The allowances permitted under section 37(3) of the Income Tax Act are not only in respect of residential accommodation but also in respect of accommodation in the nature of a guest house, including expenses towards providing food and other amenities to the guests staying in such a guest house.

Rama Jois, J.—In accordance with the directions issued by this court in C.P. No. 200 of 1974 under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), the following question of law has been referred for the opinion of this court by the Income Tax Appellate Tribunal, Bangalore.

"Whether, on the facts and in the circumstances of the case, the guest house expenditure of Rs. 13,902 is an item of allowable expenditure falling under section 37(3) of the Income Tax Act, 1961 ?"

2. The assessee in this case is a limited company. In returns filed for the assessment year 1969-70, the assessee claimed exemption towards guest house expenditure amounting to Rs. 13,902 consisting of the following items :

Rs.

(i) Provisions

8,901

(ii) Other expenditure

3,154

(iii) Equipments like crockery, utensils, etc., written off

1,847

Total

13,902

3. The ITO on going through the materials placed before him case to the conclusion that only customers of the assessee stayed in the guest house and, therefore, the deduction claimed by the assessee was not permissible under sub-s. (3) of s. 37 of the Act. In taking the said view he relied on r. 6C of the I.T. Rules, 1962 (hereinafter referred to as "the Rules"), and held that the use of the guest house by a customer is not covered by the said rule and, according to the rule, expenses incurred on the guest house used only for the occupation of the employees could be claimed for purposes of deduction under s. 37(3) of the Act. Aggrieved by the said order the assessee preferred an appeal before the AAC. The AAC allowed the appeal holding that the entire expenditure of guest house being an expenditure wholly and exclusively for the purpose of business of the assessee, has to be deducted under sub-s. (1) of s. 37 of the Act. The department went up in appeal before the Income Tax Appellate Tribunal. The Tribunal disallowed the claim. The view taken by the Tribunal can be summarised as follows :

(1) The requirement of maintaining accounts under r. 6C(3) has no application to customers who use the guest house maintained in accordance with cls. (a), (b) and (c) or r. 6C(1) of the Rules.

(2) The requirement to maintain accounts under r. 6C(3) applies to the employees and others specified in that sub-rule.

(3) The expenditure incurred only in respect of accommodation falls within the purview of sub-s. (3) of s. 37 of the Act and not other expenses.

(4) Section 37(1) of the Act is not attracted as held by the AAC as guest house expenditure specifically falls under s. 37(3) of the Act.

4. The only question required to be answered in this reference is whether the expenses towards guest house as claimed by the assessee falls within the purview of sub-s. (3) of s. 37 of the Act. Sub-sections (1) and (3) of s. 37 read as follows :

"(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80VV 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'.

(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 a 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."

5. The combined effect of the two sub-sections is that any expenditure incurred by an assessee towards maintaining of any residential accommodation or including any accommodation in the nature of a guest house, though incurred wholly and exclusively for his business, allowance i