The interpretation of the term 'guest-house' under section 37(4) of the Income Tax Act, 1961 and its application to the use of flats predominantly by company employees.

Jagannatha Shetty, J.—The common question referred by the Income Tax Appellate Tribunal, Bangalore Bench, Bangalore, in all these references under s. 256(1) of the I.T. Act, 1961 (shortly called "the Act"), is as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the expenditure in maintaining the flats in Bombay and Delhi was disallowable under section 37(4) of the Income Tax Act, 1961 ?"

2. The assessee is a public limited company. For the assessment years 1973-74 to 1975-76, it claimed deduction of expenses incurred in relation to the maintenance of two flats, one in Delhi and another in Bombay. The ITO disallowed the claim in view of the provisions of s. 37(4) of the Act. The deduction disallowed was affirmed by the AAC and also by the Appellate Tribunal.

3. The short question that arises for consideration is, whether s. 37(4) of the Act is a bar to claim the expenditure incurred in the maintenance of these flats.

4. Section 37 of the Act is the residuary and general provision extending the allowances to items of business expenditure not covered by the preceding sections. This section covers cases of business expenditure only.

5. Sub-s. (3) deal with three types of expenditure :

(i) on advertisement;

(ii) on maintenance of any residential accommodation (including guest-houses);

(ii) expenses in connection with the travelling of an employee or any other person (including hotel expenses).

6. Sub-s. (4) of s. 37 was introduced by the Finance Act, 1970, with effect from April 1, 1970. It prohibits totally any allowances in respect of any expenses on the maintenance of a quest-house incurred after February 28, 1970, and further prohibits any depreciation allowance in respect of any building used as a guest-house or any assets therein unless the guest-house is maintained exclusively as a holiday home for employees.

7. Section 37(4) reads :-

"S. 37(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 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,

(First proviso omitted)

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."

8. Before s. 37 was inserted into the Act, r. 6C of the I.T. Rules, 1962, provided for the allowance of expenditure on maintenance of guest-house as provided in the said Rules.

9. From a perusal of these provisions, one thing becomes clear that the Legislature deliberately omitted the provisions relating to expenditure incurred on maintenance of guest-houses after April 1, 1972. Under r. 6C, such allowance was limited to expenditure on the maintenance of one or more guest-houses only at the places and at the rates specified under the rule. In addition to this, the expenditure on one or more holiday homes maintained mainly for the use of employees, was also permitted up to March 31, 1972, whereas now, as per the law governing this subject, it is absolute in the sense that no such expenditure, except that incurred as provided in the second proviso to s. 37(4), is allowed.

10. Against this background of the legislative provisions, the claim of the assessee in this case which has ma