1. These are two cross-appeals, one by the assessee and the other by the revenue directed against the order of the CIT (Appeals) dated 24-10-1989 for the assessment year 1986-87. As certain common points are involved, they were heard together and are disposed of by this consolidated order for the sake of convenience. We shall first take up the appeal of the assessee.
"Disallowance under section 37(4) - Guest house Expenses of Rs. 8,83,372. - CIT(A) has erred in not accepting the appellant's contention that the occupancy charges and administration charges of guest house amount to Rs. 8,83,372 are not for the maintenance of guest house as referred in section 37(4)(1) and could not be disallowed under section 37(4)." 3. The assessee claimed expenditure on guest house of Rs. 23,31,317 and this was disallowed by the Assessing Officer under the provisions of section 37(4) of the Income-tax Act. The CIT (Appeals) deleted the following expenditure :- equipments, furniture, etc.
Rs. 2,11,447 ------------- 4. In the present ground, the assessee has sought deletion of the occupancy charges of Rs. 2,55,846 and administration charges of Rs. 6,27,526 aggregating to Rs. 8,83,372. The assessee has also raised an additional ground vide letter dated 12-12-1994 which reads as follows :- "The learned CIT (Appeals) erred in not excluding the following expenditure for processing disallowance under section 37(4) of the Income-tax Act :Rent - Rs. 2,81,574Depreciation - Rs. 1,02,701" 5. As no new facts are required to be gone into and the ground is raised in the light of the decision of the Hon'ble Bombay High Court in the case of Century Spg. & Mfg. Co. Ltd. v. CIT [1991] 189 ITR 660, the additional ground is admitted.
6. In its appeal, the revenue is aggrieved by the deletion of Rs. 7,41,305 effected by the CIT (Appeals) and has raised the following ground : "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that repairs expenses and rates and taxes incurred on guest house was not disallowable under section 37(4) thereby deleting the addition of Rs. 7,41,305." 7. We find, we have to tread the ground carefully between the two decisions of the Hon'ble Mumbai High Court in the cases of CIT v. Chase Bright Steel Ltd. No. 1 [1989] 177 ITR 124 and CIT v. Ocean Carriers (P.) Ltd. [1995] 211 ITR 357/80 Taxman 42. The latter decision has also been followed in the case of Raja Bahadur Motilal Poona Mills Ltd. v.CIT [1995] 212 ITR 175 (Bom.). In the case of Chase Bright Steel Ltd. No. 1 (supra), it was held that section 37(3) starts with a non obstante clause which relates only to the expenditure allowable under sub-section (1) of section 37 and no other provision. So, it was held that expenditure on rent and repairs was allowable under sections 30 and 31 of the Income-tax Act and could not be disallowed under the provisions of section 37(4). In the subsequent decision of the jurisdictional High Court in the case of Ocean Carriers (P.) Ltd. (supra), it was held that the assessee is not entitled to allowance of expenditure on the maintenance of the guest house and on depreciation thereon. In the light of these two decisions, we find that the expenditure of Rs. 8,83,372 being the aggregate of occupancy charges and administration charges is disallowable, as according to us, it partakes the character of maintenance. The rent of Rs. 2,81,574 is allowable in the light of the decision of the Hon'ble Bombay High Court in the case of Chase Bright Steel Ltd. No. 1 (supra). The depreciation of Rs. 1,02,701 is not allowable as it is specifically disallowed in terms of the language used in section 37(4) as held by the Hon'ble Bombay High Court in the case of Ocean Carriers (P.) Ltd. (supra). We also find that the deletion of the disallowance by the CIT (Appeals) of Rs. 7,41,305 is also on the correct lines in the light of the decision in the case of Chase Bright Steel Ltd. No. 1 (supra). So, the first ground raised by the assessee is rejected and the additional ground in terms of the claim for deduction of rent only is allowed. The ground raised by the revenue on this issued is also rejected.
"Premium on Issue of debentures - Rs. 2,37,50,000. - CIT(A) has erred in not accepting the appellant's claim that sum of Rs. 2,37,50,000 being the premium payable on redemption of debentures is admissible deduction for the purpose of computation of total income of the assessment year 1986-87 in its entirety and restricting this claim of 1/7th of the above sum, i.e., Rs. 33,92,817." 9. During the relevant previous year, the assessee has issued certain debentures and has claimed deduction in the computation of income for an amount of Rs. 2,37,50,000 being the premium at the rate of 5% payable at the time of redemption. The contention of the assessee is that the liability for paying the premium has been incurred in the current accounting year even though it is payable only at the time of redemption after lapse of the specified number of years. The Assessing Officer did not accept the claim that the liability was incurred in the year of redemption of the debentures. According to him, the premium was payable only in subsequent years at the time of redemption and so, the liability accrues only in the year of redemption.
10. The CIT (Appeals) has mentioned that the liability for the payment of premium accrued in the current accounting year but held that the entire amount of Rs. 2,37,50,000 is not allowable as deduction in the present assessment year and granted deduction for 1/7th of this amount, as according to him, the premium is payable only after 7 years at the time of redemption. The CIT (Appeals) followed the decision of the Madhya Pradesh High Court reported in M.P. Financial Corpn. v. CIT [1987] 165 ITR 765.
11. The assessee objects to the deduction of only 1/7th of the premium and that is how it has taken the ground reproduced above. The revenue objects to deduction of 1/7th of the premium granted by the CIT (Appeals) and the ground taken by it reads as follows :- "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to allow 1/7th of Rs. 2,37,50,000 representing premium on issue of debentures in this assessment year, although the liability accrues only at the time of redemption, i.e., after 7 years and only in cases where the debenture holders do not avail buy back facility." 12. Before us, the learned counsel for the assessee clarified that the debentures issued were of the order of Rs. 47.5 crores out of which debentures to the tune of Rs. 25 crores were issued by way of right issue and the balance amounting to Rs. 22.5 crores were issued to financial institutions. So far as the debentures of Rs. 25 crores are concerned, the assessee-company has the right of repurchase and the relevant clause in the letter of offer reads as follows :- "(iv) Right of Re-purchase/Buy-back Scheme. - The Company shall have the right to repurchase the debentures at any time and cancel or reissue them at its discretion either by re-issuing the same debentures or by issuing other debentures from time to time in accordance with the provisions of section 121 and other applicable provisions of the Companies Act, 1956. Upon such re-issue the person or persons to whom such re-issued debentures may be allotted by the Board shall have and shall always be deemed to have had the same rights and privileges as if the debentures had never been redeemed.
Without prejudice to the rights reserved hereinabove the Company shall repurchase the debentures at outstanding par value from any registered debentureholder or receipt of a written offer if the following conditions are fulfilled : (a) The debentures which are offered for sale to the Company shall have been held by the debentureholder for a period at least one year continuously as on the date on which the offer for sale is received by the Company; and (b) The original face value of the total holding of the debentureholder shall not exceed Rs. 40,000 (Rupees forty thousand) as on the date on which the offer for sale is received by the Company (in the case of joint-holders of the said debentures, the person whose name appears first will be considered as holder under the Buyback Scheme for the purpose of computing the limit of Rs. 40,000.) Under the Scheme of Non-Cumulative Interest Payment, interest from the date of last payment of interest up to the date of buy-back shall be paid, subject to deduction of tax as mentioned above, along with the outstanding principal amount of the debentures bought back.
Under the Scheme of Cumulative Interest Payment, the cumulated interest from the date of allotment up to the date of buy-back will be deemed to have become due on the date of payment and shall be paid, subject to deduction of tax as mentioned above, along with the outstanding principal amount of the debentures bought back (except during the 8th and 9th year where interest payment will take into account pro rata accumulated interest paid at the end of 7th or 8th year from the date of allotment, as the case may be).
The payment of the principal and interest as aforesaid on the debentures repurchased under the Buy-back Scheme shall be made by cheque or bank draft within a period of 15 working days from the date of receipt by the company of the offer for sale of the debenture(s).
The company shall be at liberty to cancel such bought back debentures or to re-issue the same either under the Scheme of Non-Cumulative Interest Payment or under the Scheme of Cumulative Interest Payment.
(v) Redemption. - The debentures under the Scheme of Non Cumulative Interest Payment will be redeemed in full together with a premium of Rs. 5 per debenture (being 5% of the face value of the debenture) on the expiry of the seventh year from the date of allotment." 13. The learned D.R. contended that as the assessee-company had the right of repurchase of the debentures in the light of the above clauses in the letter of offer, the liability for the payment of premium is only a contingent liability. In other words, if the debentures were repurchased and not re-issued, there would be no liability at all for the payment of the premium. Therefore, it is pleaded that it is only in the eventuality of the debentures not being repurchased and their being redeemed on the expiry of the 7th year, there would be a liability for the payment of the premium. It is also pleaded that the claim for deduction of the premium can be allowed only in the year of actual payment. In this context, he has relied upon the decision of the Calcutta High Court in the case of CIT v. Tungabhadra Industries Ltd. [1994] 207 ITR 553/76 Taxman 185. In this case, the Hon'ble High Court considered similar debentures which were subject to buy-back clause and held that the premium was allowable in the year of payment. The relevant portion of the headnote of this decision reads as follows :- "Held, (i) that the expenditure incurred in respect of the debentures was revenue expenditure; (ii) that the liability to pay premium arose at the expiry of the seventh year from the date of allotment and there was no liability to pay the premium at all if the debentures were repurchased under the buy-back clause and there was no further issue of debentures.
The payment of premium was clearly a contingent liability and the liability to pay the premium would arise only if the debentures were not repurchased by the company under clause 5(b) and were redeemed only at the end of seven years. The entire amount of the premium in respect of the said debentures should be allowed as a deduction in its entirety in one year, i.e., in the year in which such liability was incurred. No part of the premium was deductible in the assessment year 1984-85." In the light of the above, the learned D.R. pleaded that deduction for the premium of Rs. 2,37,50,000 can be granted only as and when a portion of it or the whole of it happens to be paid.
14. We have perused the documents filed before us relating to the issue of debentures and find that debentures of Rs. 25 crores were issued as per the letter of offer dated 5-12-1984 and they are subject to a right of repurchase. We also find that debentures of another Rs. 10 crores were issued under a letter of consent of the Deputy Controller of Capital Issues dated 25-4-1985 which is at pages 11 and 12 of the assessee's paper book and these debentures were redeemable at a premium of 5% on the expiry of 7 years from the date of allotment. They were issued to certain financial institutions like UTI, HDFC, etc. We do not find any original document on record relating to the issue of balance of debentures of Rs. 12.5 crores. It is not clear whether these debentures of Rs. 12.5 crores were issued with a right of repurchase or not.
15. As per the decision of the Hon'ble Calcutta High Court cited supra, we have to hold that in respect of the debentures issued with a right of repurchase, the liability for the payment of premium does not accrue at the time of allotment of the debentures but the liability is incurred only at the time of the payment. Therefore, the liability for the payment of premium of these debentures of Rs. 25 crores is, at this stage, only a contingent liability. Accordingly, we hold that the premium relatable to the debentures of Rs. 25 crores issued by a letter of offer dated 5-12-1984 is not an allowable deduction for this assessment year.
The debentures of Rs. 10 crores issued under a consent letter of the Dy. Controller of Capital Issues dated 25-4-1985 fall into a different category. These debentures are redeemable only after the expiry of 7 years and the liability for the payment of the premium is incurred in the year of account relevant for the present assessment year though it is to be discharged only after the expiry of the 7th year. In other words, the liability is payable in future by reason of a present obligation. In other words, it is a case of debitum in praesenti, solvendum in futuro as held by the Apex Court in the case of Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 ITR 767. We are of the view that in regard to the premium payable at the time of redemption in respect of the debentures of Rs. 10 crores, the liability is deductible in the present assessment year. However, it is not the entire premium of Rs. 50 lakhs relatable to these debentures of Rs. 10 crores that is deductible in the present assessment year but only its discounted value. That is because the liability has to be discharged only after the expiry of the 7th year. In such a situation, it is only the discounted value of the liability that has to be allowed in the present assessment year. In the case of Southern Railway of Peru Ltd. v. Owen (Inspector of Taxes) [1957] 32 ITR 737 (HL) at page 747, it was held as follows : "My Lords, as a general proposition, it is, I think, right to say that, in computing his taxable profits for a particular year, a trader, who is under a definite obligation to pay his employees for their services in that year an immediate payment and also a future payment in some subsequent year, may properly deduct, not only that immediate payment, but the present value of the future payment, provided such present value can be satisfactorily determined or fairly estimated. Apart from special circumstances, such a procedure, if practicable, is justified because it brings the true costs of trading in the particular year into account for that year and thus promotes the ascertainment of the 'annual profits or gains arising or accruing from' the trade." 16. In the light of the above, the discounted value of the liability of Rs. 50 lakhs has to be allowed as a deduction. However, the discount rate to be adopted was not discussed during the hearing and so, we remit the matter to the file of the CIT (Appeals) to decide a suitable rate of discount.
17. That leaves the balance debentures of Rs. 12.50 crores out of Rs. 47.50 crores of debentures stated to have been issued. It is not made clear during the hearing whether they are issued with a right of repurchase or without such a right. In other words, it is not clear whether they fall under the first category of debentures or the second category considered above. The CIT (Appeals) may verify this aspect of the matter also and decide the issue in the light of the principles outlined above. If they are issued with a right of repurchase, the liability for the payment of premium in respect of those debentures is not deductible. If there is no such right of repurchase and are redeemable only at the expiry of the specified period, the discounted value of the liability for the payment of the premium has to be allowed as a deduction in the present assessment year.
18. The next ground is that the CIT (Appeals) erred in not accepting the claim of the assessee for deduction of Rs. 8,35,727 being provision for estimated loss on contracts.
19. A division of the assessee-company had been executing long-term contracts for supply and erection of Ash Handling system and travelling water screen for thermal power stations. The admitted position is that the profit or loss from these contracts is being disclosed, not annually, but on the basis of the completed contract method. It is stated that the assessee or its relevant division undertook a mid-term review of the contracts and anticipated a future loss of Rs. 8,35,727 and made a provision for this loss by way of debit to the P & L account and claimed it as a deduction. The revenue authorities disallowed the claim on the ground that as the assessee has been following the completed contract basis for disclosing the results of the contracts, it cannot be allowed to make a departure from the method of accounting regularly employed by it and claim a loss that has not actually been incurred but only anticipated in the present assessment year.
20. Before us, the learned counsel for the assessee filed copies of the relevant accounting standard being AS-7 of the Institute of Chartered Accountants of India and IAS-11 being the International Accounting Standard which are in the paper book filed by the assessee and contended that even when the assessee follows the completed contract method in contra-distinction to the percentage of completion method, the assessee is entitled to claim a deduction for anticipated losses.
The relevant portion of the Accounting Standard (AS-7) is reproduced below : "19. A foreseeable loss on the entire contract should be provided for in the financial statements irrespective of the amount of work done and the method of accounting followed." The learned counsel for the assessee has pleaded that the profits under the head 'Business' have to be ascertained in accordance with the commercial principles and the method of accounting regularly employed by the assessee. In his picturesque language, section 28 of the Income-tax Act is a prisoner of section 145. Unless the assessee adopts a method which is not permissible by commercial practice or accounting standard, the computation of income by the Assessing Officer has to be based only on the method of accounting regularly employed. In the present case, the assessee has been following completed contract basis and a provision for the foreseen losses is permissible in the light of the accounting standard. In this context, he has relied upon the decision of the Hon'ble Allahabad High Court in the case of CIT v.Mahabir Jute Mills (P.) Ltd. [1991] 188 ITR 337/55 Taxman 79.
21. The learned D.R. pleaded that the assessee has been returning the results from the contracts work only at the end of their completion and it is an absurd situation to allow the assessee to postpone the profits but to grant a deduction for the anticipated losses. He claimed that if at all, a provision for the anticipated loss has to be made as per the accounting standard cited above, the provision has also to be shown as an asset in the balance sheet along with the cost incurred in respect of the contract and it should not be allowed as a deduction from the profits. He has also pleaded that section 145 of the Act which casts a duty on the Assessing Officer to compute the profits as per the method of accounting regularly followed by the assessee has to be controlled by section 5 according to which all the incomes and only the losses that have actually accrued should figure in the computation. In support of this proposition, he relied upon the following decisions :-Minister of National Revenue v. Anaconda American Brass Ltd. [1956] 30 ITR 84 (PC); (2) CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 (Mad.); (3) Standard Triumph Motor Co. Ltd. v. CIT [1993] 201 ITR 391/67 Taxman 160 (SC); and (4) CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 (SC).
The learned D.R. also pleaded that the provision made for the anticipated loss of Rs. 8,35,727 is a precise figure but there is no basis for this figure.
22. The learned counsel for the assessee countered that the CIT (Appeals) had not questioned the basis for the claim of deduction of Rs. 8,35,727 and this provision was made on the basis of a mid-term review and because of the afflux of time, the records are misplaced and it is not possible to indicate the basis. He has also stressed that the assessee has been a very good corporate citizen and there is no reason for suspecting the bona fide of the claim. He further mentioned that at this stage, what is left is only the legal question whether in spite of the assessee having followed the generally accepted accounting standards and made the provision for Rs. 8,35,727, it is not allowable on the ground that the loss is only anticipated and not actually incurred.
23. We are of the view this ground has to be rejected. Firstly, on facts, the assessee is not in a position to substantiate its claim.
Without knowing the basis for the claim and how exactly it came to the conclusion that it is likely to incur the loss, it is difficult for the Tribunal to interfere with the order of the CIT (Appeals). More importantly, we are in agreement with the contention of the learned D.R. that only accrued losses or losses actually incurred can be allowed and not anticipated losses even though such anticipation is advised or even made mandatory by accounting standards. The accounting standards to the extent they are in conflict with the terms of the statute have to be ignored. For example, it is a normal accounting practice to write off deferred revenue expenditure over a number of years, but for computation of income under the Income-tax Act, the entire expenditure is allowed in the year in which the expenditure is incurred. Similarly, the losses have to be allowed when they are incurred and not when they are anticipated. In present instance, the anticipation of the losses is sanctioned by the accounting standards cited by the learned counsel for the assessee. Anticipated loss has to be provided for as per the accounting standards. The argument of the learned D.R. that the loss has to be reflected only in the balance-sheet along with the work-in-progress and it should not be debited to the P & L account does not seem to be correct. However, to our mind, such provision is not permissible in view of the terms of section 5, according to which accrual of income (which includes loss) is the earliest stage at which such income or loss can be recognised for income-tax purposes. A prior to accrual stage like an anticipated loss or income will only be in the realm of contingency and is neither taxable as income nor allowable as loss.
24. In the case of Minister of National Revenue (supra), the Privy Council has observed that new theories of accountancy, though accepted for business purposes might not necessarily determine the income for tax purposes. The decision of the Madras High Court in the case of Standard Triumph Motor Co. Ltd. (supra) is also apposite. In this case, it was held that the liability to tax arising from the provisions of section 5(2)(b) of the Income-tax Act in respect of a non-resident cannot be defeated by resort to cash system of accounting and section 145(1) of the Income-tax Act which stipulates that the income has to be computed as per the method of accounting regularly employed by the assessee should not be permitted to defeat the charge of tax. In the present case, it has also to be remembered that the assessee is offering its income on the completed contract basis and by adoption of this method, it has postponed the disclosure of income till the completion of the contracts. In other words, it is not disclosing the income on the annual basis. While postponing the disclosure of income, it is only claiming a deduction for anticipated loss which, to our mind, appears to be a kind of double benefit. Further, it appears that this is the first time that the assessee-company made a provision of this type. In similar situation, the Hon'ble Calcutta High Court in the case of Garden Reach Workshop Ltd. v. CIT [1989] 132 ITR 814 upheld the order of the Tribunal not allowing deduction for similar provisions. In this case, the Hon'ble High Court observed as follows :- "In the present case, we find that consistently over a long period the tax authorities have made assessments on the basis of profits earned on or losses suffered in completed contracts only. The position with regard to incomplete contracts was never taken into account. It is open to an assessee to change its method of valuation. Likewise, it is open to the revenue not to adopt a basis of valuation, which had been accepted by it consistently in the past, provided there are overriding reasons for effecting a change : (See Kanga and Palkhivala's The Law and Practice of Income Tax, 7th Edn., p. 879) The Tribunal in the present case, has not found any overriding reason for effecting a change of method from the one consistently followed in the past. And, in the absence of non-availability of material facts, we are unable to state that the Tribunal has taken an erroneous view." Their Lordships have also quoted the following from the decision of the Court of Appeal in Duple Motor Bodies Ltd. v. Inland Revenue Commissioners [1961] 43 ITR 65 : "The duty of the directors is to make their decision on this matter in the best interests of the company, looking at it as a business entity, and quite plainly it could not be said that their conclusion, quite properly come to as responsible for the company's management, was decisive of the matter for income-tax purposes." 25. In view of the above, we find that the accounting standards cited by the learned counsel for the assessee are not decisive of the matter and even though the practice of providing for anticipated loss is sanctioned by the accounting standard, it is not an allowable deduction. The ground is rejected.
"Disallowance under section 40A(9) - Rs. 2,16,174. - CIT(A) erred in confirming the disallowance on Rs. 2,16,175 under section 40A(9).
Without prejudice, a sum of Rs. 30,476 which was not contributed to any external Welfare Fund should not have been disallowed." 27. The Assessing Officer made the disallowance of Rs. 2,16,174 with the following observations :- "In the computation of net income filed along with the return, the assessee-company had shown disallowable amount under section 40A(9) at Rs. 1,60,058, whereas as per the Tax Audit Report, the disallowable amount is shown as Rs. 1,90,534. At the time of hearing, it is clarified that the disallowable amount shown in the computation of net income does not include contribution to Employees Benefit Fund pertaining to Tractor Division amounting to Rs. 30,476.
It is argued that the said sum of Rs. 30,476 pertaining to Tractor Division remains internally within the company and hence should not be considered for the purpose of disallowance under section 40A(9).
In the Tax Audit Report, it is also stated that a sum of Rs. 25,640 being contribution to Mahindra Education Society was not included for the purpose of disallowance under section 40A(9). It is contended at the time of hearing that the payment to Mahindra Education Society was not contributed in the capacity of an employer and hence should not be considered for disallowance under section 40A(9). The claim of the assessee-company is not accepted. All the contributions except contribution for the purpose and to the extent provided by or under clause (iv) or clause (v) of sub-section (1) of section 36 are disallowable under section 40A(9). The total disallowance under section 40A(9) is, therefore (Rs. 1,90,534 + Rs. 25,640) = Rs. 2,16,174." 28. Before the CIT (Appeals), the dispute was only about the disallowance of Rs. 30,476 pertaining to the contribution to Employees' Benefit Fund of the Tractor Division. The CIT (Appeals) confirmed the disallowance of this amount on the ground that this amount was credited to a separate fund and so, it was hit by the provisions of section 40A(9). It was contended before him that there was an expenditure of Rs. 70,429 out of this fund during the year of account and a deduction of this amount should be allowed. He negatived this contention also on the ground that it was not proved that this expenditure was incurred by this fund before the prescribed date under section 40A(10).
29. Before us, the learned counsel for the assessee has given the details of the year-wise expenditure incurred from this fund and we find that the expenditure of Rs. 70,429 was incurred during the period November 1984 to October 1985. In other words, this expenditure was incurred after the date prescribed under section 40A(10) which happens to be the first day of March, 1984. In the circumstances, we find that no deduction for the expenditure of Rs. 70,429 or any portion of it can be allowed. The other additions made by the Assessing Officer of Rs. 30,476 and Rs. 25,640 are only contributions to funds and are hit by the provisions of section 40A(9). The balance of Rs. 1,60,058 has been offered by the assessee itself. So, we do not find any reason to interfere with the order of the CIT (Appeals) and accordingly, we reject this ground.
30. The next ground is that the CIT (Appeals) erred in treating the legal and professional expenses of Rs. 5,68,735 incurred by the assessee in the matter of merger of Mahindra Spicer Ltd. (MSL) with appellant-company as non-revenue expenditure.
31. The learned counsel for the assessee pleaded that the assessee was a major shareholder in Mahindra Spicer Ltd. and because of the accumulated losses, it became impossible for MSL to continue as an independent entity and the expenses on the merger have to be regarded as expenditure for the protection of the assessee's own investment in MSL and it should be allowed as a revenue expenditure. Even otherwise, MSL has been a supplier of clutches and propeller shafts to the assessee-company and so, in the interest of regular supply, the assessee-company had to bring about the merger and the legal expenses incurred in this context have to be regarded as allowable business expenditure. The learned counsel for the assessee has also filed a copy of the Minutes of the Meeting of the Board of Directors dated 3-4-1984 and relied on the decision reported in 85 Taxman 396.
32. We find force in the contention of the learned counsel for the assessee. Legal expenses of Rs. 5,68,735 has to be allowed as deduction. The ground is allowed.
33. The next ground is that the CIT (Appeals) erred in confirming withdrawal of investment allowance of Rs. 1,67,452 granted in earlier assessment years on plant and machinery which were scrapped during the relevant accounting year.
34. The revenue authorities withdrew the investment allowance under the provisions of section 155(4A)(a) on the ground that there was a transfer of the assets within the period of 8 years. The learned counsel for the assessee pleaded that as the assets were scrapped, there was no transfer and so, withdrawal of the investment allowance is incorrect. In this context, he relied upon the decisions reported in Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 647/59 Taxman 3 (SC),.... 35 TTJ 34, CIT v. Engg. Works of India (P.) Ltd. [1977] 108 ITR 11 (Cal.) and Hindustan Lever Ltd. v. IAC [1991] 36 ITD 585 (Bom.).
The learned D.R. on the other hand, pleaded that even if the assessee sold the assets in question as a scrap, there is no guarantee that the purchasers continued to use them as scrap and so, there is a transfer.
35. There is no material on record to hold that the assets in question were not scraps. There is also no material on record as to what happened to these scraps in the hands of the purchasers. In the circumstances, we are of the view that disposal of scrap does not amount to transfer so as to attract the provisions of section 155(4A).
In view of the authorities cited by the learned counsel for the assessee, we restore the investment allowance withdrawn by the CIT (Appeals). The ground is allowed.
36. The assessee has also raised an additional ground which reads as follows :- "The learned CIT (Appeals) erred in confirming the withdrawal of investment allowance granted in the earlier year/years in the assessment year 1986-87 on the plea that the said assets were sold during the previous year in respect of which investment allowance was granted in the earlier year/years." 37. It is pleaded by the learned counsel for the assessee that this ground is raised subsequently because the assessee became aware of the correct legal position at a later stage. As no enquiry into the new facts are required, this additional ground is admitted.
38. The assessee has sold some assets during the year of account relevant for the present assessment year, the cost of which was Rs. 4,55,282. As they were transferred within the prohibited period of 8 years, the Assessing Officer withdrew the investment allowance thereon.
The learned counsel for the assessee pleads that the withdrawal of investment allowance has to be effected in the respective years in which the investment allowance was granted. As this is the correct legal position, we have to allow this ground. The withdrawal may be effected in the year in which the investment allowance was granted in respect of the assets sold. The ground is allowed.
"Interest under section 139(8). - The CIT(A) erred in not accepting the appellant's contention that in view of the circumstances beyond the control of the appellant the return of income could not be filed in time and hence interest under section 139(8) should not be levied." 40. It is claimed that M/s. Mahindra Spicer Ltd. merged with the assessee-company and the requisite certificate under section 72A(2) of the Income-tax Act which is at page 31 of the assessee's paper book was received belatedly on 30-9-1986 and the return could not be filed till the certificate was received and enclosed with the return and so, there was an inevitable or unavoidable delay in filing of the return. The return was due on 30-6-1986 and it was filed on 30-9-1986 and in the circumstances, as the delay was caused because of non-receipt of the certificate under section 72A mentioned above, the Assessing Officer should have waived the interest under the powers vested in him under rule 117A of the I.T. Rules and should not have mechanically levied the interest. The learned counsel for the assessee has also placed reliance on the decision reported in the case of Mrs. Hilla Ginwalla v. CIT [1994] 73 Taxman 669 (Cal.). He was also fair enough to invite our attention to the decision of the Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961/27 Taxman 275 and mentioned that in that case, a writ petition was involved and so, it is not always mandatory to approach the Assessing Officer with a waiver petition under rule 117A.41. The learned D.R., on the other hand, pleaded that the levy of interest under section 139(8) is mandatory and to attract the provisions of rule 117A of the I.T. Rules, there must initially be an application from the assessee, as otherwise the relevant circumstances would not be evident to the Assessing Officer for the proper exercise of the power of waiver. He has also relied upon the decisions reported in Golecha Properties (P.) Ltd. v. CIT [1988] 171 ITR 47/[1987] 31 Taxman 34 (Raj.) and C.J. Zaehari v. ITO [1988] 173 ITR 632/37 Taxman 222 (Ker.) and pleaded that no opportunity need be given to the assessee before the levy of interest under section 139(8).
42. We are of the view that the Assessing Officer was within his right in the levy of interest under section 139(8), as there was no waiver petition. This ground is rejected.
"Interest under section 216. - The learned CIT(A) erred in not accepting the appellant's contention that interest under section 216 was not leviable in its case. In particular, he should have accepted its contention that interest should be levied under section 216, only if the first two instalments of advance tax paid are not in line with the assessed tax, where such assessed tax is less than the total advance tax paid during the year." 43. The learned counsel for the assessee filed a copy of the order under section 216 as per which the assessee paid advance tax as follows :- It is explained that the assessee initially filed a statement of advance tax payable in Form No. 28A at Rs. 1,80,00,000 and that the first two instalments were paid in terms of the statement. It is also explained that the assessee filed subsequently a higher estimate. It is pleaded that in a case where instalments are paid as per the statement, there can be no levy of interest under section 216. There is substance in the contention. However, the facts may be verified and if found correct, the interest may be deleted.
44. There are some more grounds raised regarding bonus payment of Rs. 19,87,581, disallowance under section 43B of Rs. 1,90,44,009, royalty payment of Rs. 8.82 lacs, cash compensatory support of Rs. 1,81,77,906 and deduction under section 80HHC of Rs. 17,03,184. These grounds are not pressed and they are dismissed as not pressed.
45. Now we take up the appeal of the revenue. The first ground is that the CIT (Appeals) erred in allowing the entire initial contribution to Superannuation Fund amounting to Rs. 15,36,889 as against 1/5th of 80% of initial contribution allowed in the assessment. This ground is covered against the revenue by the orders of the Tribunal in the assessee's own case for the assessment years 1983-84 to 1985-86.
Further, the decision of the Andhra Pradesh High Court reported in CIT v. Hyderabad Asbestos Cement Products Ltd. [1988] 172 ITR 762/[1984] 19 Taxman 46 supports the view taken by the Tribunal. In the circumstances, the ground is rejected.
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that as much as 50% of the conference expenses was not disallowable as entertainment expenditure on account of staff participation overlooking the Explanation 2 to section 37(2A) thereby deleting the disallowance by Rs. 11,88,177.
47. We find that in the immediately preceding year, the Tribunal in para 27 of its order in ITA Nos. 7686 and 7971/Bom/88 held that 25% of the total expenditure may be estimated to have been expended on employees wherever employees extended hospitality to company's guests.
Accordingly, we direct the Assessing Officer to modify the order and attribute 25% of the total amount as expenditure on employees. In other words, this expenditure of 25% will not call for disallowance under section 37(2A). This ground is partly allowed.
48. The next ground is that the CIT (Appeals) erred in holding that the expenditure incurred on foreign visitors to the company of Rs. 1,48,231 is not disallowable as entertainment expenditure.
49. For the immediately preceding year, the Tribunal in the order cited (supra), held that the expenditure on foreign delegates is of the nature of promotional expenditure and not entertainment expenditure and as such we hold that it has to be considered for disallowance under section 37(3A) and cannot be disallowed under section 37(2A) and so, the impugned deletion of Rs. 1,48,231 may be considered for disallowance under section 37(3A). This ground is partly allowed.
50. The next ground relating to deletion of Rs. 7,41,305 being the addition made under the provisions of section 37(4) has already been considered while disposing of the appeal of the assessee above.
51. The next ground is that the CIT (Appeals) erred in holding that the value of the presentation articles of Rs. 4,30,196 is not disallowable under rule 6B of the I.T. Rules. This issue is covered against the assessee for the immediately preceding year in the order of the Tribunal cited (supra). This ground is rejected.
52. The next ground relating to the allowance of 1/7th of the premium on issue of debentures of Rs. 2,37,50,000 has already been discussed in the context of the assessee's appeal. This ground is decided in terms of the directions given above in that context.
53. The next ground is that the CIT (Appeals) erred in holding that in case of a Managing Director, the provisions of section 40(c) are applicable and not of section 40A(5). This ground is also covered in favour of the assessee by the order of the Tribunal in the earlier years and also of the decision of the Hon'ble Bombay High Court in the case of CIT v. Hico Products (P.) Ltd. No. 2 [1993] 201 ITR 575/69 Taxman 79. This ground is rejected.
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to allow special payment of Rs. 1,53,78,843 being excess bonus, over and above the limits under the Payment of Bonus Act and not payable under the provisions of section 36(1)(ii) and section 37." 55. The assessee has given an elaborate note on the circumstances on which certain special payments have been made to the employees, which is at page 15 of the assessee's paper book. The CIT (Appeals) allowed the claim in the light of the decision of the Hon'ble Madras High Court in the case reported in CIT v. Sivanandha Mills Ltd. [1985] 156 ITR 629. The issue is covered against the revenue by the order of the Tribunal - Para 26 for the assessment year 1985-86 cited (supra). The issue is also covered against the revenue by the order of the Tribunal for the assessment years 1983-84 and 1984-85. In the circumstances, we uphold the order of the CIT (Appeals) and the ground is rejected.
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in allowing the provision of Rs. 50,43,409 made in the account on account of Special pension under the voluntary retirement scheme as against the deduction of Rs. 17,52,378 as per actual disbursement allowed in the assessment." 57. This issue is also covered against the revenue by the order of the Tribunal for the immediately preceding year cited (supra) and it is accordingly rejected.
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of interest of Rs. 10,26,371 on account of interest-free loans to subsidiaries without appreciating, inter alia, the detailed arguments of his predecessor for assessment year 1983-84." 59. This issue is covered against the revenue by the order of the Tribunal for the immediately preceding year, i.e., 1985-86 cited (supra). The ground is rejected.
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to allow deduction under section 80M on the gross dividend without deducting the estimated interest of Rs. 40,31,660 on borrowed fund attributable to investment in shares as per the provisions of section 80AA of the Act." 61. This issue is also covered against the revenue by the order of the Tribunal for the assessment year 1985-86 cited (supra). The ground is rejected.
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to allow remuneration to directors amounting to Rs. 1,24,878 although the sanction of the Central Government as prescribed in the Company's Act had not been obtained." 63. The learned counsel for the assessee mentioned that the approval has since been received and so, it will relate back and the appointment is regularised. He has also relied on the following decisions :- 1. Nilgiri Finance & Hire Purchase (P.) Ltd. v. CIT [1995] 213 ITR 384/83 Taxman 377 (Mad.); and 2. CIT v. Ramakrishna Mills (Coimbatore) Ltd. [1974] 93 ITR 49 (Mad.).
He has also distinguished the case of a director from that of a managing agent considered by the Apex Court reported in Nonsneh Tea Estate Ltd. v. CIT [1975] 98 ITR 189. A managing agent is not an employee and unless there is a prior consent of the Government, a managing agent cannot embark on his duties whereas in the case of a director, post facto approval will serve to regularise the appointment.
65. The next ground is that the CIT (Appeals) erred in holding that the royalty payment of Rs. 1,39,000 for acquisition of technical know-how was a revenue expenditure and allowable as deduction.
66. The CIT (Appeals) discussed the issue in para 10 of his order as follows :- "10. The company paid royalty to a U.K. Company during this year amounting to Rs. 1,39,000. This claim for deduction of this amount as an expenditure was not accepted by the officer on the ground that it was of a capital nature. According to him, the payment of royalty was for acquisition of Technical Know-how and, therefore, it could not be allowed as a revenue deduction. He had relied upon the decision of the Supreme Court reported in 157 ITR 86. The company however pointed out that this royalty paid during the year was over and above the lump sum consideration paid as per agreement dated 11-1-1982 between itself and the U.K. company. As per this agreement, the royalty was payable at 5% for a period of 5 years commencing from the date of commercial production. It was pointed out by the assessee that even the lump sum payment was allowed as revenue expenditure by the CIT(A) in the assessment year 1984-85.
Considering the decision taken for the earlier assessment year on this point in appeal, I accept the assessee's submission and hold that this royalty payment cannot be treated as capital expenditure.
Therefore, I allow this claim and reduce the total income by Rs. 1,39,000." 67. We find that the claim is allowable in the light of the decision of the Apex Court in the case of Alembic Chemical Works Co. Ltd. v.CIT[1989] 177 ITR 377/43 Taxman 312. The ground is rejected.
68. The department has also raised an additional ground which reads as follows :- "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that advance tax instalment paid beyond the stipulated time is to be taken into consideration for the purpose of computing interest under section 139(8)." 69. It is conceded that the amount in question was paid as advance tax instalments. The only defect pointed out is that the amount was paid beyond the stipulated time. The CIT (Appeals) observed that the amount was paid before the end of the financial year and this finding has not been controverted before us. There are number of decisions holding that belated payments of advance tax but paid within the financial year are eligible for interest under section 214. In this context, reference may be made to the case law cited at page 4726 of Chaturvedi and Pithisaria, Fourth Edition. We do not find any infirmity in the finding of the CIT (Appeals). The ground is rejected.
70. In the result, the appeal of the assessee (ITA No. 9811/Bom/89) and that of the revenue (ITA No. 124/Bom/90) are partly allowed.
71. I have carefully perused the order proposed by my learned brother, Shri M.V.R. Prasad, and since I have not been able to agree with the findings given apropos the allowability of expenditure, in the nature of rent, repairs and taxes, incurred on the maintenance of guest house, I record my views here as under : 72. The expenditure incurred by an assessee on the maintenance of guest houses was, till 28th day of February, 1970, allowed as deduction in computing the profits and gains of business or profession, subject to certain limits and conditions prescribed in Rule 6C of the Income-tax Rules, 1962.
73. In order to place an effective check on lavish expenditure on maintenance of guest houses, section 37(4) was inserted by the Finance Act, 1970. This section is reproduced here as under : "(4) Notwithstanding anything contained in sub-section (1) or sub-section (3) - (i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of February, 1970, on the maintenance of any residential accommodation in the nature of a guest house (such residential accommodation being hereafter in this sub-section referred to as 'guest house'); (ii) in relation to the assessment year commencing on the 1st day of April, 1971 or any subsequent assessment year, no allowance shall be made in respect of depreciation of any building used as a guest house or depreciation of any assets in a guest house : Provided that the aggregate of the expenditure referred to in clause (i) and the amount of any depreciation referred to in clause (ii) shall, for the purpose of sub-section, be reduced by the amount, if any, received from persons used the guest house : Provided further that nothing in this sub-section shall apply in relation to any guest house maintained as a holiday home if such guest house : (a) is maintained by an assessee who has throughout the previous year employed not less than one hundred whole-time employees in a business or profession carried on by him; and (b) is intended for the exclusive use of such employees while on leave - (i) residential accommodation in the nature of a guest house shall include accommodation hired or reserved by the assessee in a hotel for a period exceeding one hundred and eighty-two days during the previous year; and (ii) the expenditure incurred on the maintenance of a guest house shall, in a case where the residential accommodation has been hired by the assessee, include also the rent paid in respect of such accommodation." 74. It is a sound rule of construction of a statute fairly established in England, as far back as 1584, when Heydon's case [1584] 3 Co. Rep.
7a was decided that - "... for the sure and true interpretation of all statutes in general four things are to be discerned and considered : (ii) what was the mischief and defect for which the common law did not provide; (iii) what remedy the Parliament hath resolved and appointed to cure the disease of the common wealth; and then the office of all the judges is always to make such construction as shall suppress the mischief and advance the remedy." 75. Testing the prescription of section 37(4) on the touchstone of Heydon's rule, we find that expenditure on maintenance of guest house was allowable till 28-2-1970 as a deduction in computing the profits and gains of the business. It was subject to the limits as prescribed in Rule 6C as existed at that time. It was felt by the Legislature that business houses were incurring lavish expenditure on maintenance of guest house and claiming the same as deduction. In order to put a check on such lavish expenditure, section 37(4) was inserted.
76. It would be pertinent to reproduce here the relevant portion of the notes on clauses and memo explaining the provision in the Finance Bill : "Sub-clause (c) seeks to insert a new sub-section (4) in section 37 of the Income-tax Act. Under the proposed new sub-section (4), any expenditure incurred by a taxpayer on the maintenance of a guest house after the 28th February, 1970, will not be allowed as a deduction in computing his business or professional income.
Similarly, no depreciation will be allowed in respect of the building used as the guest house and assets therein. The amount to be disallowed will be calculated after setting off amounts, if any, received by the taxpayer from persons using the guest house. For the purposes of the new provision, accommodation hired or reserved by the taxpayer in a hotel for a period exceeding six months will be treated as a guest house. In the case of a taxpayer having in his employment not less than 100 whole-time employees throughout the relevant previous year, the expenditure incurred on the maintenance of a 'holiday home' exclusively for the use of his employees while on leave will not, however, be allowed." Memo explaining provisions in Finance Bill, 1970 - Clause 29 [75 ITR (St.) 81, at page 91] "Disallowance of expenditure on maintenance of guest houses in computing the profits and gains of business or profession. - At present, the expenditure incurred by an assessee on the maintenance of guest houses is allowed as a deduction in computing the profits and gains of business or profession, subject to certain limits specified in the Income-tax Rules. These Rules cover expenditure on guest houses maintained at the principal place of the business or profession in India, any place where the assessee has an establishment for processing of raw-materials, manufacture or processing or production of any article or thing or any other industrial establishment employing not less than 50 whole-time employees throughout the relevant year, and in the case of a business or profession having not less than 100 wholetime employees on its rolls, also 'holiday homes' for the use of the employees while on leave. The rules also cover guest houses at Delhi and at two other places in India which may be either the capital of a State Government or any other place which is of direct importance to the business or profession. Banking companies are allowed to maintain guest houses at Bombay to facilitate liaison with the Reserve Bank of India. Accommodation hired or reserved in a hotel for a period of more than six months during the year is treated as a guest house for the purposes of the Rules." 77. The remedy the Parliament hath resolved and appointed to cure the disease is thus explained. The meaning and intention of a Statute must be collected from the plain and unambiguous expression used therein.
The rule of construction which is relevant to the present enquiry is expressed in the maxim : The Apex Court in the case of CIT v. Shahzada Nand & Sons [1966] 60 ITR 392 at page 400 discussed the abovesaid principle.
78. To explain the rule, it would be apt to quote the following passage from the book "Craies on a Statute Law", Fifth Edition at 205 : "The rule is, that whenever there is a particular enactment and a general enactment in the same statute, and the latter, taken in its most comprehensive sense, would overrule the former, the particular enactment must be operative and the general enactment must be taken to affect only the other parts of the statute to which it may properly apply." 79. Now, it is abundantly clear that section 37(4) was enacted to deal with the expenditure concerning with the guest houses. Therefore, the prescription of the said section is to prevail over the general enactment.
80. The Hon'ble Bombay High Court in the case of Ocean Carriers (P.) Ltd. (supra) has held that section 37(4) prohibits totally any allowance in respect of any expenditure on the maintenance of a guest house and also prohibits any depreciation allowance in respect of any building used as guest house unless the guest house is maintained exclusively as a holiday home for the employees, etc.
In the case of Raja Bahadur Motilal Poona Mills Ltd. (supra), similar view was taken.
81. In the case of Century Spg. & Mfg. Co. Ltd. (supra), it was held that section 37(4) begins with a non obstante clause vis-a-vis sub-section (1) and sub-section (3) of section 37 only. In other words, the provisions of section 37(4) override the provisions of sections 37(1) and 37(3) only and not any other section. In that view of the matter, if an expenditure or allowance is allowable under sections of 1961 Act and other sections of the Income-tax Act, 1961, the allowance cannot be withdrawn or denied to the assessee because of the prohibitory provision to section 37(4). Similar view was taken in the case of Chase Bright Steel Ltd. (No. 1) (supra).
82. The Hon'ble High Court of Bombay in the cases of Ocean Carriers (P.) Ltd. (supra) and Raja Bahadur Motilal Poona Mills Ltd. (supra) took a different view. It is an axiom that when there are two conflicting rulings of the binding nature, the latter should be followed.
83. In view of the above, I am of the opinion, that expenditure, in the nature of rent, repairs and taxes, incurred on the maintenance of guest house, clearly comes within the ken of section 37(4), hence not allowable.
We, the Members of the Mumbai Bench of the Tribunal have differed in the Order to be passed in ITA Nos. 9811/Bom/89 and 124/Bom/90, in the case of Mahindra & Mahindra Ltd. v. DCIT. The question on which we have differed is referred to the Hon'ble President under section 255(4) of the Income-tax Act, 1961 as under : "Whether, the rent, repairs and taxes pertaining to the guest house maintained by the assessee can be disallowed by resorting to the provisions of section 37(4) of the Income-tax Act, 1961 ?" 1. The learned members have been unable to agree on an issue that arose from the cross appeals and I have been called upon to resolve the point of difference. The learned members have stated their disagreement in the following question for my consideration : "Whether the rent, repairs and taxes pertaining to the guest house maintained by the assessee can be disallowed by resorting to the provisions of section 37(4) of the Income-tax Act, 1961 ?" 2. The learned Accountant Member (hereinafter referred to as the AM) was of the opinion that rent, repairs and taxes are not to be disallowed by resorting to the provisions contained in section 37(4) of the Income-tax Act, 1961 (hereinafter referred to as the Act) because, they are allowed with reference to the provisions contained in sections 30 & 31 of the Act. He was further of the view that his conclusion has the sanction of the Mumbai High Court in Chase Bright Steel Ltd. (No.1) (supra).
3. The learned Judicial Member (hereinafter referred to as the JM) took into consideration the two decisions of the Mumbai High Court in Ocean Carriers (P.) Ltd.'s case (supra) and Raja Bahadur Motilal Poona Mills Ltd.'s case (supra) both of which considered the provisions of section 37(4) of the Act concerning the depreciation and expenses on the maintenance of a guest house.
The JM had observed that both the decisions had been categorical on the point that guest house expenses are to be disallowed because section 37(4) of the Act specifically dealt with the expenses on the maintenance of a guest house. The JM did observe that the decision of the Mumbai High Court in Century Spg. & Mfg. Co. Ltd. (supra) had held that the provisions of section 37(4) of the Act do override the provisions contained in section 37(1) of the Act but, not any other provisions of the Act. He however observed that the two decisions in Ocean Carriers (P.) Ltd.'s case (supra) and Raja Bahadur Motilal Poona Mills Ltd.'s case (supra) respectively being pronounced subsequent to the decisions in Chase Bright Steel Ltd. (No. 1)'s case (supra) and Century Spg. & Mfg. Co. Ltd.'s case (supra), he chose to follow the latter decisions.
4. I have heard the submissions of the learned counsel for the assessee and the learned departmental representative. I might state that the point of dispute as raised in the question reproduced in the initial para covers the claim of rent of Rs. 2,81,574 and repairs, rates & taxes of Rs. 7,41,305, incurred on the maintenance of the guest house.
The learned counsel pointed out that the decision of the Tribunal in Hindustan Lever Ltd. v. IAC [1996] 58 ITD 555 (Bom.) had dealt with the identical issue. He contended that in the stated decision it was concluded that the decisions in Ocean Carriers (P.) Ltd.'s case (supra) and Raja Bahadur Motilal Poona Mills Ltd.'s case (supra) was restrictive to the provisions of section 37(4) while the earlier decisions in Chase Bright Steel Ltd. (No. 1)'s case (supra) and Century Spg. & Mfg. Co. Ltd.'s case (supra) was on the broader concept of disallowability of expenses by resorting to the provisions contained in sections 37(3) and 37(4) of the Act, that are otherwise allowed with reference to the provisions contained in sections 30 and 31 of the Act and, therefore, the latter decisions could not be held to have overruled or reversed the earlier decisions.
The learned departmental representative contended that the Mumbai High Court in Chase Bright Steel Ltd. (No. 1's) case (supra) had considered the provisions of section 37(3) of the Act only and because, at the relevant point of time, section 37(4) of the Act did not exist it could not consider it. He submitted in the decision in Century Spg. & Mfg.
Co. Ltd.'s case (supra) the provisions of section 37(4) was duly considered after which they had applied the ruling in Chase Bright Steel Ltd. (No. 1's) case (supra). He contended that the Gujarat High Court in CIT v. Gaekwar Mills Ltd. [1992] 193 ITR 734 had upheld the disallowance of depreciation of guest house building which was so disallowed by resorting to the provisions contained in section 37(4) of the Act. He also referred to the decision of the Andhra Pradesh High Court in CIT v. Maddi Venkataratnam & Co. (P.) Ltd. [1996] 217 ITR 571/85 Taxman 53 where the principles of Ocean Carriers (P.) Ltd.'s case (supra) was applied.
5. The controversy that has arisen in the instant case is one of interpretation of the provisions contained in sections 37(1) and 37(4) of the Act and, therefore, it becomes necessary for me to appreciate the intention of the law makers.
The law makers were able to identify and group certain expenses relating to the business or profession and accordingly classified them in the sections 30 to 36 of the Act. The law makers had realised that the fact that it was humanly impossible to imagine every possible type of expenses concerning business or profession, and further with a view to allow flexibility in the consideration of newer items of expenses that might come up with the development of commerce and trade, felt the need to frame a section in the Act that could cater to such a situation. Accordingly they had evolved a section that would not only meet the most of the demands of the situation but also go to ensure that a particular type of expense if covered by that universal section then, it is not attracted by another pre-defined section. This appears to be the basis of evolving of section 37 of the Act.
Section 37(1) of the Act starts with the words "Any expenditure (not being expenditure of the nature described in sections 30 to 36...) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains from business or profession'. This is clearly indicative of the fact that the provisions of section 37(1) of the Act is intended to cover only those that can be classified as revenue expenses, which expenses could not fall into any of the groups or classes that are so classified in the sections 30 to 36 of the Act.
To put it in simple terms, any revenue expenditure that could be classified and grouped into the classes as defined in sections 30 to 36 of the Act, could not be said to fall within the ambit of section 37 of the Act. In other words, only those revenue expenses that could not be allowed by the application of sections 30 to 36 of the Act, could be stated to fall for consideration for allowance under the section 37 of the Act. The words that are placed in the braces in the section qualifies 'any expenditure' with the sole purpose of making it clear that the term 'any expenditure' means expenditure the nature of which is not described in sections 30 to 36. The said section 37 of the Act is in continuation to the provisions contained in sections 3O to 36 of the Act and has never been introduced with a view to restrict in the operation of the sections 30 to 36 of the Act or so to say override the provisions contained in those sections.
The Act does contain certain sections that override the provisions of some sections of the Act like sections 40, 40A, 43A, 43B, 44, 44A, 44AC, 44B, 44BB, 44BBA, 44BBB, 44C and 44D of the Act. Section 40 of the Act uses the words "notwithstanding anything to the contrary in sections 30 to 39 (effective from 1-4-1989, 39 is to be read as 38) the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains from the business or profession'. Section 40A uses the words, "the provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provisions of this Act...." Section 43A of the Act uses the words "notwithstanding anything to the contrary contained in any other provisions of this Act...". Section 43B of the Act also uses similar words as in section 43A of the Act concerning the deduction of certain expenses in the nature of tax, duty, cess, employer's contribution to provident fund, etc., and had added a condition that the deduction is allowable only on actual payment. Section 44 of the Act had defined the manner of computing the income from insurance business in the First Schedule to the Act that falls in the various heads of income as defined in section 14 of the Act, by overriding the provisions contained in the various sections that concern with the computation of income from such heads of income.
Similarly section 44A of the Act had defined the manner of computing the income from trade, professional or other similar associations and had stated that shortfall in the collection from subscription from members or otherwise would be allowed to be deducted in computing the income.
Sections 44AC, 44B, 44BB, 44BBA, 44BBB, 44C and 44D deal with the computation of income from (1) trading certain goods; (2) shipping business; (3) exploration of mineral oils; (4) operation of aircraft's by non residents; (5) foreign companies engaged in the business of civil construction, etc., of certain turnkey power projects; (6) deduction of head office expenditure in case of non-residents and (7) royalties, etc., in the case of foreign companies, that are chargeable under the head 'Profits and gains from business or profession' and they had used the words like, "notwithstanding anything contained to the contrary in sections 28 to 43A of the Act....", thereby specifically indicated that insofar as these sections are concerned the provisions contained in sections 28 to 43A, etc., are inapplicable.
Considering the above, and the distinctive provisions of section 37(1) of the Act, it is amply clear that section 37(1) is an addition to the sections 30 to 36 of the Act and is intended only to cover all those instances of expenditure that do not fall in any of the sections 30 to 36 of the Act. Therefore, in my view, it would be wrong to even suggest that it has been so introduced and is inserted in substitution of the provisions contained in sections 30 to 36 of the Act.
Section 37 of the Act, has a few sub-sections, viz., sub-sections (3) and (4) that have been so inserted with a view to override the provisions contained in section 37(1) of the Act. Normally, when any sub-section has an overriding effect on another sub-section of the same section, it would mean that the main sub-section has certain conditions or riders attached to it and that when applying the main sub-section, the impact of such overriding provision has to be given along side. I shall deal with them in the following paragraphs. I shall initially, for the sake of convenience, reproduce the sub-sections (3) and (4) of section 37 of the Act.
Section 37(3) of the Act starts with the words "notwithstanding anything contained in sub-section (1), any expenditure incurred by an assessee after the 31st day of March, 1964, on advertisement or on maintenance of any residential accommodation including any accommodation in the nature of a guest house or in connection with travelling by an employee or any other person (including hotel expenses or allowances paid in connection with such travelling) shall be allowed only to the extent, and subject to such other conditions, if any, as may be prescribed." Section 37(4) of the Act that is effective from 1-4-1970, reads as under : "Notwithstanding anything contained in sub-section (1) or sub-section (3) - (i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of February, 1970, on the maintenance of any residential accommodation in the nature of a guest house; (ii) in relation to the assessment year commencing on the 1st day of April, 1971, or any subsequent assessment year, no allowance shall be made in respect of depreciation of any building used as a guest house or depreciation of any assets in a guest house : Provided that the aggregate of the expenditure referred to in clause (i) and the amount of depreciation referred to in clause (ii) shall, for the purposes of this sub-section, be reduced by the amount, if any, received from persons using the guest house :** ** ** Explanation - For the purposes of this sub-section, -(i) ** ** ** (ii) the expenditure incurred on the maintenance of a guest house shall in a case where the residential accommodation has been hired by the assessee include also the rent paid in respect of such accommodation.
The sub-sections as above though, have named certain type of expense like, advertisement, sales promotion, entertainment, travelling, vehicle, aircraft, guest house, etc., there have been innumerable other type of expenditures that have been claimed and allowed with reference to the provisions of section 37 of the Act. It goes without saying that the sub-sections intend to place a curb on certain type of expenditures and such curbing is limited only to those that have been so indicated by the said sub-sections which is on an assumption that the stated type of expenditures could be claimed for deduction from out of the profits and gains from business or profession under the provisions of section 37(1) of the Act. Because, the issue in the instant case is with reference to guest house, I shall limit myself to those aspects of the sub-sections that concern or related to the allowability or otherwise of the expenses on the guest house.
Both the sub-sections (3) and (4) of section 37 of the Act use the words, "notwithstanding anything contained in sub-section (1)" and in addition to these words, sub-section (3) states 'any expenditure incurred' and sub-section (4) states 'no allowance shall be made in respect of any expenditure/depreciation' and both are related to maintenance of any accommodation in the nature of a guest house. It appears to me that the law makers had proceeded either with the assumption that the guest house expenses are to be allowed with reference to section 37(1) of the Act or that the words 'notwithstanding anything contained in sub-section (1)' had removed whatever limitation of application of that section remained.
The earlier presumption if existed, it would be a wrong one because, sections 32, 32A and 32AB clearly restrict the allowing of any additional depreciation, investment allowance and investment allowance deposit to any plant or machinery installed in any residential accommodation, including any accommodation in the nature of a guest house. This gives an impression that the law makers were aware of the aspects of a guest house like it being a building that could be owned and used for the business but, desired to place certain restrictions of it being not entitled to additional depreciation, investment allowance and investment allowance deposit. It could also be said that the law makers were aware that a building could be hired for use as a guest house resulting in expenses incurred in connection therewith like rent, repairs, rates and taxes and so on. Because, sections 30 and 31 of the Act that deals with the allowing of expenditure on rent, repairs, rates and taxes, does not contain any restrictive covenants as is seen in sections 32, 32A and 32AB of they Act, it is suggestive of the intention of the law makers that they felt no need for the same.
Sections 30 & 31 of the Act concerns itself with the rent, rates, taxes, repairs and insurance for premises used for the purposes of the business or profession. It does not contain any further qualification like factory building, guest house, etc., as is seen either in sections 32, 32A and 32AB of the Act or as is contained in the depreciation table in the Income-tax Rules, 1962. It is not denied by the law makers that accommodation of the nature of a guest house is used for the purposes of the business because, they have further classified it to exclude certain types like holiday homes for employees drawing salary below a particular limit. Therefore, to assume that the words 'premises used for the purposes of the business or profession' is to mean only those premises from where business is normally carried on to the exclusion of those premises from where business is either occasionally carried on or is used to facilitate in the carrying on of the business, like transit homes, guest house, in my humble view is erroneous.
It remains to be seen whether the law makers thought that the provision contained in sub-sections (3) and (4) of section 37 of the Act because they override what is contained in section 37(1) of the Act, it would not only cover the expenditure that are allowable with reference to section 37(1) but also with reference to the other provisions of the Act though, limiting to the computation of income under the head 'Profits and gains from business or profession'. This assumption is perhaps based on the introductory words contained in section 37(1), "any expenditure (not being expenditure of the nature described in sections 30 to 36") which when read in conjunction with the introductory words contained in sections 37(3) and 37(4) of the Act, "notwithstanding anything contained in sub-section (1)" is perhaps being read as "notwithstanding anything contained in sub-section (1), i.e., any expenditure and being expenditure of the nature described in sections 30 to 36 of the Act". If this format of reading is permissible, the obvious conclusion has to be that sections 37(3) and 37(4) of the Act override the provisions of sections 30 to 36 of the Act and had laid down restriction to the allowance of deduction on guest house expenses.
Earlier, I had observed that section 37 had been intended to allow such expenses that could not be identified and grouped in any of the sections 30 to 36 of the Act and that is why the law makers had added the words "not being expenditure of the nature described in sections 30 to 36" after the words "any expenditure". This in my view was a well intended one because, the law makers wanted clear demarcation of the term 'any expenditure' as exclusive to what has been stated in certain other sections. Therefore, it gives an impression that the section 37(1) of the Act is intended to deal with exclusive items of expenditure which expenditure are not covered by the sections 30 to 36 of the Act. The term "any expenditure" has to be read as to mean "any other expenditure that are not so described in sections 30 to 36". From this angle, the provisions of sections 37(3) and 37(4) override the provisions of section 37(1) of the Act that deals with such items of expenditure that are exclusive to the section, and therefore, the overriding has to be restricted to such items of expenditure that are exclusively dealt with that section.
The courts have ruled that the interpretation of a provision of a section should not be so made so as to negate the section itself or make it impossible to implement, and it is necessary to appreciate the provisions in a homogeneous manner. In this proposition, it might be proceeded with on the basis that the specific mention of the guest house not being eligible for additional depreciation, investment allowance and investment allowance deposit, is so intended to restrict such items of deductions only and that it could not be presumed that because in sections 30 and 31 of the Act, do not contain any specific indication of or use of the word guest house, those sections are concerned with expenses that are incurred on and in connection with guest house. In this manner, it would go to indicate that the intention of section 37(1) that it concerns itself with only those expenditures that are not covered by sections 30 to 36 of the Act and thereby, it may be erroneous to hold that allowability of expenses on guest houses is governed by section other than section 37 of the Act.
The Bombay High Court in Ocean Carriers (P.) Ltd.'s case (supra) has posed the question, "whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the expenditure of Rs. 10,029 as maintenance expenses and Rs. 11,375 as depreciation allowance, for the assessment year 1977-78 in relation to the flats at Jupiter Apartments and Sunita Apartments, was not expenditure incurred on the maintenance of residential accommodation in the nature of a guest house, and was, therefore, an admissible deduction ?" The Court had considered the term "guest house" and had held that the term has not been defined in the Act. The court further observed that "guest house" is a house for housing guests either gratuitously or at a concessional rate. The court referred to the Madras High Court in CIT v. Aruna Sugars Ltd. [1980] 123 ITR 619 wherein it was held that unless the guest house is intended for use by a complete stranger, it cannot be called a guest house by considering the provisions of section 37(3) of the Act but, held that it is not possible to subscribe to the view taken therein while construing the provisions of sub-section (4) of section 37 of the Act. The court had also referred to the Karnataka High Court in the case of Sri Durga Enterprises (Brindhavan Hotel) v. ITO [1976] 102 ITR 745 and observed that the said decision had not taken the extreme view that guest house refers to a place where guests of the assessee are received and entertained only gratuitously, on the contrary, it had been held that a guest house refers to a place where the guests of an assessee are received and entertained gratuitously or at a concessional rate. The court also referred to the provisions of sub-section (5) to section 37 of the Act, that was inserted by the Finance Act, 1983, giving it a retrospective operation from April 1, 1979, clarifying that accommodation maintained by the assessee to provide lodging or boarding and lodging to any person including any employee or a director or the holder of any office in the assessee-company would be in the nature of a guest house within the meaning of sub-section (4) of section 37 of the Act. It was accordingly concluded that - "in our view, by providing accommodation to the members of the crew as also to representatives of the assessee's principal non-resident shipping companies in these flats, the assessee-company had treated these flats as its own guest houses and since these guest houses were not maintained exclusively as a holiday home for the employees of the assessee-company, the assessee-company was not entitled to allowance under section 37(4) in respect of any expenditure on maintenance thereof incurred after February 28, 1970, nor to any depreciation allowance." The Bombay High Court in Raja Bahadur Motilal Poona Mills Ltd.'s case (supra) the question that was referred under section 256(1) of the Act - "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenses of Rs. 21,951, Rs. 17,601 and Rs. 9,273, respectively, for 1970-71, 1971-72 and 1972-73 assessment years related to the maintenance of residential accommodation in the nature of a guest house within the meaning of section 37(3)/37(4) of the Income-tax Act, 1961 ?" The court noted the provisions of sections 37(3) and 37(4) of the Act and observed that - "as per section 37(4)(i) of the Act, no allowance shall be made in respect of any expenditure incurred by an assessee on maintenance of any residential accommodation in the nature of a guest house after February 28, 1970. Accordingly, for the assessment year 1970-71, the assessee is entitled for the expenditure incurred on the maintenance of the guest house in accordance with section 37(3) of the Act. As regards the expenditure incurred for maintenance of the residential accommodation in the nature of a guest house for the assessment years 1971-72 and 1972-73, the controversy is squarely covered by our judgment in CIT v. Ocean Carriers P. Ltd. [1995] 211 ITR 357 (Income-tax Reference No. 335 of 1983) delivered on November 15, 1994." The Bombay High Court in Chase Bright Steel Ltd. (No. 1's) case (supra) had considered the following three questions :- "(i) Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to the deduction of the rent of Rs. 4,200 (ii) Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to the deduction of Rs. 1,603.19 (iii) Whether, on the facts and in the circumstance of the case, the assessee-company was entitled to the deduction of Rs. 9,156.90 ?" The facts in this case as was noted was that the assessee had paid rent of a flat that was used partly for the residence of officers of the assessee and the remaining was used as its guest house, on which expenditure of Rs. 10,760 on its maintenance, salary of cook, provisions, etc., was incurred. It was noted that the Assessing Officer had disallowed both the rent and the other expenses on the guest house, that was confirmed by the first appellate authority by rejecting the contention that rent was allowable under section 30 and in respect of the maintenance expenses under section 31, and, therefore, neither section 37(3) of the Income-tax Act, 1961, nor any rules made thereunder were applicable to the case. The Tribunal considered the submissions that expenditure of Rs. 4,200 on rent and Rs. 1,603.19 on the repairs and polishing of the furniture was allowable under sections 30 and 31 of the Act and not under section 37(1) of the Act and, therefore, the provisions of section 37(3) of the Act were not applicable and upheld the same.
The High Court considered the submissions of the department that the section 37(3) of the Act was in reality a substantive provision, which had an overriding effect on all the provisions in the Act pertaining to allowance of expenditure in computing the income from business and profession and that it specifically covered all kinds of expenses incurred in connection with the guest house maintained by an assessee for the purpose of its business and that if the view taken by the Tribunal was accepted, the provisions of section 37(3) will become otiose and further that such a construction, it was argued, is to be avoided. The court after reproducing the section 37(1) of the Act had observed as follows : "it is evident that this sub-section contemplated allowance of expenditure, which is neither personal nor of capital nature nor which is of the nature described in sections 30 to 36 of the Act.
Obviously, rent which is allowable under section 30 and expenditure relating to the repairs and polishing of furniture falling under section 31 could not again fall for consideration under this sub-section. Coming then to the provisions of sub-section (3) of section 37, it is seen that the provisions in that sub-section start with a non obstante clause 'Notwithstanding anything contained in sub-section (1)...' which of necessity must relate to expenditure allowable under sub-section (1) of section 37 of the Act and no other provision. This being so and the assessee's case, as stated by us above, not falling to be considered under section 37(1) of the Act, we are in agreement with the view taken by the Tribunal that the deduction in respect of rent for the guest house being allowable and allowed under section 30 and the expenses on repairs and polishing of furniture amounting to Rs. 1,603 being allowable under section 31 of the Act could not be disallowed under the provisions of sub-section (3) of section 37 of the Act or rules made thereunder." The Bombay High Court in Century Spg. & Mfg. Co. Ltd.'s case (supra) had considered the question, "whether, on the facts and in the circumstances of the case, the claim of the applicant for depreciation amounting to Rs. 6,875 on the house at Lonavala has been rightly disallowed under section 37 on the ground that it is a guest house ?" The court had observed that, "as regards the second additional question, Mr. Mehta invited our attention to our court's judgment in the case of CIT v. Chase Bright Steel Ltd. (No. 1) [1989] 177 ITR 124, to which one of us (Sugla, J.) was a party. It was held in that case that sub-section (4) of section 37 no doubt was a non obstante clause but it was non obstinate vis-a-vis sub-section (1) and sub-section (3) of section 37 only. That being so, if the expenditure or allowance was allowable under other sections of the Income-tax Act, the allowance could not be withdrawn or denied to the assessee because of the prohibitory provisions in section 37(4). On going through the decision, we find that the submission is correct. Accordingly, we hold that the assessee was entitled to depreciation in respect of its property." The Bombay High Court decisions in Ocean Carriers (P.) Ltd.'s case (supra) and in Raja Bahadur Motilal Poona Mills Ltd.'s case (supra) contained no reference to the earlier two decisions of the same court in Chase Bright Steel Ltd. (No. 1)'s case (supra) and Century Spg. & Mfg. Co. Ltd.'s case (supra) and furthermore because, the latter decisions and the earlier decisions are all issued by Division Benches, the latter decisions cannot be said to have overruled the earlier decisions. Because, the latter decisions did not contain any reference to the earlier decisions, the latter decisions are perhaps issued per in curium, i.e., in ignorance of the existence of an earlier decision and further because, the latter decisions had no fresh material like the decision of the apex court without which, it could be difficult to hold that the latter decisions should hold the field in preference to the earlier decisions. At best it could be said that the Bombay High Court had given two views on the subject of allowance or non-allowance of expenses concerning guest house.
The interpretation of the provisions as above shows that the issue is quite ambiguous and it appears is not capable of clear interpretation.
The various possible form of appreciation of the provisions of section 37(3) and 37(4) of the Act read with the provision of section 37(1) of the Act, indicate that the law makers were perhaps in their anxiety to restrict the expenses on guest house had not anticipated that they are perhaps opening out areas of nonchalance. The enactment that poses uncertainty or doubt takes away with it the consistency and uniformity of application from the implementers of the enactment and gives rise to several possible claims advanced by the taxpayers. This is exactly what has transpired by the enactment of sub-sections (3) and (4) of section 37. The decision of Madras High Court in Aruna Sugars Ltd.'s case (supra) dealing with the provisions of section 37(3) of the Act had observed that the expression 'guest house' would mean a place meant to house guests and not when it is used by the employees and directors.
The law makers with a view to overcome the above shortcoming brought about by the Madras High Court (supra), brought in sub-section (4) of section 37 of the Act whereby it was explained that the provisions relating to guest house are inapplicable when any guest house is maintained as a holiday home when the total number of employees are less than hundred and is exclusively used by such employees while on leave. The law makers thought the explanation would clarify the intent of the section but, the above two divergent views of the Bombay High Court go to show that the law makers' belief has been shaken.
In conclusion because, the Division Benches of the Mumbai High Court had given two views that are diametrically opposite to one another and neither of them could be said to have overruled the other for overruling of a decision of a Division Bench is possible by a Full Bench of three or more Judges of the said High Court and implementation of the provision being not free from doubt though, the intention is to restrict the expenses on guest houses, I find that I am left with no alternative but, to resort to the Supreme Court decision in CIT v.Vegetable Products Ltd. [1973] 88 ITR 192 and choose the view that is favourable to the subject. On this reasoning, I agree with the view of the Accountant Member. Now the matter would go back to the regular bench for disposal of the appeals in accordance with the view of majority.