By the court:
The following questions of law have been referred to us by the Tribunal arising out of its order passed in ITA No. 1034/Ahd/1980 relating to the assessment year 1976-77 :
(1) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the bungalow used by the employees and visitors of the company which was a place necessary for stay and could not be termed guest house within the meaning of section 37(4) of the Act ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the expenditure, of Rs. 66,248 incurred by the assessee for its guest house ?
2. The questions relate to the allowability of Rs. 62,248 the expenses incurred by the assessee for maintaining residential accommodation. The Income Tax Officer disallowed the claim without examining whether the expenses were allowable under section 37(1) or not with reference to the provisions of section 37(4) of the Act though in his order he observed that it is a settled principle that if the questions of allowability or otherwise or any business expenditure is governed by any of the specific provisions sections 28 to 44, in that event, such a specific provision should be held to be applicable to the complete exclusion of section 37(1). The order of the Income Tax Officer was confirmed in appeal by Commissioner (Appeals). The Tribunal in its appellate order held that in view of the fact that official of the corporation are entitled to stay when they visit Bombay for the purpose of corporations work and that no outsider is entitled to stay in the same and it is not used for entertainment but only as a place of necessary stay, it cannot be termed as a guest house within the meaning of section 37(4) :
3. Provision which calls for attention in this regard is the second proviso to sub-section (4) which reads as under :
'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.'
In this connection it may be noticed that sub-section (5) to section 37 was inserted with effect from 1-4-1979, by Finance Act, 1983, which reads as under :
'For the removal of doubts it is hereby declared that any accommodation by whatever name called, maintained, hired, reserved or otherwise arranged by the assessee for the purpose of providing lodging or boarding and lodging to any person (including any employee or, where the assessee is a company, also any director of, or the holder of any other office in the company) on tour or visit to the place at which such accommodation is situated, is accommodation in the nature of a guest house within the meaning of sub-section (4).'
Sub-section (5) has been inserted by Finance Act, 1983, with retrospective effect, but retrospectivity has been restricted to 1-4-1979. Hence, the provision cannot be read and pressed into service for any period of assessment prior to 1-4-1979.
4. In this regard we may refer to a recent decision of the Supreme Court in the case of CIT v. Patel Bros. & Co. Ltd. & Ors. : [1995]215ITR165(SC) . The court was considering the meaning of entertainment expenditure within the meaning of section 37(2A). Explanation 2 to that sub-section was inserted with effect from 1-4-1976, which gave extended meaning to entertainment expenditure with retrospective effect from 1-4-1976. That explanation was couched in declaratory form as sub-section (5) reproduced above. The Apex Court held Explanation 2 to be not applicable for period prior to 1-4-1976. It said :
'Learned counsel for the revenue contended that Explanation 2 is clarificatory and, therefore, even without Explanation 2, the provision must be understood and construed in the same manner. It appears to us that insertion of Explanation 2 made retrospectively, but restricted in its application only with effect from 1-4-1976, is itself an indication that its application prior to 1-4-1976, is excluded, If Explanation 2 was merely clarificatory of the ordinary meaning, as contended by learned counsel for the revenue, it was unnecessary to restrict its retrospective application in this manner only from 1-4-1976. The construction We have made of sub-section (2A) of section 37 as it existed during the relevant assessment period cannot, therefore, be affected by Expln. 2 to sub-section (2A) which was inapplicable during the relevant period.'
5. In our opinion, any accommodation exclusively used by the assessee for the purpose of providing accommodation to its employees during their visit on official tour cannot be considered as guest house for the purpose of sub-section (4) of section 37. The word guest house in its ordinary sense is suggestive of any accommodation maintained for extending hospitality to a guest or an outside visitor and not providing shelter and/or food to inhouse persons for the purpose of business itself. Employees of a business house cannot be considered a guest of the business. As the scheme suggests that in order to consider any accommodation by the assessee as guest house an element of extending, some extra additional hospitality other than to meet obligatory necessity is essential to meet the requirement of business. The second proviso to sub-section (4) to above is also suggestive of the fact that an accommodation maintained by the assessee for the purpose of extending convenience and comfort to its employees on leave and while not on official duty has been exempted from the purview of the operation of sub-section (4). The extension of such facility during leave is obviously part of extending hospitality may be on account of business consideration but obviously no part of obligatory expenditure to be incurred by the employer. An accommodation maintained for use of employees while on leave and occupation is not for business undoubtedly falls in category of a guest house. To keep it out of rigours of sub-section (4) specific provision was needed. The very fact that expenses incurred for maintenance of such holiday home are kept outside the purview of sub-section (4) indicates that expenses incurred to maintain an accommodation exclusively to be used by the employees while they are on duty and not otherwise was not intended to be brought within the purview of sub-section (4) of section 37.
As sub-section (5) is not applicable to assessment year in question, we have not expressed any opinion about its effect, on any accommodation maintained for use by employees only while on duty, after 1-4-1979.
In the aforesaid circumstances, we are of the view that on the premises that the accommodation was available exclusively for the purpose of its employees while they were on duty in Bombay, the Tribunal was justified in its finding that the accommodation in question is not a guest house within the meaning of section 37(4). We are fortified in our aforesaid conclusion by a decision of the Madras High Court in the case of CIT v. Aruna Sugars Ltd. : [1980]123ITR619(Mad) wherein Their Lordships while considering the meaning of guest house came to the conclusion that where an accommodation is maintained either in the principal or in a place where the factory is located for the directors and other employees of the assessee- company who have to visit it for the purpose of companys business, any expenditure incurred for the maintenance of such accommodation cannot be brought within the scope of section 37(3) of the Income Tax Act, 1961.
We accordingly answer the first question referred to above in the affirmative i.e. in favour of the assessee and against the revenue.
6. This brings us to question No. 2. The assessee has claimed the expenses in question as allowable deduction under section 37(1) of the Act. The essential ingredients of any allowance to be made under section 37(1) ought not to be of the nature described in sections 30 to 36 and also that they are not in the nature of capital expenditure or personal expenses of the assessee and thirdly such expenses must be laid out or expended wholly and exclusively for the purposes of the business or profession, and therefore, before any expenses can be held to be allowable under section 37(1), the Income Tax Officer has to apply his mind and to find out whether the expenditure claimed by the assessee does not correspond to the nature described in sections 30 to 36 and if that expenditure in found to be of the nature described in sections 30 to 36, it has to be dealt with in accordance with those provisions and not under section 37. Where the assessing officer comes to the conclusion that the expenses are not of the nature described in sections 30 to 36 and are also not in the nature of capital expenditure, the assessing officer has further to apply his mind to the question whether the expenses have been laid out or expended wholly and exclusively for the purpose of its business or profession.
7. We have already noticed above that the Income Tax Officer though set out the principle on which a claim can be made under section 37(1), yet he has not applied his mind to the effect whether the expenditure claimed by the assessee are of the nature described in sections 30 to 36 or not and whether such expenditure is laid out or expended wholly and exclusively for the purposes of business or profession. Here we may cite a decision of the Gujarat High Court in the case of CIT v. Ahmedabad Mfg. & Calico Printing Co. Ltd. (1990) 197 ITR 538 which lays down that :
'The assessee was, admittedly, a tenant of the premises described as residential accommodation in the nature of guest house and employees of the assessee stayed there for temporary periods. The assessee would be entitled to deduction of rent paid by him for such premises under sub-clause (i) of clause (a) of section 30. It would also be entitled to deduction of the cost of repairs to such premises. It was the case of the assessee that an expenditure of Rs. 19,200 has been incurred in paying rent for the said premises described as guest house and Rs. 539 for water connection. Both these items of expenditure would be covered by section 30(a)(i). The assessee not having claimed deduction under section 37(1), the question of disallowing any part of the said expenditure under section 37(4) did not arise. In other words, the expenditure could not be disallowed under section 37(4).'
8. The Income Tax Officer had disallowed the claim of the assessee for deduction in respect of its share of expenditure regarding maintenance of accommodation in question only on the ground that the same is prohibited under section 37(4) of the Act. Section 37(4) is merely an exception to section 37(1). That is to say, what the expenditure, otherwise falls under section 37(1) may still be not allowable because of section 37(4). It was not the case of the revenue or the assessee that the nature of expenses fans under any other provisions of the Act. If it falls in any other provision it would have been still allowable in view of aforesaid decision in Ahmedabad Mfg. & Calico Printing Co.s case (supra), It is also not in dispute that but for provisions of section 37(4), the expenses were considered as allowable. The finding that the accommodation was maintained for employees while on business inhouse that expenses were laid out wholly and exclusively for the business. In that view of the matter, the Tribunal was justified in allowing the deduction of expenditure of Rs. 66,248. Accordingly, we answer question No. 2 referred to above in affirmative i.e., to say in favour of the assessee and against the revenue.
There shall be no order as to costs.