TMI Blog1979 (7) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... t years. The ITO took the view that the expenditure on the maintenance of guest house could be allowed as deduction only if such maintenance was for the benefit of the employees and if a register in the prescribed form had also been maintained. The assessee started maintaining the register only from first of February, 1967. The ITO was of the view that the provisions of r. 6(c) had not been complied with and he, therefore, disallowed the amounts. The AAC, on appeal, confirmed the disallowance. Thereafter the assessee appealed to the Tribunal. After referring to the relevant provisions, the Tribunal came to the conclusion that the building was not in the nature of a guest house and that the expenditure incurred therein did not fall within the scope of s. 37(3) of the I.T. Act, 1961, so as to be disallowed in the manner done by the I.T. authorities. On this point, the question that has been referred runs as follows : " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the expenditure of Rs. 12,944 for the assessment year 1968-69 and Rs. 12,009 for the assessment year 1969-70, incurred in relation to the building at Pennadam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of personnel stay. The first category consists of the directors of the company and its employees ; the second category consists of Government officials who visit the factory in the course of their work under the customs law, sales tax law, labour laws, etc., and the third category consists of other persons, some of whom may even be persons connected with the company either by way of sellers of sugarcane or purchasers of sugar in a case like this. The section itself does not in any manner specify the kind of maintenance expenditure that is liable to be allowed. The extent and the conditions of allowance are only to be prescribed. Rule 6C(1) prescribes the allowance with reference to the maintenance of residential accommodation in the nature of a guest house. Rule 6C(1) does not apply to any residential accommodation which is not in the nature of a guest house. With reference to residential accommodation in the nature of a guest house, there are various provisions made. The guest house or houses must be at the principal place of business of the assessee in India or it must be in a place where manufacture is carried on or industrial establishment is maintained. The assessee, in the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of guest ". In the Shorter Oxford Dictionary, 3rd Edn., the meaning of " guest house " is given as " an inn-- A house or apartment for the reception of strangers or guests ". From the language of r. 6C it appears that the rule-making authority considered that even the employees of a company would be guests because provision is made for the category of employees who would use the guest house in places other than the principal place of business of the assessee or the factory premises of the assessee. In such cases, as already seen, the guest house must be maintained exclusively for the benefit of the employees (see cl. (d) of r. 6C). However, with reference to the factory premises as in this case, there is no restriction on the category of persons who alone could stay in it. This stands to reason, as in a case like this, where the factory is located away from any urban locality and where the normal facilities available for food or accommodation cannot be had, it is necessary in the interests of the business of the company to maintain a guest house. As is sometimes graphically put, a company has no body to be kicked or soul to be damned and, therefore, the company has to function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t house falling within the scope of s. 37(3). The expenditure incurred in the present case would thus really fall within the scope of the expenditure contemplated by s. 37(3) and would qualify for an allowance only if it complied with the rules. The learned counsel for the assessee cited certain decisions dealing with entertainment expenditure. But as pointed out by the Supreme Court in dealing with this very provision in CIT v. Sirpur Paper Mills Ltd. [1978] 112 ITR 776, the expenditure on the maintenance of a guest house is wholly different from the expenditure in the nature of entertainment. Therefore, the decision bearing on the allowability or otherwise of entertainment expenditure would be of no assistance here. As far as the allowability of expenditure on a guest house is concerned, there is no reported decision so far on the ambit or scope of s. 37(3) in so far as it relates to expenditure on the maintenance of a guest house. Consequent on the assessee not complying with the rules, the disallowance as made by the I.T. authorities was proper. Therefore, the question has to be answered in the negative and in favour of the revenue. The next question that has been referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to in s. 33 should not be denied by reason only that the amount debited to the profit and loss account of the relevant previous year and credited to the reserve account aforesaid exceeds the amount of the profit of such previous year as arrived at without making the debit aforesaid. The Explanation was brought in to provide for cases where an assessee did not have adequate profits to create the necessary amount as a reserve. This provision enabled the creation of a reserve of the requisite amount in the absence of profits or adequate profits to cover the reserve. However, what is clear from the whole provision is that the reserve is to be created out of the profits of the relevant previous year and credited to a reserve account to be utilised by the assessee for the business. In the present case, there is no such debit to the profit and loss account of the relevant previous year. The Tribunal was, therefore, in error in directing the ITO to give the allowance. The presence of a larger amount in the development rebate reserve in an earlier year cannot be taken as satisfying the specific requirements of s. 34(3)(a), viz., of a debit to the profit and loss account of the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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