37(4) by the second proviso. However, it will have to be considered independent of the proviso whether the establishment maintained by the assessee falls within the expression 'guest house' used in Section 37(4).
4. Shri B.V. Jhaveri, appearing for Dandeli Ferro Alloys Pvt. Ltd., has stated that in his client's case there were two guest houses, one was in the factory premises which was in a forest in the interior area of the State of Karnataka and the other was in Bombay on Warden Road. It is pointed out that a considerable amount out of the total expenditure pertained to expenditure on current repairs which is allowed Under Section 30 of the Act and, therefore, Section 37(4) which overrides the provisions of Section 37(1) and 37(3) only will have no bearing whatsoever. His client also does not maintain any register. It is, however, contended that the establishments are used by the assessee's employees, directors, auditors, etc., while on tour for the purpose of the assessee's business only. For the purpose of contending that in these circumstances, the establish ments are not guest houses, the counsel has adopted the arguments advanced by Shri Doshi.
5. Shri B.C. Mehta, who is appearing for Bhavana Chemicals Ltd., has invited our attention to a Special Bench order of the Tribunal in the case of ITO v. Kothari {Madras) Ltd. [1985] SOT 432 (Mad.) for the purpose of saying that Sub-section (5) of Section 37 is applicable to the proceedings for the assessment year 1979-80 and onwards only. The facts in this case are stated to be that the assessee's factory is in a suburb of Baroda which is about 7 kms. from the city. The guest house is in the city. A register is stated to have been maintained and it is stated that the expenditure in the earlier years was allowed by the ITO himself and that in this year it has been allowed by the Commissioner (Appeals). The total expenditure is claimed to be Rs. 36,471.
6. Shri K.K. Tuli, the senior departmental representative, has, on the other hand, strongly relied on the Tribunal's order in the assessee's own case for the earlier years. As regards Section 37(5), it is admitted that it has been inserted with retrospective effect from 1-4-1979 by the Finance Act. It is, however, stated that this provision which is for the removal of doubts, if any, is of a clarificatory nature and, therefore, the meaning of 'retrospective effect from 1-4-1979' would be that Sub-section (5) will apply to all proceedings for prior years pending on 1-4-1979 and the proceedings for the assessment years 1979-80 onwards. Placing reliance on theKarnataka High Court decision in the case of N.G.E.F. Ltd. v. CIT [1985] 153 ITR 197, it is stated that the Karnataka High Court distinguished the Madras and Punjab and Haryana High Court decisions on the ground that they pertained to the provisions of Section 37(3) and has held in the context of Section 37(4) that the use of the flats predominantly by the employees does not make the flats any the less a guest house. This being the only decision interpreting Section 37(4), Shri Tuli submitted that following the ratio of the Bombay High Court decision in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589, the Tribunal should follow the Karnataka High Court decision in preference to the Madras and Punjab and Haryana High Court decisions.
7. In reply, the counsel has made an attempt to distinguish the Karnataka High Court's decision. It is stated that when one examines carefully the three decisions, it will be found that all the three High Courts have interpreted the expression 'residential accommodation in the nature of guest house' which is used both in Section 37(3) and (4).
Therefore, it is not correct to say that there is only the decision of the High Court on the issue. Identical expressions have been used both in Section 37(3) and (4). It is urged that there are three decisions, two in favour of the assessee while the other one is against the assessee and it is open to the Tribunal to take a view which appeals to it.
8. There appears to be no dispute about the fact that both the residential accommodations maintained by the assessee at Prithviraj Road, Delhi and Altamount Road, Bombay, are mainly for the use of the employees, directors and auditors of the assessee-company when they are on tour for the purpose of the assessee's business. In the absence of records maintained for those who use the above two places, it cannot, however, be accepted that these accommodations were never used by the friends of the directors or outsiders. It is on the abovestated facts we have to decide whether the two residential accommodations maintained by the assessee would be guest houses within the meaning of Section 37(4).
9. The provisions of Sub-section (5) have been inserted in Section 37 by the Finance Act, with effect from 1-4-1979 and the sub-section begins with the expression 'For the removal of doubts'. The first question that requires consideration is whether Sub-section (5) is applicable for the assessment year 1978-79. It may be that when the Legislature uses the expression 'For the removal of doubts', it ordinarily means that the legislative inten tion has all along been the same and that the new provision has been introduced to clarify the position. This would only mean that an adverse inference cannot be drawn from the absence of such a provision earlier. However, what the earlier provision, i.e., Section 37(4), really meant will have to be decided on the basis of the language used in the provision. In the present case, even an adverse inference may be justified as the Legislature has not stopped by merely stating that the provisions of Sub-section (5) are for the removal of doubts. It has made Sub-section (5) retrospective with effect from 1-4-1979. If the provision was merely for the removal of doubts, there would be no necessity to make it retrospective with effect from 1-4-1979. In the circumstances, it will be reasonable to hold that the Legislature has intended to remove the doubt, if we may say so, also with effect from 1-4-1979. We are inclined to take this view as we have to assume that the Legislature does not use any word/s without purpose and Sub-section (5) is not merely procedural. It makes certain expenses inadmissible which but for it may be admissible. For these and other reasons given by the Special Bench of the Tribunal, Madras, in the case of Kothari (Madras) Ltd. {supra), we hold that the provisions of Sub-section (5) of Section 37 are not applicable for the assessment year 1978-79.
10. Therefore, we proceed to consider the meaning and purport of the expression 'residential accommodation in the nature of a guest house' as used in Sub-section (4) of Section 37. This very expression is also used in Section 37(3). The Madras High Court has considered this expression in the context of Section 37(3) in the case of Aruna Sugars Ltd. (supra). The said section has, it may be stated, used the expression 'any residential accommodation including any accommodation in the nature of guest house'. The High Court has held that the residential accommodation maintained for the directors and other employees or officers in connection with the company's business, as distinct from complete strangers, cannot be called a guest house which falls within the scope of Section 37(3). It has observed that the term 'guest house' as a place for reception of strangers has been accepted even by the rule-making authority as Rule 6C of the Income-tax Rules, 1962 ('the Rules') framed there under envisages employees staying in the premises. It has been made clear that the rule-making authority cannot expand the concept of the word 'guest' so as to include employees if the word did not comprehend such employees. A similar view has been taken in the Punjab and Haryana High Court in the case of Saraswati Industrial Syndicate Ltd. (supra).
11. This expression has again come up for consideration in the context of Section 37(4) before the Karnataka High Court in the case of N.G.E.F. Ltd. {supra). The Karnataka High Court has distinguished the above two decisions by observing that the decisions largely relied on the language of Rule 6C which has since been deleted. It was held that after the introduction of Sub-section (4) in Section 37 and the deletion of Rule 6C, the allowance is limited to the expenditure in relation to the guest house in the nature of a holiday home on the conditions laid down in the second proviso, to Sub-section (4). On behalf of the department it was urged that the only decision on the interpretation of the expression 'residential accommodation in the nature of a guest house' as used in Section 37(4) being that of the Karnataka High Court, we are bound to follow this decision in view of the Bombay High Court decision in the case of Godavaridevi Saraf (supra).
12. It is true that the expression 'any residential accommodation or accommodation in the nature of a guest house' as used in Section 37(3) had come up for consideration before the Madras and Punjab and Haryana High Courts in the cases supra. However, the manner in which their Lordships of the Madras High Court have referred to Rule 6C, it is doubtful whether they have derived any support from the Rules. In our view the observations of their Lordships clearly indicate that the decision is rendered independent of Rule 6C and, in any event, it may not be true to say that the decision has largely depended on the language of Rule 6C. ... It is only with reference to the other categories, like strangers, that the accommodation which is maintained can be correctly called a guest house. In other words, the meaning of the term 'guest house' as a place for the reception of strangers appears to have been accepted by the rule-making authority as the rules envisage employees staying in these premises. If employees were considered to be strangers such a provision would not have been made. It is necessary to bear in mind the legal position that the rule-making authority cannot expand the concept of the word 'guest' so as to include employees if the word did not comprehend such employees. Thus, employees are not strangers so as to be guests. The result is that unless the guest house is intended for use by a complete stranger, it cannot be called a guest house which falls within the scope of Section 37(3). (p. 624) Moreover, Rule 6C does not lay down that the residential accommodation not used by complete strangers will not be a guest house. In the premises, it appears to us that both the High Courts have understood the expression to be residential accommodation for the use of complete strangers independent of Rule 6C.13. Since the expression 'residential accommodation in the nature of a guest house' in Sub-sections (3) and (4) of Section 37 is in similar phraseo logy, we are inclined to accept the assessee's submission that there are three High Courts' decisions on the interpretation of the above expression. In the earlier two decisions the view that the residential accommodation will be a guest house only if it is maintained for complete strangers has been taken while in the last one a contrary view has been taken. Having regard to the above discussion, we are inclined to follow the Madras and Punjab and Haryana High Courts' decisions supra and hold that the residential accommodation maintained by the assessee during the previous year relevant for the assessment year 1978-79 cannot be treated as in the nature of a guest house.
14. It may not be out of place to mention that it was strongly argued on behalf of the department that after the insertion of Sub-section (4) in Section 37 and deletion of Rule 6C, the only expenditure that can be allowed in respect of a guest house is the one which is covered by the second proviso to Section 37(4), i.e., for a holiday home under specified conditions. To our mind, this argument cannot be accepted.
The second proviso to Section 37(4) only provides that Section 37(4) will not apply to cases covered by the second proviso. The question whether or not a residential accommodation is or is not in the nature of a guest house will have to be decided independently with reference to the provisions of Section 37(4). This is what has been done by us above.
15. We now dispose of other grounds in the assessee's appeal. The first ground in the assessee's appeal is : For that on the facts and in the circumstances of the case, the Commissioner (Appeals) erred in not deciding the ground preferred by the appellant in regard to the disallowance of Rs. 85,501 under Section 40(c)(i) and (ii) of the Income-tax Act, being ground No. 2 of the appeal.
The ground has not been considered by the Commissioner (Appeals). In response to a query from the Bench it has been fairly conceded that a Special Bench of the Tribunal in the case of ITO v. Sapt Textiles Products India Ltd. [1982] 1 SOT 269 (Bom.) and a Division Bench of the Tribunal in the assessee's own case for the assessment years 1975-76 to 1977-78 dated 22-1-1983 (paragraph 8) have decided the issue against the assessee. The issue was again contested by Shri Jal Dastur in the case of Homi Mehta & Sons (P.) Ltd. [IT Appeal No. 1737 (Bom.) of 1983, dated 2-8-1983] where again it has been held that a finding that the remuneration paid to the director-employee is excessive is not necessary for the purpose of computing the disallowance under Section 40(c) of the Act. The ground is, therefore, stated to be rejected.
For that on the facts and in the circumstances of the case, the Commissioner (Appeals) erred in holding that the following expenses incurred by the company in regard to a flat owned by it and used by the managing director of the company at Bombay as his residence are disallowable under Section 40(c)(i) and (ii) of the Income-tax Act, 1961: It is pertinent to mention that the ITO had computed the disallowance under Section 40A(5) of the Act by including the municipal tax, telephone expenses and flat maintenance expenses in their entirety as perquisites. The Commissioner (Appeals) held that flat maintenance expenses to the extent of Rs. 6,000 were incurred by the assessee as the owner of the property and that only a sum of Rs. 5,400 (the total expenses being Rs. 11,400) can be taken as a perquisite to the director-employee. It is for this reason that both the assessee and the ITO have come up in appeal regarding the above issue.
17. Shri Gautam Doshi, the learned counsel for the assessee, has not pressed the claim with regard to the municipal tax. The inclusion of the said amount for computing the disallowance under Section 40(c) is upheld. As regards the telephone expenses and flat maintenance expenses he has placed reliance on paragraphs 9, 10 and 15 of the Tribunal's order supra. It is stated that the Tribunal has taken the same view as regards the maintenance expenses in its order in IAC v. Mercantile Bank Ltd. [1984] 7 ITD 198 (Bom.). The departmental representative has relied on the order of the ITO. There being no fresh arguments, following the orders supra of the Tribunal, we hold that the inclusion of telephohe expenses and flat maintenance expenses for the purpose of computing the disallowance Under Section 40(c) are not justified.
For that on the facts and in the circumstances of the case, the Commissioner (Appeals) erred in upholding the disallowance of Rs. 8,000 in transport and hotel expenses.
The department has also come up in appeal in this regard. Their ground is as under : That the Commissioner (Appeals) is not legally justified in restricting the disallowance under the head 'Transport and hotel expenses' in absence of prescribed particulars required Under Rule 6D(2).
The total of the travelling expenses incurred by the assessee during the previous year amounted to Rs. 2,37,131. Observing that the assessee has not maintained proper details of each tour undertaken by the officers, the ITO disallowed a sum of Rs. 23,717 being 10 per cent of the total expenses, on estimate. The Commissioner (Appeals) found that a sum of Rs. 1,47,041 out of the total amount of Rs. 2,37,171 represented air, rail fare, etc., and that the expenditure in the nature of hotel expenses and taxi fare amounted to about Rs. 80,000 only. Being of the view that it would be fair to disallow 10 per cent of the expenditure out of Rs. 80,000 only, he restricted the disallowance to Rs. 8,000. It is for this reason that both the assessee and the ITO have come up in appeal.
19. It is fairly admitted by Shri Doshi, the learned counsel for the assessee, that a similar issue had come up before the Tribunal for the earlier year and that the Tribunal had restored the disallowance made by the ITO. The facts and rival contentions being identical, following the order of the Tribunal for the assessment years 1975-76 to 1977-78, we hold that the disallowance of Rs. 23,717 as made by the ITO was justified and that the Commissioner (Appeals) in restricting the disallowance to Rs. 8,000 was not justified.
20. The other and the last ground in the departmental appeal is against the extra shift allowance on diesel generator sets. The ITO has disallowed the claim observing : This year also the company has claimed E.S.A. on generator which is an electrical machinery to which E.S.A. is not admissible under the rules.
The Commissioner (Appeals) has, on the other hand, allowed the claim following the Commissioner (Appeals) (Central) order in the assessee's own case for the preceding year. He has also noted that the Madras Bench of the Tribunal has taken the same view.
21. Shri Tuli has invited our attention to Appendix I, Part I, Item III F(IV) illustration under Rule 5 of the Rules prescribing the table of rates at which depreciation is admissible. In particular, reliance is placed on the following provision in the Appendix : The extra shift allowance shall not be allowed in respect of any item of machinery or plant which has been specifically excepted by inscription of the letters 'N.E.S.A.' (meaning 'No extra shift allowance') against it in sub-item (ii) above and also in respect of the following items of machinery and plant to which the general rate of depreciation of 10 per cent applies : (1) Electrical machinery-switchgear and instruments, transformers and other stationary plant and wiring and fittings of electric light and fan installations.
It is stated that the generator including diesel generator is an electrical machinery and does not, therefore, qualify for extra shift allowance. Shri Doshi has, on the other hand, invited our attention to two orders of the Tribunal, at pages 34 and 38 of the paper book, for the purpose of showing that the generator sets are more basic than electrical machinery envisaged in the above Schedule and that, therefore, the bar to extra shift allowance is not applicable to the generator sets.
22. We have considered the rival contentions. It is pertinent to mention that in response to a query from the Bench Shri Doshi admitted that depreciation at the rate of 10 per cent was allowed on the generating sets. However, this fact by itself does not deprive the assessee of its claim for extra shift allowance. The short question that requires consideration is whether the diesel generating sets are electrical machineries of the type envisaged in the above Schedule. We need hardly mention that the words used herein are indicative of the type of machinery envisaged in this column. Considering the column from this point of view we find that all these machineries and installations are post generation of electricity. The generating set is a basic machinery and, therefore, it is not possible to hold that the generating set falls under this column. Accordingly, following the two orders of the Tribunal relied upon by the assessee's counsel, we hold that the assessee is entitled to extra shift allowance on the generating sets.