Full Judgment Text
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CASE NO.:
Appeal (civil) 2415 of 2004
PETITIONER:
Britannia industries Ltd.
RESPONDENT:
Commissioner of Income Tax,West Bengal, Kolkata & Anr.
DATE OF JUDGMENT: 05/10/2005
BENCH:
B.P. Singh,Tarun Chatterjee & Altamas Kabir
JUDGMENT:
JUDGMENT
ALTAMAS KABIR, J
The question which has been raised in this Civil Appeal appears to
have been considered by different High Courts which have expressed
divergent views in the matter. The said question has come up before this
Court for consideration to resolve the anomalous situation.
The dispute in the instant case is with regard to disallowance of a sum
of Rs.31,38,017/- for the Assessment Year 1994-1995, which sum was
claimed by the assessee as expenses towards rent, repairs, depreciation and
maintenance of a guest house which was purportedly used in connection
with the business of the company.
Chapter IV of the Income Tax Act, 1961 (hereinafter referred to as
’the Act’), deals with computation of total income and is divided into several
parts. Part ’D’, beginning with Section 28, deals with profits and gains of
business or profession. Sections 30 to 36 relate to certain deductions which
are allowed inter alia, on account of rent, rates, taxes, repairs and insurance
in respect of premises and buildings used for the purposes of business or
profession and includes
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 rent, rates, local rates,
municipal taxes;
(c) the amount of any premises paid in respect of
insurance against risk of damage destruction of the
premises paid in respect of insurance against risk
of damage destruction of the premises.
In the explanation to Section 30, it has been indicated that the
amounts paid on account of the items indicated above shall not
include any expenditure in the nature of capital expenditure.
Sections 31 and 32 deal with the amounts which are allowable
in respect of repairs and insurance of machinery, plant and furniture
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used for the purposes of the business or profession and in respect of
depreciation of buildings, machinery, plant or furniture, being tangible
assets along with other intangible assets.
The facts involved in this case do not attract the provisions of
Sections 30 to 36 of the Act, but have been referred to on account of
reference made thereto under Section 37 of the Act which is important
for our purpose. In order to appreciate the arguments advanced on
behalf of the appellant, the provisions of Section 37 as they stood
during the relevant assessment year are set out herein below :-
General.
"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".
(2) Notwithstanding anything contained in sub-section (1),
no expenditure in the nature of entertainment expenditure shall be
allowed in the case of a company, which exceeds the aggregate
amount computed as hereunder:-
i) On the first
Rs.10,00,000/- of the profits
and gains of the business
(computed before making any
allowance under Section 33 [or
Section 33A] or in respect of
entertainment expenditure)
At the rate of 1 per cent or
Rs.5,000/- whichever is higher;
ii) On the next Rs.40,00,000/-
of the profits and gains of the
business (computed in the
manner aforesaid)
At the rate of 3 = per cent;
iii) On the next
Rs.1,20,00,000/- of the profits
and gains of the business
(computed in the manner
aforesaid)
At the rate of 4 = per cent;
iv) On the balance of the
profits and gains of the
business (computed in the
manner aforesaid)
Nil
(2A) Notwithstanding anything contained in sub-Section(1) or
sub-Section (2), no allowance shall be made in respect of so much of
the expenditure in the nature of entertainment expenditure incurred by
any assessee during any previous year which expires after the 30th day
of September, 1967, as is in excess of the aggregate amount computed
as hereunder:-
i) On the first Rs.10,00,000/-
of the profits and gains of the
business or profession
(computed before making any
allowance under [Section
32A or] Section 33 or Section
33A or in respect of
entertainment expenditure)
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At the rate of = per cent or
Rs.5,000/- whichever is higher;
ii) On the next Rs.40,00,000/-
of the profits and gains of the
business or profession
(computed in the manner
aforesaid)
At the rate of < per cent;
iii) On the balance of profits
and gains of the business or
profession (computed in the
manner aforesaid
At the rate of 1/8 per cent.
So, however, that the allowance shall in no case exceed
Rs.50,000/-.
Provided that where the previous year of any assessee falls
partly before and partly after the 30th day of September, 1967, the
allowance in respect of such expenditure incurred during the
previous year shall not exceed-
a) In the case of a company-
i) in respect of such expenditure incurred before the 1st day of
October, 1967, the sum which bears to the aggregate amount
computer at the rate or rates specified in sub-Section (2), the same
proportion as the number of days comprised in the period
commencing on the 1st day of such previous year and ending with
the 30th day of September, 1967, bears to the total number of days
in the previous year;
ii) in respect of such expenditure incurred after the 30th day
of September, 1967, the sum which bears to the aggregate amount
computed at the rate or rates specified in this sub-section, the same
proportion as the number of days comprised in the period
commencing on the 1st day of October, 1967, and ending with the
last day of the previous year bears to the total number of days in
the previous year;
(b) in any other case-
i) in respect of such expenditure incurred before the 1st
day of October, 1967, the amount admissible under sub-section
(1);
ii) in respect of such expenditure incurred after the 30th
day of September, 1967, the sum which bears to the aggregate
amount computed at the rate or rates specified in this sub-section,
the same proportion as the number of days comprised in the period
commencing on the 1st day of October, 1967, and ending with the
last day of the previous year bears to the total number of days in
the previous year.
[Explanation 1] : For the purposes of this ‘entertainment
expenditure’ includes-
i) the amount of any allowance in the nature of
entertainment allowance paid by the assessee to any employee
or other person after the 29th of February, 1968;
ii) the amount of any expenditure in the nature of
entertainment expenditure [not being expenditure incurred out
of an allowance of the nature referred to in Clause (i) incurred
after the 29th day of February, 1968, for the purposes of the
business or profession of the assessee by any employee or
other person).
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Explanation 2 : For the removal of doubts, it is hereby
declared that for the purposes of this sub-section and sub-section
(2B), as it stood before the 1st day of April 1977, ‘entertainment
expenditure’ includes expenditure on provision of hospitality of
every kind by the assessee to any person, whether by way of
provision of food or beverages or in any other manner whatsoever
and whether or not such provision is made by reason of any
express or implied contract or custom or usage of trade, but does
not include expenditure on food or beverages provided by the
assessee to his employees in office, factory or other place of their
work.
(2B) Notwithstanding anything contained in sub-section (1), 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.
(3) Notwithstanding anything contained in sub-section (1), any
expenditure incurred by an assessee after the 31st 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.
(3A) Notwithstanding anything contained in sub-section (1),
where the expenditure or, as the case may be, the aggregate
expenditure incurred by an assessee on any one or more of the
items specified in sub-section (3B) exceeds one hundred thousand
rupees, twenty per cent of such excess shall not be allowed as
deduction in computing the income chargeable under the head
‘profits and gains’ of business or profession.
(3B) The expenditure referred to in sub-section (3A) is that
incurred on \026
i) advertisement, publicity and sales promotion, or
ii) running and maintenance of aircraft and motor cars; or
iii) payments made to hotel.
Explanation : for the purposes of sub-sections (3A) and (3B)
\026
a) the expenditure specified in clause (i) to clause (iii) of
sub-section (3B) shall be aggregate amount of expenditure
incurred by the assessee as reduced by so much of such
expenditure as is not allowed under any other provisions of
this Act;
b) expenditure on advertisement, publicity and sales
promotion shall not include remuneration paid to employees of the
assessee engaged in one or more of the said activities;
c) Expenditure on running and maintenance of aircraft and
motor cars shall include \026
i) expenditure incurred on chartering any aircraft and
expenditure on hire charges for engaging cars plied for hire;
ii) conveyance allowance paid to employees and, where the
assessee is a company, conveyance allowance paid to its directors
also.
(3C) Nothing contained in sub-section (3A) shall apply in respect
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of expenditure incurred by an assessee, being a domestic company
as defined in clause (2) of Section 80B, or a person (other than a
company) who is resident in India in respect of expenditure
incurred wholly and exclusively on \026
i) advertisement, publicity and sales promotion outside
India in respect of the goods, services or facilities which the
assessee deals in or provides in the course of his business;
ii) running and maintenance of motor cars in any branch,
office or agency maintained outside India for the promotion of the
sale outside India of such goods, services or facilities.
(3D) No disallowance under sub-section (3A) shall be made-
i) in the case of an assessee engaged in the business of
operation of aircraft, in respect of expenditure incurred on running
and maintenance of such aircraft;
ii) in the case of an assessee engaged in the business of
running motor cars on hire, in respect of expenditure incurred in
running and maintenance of such motor cars.
(4) Notwithstanding anything contained in sub-section (i) or sub-
section (3) \026
i) no allowance shall be made in respect of any expenditure
incurred by the assessee after the 28th day of February, 1970, on
the maintenance of any residential accommodation in the nature of
a guest house (such residential accommodation being hereafter in
this sub-section referred to as "guest house");
ii) in relation to the assessment year commencing on the 1st
day of April, 1971, or any subsequent assessment year, no
allowance shall be made in respect of depreciation of any building
used as a guest house or depreciation of any assets in a guest
house:
Provided that the aggregate of the expenditure referred to in
clause (i) and the amount of any depreciation referred to in clause
(ii) shall, for the purposes of this sub-section, be reduced by the
amount, if any, received from persons using 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 was 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 \026
(i) residential accommodation in the nature of a guest-
house shall include accommodation hired or reserved by the
assessee in a hotel for the 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.
(5) For the removal of doubts, it is hereby declared that any
accommodation, by whatever name called, maintained, hired,
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reserved or otherwise arranged by the assessee for the purpose of
providing lodging or boarding and lodging to any person
(including any employee or, where the assessee is a company, also
any director of, or the holder of any other office in, the company),
on tour or visit to the place at which such accommodation is
situated, is accommodation in the nature of a guest-house within
the meaning of sub-section (4)."
The aforesaid provision of the Income Tax Act has undergone
several changes from time to time and some of the portions, which are
relevant for a decision in this case have since been omitted. However,
it may be of interest to note that Sub-section (1) of Section 37 was
brought on the statute book in 1964 and underwent several other
changes thereafter. Sub-section (3) of Section 37 was inserted by the
Finance Act 1964 with effect from 1st April, 1964 and was, thereafter,
omitted by the Finance Act, 1997 with effect from 1st April, 1998.
Similarly Sub-section (4) was inserted by the Finance Act 1970
with effect from 1st April, 1970 and was, thereafter, omitted by the
Finance Act, 1997 with effect from 1st April, 1998.
As will be apparent from a reading of Sub-section (1) of
Section 37 of the Act, any expenditure not being expenditure of the
nature described in Sections 30 to 36, inter alia, allowed and expended
wholly and exclusively for the purposes of business or profession, is
to be allowed in computing the income chargeable under the heading
"profits and gains of business or profession". In other words, Section
37 is to be read to the exclusion of the amounts allowable under
Sections 30 to 36.
Although, the expression "premises used for the purposes of the
business or profession" has been used along with the expression
"buildings and furniture" under Sections 30, 31 and 32 of the Act, for
the first time the expression "residential accommodation including
any accommodation in the nature of a guest house" has been used in
Sub-section (3) of Section 37 of the Act. As will be seen, Sub-section
(3) of Section 37 indicates that notwithstanding anything contained in
Sub-section (1) any expenditure incurred by an assessee after 31st of
March, 1964, inter alia, on maintenance of any residential
accommodation in the nature of a guest house and hotel expenses,
would be allowed only to the extent and subject to such conditions, if
any, as may be prescribed.
Sub-section (4), which was inserted in the statute book with
effect from 1st April, 1970, is specific and provides that
notwithstanding anything contained in Sub-section (1) and Sub-
section (3) no allowance shall be made in respect of any expenditure
incurred by the assessee after 28th February, 1970, on the maintenance
of any residential accommodation in the nature of guest house and no
allowance shall be made in respect of depreciation of any building
used as a guest house or depreciation of any assets in the guest house.
However, a guest house maintained as holiday home in the
circumstances indicated have been excluded from the purview of Sub-
section (4) referred to hereinabove.
Inasmuch as, doubts still remained regarding the nature of
accommodation used as a guest house by the companies, Sub-section
(5) was included in Section 37 by the Finance Act in 1983 with effect
from 1st April 1979 and was subsequently omitted by the Finance Act,
1997 with effect from 1st April, 1998. At the relevant point of time,
namely, the assessment year 1994-1995, all the aforesaid provisions
of Section 37 were available and, therefore, applicable to the case of
the appellant-company.
Dr. Debi Prasad Pal, learned senior counsel, appearing on
behalf of the company, urged that Sections 30 to 32 deal with specific
types of expenditure which are allowable in terms of the said
provisions, whereas Section 37 deals with all other expenditure, not
being expenditure described in Sections 30 to 36 of the Act, subject to
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the conditions:
(a) the expenditure must not be of a capital expenditure;
(b) expenditure must not be of a personal nature; and
(c) the expenditure must be incurred wholly and exclusively for
the purposes of business.
Dr. Pal also urged that Section 37 contains general provisions
allowing deductions in respect of expenditure not included within
Sections 30 to 36 of the Act. Dr Pal also urged that since expenditure
incurred by the assessee towards payment of rent, rates, taxes, repairs
and insurance of premises, buildings and furniture used for the
purposes of the business or profession has been provided for
specifically under Sections 30, 31 and 32 of the Act, by virtue of the
non-obstante clause used in Sub-section (1) of Section 37 such
expenses could not again be referable to Section 37 and the different
provisions thereof. In other words, Dr. Pal urged that since the
aforesaid expenses had been specifically allowed to be deducted the
said benefit could not be taken away by the including of the
expression "residential accommodation including any accommodation
in the nature of a guest house" in Sub-section (3) of Section 37 of the
said Act.
Dr. Pal then urged that having allowed a partial benefit, it could
not have been the intention of the Legislature to take away the entire
benefit by incorporating Sub-section (4) with effect from 1st April,
1970. It was urged that such a view would be borne out from the fact
that the provisions relating to the restrictions imposed with regard to
expenses incurred towards the maintenance and other expenditure of
guest houses run by companies, were sought to be omitted with effect
from 1st April, 1998.
Dr. Pal urged that the interpretation regarding the allowability
of rents, repairs, insurance and maintenance expenses of guest houses
under Section 37(3) of the Act fall for consideration of the Bombay
High Court in Commissioner of Income Tax vs. Chase Bright Steel
Limited., reported in (1989) 177 ITR 124, wherein it was held that
business expenditure, such as rent for premises used as a guest house
and amounts spent on repairs to furniture used therein, could not be
disallowed under Section 37(3) of the Act, inasmuch as the same had
been allowed under Sections 30 and 31 of the Act.
Dr. Pal also referred to another decision of the Bombay High
Court in Century Spinning and Manufacturing Co. Ltd. vs.
Commissioner of Income Tax, reported in (1991) 189 ITR 660, where
following its earlier decision in the case of Chase Bright Steel Private
Ltd. (supra), it was held that Sub-Section (4) of Section 37 of the Act
is a non-obstante clause in relation to Sub-section (1) and Sub-Section
(3) of Section 37 and if any expenditure or allowance was made
allowable in other sections of the Act, the same could not be
withdrawn or denied to the assessee because of the prohibitory
provisions of Sub-section (4) of Section 37.
A similar view appears to have been expressed by the Gujarat
High Court in case of Commissioner of Income Tax vs. Ahmedabad
Manufacturing and Calico Printing Co. Ltd., reported in (1992) 197
ITR 538; wherein it was also held that expenses incurred of the nature
described in Sections 30 to 36 could not be disallowed under Section
37 (4) of the Act.
Dr. Pal also referred to a Full Bench decision of the Kerala
High Court in Commissioner of Income Tax vs. Travancore Cements
Ltd., reported in (1999) 240 ITR 816, wherein a distinction was
sought to be made between the expression "repairs" as used in Section
37 and the expression "maintenance" as used in Sub-section (3A) and
(3B) of Section 37. Based on such distinction, it was held that the
non-obstante clause in Section 37 (3A) cannot have any overriding
effect in respect of other provisions pertaining to the allowances of
expenditure under Sections 30 to 36 of the Act.
Dr. Pal submitted that a similar distinction has been made by
the Madras High Court in Commissioner of Income Tax vs. South
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India Viscose Ltd., reportesd in (2003) 259 ITR 107. Based on such
distinction, it was held that rent paid for a guest house has been
specifically dealt with in Section 30 and could not, therefore, be
disallowed under Sub-section (4) of Section 37.
Dr. Pal lastly referred to two decisions of the Calcutta High
Court in Kesoram Industries and Cotton Mills Ltd. vs. Commissioner
of Income Tax, reported in (1991) 191 ITR 518 and Commissioner of
Income Tax vs. Upper Ganges Sugar Mills Ltd., reported in (1994)
206 ITR 215, which have both taken the view that business
expenditure for guest houses would not be allowable, having regard to
the provisions of Section 37(4) of the Act.
Dr. Pal submitted that apart from the said two decisions of the
Calcutta High Court, the uniform decision of most of the High Courts
appears to be that since the expenditure incurred for rents, rates, taxes,
repairs and insurance of buildings and premises and furniture used for
the purposes of business or profession, have been specifically
provided for in Sections 30, 31 and 32 of the Act, benefits thereof
could not be denied to the assessee under the relevant provisions of
Section 37 of the Act.
Dr. Pal urged that the judgment under appeal did not give any
independent reasoning but was rendered following the decision of the
Calcutta High Court in Century Spinning and Manufacturing Co. Ltd.
and Upper Ganges Sugar Mills Ltd. (supra) and could not therefore be
sustained.
Appearing for the Revenue, Mr. Rajeev Dutta, learned senior
counsel, however, contended that the provisions of Section 37 would
have to be read in isolation from the provisions of Sections 30 to 36
of the Act as contemplated by the non-obstante clause in Sub-section
(1) of Section 37. Mr. Dutta urged that the provisions of Section 37
had been correctly interpreted in the two decisions of the Calcutta
High Court in Century Spinning and Manufacturing Co. Ltd. and
Upper Ganges Sugar Mills Ltd. (supra).
Mr. Dutta urged that it was the clear intention of the Legislature
to exclude the benefit of deduction in respect of guest houses which
were being run and maintained by companies in a lavish manner. Mr.
Dutta submitted that while premises and buildings had been referred
to in general terms in Sections 30, 31 and 32 of the Act, guest houses
had been separately categorized for the purposes of Section 37 which
would be quite evident from the manner in which expenses, including
rent and maintenance, were sought to be withdrawn in respect of such
guest houses. Mr. Dutta submitted that the intention of the
Legislature would be further clear from the insertion of Sub-section
(5) which brought within the scope and ambit of Section 37(4) all
accommodation by whatever name called in the nature of a guest
house.
In support of his submissions, Mr. Dutta referred to the decision
of Rajasthan High Court in Commissioner of Income Tax vs.
Instrumentation Ltd. reported in (2002) 258 ITR 513, where upon
considering the views expressed by the Bombay High Court and the
Gujarat High Court in the cases of Chase Bright Steel Ltd. and
Ahmedabad Mfg. And Calico Printing Co. Ltd. (supra), it was urged
that expenditure incurred towards rent and maintenance of guest
houses after 28th February 1970, was not deductible in view of Section
37(4) of the Act.
Reference has also been made to a decision of the Madras High
Court in Commissioner of Income Tax vs. Mathurantakam Co-
operative Sugar Mills Ltd., reported in (2000) 241 ITR 817; wherein
certain expenses, which came within the mischief of Section 37(4) of
the Act were disallowed.
Other similar decisions of the Madras and the Rajasthan High
Courts were also referred to.
Mr. Dutta lastly referred to another decision of the Calcutta
High Court in the case of Commissioner of Income Tax vs. Biswanath
Tea Co. Ltd. (2003) 264 ITR 166 to which one of us (Hon’ble
Altamas Kabir, J) was a party. In the said case the Calcutta High
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Court had occasion to consider the various decisions which have also
been cited by Dr. Pal in the instant case and upon a consideration of
the language of Section 37(4), it was held that having regard to the
unambiguous bar incorporated under Sub-section (4) of Section 37,
the benefits indicated in Sections 30 to 36 although, independent of
Section 37, could not be related to the guest house maintained by the
assessee. It was held that apart from the view taken in Upper Ganges
Sugar Mills Ltd. and Kesoram Industries and Cotton Mills Ltd., any
other interpretation would negate the object of the prohibition
engrafted in Sub-Section (4).
The only question which we are called upon to consider in the
instant case is whether the expression ’premises and buildings’
referred to in Sections 30 and 32 and used for the purposes of the
business or profession would include within its scope and ambit the
expression ’residential accommodation including any accommodation
in the nature of guest house’ used in Sub-sections (3), (4) and (5) of
Section 37 of the Act. While the two expressions can be similarly
interpreted, a distinction has been sought to be introduced for the
purposes of Section 37 by specifying the nature of building to be a
guest house. In our view, the intention of the Legislature appears to
be clear and unambiguous and was intended to exclude the expenses
towards rents, repairs and also maintenance of
premises/accommodation used for the purposes of a guest house of the
nature indicated in Sub-section (4) of Section 37. When the language
of a statue is clear and unambiguous, the courts are to interpret the
same in its literal sense and not to give it a meaning which would
cause violence to the provisions of the statute. If the Legislature had
intended that deduction would be allowable in respect of all types of
buildings/accommodations used for the purposes of business or
profession, then it would not have felt the need to amend the
provisions of Section 37 so as to make a definite distinction with
regard to buildings used as guest houses as defined in Sub-section (5)
of Section 37 and the provisions of Sections 31 and 32 would have
been sufficient for the said purpose. The decisions cited by Dr. Pal
contemplate situations where specific provision had been made in
Sections 30 to 36 of the Act and it was felt that what had been
specifically provided therein could not be excluded under Section 37.
The clarification introduced by way of Sub-section (5) to Section 37
was also not considered in the said case.
As mentioned in the decision of the Calcutta High Court in the
case of Biswanath Tea Co. Ltd. (supra), any other interpretation
would negate the very purpose of Sub-section (4) of Section 37.
It is another matter that at a subsequent point of time, the
Legislature felt it necessary to omit the said provisions, but they were
in the statute book at the relevant point of time. The rigours of the
same, in our view, cannot be avoided in the instant case.
The appeal is accordingly dismissed, but without any order as
to costs.