TMI Blog1995 (7) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... of which two items were : (a) Rs. 9,974, spent on salary and bonus of the employees working in a bungalow maintained by the assessee as a guest house ; and (b) Rs. 5,141, spent on lighting charges of the guest house. Those two items of expenditure were disallowed by the Income-tax Officer. The asses see went in appeal to the Commissioner of Income-tax (Appeals) who took the view that the expenditure claimed could not be allowed. The assessee filed a second appeal before the Income-tax Appellate Tribunal. Following its own earlier decision in I. T. A. Nos. 1056 and 1057 of 1979 for the earlier two assessment years in respect of the very same assessee, the Tribunal allowed the deductions. The Tribunal noted that in the assessee's own case for the assessment year 1967-68, the Tribunal's view allowing similar expenditure was confirmed by the High Court in Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514 (AP). Learned standing counsel for the Revenue submits that the judgment of this court in Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514 related to the assessment year 1967-68 ; the provisions of sub-section (4) of section 37 which came into force with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilities for their accommodation, food, drink, etc., had to be provided within reasonable limits so that the company could carry on its business of exporting tobacco from India and as such the principle enunciated by the Gujarat High Court in CIT v. Patel Brothers and Co. Ltd. [1977] 106 ITR 424, namely, the provision of food, drinks, etc., to client was in the nature of a bare necessity or by way of ordinary courtesy or as an express or implied term of the contract or employment spelled out from longstanding practice or custom of trade or business, it would not amount to entertainment. It was also pointed out therein that it was nobody's case that the guest houses were run on a lavish scale looking particularly to the needs of customers from abroad. Therefore, this judgment cannot be an authority on the question of deductibility of the expenditure incurred on maintenance of guest house which is dealt with by sub-section (4) of section 37, brought into force with effect from April 1, 1970. In CIT v. Navabharat Enterprises (P.) Ltd. (No. 2) [1988] 170 ITR 332, a Division Bench of this court had to consider the scope and the meaning of the expression "in the nature of entertainment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived 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 wholetime 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. " This sub-section opens with a non obstante clause to exclude the provisions of sub-section (1) and sub-section (3) and directs that any expenditure incurred by the assessee after the 28th day of February, 1970, on the maintenance of any residential accommodati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the expenditure, the Commissioner of Income-tax revised the order of assessment under section 263 of the Income-tax Act and held that the expenses were not allowable. On appeal by the assessee, the Tribunal upheld the order of the Income-tax Officer. The Bombay High Court considered the question whether the expenditure claimed therein was not expenditure incurred on the maintenance of the residential accommodation in the nature of a guest house and was, therefore, an admissible deduction. It was held that by providing accommodation to the members of crew as also to representatives of the assessee's principal non-resident shipping companies, in these flats, the assessee-company had treated those flats as its own guest houses and since those guest houses were not maintained exclusively as a holiday home for employees of the assessee-company, the assessee-company was not entitled to allowance under section 37(4) in respect of any expenditure on maintenance thereof incurred after February 28, 1970, nor was it entitled to any depreciation allowance in respect of those guest houses. We respectfully agree with the view taken by the Bombay High Court. However, Mr. D. Manmohan, learned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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