Khimji Visram and Sons (Gujarat) Private Limited Vs. Commissioner of Income-tax - Court Judgment

Excerpt:
direct taxation - municipal tax - sections 28, 29, 30, 31, 32, 32a, 33, 33a, 33ab, 33ac, 34, 34a, 35, 35a, 35d, 35ab, 35ac, 35cca, 36ccb, 36, 36 (1), 37, 37 (1), 37 (2b), 37 (3), 37 (4), 38, 39, 40, 40a, 41, 42 and 43d of income tax act, 1961 - assessee company purchased premises in july 1975 and shifted its office in january 1977 - assessee claimed deduction of rs. 59280 for maintenance charges for period from july 1975 to december 1976 - whether assessee entitled to deduction of municipal tax either under section 30 (b) or under section 37 in respect of premises - assessee taken lease premises for purpose of business and took over possession in july 1975 - handed over premises to agent for furnishing and repairs - after taking over possession premises used for purpose of business - held, question answered in favour of assessee. head note: income tax depreciation--office premises--building taken on rent and handed over for furnishing, and repair--business commenced in building after two years when furnishing etc. completed--assessee was already running business and the new building was for expansion. held : the assessee was running its business at ahmedabad. the assessee was having his office at ahmedabad. for expansion of its business activities, it took on rent the premises in question in may 1975 and for furnishing it, it handed over the possession to its agent and after furnishing and repairs were over, it commenced its business from january, 1977 from the said premises. hence, it would be apparent that in the present case, as the assessee had taken on lease the premises in bombay for the purpose of its business or setting up of the business and that it took over the possession in may 1975 and handed over the same to its agent for furnishing and repairs, it can be said that, after taking over the possession, the said premises were used for the purpose of business. may be the actual commencement of business might have started only in january, 1977. the assessee was,therefore, entitled to depreciation in respect of bombay building.--cit v. r. tolat & co. (1980) 126 itr 551 (guj), hotel alankar v. cit (1982) 133 itr 866 (guj) followed. conclusion : there is a clear distinction between a person commencing a business and a person setting up a business and for the purpose of the it act it is setting up of the business and not the commencement of the business that is to be considered. when a business is established and is ready to commence business, then it can be said of that business that it is set up. there may, however, be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be a permissible deduction.--vide western india vegetable products ltd. v. cit (1954) 26 itr 151 (bom). application : also to current assessment years. citation : income tax act 1961 s.32 business expenditure--municipal taxes--allowability under s. 37(1) when disallowed under s. 30(b). facts : municipal tax claimed as deduction under s. 30(b) was disallowed on the ground that the building was not used for business purposes in the year in question. held : if the expenses are not covered by the specific provisions of ss. 30 to 36 and yet the said expenses are laid out or expended wholly and exclusively for the purposes of the business or profession and they are not in the nature of capital expenditure or personal expenses of the assessee, then deduction is required to be given for the said expenses. it is quite possible with regard to some expenses that there may be overlapping between ss. 30 to 36 and s. 37. in that set of circumstances, if the expenses are deductible under ss. 30 to 36, then s. 37 is not to be resorted to. but if the said expenses are not deductible under ss. 30 to 36 and the conditions prescribed under s. 37 are satisfied, then the said expenses are required to be deducted while computing the income unless there is specific prohibition. as the assessee has incurred expenditure incidental to carrying on business, deduction is required to be granted under s. 37. case law analysis : cit v. kalyanji mavji & co. (1980) 122 itr 49 (sc) badridas dage v. cit (1958) 34 itr 10 (sc), madhav prasad jatia v. cit, u. p. (1979) 118 itr 200 (sc) followed; aruna mills ltd. v. cit (1957) 31 itr 153 (ahd), dehra dun tea co. ltd. v. cit (1973) 88 itr 197 (), cit v. high land produce co. ltd. reported in (1976) 102 itr 803 (ker) relied on. conclusion : expenditure disallowed under ss. 30 to 36 can be allowed under s. 37(1) if it was incurred wholly and exclusively for business. application : also to current assessment years. citation : income tax act 1961 s.37(1) income tax act 1961 s.30(b) - - if the assessee is not entitled to get deduction because the conditions laid down therein are not satisfied, then it is not entitled to get the deduction under the general or residuary provision of section 37. 9. for determining the aforesaid contentions, it would be necessary to refer to some provisions of chapter iv under the head 'profits and gains of business or profession',more particularly the provisions of section 28, 29, 32 and 37 of the income-tax act. various other deduction are provided for various other items including bad and doubtful debts. section 37(2b) provides that no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. (2) notwithstanding anything contained in sub-section (1), any expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year commencing on the 1st day of april, 1992, shall be allowed as follows :(2b) notwithstanding anything contained in sub-section (1), no allowance shall be made in respect expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. if this condition is satisfied, then deduction in respect of rent paid for such premises including the cost of repairs or any sum paid on account of land revenue, local rates or municipal taxes and the amount paid in respect of insurance against risk of damage or destruction of the premises can be allowed. but if the said expenses are not deductible under section 30 to 36 and the conditions prescribed under section 37 are satisfied, then the said expense are required to be deducted while computing the income unless there is a specific prohibition. the subject-matter of section 10(2) (v) is 'current repairs' and it apiaries difficult to agree that repairs which are not 'current repairs' should not be considered for deduction on general principles or under section 10(2) (xv). there must be very strong evidence that in the case of such repairs, the legislature intended a departure from the principle that an expenditure, laid out or expended wholly and exclusively for the purposes of the business, and which expenditure is not capital in nature should not be allowed in computing the income from business. cit [1959]37itr1(sc) .if the contents of that rule be true on general principles, there is good reason why the scope of section 10(2) (xv) should be construed liberally. section 10(2) enumerates various items which are admissible as deductions, but it is well settled that they are not exhaustive of all allowance which could be made in ascertaining profits taxable under section 10(1).'17. the court further observed (at page 15) :it is likewise well-settled that profits and gains which are liable to be taxed under section 10(1) are what are understood to be such according to ordinary commercial principles, the word 'profits'.is to be understood',observed lord halsbury in gresham life assurance society v. the relevant observations are as under (at page 108) :proceeding to consider the claim for deduction made by the assessee under section 10(2) (iii) or section 10(2) (xv) we may point out that under section 10(2) (iii), three conditions are required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital, namely, (a) that money (capital) must have been borrowed by the assessee, (b) that it must have been borrowed for the propose of business, and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. ' 22. the court, therefore, held that the mere fact that a claim will not fall under any of the section 30 to 36 will not automatically make the claim unsustainable under section 37(1) of the act of the act as well. the court further held (at page 808) :we cannot give a meaning to the words 'in the nature of' so as to stultify a legitimate claim in accordance with the principles of accountancy and according to well-established commercial practice and which must be taken into account in ascertaining the true profits and gains of business. 12,600 spent in each of the two years, was spent wholly and exclusively for the purposes of the business of the assessee so that the assessee could ultimately have larger office premises where its business could be carried on in a better manner and more efficiently.orderm.b. shah, j. 1. the points debated at the time of hearing of this matter are confined to the interpretation of section 30, 32 and 37 of the income-tax act, 1961 (hereinafter referred to as 'the act'). it was contended that, once the claim for deduction by the assessee is not covered by the specific provisions under section 30 or 32, then he is not entitled to get deduction under section 37, even though the case of the assessee squarely falls within the ambit of section 37. it was also hotly debated, on the facts and in the circumstances of the case, whether or not the assessee has used the premises for business purpose. 2. these questions arise in the background of the facts that the assessee-company carries on business in cotton on a wholesale basis and it submitted its return of income for the assessment year 1976-77. it claimed deduction of expenses and depreciation in respect of the registered office situated at sagar mahal, ahmedabad. it also claimed deduction of expenses under clause (b) of section 30 of the income-tax act and depreciation under section 32 of the income-tax act with regard to the premises, which are part of mittal chambers, nariman point, bombay. the assessee had purchased the said office premises in july, 1975. the company shifted its office in january, 1977. it is the contention of the assessee that, during the period prior to january, 1977, the work of furnishing and other decorations was required to be carried out in the premises. the assessee claimed deduction of rs. 59,280 for maintenance charges for the period from july, 1975, to december, 1976. 3. the income-tax officer disallowed the said claim. however, in appeal, the appellate assistant commissioner allowed the claim of the assessee with regard to the expenses incurred for ground rent and maintenance charges of the premises at bombay under section 37 of the income-tax act as they were expended wholly and exclusively for the purpose of business of the assessee-company by holding that it cannot be said that they were in the nature of capital or personal expenses. the appellate assistant commissioner also allowed the claim of the assessee for municipal tax under section 30(b) and the claim regarding depreciation on the said premises under section 32 of the income-tax act. 4. against the at order the department filed various appeals before the income-tax appellate tribunal, ahmedabad, for different assessment years. before the tribunal, it was, inter alia, contended that for the assessment year 1976-77, the deduction of expenses incurred for the property situated in mittal chambers, which are in the nature of ground rent, municipal tax and depreciation, ought not to have been granted. it was pointed out that the assessee took possession of the premises in july, 1975. it shifted its office to the premises at bombay only in january, 1977. during the intervening period, the premises were not ready for the assessee's use as office, since the work of furnishing was not completed. the furnishing cum layout plan was completed only by the end of 1976. it was pointed out that the property was put neither in active use nor in passive use. no business was carried on from these premises during the relevant assessment year. therefore, it cannot be said that they were actively used. the tribunal, by its order dated january 11, 1980, allowed the appeal of the department and vacated the order passed by the appellate assistant commissioner. 5. subsequently, it seems that the assessee had filed miscellaneous application no. 14 of 1989 before the tribunal. the aforesaid order was modified by the tribunal vide its order dated august 18, 1980. it is the say of the learned counsel for the assessee that by the order dated august 18, 1980, the tribunal allowed the deduction of ground rent and maintenance charges under section 37 of the income-tax act. 6. thereafter, the assessee filed a reference application no. 398/ahd. of 1980 before the tribunal. by order dated june 15, 1981, the tribunal referred the following question for our opinion : 'whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of municipal taxes and depreciation under section 32 in respect of its office premises at mittal chambers ?' 7. it appears that there is some mistake in the question framed by the tribunal. hence, as agreed by learned counsel for the parties, the question is divided and reframed as under : '1. whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction of municipal tax either under section 30(b) or under section 37 of the income-tax act in respect of the office premises at mittal chambers at bombay 2. whether, on the facts and in the circumstances of the case, the assessee was entitled to depreciation under section 32 of the income-tax act in respect of its office premises at mittal chambers at bombay ?' 8. learned counsel mr. b. j. shelat for the department vehemently submitted that if the nature of expenditure is provided under section 30 to 36 and the assessee is not entitled to get deduction under the said provisions, then section 37, which is a general provision, cannot be resorted to for allowing deduction. he submitted that, once the assessee is not entitled to get deduction of municipal tax under section 30(b), because the premises at bombay were not used for the purpose of business, then it is not entitled to get deduction under the general provision on the ground that the said amount was expended wholly and exclusively for the purpose of the business. it is his contention that, in respect of municipal taxes, rent, repairs and insurance for premises, there is a specific provision under section 30 of the income-tax act. if the assessee is not entitled to get deduction because the conditions laid down therein are not satisfied, then it is not entitled to get the deduction under the general or residuary provision of section 37. 9. for determining the aforesaid contentions, it would be necessary to refer to some provisions of chapter iv under the head 'profits and gains of business or profession', more particularly the provisions of section 28, 29, 32 and 37 of the income-tax act. section 28 provides that the types of income mentioned therein shall be chargeable to income-tax under the head 'profits and gains of business or profession' and for computing the income, various heads of income are enumerated. section 29 provides that the income referred to in section 28 shall be computed in accordance with the provisions contained in section 30 to section 43d. sections 30 to 43 provide the scheme for allowable deduction from the income for computing the profits and gains. section 30 deals with rent, rates, taxes, repairs and insurance for premises used for the purpose of the business or profession. section 31 deals with allowable deduction in respect of repairs and insurance of machinery, plant or furniture used or the purposes of the business or profession. similarly, section 32 deals with allowable deduction under the head of depreciation in respect of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession. section 32a or 32ab provide elaborate scheme for grant of deduction in respect of investment allowance. sections 33, 33a, 33ab and 34a provide for development rebate, development allowance and tea development account. various elaborate provisions are made providing the circumstances in which the rebate or allowance is granted. similarly, section 33ac provides for deduction in respect of reserves for shipping business. section 35 provides for set of circumstances in which the deduction on scientific research can be allowed. section 35a deals with deduction of expenditure on acquisition of patent rights or copyrights and provision is made under sections 35a, 35ab, 35ac and 35cca, 35ccb, 35d and 35e. we are not dealing with them as they are not relevant for the purposes of the present reference. section 36 provides for deduction in respect of other matters provided therein such as the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession. various other deduction are provided for various other items including bad and doubtful debts. section 37, which is a general section, provides that any expenditure other than of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, 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 of business or profession'. then there ware provisions laying down the circumstances in which deductions shall not be granted. section 37(2b) provides that no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. similarly, for the guest-house, sub-section (4) provides that the deduction of expenditure incurred on the maintenance of any residential accommodation in the nature of a guest-house is not to be allowed. section 38 deals with the circumstances where a part of any premises, building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, the proportionate deduction is required to be granted. further, section 40 and 40a prohibit that, in the cases enumerated therein, the amounts shall not be deducted in computing the income chargeable under head 'profits and gains of business or profession'. 10. keeping in mind the aforesaid provisions, we would first refer to the relevant parts of sections 30 and 37 which are as under : '30. rent, rates, taxes, repairs and insurance for buildings. - in respect of rent, rates, taxes, repairs and insurance for premises used for the purpose of the business or profession, the following deductions shall be allowed - (a) where the premises are occupied by the assessee - (i) as a tenant, the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs; (ii) otherwise than as a tenant, the amount paid by him on account of current repairs to the premises; (b) any sums paid on account of land revenue, local rates or municipal taxes; (c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the premises. 37. general. - (1) any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under head 'profits and gains of business or profession. (2) notwithstanding anything contained in sub-section (1), any expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year commencing on the 1st day of april, 1992, shall be allowed as follows :....... (2b) notwithstanding anything contained in sub-section (1), no allowance shall be made in respect expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. (3) 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 conditions, if any, as may be prescribed. (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 the 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; .... (5) 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 or a guest-house within the meaning of sub-section (4).' 11. from section 30, it is apparent that for getting deduction the assessee has to satisfy the condition that the premises for which the expenditure was incurred in respect of rent, local rates, taxes, repairs and insurance premium, ought to have been used for the purpose of business or profession. if this condition is satisfied, then deduction in respect of rent paid for such premises including the cost of repairs or any sum paid on account of land revenue, local rates or municipal taxes and the amount paid in respect of insurance against risk of damage or destruction of the premises can be allowed. as against this, under section 37, deduction of any expenditure could be allowed in computing the income chargeable under the head 'profits and gains of business or profession', if it is found that : (i) it is not an expenditure of the nature described in section 30 to 36; (ii) it is not in the nature of capital expenditure or personal expenses of the assessee; (iii) it must have been laid out or expended wholly and exclusively for the purposes of the business or profession; and (iv) there is no specific prohibition for its allowance such as section 37(2b), (3) and (4) or as provided in other sections. 12. from the aforesaid two sections, it is apparent that, under section 37, only revenue expenditure, which is expended wholly and exclusively for the purpose of business or profession, can be allowed to be deducted in computing the income while under section 30 to 36, it could be either revenue expenditure or capital expenditure. further, section 37 as such is a general provision which provides for deduction of expenditure while computing the income chargeable under the head 'profits and gains of business or profession' of the assessee, if the expenditure is of revenue nature and not personal expenses of the assessee and if the said expenditure is laid out or expended wholly and exclusively for the purpose of business or profession. hence, if the expenses are not covered by the specific provisions of section 30 to 36 and yet the said expenses are laid out or expended wholly and exclusively for the purposes of the business or profession and they are not in the nature of capital expenditure or personal expenses of the assessee, then deduction is required to be given for the said expenses. it is quite possible that with regard to some expenses there may be overlapping between section 30 to 36 and section 37. in that set of circumstances, if the expenses are deductible under sections 30 to 36, then section 37 is not to be resorted to. but if the said expenses are not deductible under section 30 to 36 and the conditions prescribed under section 37 are satisfied, then the said expense are required to be deducted while computing the income unless there is a specific prohibition. 13. the supreme court in the case cit v. kalyanji mavji and co. : [1980]122itr9(mad) , dealt with similar contentions for current repairs under sections 10(2) (v) for building and machinery and section 10(2) (xv) under the indian income-tax act, 1922. in that case, the assessee was a registered firm and owned several collieries in west bengal and bihar. one of the collieries was known as the sought samla colliery. the south samla colliery was under military occupation from 1942 and was released in 1955. during the period of military occupation, the assessee incurred expenditure on account of minimum royalty payable in respect of the colliery, the surface rent and salaries for the watch and ward employees. this expenditure was allowed a in income-tax proceedings as a business expenditure. after the colliery was released by the military, the assessee incurred a further expenditure on the colliery with a view to resuming mining operations. in the assessment proceedings, the assessee claimed deduction of the said amount under section 10(2) (xv) of the indian income-tax act, 1922. but the deduction was disallowed by the income-tax officer on the ground that the expenditure was capital in nature. the order passed by the income-tax officer was confirmed by the appellate assistant commissioner and by the appellate tribunal. on a reference, the high court held that the expenditure was incurred by the assessee for the purposes of carrying on an existing business and not for acquiring any concern not in existence. therefore, it was held as revenue expenditure. in appeal before the supreme court, it was contended that, if section 10(2) (v) is the relevant clause, being the specific provision in respect of expenditure on current repairs to buildings and machinery, there is no justification for relying on section 10(2) (xv) which is a residuary clause as section 10(2) (xv) deals with expenditure not being an allowance of the nature described in any of the preceding clauses of section 10(2). the aforesaid submission was made on the principle that, if a special provision covers the case, resort cannot be had to the general provision. the court negatived the said contention by holding that the subject-matter of section 10(2) (v) is 'current repairs' and it is difficult to agree that repairs which are not 'current repairs' should not be considered for deduction on general principles or under section (10)(2) (xv). there is nothing in the language of section 10(2) (v) which declares or necessarily implies that repairs, other than current repairs, will not qualify for the benefit of that principle. the court further observed that section 10(2) (xv) should be construed liberally. the relevant discussion is as under (at page 52) : 'the second contention is that the claim of the assessee must be considered with reference to section 10(2) (v) and not section 10(2) (xv) of the act. it is urged that if section 10(2) (v) is the relevant clause, being the specific provision in respect of expenditure on current repairs to buildings and machinery, there is no justification for relying on section 10(2) (xv). section 10(2) (xv) is a residuary clause, and deals with expenditure not being an allowance of the nature described in any of the preceding clauses of section 10(2). the submission is that where repairs are effected to buildings and machinery a deduction under section 10(2) is permissible only in respect of current repairs, and repairs which are not 'current repairs' are not intended to be the subject of relied. the act, it is contended, limits the repairs to 'current' repairs. the repairs made by the assessee, it is said, cannot be described as 'current repairs'. now, this contention rests on the principle that if a special provision covers the case, resort cannot be had to a general provision. it seems to us that if the renovation of the building, the reconditioning of machinery and the removal of debris cannot be described as 'current repairs' - and we assume that to be so - the case would be entitled to consideration under section 10(2) (xv). section 10(2) (v) deals with current repairs only. the subject-matter of section 10(2) (v) is 'current repairs' and it apiaries difficult to agree that repairs which are not 'current repairs' should not be considered for deduction on general principles or under section 10(2) (xv). there must be very strong evidence that in the case of such repairs, the legislature intended a departure from the principle that an expenditure, laid out or expended wholly and exclusively for the purposes of the business, and which expenditure is not capital in nature should not be allowed in computing the income from business. there is nothing in the language of section 10(2) (v) which declares or necessarily implies that repairs, other than current repairs, will not qualify for the benefit of that principle. we must remember that on accepted commercial practice and trading principles an item of business expenditure must be deducted in order to arrive at the true figure of profits and gains for tax purposes. the rule was held by the privy council in cit v. s. m. chitnavis , to be applicable in the case of losses, and it has been applied by the courts in india to business expenditure incurred by an assessee : see motipur sugar factory ltd. v. cit : [1955]28itr128(patna) and devi films p. ltd. v. cit : [1970]75itr301(mad) . the principle found favour with this court in badridas daga v. cit : [1958]34itr10(sc) and calcutta co. ltd. v. cit : [1959]37itr1(sc) . if the contents of that rule be true on general principles, there is good reason why the scope of section 10(2) (xv) should be construed liberally. in our opinion, even if the expenditure made by the assessee in the present case cannot be described as 'current repairs', he is entitled to invoke the benefit of section 10(2) (xv). we may mention that in law shipping co. ltd. v. irc [1923] 12 tc 621 it has been held that accumulated arrears for repairs are none the less repairs necessary to earn profits, although they have been allowed to accumulate.' 14. similar would be the position with regard to section 30. it operates in a limited filed in cases where the premises are used for the purposes of business or profession and in that case the deduction for rent, local rates or municipal taxes and premium can be granted. it would not cover a case where the premises are not used for the purposes of the business but are used for carrying on the business and incidental to it. in that situation, section 30 would have no application and the expenditure on that count would not be of the nature described in section 30. in such a case, section 37 would be applicable. 15. further, in the present case, the premises in mittal chambers is bombay were kept wholly and exclusively for the purposes of business by the assessee. normal commercial practice and trade principles would be that an item of business expenditure must be deducted in order to arrive at the true figure of profits and gains for tax purposes. a prudent businessman would naturally take into consideration this type of business expenditure before arriving at the true figure of his profits and gains. in this context, it would be appropriate to refer to the following succinct observations made by chagla c. j., in the case of aruna mills ltd. v. cit : [1957]31itr153(bom) ; 'now, we have had occasion to point out in several decisions that what the income-tax act purports to tax is business profits, and business profits are the true profits of a business as ascertained according to commercial principles. there may be an expenditure or there may be a loss which may not be an admissible loss under any of the provisions of section 10(2) and yet such an expenditure or loss would have to be allowed in order to determine what were the true profits of a business, and it is the duty of every one who has anything to do with taxing business people to understand what are the principles of commercial expediency. unless one understands these principles it is difficult to make a proper assessment on a business or on a businessman.' 16. the supreme court has in the case of badridas daga v. cit : [1958]34itr10(sc) , also held that the principle of granting deduction with regard to the claim for which there is no specific provision under the act on the basis of 'accepted commercial practice and trading principles' is that loss for which the deduction is claimed arises out of carrying on the business and is incidental to it. the court held that loss resulting from embezzlement by an employee or agent in a business is admissible as a deduction under section 10(1) of the india income-tax act, if it arises out of the carrying on the business and is incidental to it. in that case, the court observed (at page 14) : 'it is to be noted that while section 10(1) imposed a charge on the profits or gains of a trade, it doe not provide how those profits are to be computed. section 10(2) enumerates various items which are admissible as deductions, but it is well settled that they are not exhaustive of all allowance which could be made in ascertaining profits taxable under section 10(1).' 17. the court further observed (at page 15) : 'it is likewise well-settled that profits and gains which are liable to be taxed under section 10(1) are what are understood to be such according to ordinary commercial principles, ' the word 'profits'.... is to be understood', observed lord halsbury in gresham life assurance society v. styles [1892] ac 309; [1892] 3 tc 185 'in its natural and proper sense - in a sense which no commercial man would misunderstand.' 18. the court thereafter held (at page 15) : 'the result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business to be incidental to it. if that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the act.' 19. further, the supreme court in the case of madhav prasad jatia v. cit : [1979]118itr200(sc) , while considering the scope of section 10(2) (xv), has held that its range being wide, may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commencing or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business. the relevant observations are as under (at page 108) : 'proceeding to consider the claim for deduction made by the assessee under section 10(2) (iii) or section 10(2) (xv) we may point out that under section 10(2) (iii), three conditions are required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital, namely, (a) that money (capital) must have been borrowed by the assessee, (b) that it must have been borrowed for the propose of business, and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. as regards the claim for deduction in respect of expenditure under section 10(2) (xv), the assessee must also satisfy three conditions, namely, (a) it (the expenditure) must not be an allowance of the nature described in clauses (i) to (xiv), (b) it must not be in the nature of capital expenditure or personal expenses of the assessee, and (c), it must have been laid out or expended wholly and exclusively for the purpose of his business. it cannot be disputed that the expression 'for the purpose of business' occurring in section 10(2) (iii) and also in section 10(2) (xv) is wider in scope than the expression 'for the purpose of earning income, profits or gains' occurring in section 12(2) of the act and, therefore, the scope for allowing a deduction under section 10(2) (iii) or section 10(2) (xv) would be much wider than the one available under section 12(2) of the act. this court in the case of cit v. malayalam plantations ltd. : [1964]53itr140(sc) , has explained that the former expression occurring in sections 10(2) (iii) and 10(2) (xv), its range being wide, may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commencing or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business but, however wide the meaning of the expression may be, its limits are implicit in it; the purpose shall be for the purpose of business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.' 20. similarly, in the case of dehra dun tea co. ltd. cit : [1973]88itr197(sc) , the court dealt with payment of tax by the assessee-company on the tea garden lands under the u. p. large land holdings tax act, 1957, and held that if the expenditure laid out by the assessee is as an owner-cum-trader an the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business and held that the lands owned by the assessee companies are their business assets and the tax paid thereon under the u. p. act is an item of expenditure laid out by the assessee companies so traders and as incidental to their business. consequently, the same must be treated as an item of expenditure under section 10(2) (xv) of the act. 21. similar contention with regard to gratuity is dealt with by the kerala high court in the case of cit v. high land produce co. ltd. : [1976]102itr803(ker) . the court considered the provisions of section 36 and 37 of the income-tax act in the context of the assessee's claim for deduction towards the liability for gratuity under the kerala industrial employees' payment of gratuity act, 1970. in that case, on behalf of the revenue, it was contended that, when there is a specific provision made in section 36(1)(v) of the act for deducting payments towards a fund for meeting the liability towards gratuity, a claim for deduction of gratuity under section 37 cannot be granted. it was pointed out that section 37 was not applicable because it was a liability of the nature described in section 30 to 36. the court negatived the said contention. for this purpose, it referred to the objects and reasons for adding 'not being expenditure of the nature described in sections 30 to 36 and not in the nature of capital expenditure or personal expenses of the assessee' in the indian income-tax act, 1922, which are as under (at page 807) : 'this is a clarificatory amendment to make it clear that the revenue expenditure admissible under this residuary clause is that which is not specifically covered by the preceding clauses. if it is covered by those clauses, it should be admissible only under those clauses, and not under this residuary clause.' 22. the court, therefore, held that the mere fact that a claim will not fall under any of the section 30 to 36 will not automatically make the claim unsustainable under section 37(1) of the act of the act as well. the court held that the aforesaid words in section 37 do not preclude certain species of liabilities but only exclude consideration of liabilities which would fall under any of those sections. the court further held (at page 808) : 'we cannot give a meaning to the words 'in the nature of' so as to stultify a legitimate claim in accordance with the principles of accountancy and according to well-established commercial practice and which must be taken into account in ascertaining the true profits and gains of business. unless there be some statutory provision which in clear terms or by necessary implication negative against the adoption of such principles and practices, those principles and practices must be given their full pay.' 23. the aforesaid judgment of the kerala high court is confirmed by the supreme court by its judgment in cit v. high land produce co. ltd. : [1986]158itr419(sc) . 24. considering the aforesaid judgments and the provisions of sections 30 to 36 and 37, it can be held that : (a) section 37 is required to be construed liberally; (b) section 37 is of general nature and it operates in a wide range covering all expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, which expenditure is not capital in nature or personal expenses of the assessee; (c) it may take into account not only the day-to-day running expenses of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process and assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as precondition to commencing or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business; (d) unless there is express or implied prohibition under other provisions of act, if the expenditure is covered by the provisions of section 37, then the necessary deduction is required to be given : (e) the words 'profits and gains' in trade are to be understood in their natural and proper sense, i.e., in a sense in which it is understood by a prudent businessman. therefore, unless the legislature intended a departure from the principle that an expenditure, laid out or expended wholly and exclusively for the purposes of the business, and which expenditure is not capital in nature or personal expenses it should not be allowed in computing the income from the business, deduction should be granted for the said expenses; (f) sections 30 to 36 deal with specified expenses and for specific purposes. the nature of expenditure in those sections would be relatable only for the purposes mentioned therein. 25. applying the aforesaid principles in the present case, as the assessee has incurred expenditure incidental to the carrying on of business, deduction is required to be granted under section 37 of the income-tax act. that is to say, even presuming that the claim of the assessee is not sustainable under section 30 in respect of ground rent and municipal taxes paid by it for the premises occupied by it since 1975 yet as the said rent and taxes were paid wholly and exclusively for the purpose of business, according to commercial expediency also, it is required to be deducted under section 37 of the act for determining the true profits and gains of the business. it would be difficult to believe that a prudent businessman would count it as part of the profits and gains of his business. for determining the exact profits and gains of the business, undoubtedly, he would take it into consideration. in view of the aforesaid discussion, it can be held that the assessee was entitled to get deduction under section 37 for ground rent and municipal tax even if we presume that the assessee is not entitled to get the said deduction under section 30. 26. the next limb of the question is : whether the property occupied by the assessee at mittal towers in bombay can be considered to be used for the purpose of business is required to be decided, as it is the claim of the assessee that it is laos entitled to get deduction under the head 'depreciation', learned counsel for the assessee vehemently pointed out that the assessee has taken possession of the said premises in july, 1975. after taking over possession, the assessee had used the said premises for business purposes because immediately the possession was handed over to its agent 27. for furnishing it and for layout plan. it was completed by the end of 1976 and the assessee started business activity from the said premises from january, 1977. it is the contention of the assessee that up to january, 1977, the said premises were used for the purpose of the business because before commencing business from that premises, some repairs and furnishing were required to be carried out and the said activities were in the course of carrying on the assessee's business and, therefore, it should be held that the premises at mittal towers in bombay were used by the assessee for the purpose of business. for this purpose, reliance is placed on the decision of this court in the case of sarabhai management corporation ltd. v. cit : [1976]102itr25(guj) . in that case, the court observed that in each case, the matter is required to be considered from the angle as to what was the business of the assessee and in particular what were the activities which constituted such business. the court further pointed out the confusion which is likely to be created by the two concepts, setting up the business for the particular business concern and the commencement of the business of the particular assessee. for this purpose, the court referred to the decision of the bombay high court in the case of western india vegetable products ltd. v. cit : [1954]26itr151(bom) , wherein the bombay high court had held (at page 31 of 102 itr) : 'there is a clear distinction between a person commencing a business and a person setting up a business and for the purpose of the indian income-tax act it is the setting up of the business and not the commencement of the business that is to be considered. it is only after the business is set up that the previous year of the at business commences and any expense incurred prior to the setting up of a business would not be a permissible deduction. when a business is established and is ready to commence business, then it can be said of that business that it is set up; but before it is ready to commence business it is not set up. there may, however, be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be a permissible deduction.' 28. this court thereafter referred to various decisions and observed that when the company actually let out on leave and licence basis a potion of its particular premises with effect from may 1, 1965, the earlier preceding part of is activities were also part of the business activities of the company, for example, engaging the garden staff, kitchen staff or other staff, buying the equipment and getting the equipment ready, making the staff familiar with the working of that equipment, etc. they are all part of the business activities of the company so that ultimately when the licensee or lessee came to occupy the premises, everything would be in shape for use by the license or lessee, as the case may be. the aforesaid decision in the case of sarabhai management corporation ltd. : [1976]102itr25(guj) is confirmed by the supreme court in its judgment in cit v. sarabhai management corporation ltd. : [1991]192itr151(sc) . while dismissing the appeal filed by the department, the supreme court observed that after purchase of the building for the business activities, the subsequent activities certainly constitute activities in the course of the carrying on of the assessee's business. the supreme court held that it would not be correct to treat the assessee as having commenced its business only when the licensee or lessee occupied the premises or started paying rent. 29. a similar view was taken by this court in the case of hotel alankar v. cit : [1982]133itr866(guj) . in that case, the assessee-firm was formed in july, 1967, for carrying on the business of a boarding and lodging house. the partner placed his building at the disposal of the firm as his capital contribution. he allowed the use of the first second, third and fourth floors of the building for the purposes of the business. expenses were incurred in installing lights, making the building more ventilated, etc. the hotel was formally inaugurated in february, 1968. the tribunal upheld the disallowance on the grounds that (i) the business had commenced only from february, 1968, and the expenses had been incurred prior to the commencement of business, and (ii) the expenses were of a capital nature. on a reference, this court held that it would be de hors the commercial sense to assert that it was only when one reached the stage of receiving customers that one could be said to have set up a hotel business. the court observed that certain preliminary activities have got to be carried out before it can be said that the business has commenced in the popular sense. for the purposes of starting the business of a boarding and lodging house, the assessee had got to obtain a suitable building where it can, with minor changes as tittle as possible, make the building more serviceable and suitable for the business of a boarding and lodging house. the court further observed that it is always a question of fact whether in a given case a business had been set up or not, and in order to decide whether in a given case the business has been set up or not, the court has to consider what is the nature of the business, whether it comprises integrated activities, whether the activities are such that they can be undertaken at a time and such other relevant factors for the purpose of determining as to whether in a given case it can be said that the business has been set up or not. 30. further, in the case cit v. r. tolat and co. : [1980]126itr551(guj) , this court considered the question as to whether payment of lease rent for the land on which the office building was constructed by the assessee-firm which carried on the business of giving on hire loudspeakers, film projectors, stage lighting, cine-photography and repairing of electronic equipments, radio sets, etc., can be deducted as business expenditure under section 37 of the act. the court held that lease rent of rs. 12,600 for the period of two years during which the office building was constructed was an admissible deduction under section 37 of the act. in that case, the construction work was stated in the month of may, 1970, and it was completed in march, 1973. the land was taken on rent for the purpose of the business of the assessee as the object of the assessee was to put up a showroom and office building on the land. the court held that though the land was not immediately put to use in the two years, the amount of rs. 12,600 spent in each of the two years, was spent wholly and exclusively for the purposes of the business of the assessee so that the assessee could ultimately have larger office premises where its business could be carried on in a better manner and more efficiently. the court held that the payment of rent, which was debited from time to time, for the entire year under consideration was rs. 12,600 and it was spent wholly and exclusively for the purpose of the business of the assessee. 31. in our view, the facts in the present case are also similar. the assessee was running its business at ahmedabad. the assessee was having his office at ahmedabad. for expansion of its business activities, it purchased the premises at mittal towers in bombay in july, 1975, and for furnishing it, it handed over its possession to its agent and after furnishing and repairs were over, it commenced its business from january, 1977, from the said premises. hence, it would be apparent that in the present case, as the assessee had tan on lease (sic) the premises at mittal chambers at bombay for the purpose of its business or setting up of the business and that it took over the possession in july, 1975, and handed over the same to its agent for furnishing and repairs, it can be said that, after taking over the possession, the said premises were used for the purpose of business. may be the actual commencement of business might have stated only in january, 1977. 32. in view of the aforesaid discussion, we answer the questions in the affirmative, i.e., in favour of the assessee and against the revenue. the reference stands disposed of accordingly with no order as to costs.

Judgment:
ORDER

M.B. Shah, J.

1. The points debated at the time of hearing of this matter are confined to the interpretation of section 30, 32 and 37 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). It was contended that, once the claim for deduction by the assessee is not covered by the specific provisions under section 30 or 32, then he is not entitled to get deduction under section 37, even though the case of the assessee squarely falls within the ambit of section 37. It was also hotly debated, on the facts and in the circumstances of the case, whether or not the assessee has used the premises for business purpose.

2. These questions arise in the background of the facts that the assessee-company carries on business in cotton on a wholesale basis and it submitted its return of income for the assessment year 1976-77. It claimed deduction of expenses and depreciation in respect of the registered office situated at Sagar Mahal, Ahmedabad. It also claimed deduction of expenses under clause (b) of section 30 of the Income-tax Act and depreciation under section 32 of the Income-tax Act with regard to the premises, which are part of Mittal Chambers, Nariman Point, Bombay. The assessee had purchased the said office premises in July, 1975. The company shifted its office in January, 1977. It is the contention of the assessee that, during the period prior to January, 1977, the work of furnishing and other decorations was required to be carried out in the premises. The assessee claimed deduction of Rs. 59,280 for maintenance charges for the period from July, 1975, to December, 1976.

3. The Income-tax Officer disallowed the said claim. However, in appeal, the Appellate Assistant Commissioner allowed the claim of the assessee with regard to the expenses incurred for ground rent and maintenance charges of the premises at Bombay under section 37 of the Income-tax Act as they were expended wholly and exclusively for the purpose of business of the assessee-company by holding that it cannot be said that they were in the nature of capital or personal expenses. The Appellate Assistant Commissioner also allowed the claim of the assessee for municipal tax under section 30(b) and the claim regarding depreciation on the said premises under section 32 of the Income-tax Act.

4. Against the at order the Department filed various appeals before the Income-tax Appellate Tribunal, Ahmedabad, for different assessment years. Before the Tribunal, it was, inter alia, contended that for the assessment year 1976-77, the deduction of expenses incurred for the property situated in Mittal Chambers, which are in the nature of ground rent, municipal tax and depreciation, ought not to have been granted. It was pointed out that the assessee took possession of the premises in July, 1975. It shifted its office to the premises at Bombay only in January, 1977. During the intervening period, the premises were not ready for the assessee's use as office, since the work of furnishing was not completed. The furnishing cum layout plan was completed only by the end of 1976. It was pointed out that the property was put neither in active use nor in passive use. No business was carried on from these premises during the relevant assessment year. Therefore, it cannot be said that they were actively used. The Tribunal, by its order dated January 11, 1980, allowed the appeal of the Department and vacated the order passed by the Appellate Assistant Commissioner.

5. Subsequently, it seems that the assessee had filed Miscellaneous Application No. 14 of 1989 before the Tribunal. The aforesaid order was modified by the Tribunal vide its order dated August 18, 1980. It is the say of the learned counsel for the assessee that by the order dated August 18, 1980, the Tribunal allowed the deduction of ground rent and maintenance charges under section 37 of the Income-tax Act.

6. Thereafter, the assessee filed a reference Application No. 398/Ahd. of 1980 before the Tribunal. By order dated June 15, 1981, the Tribunal referred the following question for our opinion :

'Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of municipal taxes and depreciation under section 32 in respect of its office premises at Mittal Chambers ?'

7. It appears that there is some mistake in the question framed by the Tribunal. Hence, as agreed by learned counsel for the parties, the question is divided and reframed as under :

'1. Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction of municipal tax either under section 30(b) or under section 37 of the Income-tax Act in respect of the office premises at Mittal Chambers at Bombay

2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to depreciation under section 32 of the Income-tax Act in respect of its office premises at Mittal Chambers at Bombay ?'

8. Learned counsel Mr. B. J. Shelat for the Department vehemently submitted that if the nature of expenditure is provided under section 30 to 36 and the assessee is not entitled to get deduction under the said provisions, then section 37, which is a general provision, cannot be resorted to for allowing deduction. He submitted that, once the assessee is not entitled to get deduction of municipal tax under section 30(b), because the premises at Bombay were not used for the purpose of business, then it is not entitled to get deduction under the general provision on the ground that the said amount was expended wholly and exclusively for the purpose of the business. It is his contention that, in respect of municipal taxes, rent, repairs and insurance for premises, there is a specific provision under section 30 of the Income-tax Act. If the assessee is not entitled to get deduction because the conditions laid down therein are not satisfied, then it is not entitled to get the deduction under the general or residuary provision of section 37.

9. For determining the aforesaid contentions, it would be necessary to refer to some provisions of Chapter IV under the head 'Profits and gains of business or profession', more particularly the provisions of section 28, 29, 32 and 37 of the Income-tax Act. Section 28 provides that the types of income mentioned therein shall be chargeable to income-tax under the head 'Profits and gains of business or profession' and for computing the income, various heads of income are enumerated. Section 29 provides that the income referred to in section 28 shall be computed in accordance with the provisions contained in section 30 to section 43D. Sections 30 to 43 provide the scheme for allowable deduction from the income for computing the profits and gains. Section 30 deals with rent, rates, taxes, repairs and insurance for premises used for the purpose of the business or profession. Section 31 deals with allowable deduction in respect of repairs and insurance of machinery, plant or furniture used or the purposes of the business or profession. Similarly, section 32 deals with allowable deduction under the head of depreciation in respect of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession. Section 32A or 32AB provide elaborate scheme for grant of deduction in respect of investment allowance. Sections 33, 33A, 33AB and 34A provide for development rebate, development allowance and tea development account. Various elaborate provisions are made providing the circumstances in which the rebate or allowance is granted. Similarly, section 33AC provides for deduction in respect of reserves for shipping business. Section 35 provides for set of circumstances in which the deduction on scientific research can be allowed. Section 35A deals with deduction of expenditure on acquisition of patent rights or copyrights and provision is made under sections 35A, 35AB, 35AC and 35CCA, 35CCB, 35D and 35E. We are not dealing with them as they are not relevant for the purposes of the present reference. Section 36 provides for deduction in respect of other matters provided therein such as the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession. Various other deduction are provided for various other items including bad and doubtful debts. Section 37, which is a general section, provides that any expenditure other than of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, 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 of business or profession'. Then there ware provisions laying down the circumstances in which deductions shall not be granted. Section 37(2B) provides that no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. Similarly, for the guest-house, sub-section (4) provides that the deduction of expenditure incurred on the maintenance of any residential accommodation in the nature of a guest-house is not to be allowed. Section 38 deals with the circumstances where a part of any premises, building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, the proportionate deduction is required to be granted. Further, section 40 and 40A prohibit that, in the cases enumerated therein, the amounts shall not be deducted in computing the income chargeable under head 'Profits and gains of business or profession'.

10. Keeping in mind the aforesaid provisions, we would first refer to the relevant parts of sections 30 and 37 which are as under :

'30. Rent, rates, taxes, repairs and insurance for buildings. - In respect of rent, rates, taxes, repairs and insurance for premises used for the purpose of the business or profession, the following deductions shall be allowed - (a) where the premises are occupied by the assessee -

(i) as a tenant, the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs;

(ii) otherwise than as a tenant, the amount paid by him on account of current repairs to the premises;

(b) any sums paid on account of land revenue, local rates or municipal taxes;

(c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the premises.

37. General. - (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under head 'Profits and gains of business or profession.

(2) Notwithstanding anything contained in sub-section (1), any expenditure in the nature of entertainment expenditure incurred by any assessee during any previous year commencing on the 1st day of April, 1992, shall be allowed as follows :.......

(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.

(3) 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 conditions, if any, as may be prescribed.

(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 the 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; ....

(5) 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 or a guest-house within the meaning of sub-section (4).'

11. From section 30, it is apparent that for getting deduction the assessee has to satisfy the condition that the premises for which the expenditure was incurred in respect of rent, local rates, taxes, repairs and insurance premium, ought to have been used for the purpose of business or profession. If this condition is satisfied, then deduction in respect of rent paid for such premises including the cost of repairs or any sum paid on account of land revenue, local rates or municipal taxes and the amount paid in respect of insurance against risk of damage or destruction of the premises can be allowed.

As against this, under section 37, deduction of any expenditure could be allowed in computing the income chargeable under the head 'Profits and gains of business or profession', if it is found that :

(i) it is not an expenditure of the nature described in section 30 to 36;

(ii) it is not in the nature of capital expenditure or personal expenses of the assessee;

(iii) it must have been laid out or expended wholly and exclusively for the purposes of the business or profession; and

(iv) there is no specific prohibition for its allowance such as section 37(2B), (3) and (4) or as provided in other sections.

12. From the aforesaid two sections, it is apparent that, under section 37, only revenue expenditure, which is expended wholly and exclusively for the purpose of business or profession, can be allowed to be deducted in computing the income while under section 30 to 36, it could be either revenue expenditure or capital expenditure. Further, section 37 as such is a general provision which provides for deduction of expenditure while computing the income chargeable under the head 'Profits and gains of business or profession' of the assessee, if the expenditure is of revenue nature and not personal expenses of the assessee and if the said expenditure is laid out or expended wholly and exclusively for the purpose of business or profession. Hence, if the expenses are not covered by the specific provisions of section 30 to 36 and yet the said expenses are laid out or expended wholly and exclusively for the purposes of the business or profession and they are not in the nature of capital expenditure or personal expenses of the assessee, then deduction is required to be given for the said expenses. It is quite possible that with regard to some expenses there may be overlapping between section 30 to 36 and section 37. In that set of circumstances, if the expenses are deductible under sections 30 to 36, then section 37 is not to be resorted to. But if the said expenses are not deductible under section 30 to 36 and the conditions prescribed under section 37 are satisfied, then the said expense are required to be deducted while computing the income unless there is a specific prohibition.

13. The Supreme Court in the case CIT v. Kalyanji Mavji and Co. : [1980]122ITR9(Mad) , dealt with similar contentions for current repairs under sections 10(2) (v) for building and machinery and section 10(2) (xv) under the Indian Income-tax Act, 1922. In that case, the assessee was a registered firm and owned several collieries in West Bengal and Bihar. One of the collieries was known as the Sought Samla Colliery. The South Samla Colliery was under military occupation from 1942 and was released in 1955. During the period of military occupation, the assessee incurred expenditure on account of minimum royalty payable in respect of the colliery, the surface rent and salaries for the watch and ward employees. This expenditure was allowed a in income-tax proceedings as a business expenditure. After the colliery was released by the military, the assessee incurred a further expenditure on the colliery with a view to resuming mining operations. In the assessment proceedings, the assessee claimed deduction of the said amount under section 10(2) (xv) of the Indian Income-tax Act, 1922. But the deduction was disallowed by the Income-tax Officer on the ground that the expenditure was capital in nature. The order passed by the Income-tax Officer was confirmed by the Appellate Assistant Commissioner and by the Appellate Tribunal. On a reference, the High Court held that the expenditure was incurred by the assessee for the purposes of carrying on an existing business and not for acquiring any concern not in existence. Therefore, it was held as revenue expenditure. In appeal before the Supreme Court, it was contended that, if section 10(2) (v) is the relevant clause, being the specific provision in respect of expenditure on current repairs to buildings and machinery, there is no justification for relying on section 10(2) (xv) which is a residuary clause as section 10(2) (xv) deals with expenditure not being an allowance of the nature described in any of the preceding clauses of section 10(2). The aforesaid submission was made on the principle that, if a special provision covers the case, resort cannot be had to the general provision. The court negatived the said contention by holding that the subject-matter of section 10(2) (v) is 'current repairs' and it is difficult to agree that repairs which are not 'current repairs' should not be considered for deduction on general principles or under section (10)(2) (xv). There is nothing in the language of section 10(2) (v) which declares or necessarily implies that repairs, other than current repairs, will not qualify for the benefit of that principle. The court further observed that section 10(2) (xv) should be construed liberally. The relevant discussion is as under (at page 52) :

'The second contention is that the claim of the assessee must be considered with reference to section 10(2) (v) and not section 10(2) (xv) of the Act. It is urged that if section 10(2) (v) is the relevant clause, being the specific provision in respect of expenditure on current repairs to buildings and machinery, there is no justification for relying on section 10(2) (xv). Section 10(2) (xv) is a residuary clause, and deals with expenditure not being an allowance of the nature described in any of the preceding clauses of section 10(2). The submission is that where repairs are effected to buildings and machinery a deduction under section 10(2) is permissible only in respect of current repairs, and repairs which are not 'current repairs' are not intended to be the subject of relied. The Act, it is contended, limits the repairs to 'current' repairs. The repairs made by the assessee, it is said, cannot be described as 'current repairs'. Now, this contention rests on the principle that if a special provision covers the case, resort cannot be had to a general provision. It seems to us that if the renovation of the building, the reconditioning of machinery and the removal of debris cannot be described as 'current repairs' - and we assume that to be so - the case would be entitled to consideration under section 10(2) (xv). Section 10(2) (v) deals with current repairs only. The subject-matter of section 10(2) (v) is 'current repairs' and it apiaries difficult to agree that repairs which are not 'current repairs' should not be considered for deduction on general principles or under section 10(2) (xv). There must be very strong evidence that in the case of such repairs, the Legislature intended a departure from the principle that an expenditure, laid out or expended wholly and exclusively for the purposes of the business, and which expenditure is not capital in nature should not be allowed in computing the income from business. There is nothing in the language of section 10(2) (v) which declares or necessarily implies that repairs, other than current repairs, will not qualify for the benefit of that principle. We must remember that on accepted commercial practice and trading principles an item of business expenditure must be deducted in order to arrive at the true figure of profits and gains for tax purposes. The rule was held by the Privy Council in CIT v. S. M. Chitnavis , to be applicable in the case of losses, and it has been applied by the courts in India to business expenditure incurred by an assessee : see Motipur Sugar Factory Ltd. v. CIT : [1955]28ITR128(Patna) and Devi Films P. Ltd. v. CIT : [1970]75ITR301(Mad) . The principle found favour with this court in Badridas Daga v. CIT : [1958]34ITR10(SC) and Calcutta Co. Ltd. v. CIT : [1959]37ITR1(SC) . If the contents of that rule be true on general principles, there is good reason why the scope of section 10(2) (xv) should be construed liberally. In our opinion, even if the expenditure made by the assessee in the present case cannot be described as 'current repairs', he is entitled to invoke the benefit of section 10(2) (xv). We may mention that in Law Shipping Co. Ltd. v. IRC [1923] 12 TC 621 it has been held that accumulated arrears for repairs are none the less repairs necessary to earn profits, although they have been allowed to accumulate.'

14. Similar would be the position with regard to section 30. It operates in a limited filed in cases where the premises are used for the purposes of business or profession and in that case the deduction for rent, local rates or municipal taxes and premium can be granted. It would not cover a case where the premises are not used for the purposes of the business but are used for carrying on the business and incidental to it. In that situation, section 30 would have no application and the expenditure on that count would not be of the nature described in section 30. In such a case, section 37 would be applicable.

15. Further, in the present case, the premises in Mittal Chambers is Bombay were kept wholly and exclusively for the purposes of business by the assessee. Normal commercial practice and trade principles would be that an item of business expenditure must be deducted in order to arrive at the true figure of profits and gains for tax purposes. A prudent businessman would naturally take into consideration this type of business expenditure before arriving at the true figure of his profits and gains. In this context, it would be appropriate to refer to the following succinct observations made by Chagla C. J., in the case of Aruna Mills Ltd. v. CIT : [1957]31ITR153(Bom) ;

'Now, we have had occasion to point out in several decisions that what the Income-tax Act purports to tax is business profits, and business profits are the true profits of a business as ascertained according to commercial principles. There may be an expenditure or there may be a loss which may not be an admissible loss under any of the provisions of section 10(2) and yet such an expenditure or loss would have to be allowed in order to determine what were the true profits of a business, and it is the duty of every one who has anything to do with taxing business people to understand what are the principles of commercial expediency. Unless one understands these principles it is difficult to make a proper assessment on a business or on a businessman.'

16. The Supreme Court has in the case of Badridas Daga v. CIT : [1958]34ITR10(SC) , also held that the principle of granting deduction with regard to the claim for which there is no specific provision under the Act on the basis of 'accepted commercial practice and trading principles' is that loss for which the deduction is claimed arises out of carrying on the business and is incidental to it. The court held that loss resulting from embezzlement by an employee or agent in a business is admissible as a deduction under section 10(1) of the India Income-tax Act, if it arises out of the carrying on the business and is incidental to it. In that case, the court observed (at page 14) :

'It is to be noted that while section 10(1) imposed a charge on the profits or gains of a trade, it doe not provide how those profits are to be computed. Section 10(2) enumerates various items which are admissible as deductions, but it is well settled that they are not exhaustive of all allowance which could be made in ascertaining profits taxable under section 10(1).'

17. The court further observed (at page 15) :

'It is likewise well-settled that profits and gains which are liable to be taxed under section 10(1) are what are understood to be such according to ordinary commercial principles, ' the word 'profits'.... is to be understood', observed Lord Halsbury in Gresham Life Assurance Society v. Styles [1892] AC 309; [1892] 3 TC 185 'in its natural and proper sense - in a sense which no commercial man would misunderstand.'

18. The court thereafter held (at page 15) :

'The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act.'

19. Further, the Supreme Court in the case of Madhav Prasad Jatia v. CIT : [1979]118ITR200(SC) , while considering the scope of section 10(2) (xv), has held that its range being wide, may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commencing or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business. The relevant observations are as under (at page 108) :

'Proceeding to consider the claim for deduction made by the assessee under section 10(2) (iii) or section 10(2) (xv) we may point out that under section 10(2) (iii), three conditions are required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital, namely, (a) that money (capital) must have been borrowed by the assessee, (b) that it must have been borrowed for the propose of business, and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. As regards the claim for deduction in respect of expenditure under section 10(2) (xv), the assessee must also satisfy three conditions, namely, (a) it (the expenditure) must not be an allowance of the nature described in clauses (i) to (xiv), (b) it must not be in the nature of capital expenditure or personal expenses of the assessee, and (c), it must have been laid out or expended wholly and exclusively for the purpose of his business. It cannot be disputed that the expression 'for the purpose of business' occurring in section 10(2) (iii) and also in section 10(2) (xv) is wider in scope than the expression 'for the purpose of earning income, profits or gains' occurring in section 12(2) of the Act and, therefore, the scope for allowing a deduction under section 10(2) (iii) or section 10(2) (xv) would be much wider than the one available under section 12(2) of the Act. This court in the case of CIT v. Malayalam Plantations Ltd. : [1964]53ITR140(SC) , has explained that the former expression occurring in sections 10(2) (iii) and 10(2) (xv), its range being wide, may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commencing or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business but, however wide the meaning of the expression may be, its limits are implicit in it; the purpose shall be for the purpose of business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.'

20. Similarly, in the case of Dehra Dun Tea Co. Ltd. CIT : [1973]88ITR197(SC) , the court dealt with payment of tax by the assessee-company on the tea garden lands under the U. P. Large Land Holdings Tax Act, 1957, and held that if the expenditure laid out by the assessee is as an owner-cum-trader an the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business and held that the lands owned by the assessee companies are their business assets and the tax paid thereon under the U. P. Act is an item of expenditure laid out by the assessee companies so traders and as incidental to their business. Consequently, the same must be treated as an item of expenditure under section 10(2) (xv) of the Act.

21. Similar contention with regard to gratuity is dealt with by the Kerala High Court in the case of CIT v. High Land Produce Co. Ltd. : [1976]102ITR803(Ker) . The court considered the provisions of section 36 and 37 of the Income-tax Act in the context of the assessee's claim for deduction towards the liability for gratuity under the Kerala Industrial Employees' Payment of Gratuity Act, 1970. In that case, on behalf of the Revenue, it was contended that, when there is a specific provision made in section 36(1)(v) of the Act for deducting payments towards a fund for meeting the liability towards gratuity, a claim for deduction of gratuity under section 37 cannot be granted. It was pointed out that section 37 was not applicable because it was a liability of the nature described in section 30 to 36. The court negatived the said contention. For this purpose, it referred to the Objects and Reasons for adding 'not being expenditure of the nature described in sections 30 to 36 and not in the nature of capital expenditure or personal expenses of the assessee' in the Indian Income-tax Act, 1922, which are as under (at page 807) :

'This is a clarificatory amendment to make it clear that the revenue expenditure admissible under this residuary clause is that which is not specifically covered by the preceding clauses. If it is covered by those clauses, it should be admissible only under those clauses, and not under this residuary clause.'

22. The court, therefore, held that the mere fact that a claim will not fall under any of the section 30 to 36 will not automatically make the claim unsustainable under section 37(1) of the Act of the Act as well. The court held that the aforesaid words in section 37 do not preclude certain species of liabilities but only exclude consideration of liabilities which would fall under any of those sections. The court further held (at page 808) :

'We cannot give a meaning to the words 'in the nature of' so as to stultify a legitimate claim in accordance with the principles of accountancy and according to well-established commercial practice and which must be taken into account in ascertaining the true profits and gains of business. Unless there be some statutory provision which in clear terms or by necessary implication negative against the adoption of such principles and practices, those principles and practices must be given their full pay.'

23. The aforesaid judgment of the Kerala High Court is confirmed by the Supreme Court by its judgment in CIT v. High Land Produce Co. Ltd. : [1986]158ITR419(SC) .

24. Considering the aforesaid judgments and the provisions of sections 30 to 36 and 37, it can be held that :

(a) section 37 is required to be construed liberally;

(b) section 37 is of general nature and it operates in a wide range covering all expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, which expenditure is not capital in nature or personal expenses of the assessee;

(c) it may take into account not only the day-to-day running expenses of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process and assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as precondition to commencing or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business;

(d) unless there is express or implied prohibition under other provisions of Act, if the expenditure is covered by the provisions of section 37, then the necessary deduction is required to be given :

(e) the words 'profits and gains' in trade are to be understood in their natural and proper sense, i.e., in a sense in which it is understood by a prudent businessman. Therefore, unless the Legislature intended a departure from the principle that an expenditure, laid out or expended wholly and exclusively for the purposes of the business, and which expenditure is not capital in nature or personal expenses it should not be allowed in computing the income from the business, deduction should be granted for the said expenses;

(f) sections 30 to 36 deal with specified expenses and for specific purposes. The nature of expenditure in those sections would be relatable only for the purposes mentioned therein.

25. Applying the aforesaid principles in the present case, as the assessee has incurred expenditure incidental to the carrying on of business, deduction is required to be granted under section 37 of the Income-tax Act. That is to say, even presuming that the claim of the assessee is not sustainable under section 30 in respect of ground rent and municipal taxes paid by it for the premises occupied by it since 1975 yet as the said rent and taxes were paid wholly and exclusively for the purpose of business, according to commercial expediency also, it is required to be deducted under section 37 of the Act for determining the true profits and gains of the business. It would be difficult to believe that a prudent businessman would count it as part of the profits and gains of his business. For determining the exact profits and gains of the business, undoubtedly, he would take it into consideration. In view of the aforesaid discussion, it can be held that the assessee was entitled to get deduction under section 37 for ground rent and municipal tax even if we presume that the assessee is not entitled to get the said deduction under section 30.

26. The next limb of the question is : whether the property occupied by the assessee at Mittal Towers in Bombay can be considered to be used for the purpose of business is required to be decided, as it is the claim of the assessee that it is laos entitled to get deduction under the head 'Depreciation', Learned counsel for the assessee vehemently pointed out that the assessee has taken possession of the said premises in July, 1975. After taking over possession, the assessee had used the said premises for business purposes because immediately the possession was handed over to its agent

27. for furnishing it and for layout plan. It was completed by the end of 1976 and the assessee started business activity from the said premises from January, 1977. It is the contention of the assessee that up to January, 1977, the said premises were used for the purpose of the business because before commencing business from that premises, some repairs and furnishing were required to be carried out and the said activities were in the course of carrying on the assessee's business and, therefore, it should be held that the premises at Mittal Towers in Bombay were used by the assessee for the purpose of business. For this purpose, reliance is placed on the decision of this court in the case of Sarabhai Management Corporation Ltd. v. CIT : [1976]102ITR25(Guj) . In that case, the court observed that in each case, the matter is required to be considered from the angle as to what was the business of the assessee and in particular what were the activities which constituted such business. The court further pointed out the confusion which is likely to be created by the two concepts, setting up the business for the particular business concern and the commencement of the business of the particular assessee. For this purpose, the court referred to the decision of the Bombay High Court in the case of Western India Vegetable products Ltd. v. CIT : [1954]26ITR151(Bom) , wherein the Bombay High Court had held (at page 31 of 102 ITR) :

'There is a clear distinction between a person commencing a business and a person setting up a business and for the purpose of the Indian Income-tax Act it is the setting up of the business and not the commencement of the business that is to be considered. It is only after the business is set up that the previous year of the at business commences and any expense incurred prior to the setting up of a business would not be a permissible deduction. When a business is established and is ready to commence business, then it can be said of that business that it is set up; but before it is ready to commence business it is not set up. There may, however, be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be a permissible deduction.'

28. This court thereafter referred to various decisions and observed that when the company actually let out on leave and licence basis a potion of its particular premises with effect from May 1, 1965, the earlier preceding part of is activities were also part of the business activities of the company, for example, engaging the garden staff, kitchen staff or other staff, buying the equipment and getting the equipment ready, making the staff familiar with the working of that equipment, etc. They are all part of the business activities of the company so that ultimately when the licensee or lessee came to occupy the premises, everything would be in shape for use by the license or lessee, as the case may be. The aforesaid decision in the case of Sarabhai Management Corporation Ltd. : [1976]102ITR25(Guj) is confirmed by the Supreme Court in its judgment in CIT v. Sarabhai Management Corporation Ltd. : [1991]192ITR151(SC) . While dismissing the appeal filed by the Department, the Supreme Court observed that after purchase of the building for the business activities, the subsequent activities certainly constitute activities in the course of the carrying on of the assessee's business. The Supreme Court held that it would not be correct to treat the assessee as having commenced its business only when the licensee or lessee occupied the premises or started paying rent.

29. A similar view was taken by this court in the case of Hotel Alankar v. CIT : [1982]133ITR866(Guj) . In that case, the assessee-firm was formed in July, 1967, for carrying on the business of a boarding and lodging house. The partner placed his building at the disposal of the firm as his capital contribution. He allowed the use of the first second, third and fourth floors of the building for the purposes of the business. Expenses were incurred in installing lights, making the building more ventilated, etc. The hotel was formally inaugurated in February, 1968. The Tribunal upheld the disallowance on the grounds that (i) the business had commenced only from February, 1968, and the expenses had been incurred prior to the commencement of business, and (ii) the expenses were of a capital nature. On a reference, this court held that it would be de hors the commercial sense to assert that it was only when one reached the stage of receiving customers that one could be said to have set up a hotel business. The court observed that certain preliminary activities have got to be carried out before it can be said that the business has commenced in the popular sense. For the purposes of starting the business of a boarding and lodging house, the assessee had got to obtain a suitable building where it can, with minor changes as tittle as possible, make the building more serviceable and suitable for the business of a boarding and lodging house. The court further observed that it is always a question of fact whether in a given case a business had been set up or not, and in order to decide whether in a given case the business has been set up or not, the court has to consider what is the nature of the business, whether it comprises integrated activities, whether the activities are such that they can be undertaken at a time and such other relevant factors for the purpose of determining as to whether in a given case it can be said that the business has been set up or not.

30. Further, in the case CIT v. R. Tolat and CO. : [1980]126ITR551(Guj) , this court considered the question as to whether payment of lease rent for the land on which the office building was constructed by the assessee-firm which carried on the business of giving on hire loudspeakers, film projectors, stage lighting, cine-photography and repairing of electronic equipments, radio sets, etc., can be deducted as business expenditure under section 37 of the Act. The court held that lease rent of Rs. 12,600 for the period of two years during which the office building was constructed was an admissible deduction under section 37 of the Act. In that case, the construction work was stated in the month of May, 1970, and it was completed in March, 1973. The land was taken on rent for the purpose of the business of the assessee as the object of the assessee was to put up a showroom and office building on the land. The court held that though the land was not immediately put to use in the two years, the amount of Rs. 12,600 spent in each of the two years, was spent wholly and exclusively for the purposes of the business of the assessee so that the assessee could ultimately have larger office premises where its business could be carried on in a better manner and more efficiently. The court held that the payment of rent, which was debited from time to time, for the entire year under consideration was Rs. 12,600 and it was spent wholly and exclusively for the purpose of the business of the assessee.

31. In our view, the facts in the present case are also similar. The assessee was running its business at Ahmedabad. The assessee was having his office at Ahmedabad. For expansion of its business activities, it purchased the premises at Mittal Towers in Bombay in July, 1975, and for furnishing it, it handed over its possession to its agent and after furnishing and repairs were over, it commenced its business from January, 1977, from the said premises. Hence, it would be apparent that in the present case, as the assessee had tan on lease (sic) the premises at Mittal Chambers at Bombay for the purpose of its business or setting up of the business and that it took over the possession in July, 1975, and handed over the same to its agent for furnishing and repairs, it can be said that, after taking over the possession, the said premises were used for the purpose of business. May be the actual commencement of business might have stated only in January, 1977.

32. In view of the aforesaid discussion, we answer the questions in the affirmative, i.e., in favour of the assessee and against the Revenue. The reference stands disposed of accordingly with no order as to costs.