Kitchen expenses of a guest house are allowable as a deduction under Section 37(3) of the Income-tax Act, 1961.

J.V.Gupta, J.

1. Income-tax References Nos. 50 to 52 of 1976 will be disposed of by this order as they arise out of one order of reference dated December 26, 1975 of the Income-tax Appellate Tribunal, Chandigarh Bench (hereinafter called "the Tribunal"), in which the following questions of law have been referred for the opinion of this court under Section 256(1) of the I.T. Act (hereinafter called " the Act").

"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified, in law, in holding that the amount of Rs. 9,859 was chargeable to tax under Sub-section (1) of Section 41 of the Income-tax Act for the assessment year 1966-67 ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified, in law, in holding that the amount of Rs. 12,103 was chargeable to tax under Sub-section (1) of Section 4-1 of the Income-tax Act for the assessment year 1969-70 ?

(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right, in law, in upholding the deletion of Rs. 29,237 by the Appellate Assistant Commissioner out of the guest house expenses for the assessment year 1969-70 ?"

2. As regards the first two questions, they stand concluded because of the view taken by this court in Income-tax References Nos. 29 and 30 of 1971 and 14 of 1972 (Commissioner of Income-tax v. Saraswati Industrial Syndicate Ltd.) decided on April 15, 1975, a copy each of which is annexs. I and F of the Income-tax References (reported as Appendix : See p. 366 infra). The said cases related to the assessment years 1964-65 and 1965-66 in which similar questions of law between the parties had arisen and were decided. In view of that decision, the learned counsel for the assessee conceded that the answer to the first two questions will be in the same terms, that is, against the assessee.

3. The facts relevant for the decision of question No. (iii) above are these. The assessee is a public limited company carrying on the business of manufacture and sale of sugar and machinery for sugar mills and other industries. For the assessment year 1969-70 of the assessee, the previous year ended on August 31, 1968. For that assessment year, the assessee claimed deductions in respect of, (i) Rs. 28,757 under the head "Entertainment expenses", (ii) Rs. 58,474 under the head "Guest house Expenses", and (iii) Rs. 3,000 under the head "Sumptuary Allowance" (as paid to the managing director). The total of these three amounts came to Rs. 90,231. The break-up of Rs. 58,474, under the head "Guest house Expenses", was as under:

(a) Rs. 34,082 for maintenance of three guest houses ; and

(b) Rs. 24,392 as expenses of the kitchen attached to one of the said guest houses, that is, the one at S. S. Mills.

4. Out of the break-up of Rs. 34,082 relating to the expenses on the maintenance of the three guest houses, the amount of Rs. 29,237 was allowed by the ITO as permissible under Section 37(3). Thus, out of the total amount of Rs. 90,231 under the abovesaid three heads, the amount of Rs. 60,994 was treated as pertaining to entertainment expenses under Section 37(2A)(i) of the Act by the ITO and he allowed the highest limit of Rs. 5,000 as a deduction.

5. On appeal, the AAC reduced the disallowance from Rs. 55,994 to Rs. 26,757, He supported his action on the two grounds, firstly, that there had been no disallowance in this respect in the past and, secondly, that there was no warrant for the ITO to treat a part of the guest house expenses as general entertainment expenses.

6. The revenue came up in appeal before the Tribunal. Vide order dated July 24, 1975, it held:

"There is no finding of the Income-tax Officer that any portion of the expenditure covered by the assessees total claim of Rs. 90,231 was either not incurred or was not of the nature of allowable expenditure under Section 37(1). Again, Section 37(3) laid down no outside limit as to the allowable extent of expenditure incurred on maintenance