Britannia Industries Ltd. vs Commissioner of Income Tax and Another

This is a petition of appeal u/s 260A seeking to challenge the decision of the Tribunal given on December 12, 2001.

The sum involved is Rs. 31,38,017 for the assessment year 1994-95, the said sum being claimed by the assessee as expenses for rent, depreciation, repair and maintenance of its guest-house.

Although it is the stage of mere admission of appeal, the Revenue hotly resisted the admission itself on the twin argument, that--

(i) Two Division Bench decisions of the Calcutta High Court given in the cases of Commissioner of Income Tax Vs. Upper Ganges Sugar Mills Ltd., and Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Income Tax, squarely cover the issue ; and

(ii) The wording of Section 37(4), as operative at the material time is too clear to permit any doubts being had as regards the disallowance of the guesthouse expenditure items.

Faced with the stiff opposition of the Revenue, Dr. Pal appearing for the assessee, had to place before us numerous authorities to support his case for admission of the appeal.

Before we go on to the authorities, let us discuss the basic point on the wording of the section itself, so that the legal issue, simple and ordinary as it is, is clearly seen from the very beginning.

The items claimed by the assessee are four in number, viz., depreciation, repairs, maintenance and rent.

These are all admittedly in respect of the assessee''s guest-house.

Sub-section (4) of Section 37 clearly states that "notwithstanding anything contained in Sub-section (1) or Sub-section (3), no allowance shall be made in respect of any expenditure ... on the maintenance of.... a guest-house".

The said sub-section further states that "no allowance shall be made in respect of depreciation of ... a guest-house".

For the purpose of completeness the said sub-section is reproduced below in full but the most important words are as above.

"37. (4) Notwithstanding anything contained in Sub-section (1) or subsection (3),--

(i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of February, 1970, on the maintenance of any residential accommodation in the nature of a guest-house (such residential accommodation being hereafter in this sub-section referred to as ''guesthouse'') ;

(ii) in relation to the assessment year commencing on the 1st day of April, 1971, or any subsequent assessment year, no allowance shall be made in respect of depreciation of any building used as a guest-house or depreciation of any assets in a guest-house :

Provided that the aggregate of the expenditure referred to in Clause (i) and the amount of any depreciation referred to in Clause (ii) shall, for the purposes of this sub-section, be reduced by the amount, if any, received from persons using the guest-house :

Provided further that nothing in this sub-section shall apply in relation to any guest-house maintained as a holiday home if such guest-house.

(a) is maintained by an assessee who has throughout the previous year employed not less than one hundred whole-time employees in a business or profession carried on by him ; and

(b) is intended for the exclusive use of such employees while on leave.

Explanation.--for the purposes of this sub-section,--

(i) residential accommodation in the nature of a guest-house shall include accommodation hired or reserved by the assessee in a hotel for a period exceeding one hundred and eighty-two days during the previous year ; and

(ii) the expenditure incurred on the maintenance of a guest-house shall, in a case where the residential accommodation has been hired by the assessee, include also the rent paid in respect of such accommodation."

Dr. Pal''s arguments were all run on the existence of the phrase "notwithstanding anything contained in Sub-section (1) or Sub-section (3)", with which words, the sub-section starts.

He argued that under Sub-section (1) of Section 37, only certain types of expenses are envisaged, by way of residuary deduction, and if the assessee''s claimed expenses did not come within the residuary ambit of Section 37, Sub-section (4) could not have any adverse effect against the assessee''s claims of deduction.

Sub-section (1) of Section 37 states that "any expenditure (not being expenditure of the nature described in sections 30 to 36 . . .) laid out . . . wholly .... for ... business. . . shall be allowed."

Now, u/s 30 provision is made, amongst others, for rent and repairs of buildings in general.

u/s 32 provision is made, amongst other things, for depreciation of buildings in general. Amongst sections 30 to 36 there is no exact section mentioning the very word "maintenance" of building.

Dr. Pal argued that if rent, repairs and insurance of buildings were not within the ambit of Section 37(1), the claims, and disallowances to be made, with regard to these items, by reason of Section 37(4), could not go against the interest of his client in any manner at all.

Section 37(1) is quoted below :

"37(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 the head ''Profits and gains of business or profession''.

Explanation.--For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."

The commencement of Section 30 is in the following words :

"30. In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deduction shall be allowed."

The beginning of Section 32 is in the following terms :

"32. Depreciation.--(1) In respect of depreciation of-

(i) buildings, machinery, plant or furniture, being tangible assets ;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed."

u/s 37(3), as existing in the Act before April 1, 1998, there were similar provisions in relation to residential accommodation including guesthouses, as are contained in Section 37(4) ; and in Section 37(3A) and section 37(3B) there were similar limiting provisions with regard to expenses on such items as hotel payments, sales promotion and running of motor cars.

Dr. Pal submitted that in relation to Section 37(3A) no fewer than four Division Bench decisions of our court support Dr. Pal''s contention that the disallowance u/s 37 can be imposed only if the claim for expenditure could be made under the residuary item encompassed by Section 37(1). His cases were those of Commissioner of Income Tax Vs. Tungabhadra Industries Ltd., ; Commissioner of Income Tax Vs. Orient Paper and Industries Ltd., ; National Engineering Industries Ltd. Vs. Commissioner of Income Tax, and Commissioner of Income Tax Vs. Coates of India Limited, . He said that a similar line of reasoning has been adopted in several cases in several of the other High Courts and he mentioned the Bombay decision in Commissioner of Income Tax Vs. Chase Bright Steel Ltd. (No. 1), and the Kerala Full Bench decision, reported at Commissioner of Income Tax Vs. Travancore Cements Ltd., .

As against these authorities, Mr. Mullick submitted that the two cases mentioned above, viz., Commissioner of Income Tax Vs. Upper Ganges Sugar Mills Ltd., and Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Income Tax, , clearly laid down that in relation to Section 37(3) and Section 37(4), so to speak, the guest-house sub-sections, the specific disallowances prescribed have to be given effect, and deductions cannot be maintained contrary to the words of those very sub-sections.

If we were in any manner in doubt about this case, if we were in any sort of hesitation whether to follow the decision given in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Income Tax, , we would have to admit the appeal and refer the matter, through the auspices of the Chief Justice, to a larger Bench. But, notwithstanding a different line of reasoning given by the Gujarat High Court in Commissioner of Income Tax Vs. Ahmedabad Mfg. and Calico Printing Co. Ltd., , we do not with all due respect, entertain any doubt about the matter.

We deal with the four items of the assessee separately.

Depreciation : The main section is Section 32. No depreciation can ever be claimed under the residuary section which is Section 37(1). Section 37(4) clearly states that depreciation for guest-houses is not allowed. Our court has also held so in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Income Tax, . We are at a loss to see how any doubt can exist in this matter or how an open question of law can still be said to remain in this regard.

Repairs : These are mentioned in Section 30. Since these are mentioned in Section 30 the general Section 37(1) cannot have any operation. The phrase "notwithstanding anything contained in Section 37(1)" cannot detract from the power, extent and validity of Section 37(4). These non obstante clauses are added to increase the effectiveness of the section, or sub-section, and not for the reverse purpose. Thus, the court has to read Section 30 along with Section 37(4). Section 30 is the general section for all buildings. Section 37(4)) is the special section for buildings which are guest-houses. The disallowance as per the special section is specially enacted and it prevails. This is the view in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Income Tax, and, in our opinion, no two views are possible.

Maintenance : This is not specially mentioned in any of the sections 30 to 36. Thus maintenance is appropriately a subject-matter of Section 37(1). If this is so, the limitation of Section 37(4) operates without any arguments being available against it. This is because Section 37(4) is clearly applicable, notwithstanding anything contained in Section 37(1).

Rent: The main general section is Section 30. This is with regard to rent for all buildings of the assessee in general. Rent for guest-houses is specially excluded from claims of deduction by Section 37(4). Rent can never be claimed under the residuary provision engrafted by way of Section 37(1), when a special section already exists for it. Reading the general Section 30 and the special Section 37(4), there is no way but to allow the special section prevail. If that were not done, it would never have any operation and any assessee could claim deductions for rent of guest-houses notwithstanding the existence of specific contrary provisions in the Act prohibiting the same.

Thus, although various High Courts have spoken on Section 37, and the several sub-sections of it, so far as we are concerned, in regard to the instant case, our clear opinion is, and has to be, that no open question of law remains for admission or further scrutiny by us. The question as formulated in the petition of appeal is as follows :

"Whether on a true and proper interpretation of Section 37(1) read with Section 37(3) and Section 37(4) of the Income Tax Act, 1961, the claim for depreciation, repairs and maintenance and rent of the guest-house can be disallowed as falling within the scope of the said provisions ?"

In view of our above discussion the further discussion of this question, in an appeal, later on, would be an exercise, involving ourselves trying to go against the decision of our High Court. This is not proper. The petition of appeal is thus rejected. The order of the Tribunal is consequentially confirmed.

Authenticated copies of this order might issue to the parties.