COMMISSIONER OF INCOME TAX Vs. GAEKWAR MILLS LIMITED

JUDGEMENT

(1.) THE assessee is a public limited company and the assessment year which is relevant for the purpose of this reference is 1971 -72, the year of account having ended on December 31, 1970. The assessee maintained a guest house with a mess at the factory premises in Bilimora. Bilimora is a small town with no adequate hotel facilities. The assessee was, therefore, maintaining the guest house with mess for its staff members coming from Bombay and the merchants who came to the factory premises for the purpose of business. It was stated that auditors, technicians and other employees of the assessee came from Bombay to Bilimora and these employees were provided with lodging and boarding facilities in the incurred a total expenditure of Rs. 17,687 in providing messing facilities to its employees who came to Bilimora from Bombay. The assessee claimed deduction of the said expenditure as business expenditure. The Income -tax Officer held that the said expenditure which the assessee had incurred was expenditure was for the purpose of business. He, however, held that deduction of the said expenditure was not allowable in view of the specific provisions of sub -sections (2B) and (3) of section 37 of the Income -tax Act, 1961 ('the Act' for short). According to the Income -tax Officer, no expenditure for maintenance of guest house was allowable under section 37(3). He held that the entire expenditure of Rs. 17,687 was nothing but expenditure incurred for the maintenance of residential accommodation and, therefore, the assessee's claim for its deduction could not be allowed under section 37(3) of the Act. The Income -tax Officer further held that, under sub -section (4) of section 37, depreciation on the said residential accommodation was also not allowable. There was no separate written down value for the portion of the factory premises used as residential accommodation or guest house. Therefore, the Income -tax Officer estimated the depreciation attributable to the said residential accommodation or guest house at Rs. 500 and disallowed the same from the depreciation of the building as claimed by the assessee.

(2.) BEING aggrieved by the disallowance of the claim of expenditure of Rs. 17,687 and depreciation of Rs. 500 and other disallowances which are not relevant for the purpose of this reference, the assessee carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the assessee had provided messing facility in the interest of its business and, therefore, the expenditure incurred for providing such facility would be an allowable expenditure under section 37(1) as expenditure incurred wholly and exclusively for the purpose of the business. According to him, the expenditure incurred for the maintenance of guest house is to be allowed subject to the fulfilment of the conditions laid down in rules 6 (a) and (c). The Appellate Assistant Commissioner, therefore, held that the action of the Income -tax Officer in disallowing the said expenditure under section 37(3) was wrong. The Appellate Assistant Commissioner further held that the expenditure was not in the nature of entertainment expenditure and, therefore, it could not be disallowed under section 37(2B) of the Act. For the aforesaid reasons, the Appellate Assistant Commissioner deleted the addition of Rs. 17,867 and disallowance of depreciation on the residential accommodation or guest house.

(3.) BEING aggrieved by the order of the Tribunal, the Revenue sought reference and, at its instance, the following questions have been referred to us, for our opinion, under section 256(1) of the Act :