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CASE NO.: Appeal (civil)  2415 of 2004

PETITIONER: Britannia industries Ltd.                          

RESPONDENT: Commissioner of Income Tax,West Bengal, Kolkata & Anr.             

DATE OF JUDGMENT: 05/10/2005

BENCH: B.P. Singh,Tarun Chatterjee & Altamas Kabir

JUDGMENT: JUDGMENT

ALTAMAS KABIR, J

                The question which has been raised in this Civil Appeal appears to  have been considered by different High Courts which have expressed  divergent views in the matter.  The said question has come up before this  Court for consideration to resolve the anomalous situation.         The dispute in the instant case is with regard to disallowance of a sum  of Rs.31,38,017/- for the Assessment Year 1994-1995, which sum was  claimed by the assessee as expenses towards rent, repairs, depreciation and  maintenance of a guest house which was purportedly used in connection  with the business of the company.         Chapter IV of the Income Tax Act, 1961 (hereinafter referred to as  ’the Act’), deals with computation of total income and is divided into several  parts.  Part ’D’, beginning with Section 28, deals with profits and gains of  business or profession.  Sections 30 to 36 relate to certain deductions which  are allowed inter alia, on account of rent, rates, taxes, repairs and insurance  in respect of premises and buildings used for the purposes of business or  profession and includes  

a)      where the premises are occupied by the assessee-

(i)     as a tenant, the rent paid for such  premises; and further if he has  undertaken to bear the cost of  repairs to the premises, the amount  paid on account of such repairs; (ii)    otherwise than as a tenant, the  amount paid by him on account of  current repairs to the premises;

(b)     any sums paid on account of rent, rates, local rates,  municipal taxes;  

(c)     the amount of any premises paid in respect of  insurance against risk of damage destruction of the  premises paid in respect of insurance against risk  of damage destruction of the premises.

In the explanation to Section 30, it has been indicated that the  amounts paid on account of the items indicated above shall not  include any expenditure in the nature of capital expenditure.         Sections 31 and 32 deal with the amounts which are allowable  in respect of repairs and insurance of machinery, plant and furniture

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used for the purposes of the business or profession and in respect of  depreciation of buildings, machinery, plant or furniture, being tangible  assets along with other intangible assets.         The facts involved in this case do not attract the provisions of  Sections 30 to 36 of the Act, but have been referred to on account of  reference made thereto under Section 37 of the Act which is important  for our purpose.   In order to appreciate the arguments advanced on  behalf of the appellant, the provisions of Section 37 as they stood  during the relevant assessment year are set out herein below :- General.

"37(1)Any expenditure (not being expenditure of the nature  described in Sections 30 to 36 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".

(2)     Notwithstanding anything contained in sub-section (1),  no expenditure in the nature of entertainment expenditure shall be  allowed in the case of a company, which exceeds the aggregate  amount computed as hereunder:-

i)  On the first  Rs.10,00,000/- of the profits  and gains of the business  (computed before making any  allowance under Section 33 [or  Section 33A] or in respect of  entertainment expenditure) At the rate of 1 per cent or  Rs.5,000/- whichever is higher; ii)  On the next Rs.40,00,000/-  of the profits and gains of the  business (computed in the  manner aforesaid) At the rate of 3 = per cent; iii)  On the next  Rs.1,20,00,000/- of the profits  and gains of the business  (computed in the manner  aforesaid) At the rate of 4 = per cent; iv)  On the balance of the  profits and gains of the  business (computed in the  manner aforesaid) Nil

               (2A)  Notwithstanding anything contained in sub-Section(1) or  sub-Section (2), no allowance shall be made in respect of so much of  the expenditure in the nature of entertainment expenditure incurred by  any assessee during any previous year which expires after the 30th day  of September, 1967, as is in excess of the aggregate amount computed  as hereunder:-

i) On the first Rs.10,00,000/-  of the profits and gains of the  business or profession  (computed before making any  allowance under [Section  32A or] Section 33 or Section  33A or in respect of  entertainment expenditure)

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At the rate of = per cent or  Rs.5,000/- whichever is higher; ii) On the next Rs.40,00,000/-  of the profits and gains of the  business or profession  (computed in the manner  aforesaid) At the rate of < per cent; iii) On the balance of profits  and gains of the business or  profession (computed in the  manner aforesaid  At the rate of 1/8 per cent.

So, however, that the allowance shall in no case exceed  Rs.50,000/-.

Provided that where the previous year of any assessee falls  partly before and partly after the 30th day of September, 1967, the  allowance in respect of such expenditure incurred during the  previous year shall not exceed-

a)      In the case of a company-

i)      in respect of such expenditure incurred before the 1st day of  October, 1967, the sum which bears to the aggregate amount  computer at the rate or rates specified in sub-Section (2), the same  proportion as the number of days comprised in the period  commencing on the 1st day of such previous year and ending with  the 30th day of September, 1967, bears to the total number of days  in the previous year;   ii)     in respect of such expenditure incurred after the 30th day  of September, 1967, the sum which bears to the aggregate amount  computed at the rate or rates specified in this sub-section, the same  proportion as the number of days comprised in the period  commencing on the 1st day of October, 1967, and ending with the  last day of the previous year bears to the total number of days in  the previous year;

(b)             in any other case-

i)      in respect of such expenditure incurred before the 1st   day of October, 1967, the amount admissible under sub-section  (1); ii)     in respect of such expenditure incurred after the 30th  day of September, 1967, the sum which bears to the aggregate  amount computed at the rate or rates specified in this sub-section,  the same proportion as the number of days comprised in the period  commencing on the 1st day of October, 1967, and ending with the  last day of the previous year bears to the total number of days in  the previous year.

[Explanation 1] :  For the purposes of this ‘entertainment  expenditure’ includes-

i)      the amount of any allowance in the nature of  entertainment allowance paid by the assessee to any employee  or other person after the 29th of February, 1968; ii)     the amount of any expenditure in the nature of  entertainment expenditure [not being expenditure incurred out  of an allowance of the nature referred to in Clause (i) incurred  after the 29th day of February, 1968, for the purposes of the  business or profession of the assessee by any employee or  other person).

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Explanation  2 :  For the removal of doubts, it is hereby  declared that for the purposes of this sub-section and sub-section  (2B), as it stood before the 1st day of April 1977, ‘entertainment  expenditure’ includes expenditure on provision of hospitality of  every kind by the assessee to any person, whether by way of  provision of food or beverages or in any other manner whatsoever  and whether or not such provision is made by reason of any  express or implied contract or custom or usage of trade, but does  not include expenditure on food or beverages provided by the  assessee to his employees in office, factory or other place of their  work.

(2B)  Notwithstanding anything contained in sub-section (1), no  allowance shall be made in respect of expenditure incurred by an  assessee on advertisement in any souvenir, brochure, tract,  pamphlet or the like published by a political party.      (3)     Notwithstanding anything contained in sub-section (1), any  expenditure incurred by an assessee after the 31st of March, 1964,  on advertisement or on maintenance of any residential  accommodation including any accommodation in the nature of a  guest house or in 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.

(3A)  Notwithstanding anything contained in sub-section (1),  where the expenditure or, as the case may be, the aggregate  expenditure incurred by an assessee on any one or more of the  items specified in sub-section (3B) exceeds one hundred thousand  rupees, twenty per cent of such excess shall not be allowed as  deduction in computing the income chargeable under the head  ‘profits and gains’ of business or profession.

(3B)  The expenditure referred to in sub-section (3A) is that  incurred on \026

i)      advertisement, publicity and sales promotion, or ii)     running and maintenance of aircraft and motor cars; or iii)    payments made to hotel.

Explanation :  for the purposes of sub-sections (3A) and (3B)  \026

a)      the expenditure specified in clause (i) to clause (iii) of  sub-section (3B) shall be aggregate amount of expenditure  incurred by the assessee as reduced by so much of such  expenditure as is not allowed under any other provisions of  this Act;

b)      expenditure on advertisement, publicity and sales    promotion shall not include remuneration paid to employees of the  assessee engaged in one or more of the said activities;

c)      Expenditure on running and maintenance of aircraft and  motor cars shall include \026

i)      expenditure incurred on chartering any aircraft and  expenditure on hire charges for engaging cars plied for hire; ii)     conveyance allowance paid to employees and, where the  assessee is a company, conveyance allowance paid to its directors  also.

(3C)  Nothing contained in sub-section (3A) shall apply in respect

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of expenditure incurred by an assessee, being a domestic company  as defined in clause (2) of Section 80B, or a person (other than a  company) who is resident in India in respect of expenditure  incurred wholly and exclusively on \026

i)      advertisement, publicity and sales promotion outside  India in respect of the goods, services or facilities which the  assessee deals in or provides in the course of his business; ii)     running and maintenance of motor cars in any branch,  office or agency maintained outside India for the promotion of the  sale outside India of such goods, services or facilities.

(3D)  No disallowance under sub-section (3A) shall be made-

i)      in the case of an assessee engaged in the business of  operation of aircraft, in respect of expenditure incurred on running  and maintenance of such aircraft; ii)     in the case of an assessee engaged in the business of  running motor cars on hire, in respect of expenditure incurred in  running and maintenance of such motor cars.

(4)     Notwithstanding anything contained in sub-section (i) or sub- section (3) \026

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:

Provided that the aggregate  of the expenditure referred to in  clause (i) and the amount of any depreciation referred to in clause  (ii) shall, for the purposes of this sub-section, be reduced by the  amount, if any, received from persons using 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 was 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.

Explanation -  For the purposes of this sub-section \026

(i)     residential accommodation in the nature of a guest- house shall include accommodation hired or reserved by the  assessee in a hotel for the 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.

(5)  For the removal of doubts, it is hereby declared that any  accommodation, by whatever name called, maintained, hired,

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reserved or otherwise arranged by the assessee for the purpose of  providing lodging or boarding and lodging to any person  (including any employee or, where the assessee is a company, also  any director of, or the holder of any other office in, the company),  on tour or visit to the place at which such accommodation is  situated, is accommodation in the nature of a guest-house within  the meaning of sub-section (4)."                  

       The aforesaid provision of the Income Tax Act has undergone  several changes from time to time and some of the portions, which are  relevant for a decision in this case have since been omitted.  However,  it may be of interest to note that Sub-section (1) of Section 37 was  brought on the statute book in 1964 and underwent several other  changes thereafter.  Sub-section (3) of Section 37 was inserted by the  Finance Act 1964 with effect from 1st April, 1964 and was, thereafter,  omitted by the Finance Act, 1997 with effect from 1st April, 1998.         Similarly Sub-section (4) was inserted by the Finance Act 1970  with effect from 1st April, 1970 and was, thereafter, omitted by the  Finance Act, 1997 with effect from 1st April, 1998.

       As will be apparent from a reading of Sub-section (1) of  Section 37 of the Act, any expenditure not being expenditure of the  nature described in Sections 30 to 36, inter alia, allowed and expended  wholly and exclusively for the purposes of business or profession, is  to be allowed in computing the income chargeable under the heading  "profits and gains of business or profession".   In other words, Section  37 is to be read to the exclusion of the amounts allowable under  Sections 30 to 36.           Although, the expression "premises used for the purposes of the  business or profession" has been used along with the expression  "buildings and furniture" under Sections 30, 31 and 32 of the Act, for  the first time the expression "residential accommodation including  any accommodation in the nature of a guest house" has been used in  Sub-section (3) of Section 37 of the Act.  As will be seen, Sub-section  (3) of Section 37 indicates that notwithstanding anything contained in  Sub-section (1) any expenditure incurred by an assessee after 31st of  March, 1964, inter alia, on maintenance of any residential  accommodation in the nature of a guest house and  hotel expenses,  would be allowed only to the extent and subject to such conditions, if  any, as may be prescribed.         Sub-section (4), which was inserted in the statute book with  effect from 1st April, 1970, is specific and provides that  notwithstanding anything contained in Sub-section (1) and Sub- section (3) no allowance shall be made in respect of any expenditure  incurred by the assessee after 28th February, 1970, on the maintenance  of any residential accommodation in the nature of guest house and no  allowance shall be made in respect of depreciation of any building  used as a guest house or depreciation of any assets in the guest house.    However, a guest house maintained as holiday home in the  circumstances indicated have been excluded from the purview of Sub- section (4) referred to hereinabove.         Inasmuch as, doubts still remained regarding the nature of  accommodation used as a guest house by the companies, Sub-section  (5) was included in Section 37 by the Finance Act in 1983 with effect  from 1st April 1979 and was subsequently omitted by the Finance Act,  1997 with effect from 1st April, 1998.  At the relevant point of time,  namely, the assessment year 1994-1995, all the aforesaid provisions  of Section 37 were available and, therefore, applicable to the case of  the appellant-company.         Dr. Debi Prasad Pal, learned senior counsel, appearing on  behalf of the company, urged that Sections 30 to 32 deal with specific  types of expenditure which are allowable in terms of the said  provisions, whereas Section 37 deals with all other expenditure, not  being expenditure described in Sections 30 to 36 of the Act, subject to

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the conditions: (a)     the expenditure must not be of a capital expenditure; (b)     expenditure must not be of a personal nature; and (c)     the expenditure must be incurred wholly and exclusively for  the purposes of business.

Dr. Pal also urged that Section 37 contains general provisions  allowing deductions in respect of expenditure not included within  Sections 30 to 36 of the Act.  Dr Pal also urged that since expenditure  incurred by the assessee towards payment of rent, rates, taxes, repairs  and insurance of premises, buildings and furniture used for the  purposes of the business or profession has been provided for  specifically under Sections 30, 31 and 32 of the Act, by virtue of the  non-obstante clause used in Sub-section (1) of Section 37 such  expenses could not again be referable to Section 37 and the different  provisions thereof.   In other words, Dr. Pal urged that since the  aforesaid expenses had been specifically allowed to be deducted the  said benefit could not be taken away by the including  of the  expression "residential accommodation including any accommodation  in the nature of a guest house"  in Sub-section (3) of Section 37 of the  said Act.         Dr. Pal then urged that having allowed a partial benefit, it could  not have been the intention of the Legislature to take away the entire  benefit by incorporating  Sub-section (4) with effect from 1st April,  1970.  It was urged that such a view would be borne out from the fact  that the provisions relating to the restrictions imposed with regard to  expenses incurred towards the maintenance and other expenditure of  guest houses run by companies, were sought to be omitted with effect  from 1st April, 1998.         Dr. Pal urged that the interpretation regarding the allowability  of rents, repairs, insurance and maintenance expenses of guest houses  under Section 37(3) of the Act fall for consideration of the Bombay  High Court in Commissioner of Income Tax vs. Chase Bright Steel  Limited., reported in (1989) 177 ITR 124,  wherein it was held that  business expenditure, such as rent for premises used as a guest house  and amounts spent on repairs to furniture used therein, could not be  disallowed under Section 37(3) of the Act, inasmuch as the same had  been allowed under Sections 30 and 31 of the Act.         Dr. Pal also referred to another decision of the Bombay High  Court in Century  Spinning and Manufacturing Co. Ltd. vs.  Commissioner of Income Tax, reported in (1991) 189 ITR 660, where  following its earlier decision in the case of Chase Bright Steel Private  Ltd. (supra), it was held that Sub-Section (4) of Section 37  of the Act  is a non-obstante clause in relation to Sub-section (1) and Sub-Section  (3) of Section 37 and if any expenditure or allowance was made  allowable in other sections of the Act, the same could not be  withdrawn or denied to the assessee because of the prohibitory  provisions of Sub-section (4) of Section 37.         A similar view appears to have been expressed by the Gujarat  High Court in case of Commissioner of Income Tax vs. Ahmedabad  Manufacturing and Calico Printing Co. Ltd., reported in (1992) 197  ITR 538; wherein it was also held that expenses incurred of the nature  described in Sections 30 to 36 could not be disallowed under Section  37 (4) of the Act.         Dr. Pal also referred to a Full Bench decision of the Kerala  High Court in Commissioner of Income Tax vs. Travancore Cements  Ltd., reported in (1999) 240 ITR 816, wherein a distinction was  sought to be made between the expression "repairs" as used in Section  37 and the expression "maintenance" as used in Sub-section (3A) and  (3B) of Section 37.  Based on such distinction, it was held that the  non-obstante clause in Section 37 (3A) cannot have any overriding  effect in respect of other provisions pertaining to the allowances of  expenditure under Sections 30 to 36 of the Act.         Dr. Pal submitted that a similar distinction has been made by  the Madras High Court in Commissioner of Income Tax vs. South

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India Viscose Ltd., reportesd in (2003) 259 ITR 107.  Based on such  distinction, it was held that rent paid for a guest house has been  specifically dealt with in Section 30 and could not, therefore, be  disallowed under Sub-section (4) of Section 37.         Dr. Pal lastly referred to two decisions of the Calcutta High  Court in Kesoram Industries and Cotton Mills Ltd. vs. Commissioner  of Income Tax, reported in (1991) 191 ITR 518 and Commissioner of  Income Tax vs. Upper Ganges Sugar Mills Ltd., reported in (1994)  206 ITR 215, which have both taken the view that business  expenditure for guest houses would not be allowable, having regard to  the provisions of Section 37(4) of the Act.         Dr.  Pal submitted that apart from the said two decisions of the  Calcutta High Court, the uniform decision of most of the High Courts  appears to be that since the expenditure incurred for rents, rates, taxes,  repairs and insurance of buildings and premises and furniture used for  the purposes of business or profession, have been specifically  provided for in Sections 30, 31 and 32 of the Act, benefits thereof  could not be denied to the assessee under the relevant provisions of  Section 37 of the Act.         Dr. Pal urged that the judgment under appeal did not give any  independent reasoning but was rendered following the decision of the  Calcutta High Court in Century Spinning and Manufacturing Co. Ltd.  and Upper Ganges Sugar Mills Ltd. (supra) and could not therefore be  sustained.         Appearing for the Revenue, Mr. Rajeev Dutta, learned senior  counsel, however, contended that the provisions of Section 37 would  have to be read in isolation from the provisions of Sections  30 to 36  of the Act as contemplated by the non-obstante clause in Sub-section  (1) of Section 37.   Mr. Dutta urged that the provisions of Section 37  had been correctly interpreted in the two decisions of the Calcutta  High Court in Century Spinning and Manufacturing Co. Ltd. and  Upper Ganges Sugar Mills Ltd. (supra).         Mr. Dutta urged that it was the clear intention of the Legislature  to exclude the benefit of deduction in respect of guest houses which  were being run and maintained by companies in a lavish manner.  Mr.  Dutta submitted that while premises and buildings had been referred  to in general terms in Sections 30, 31 and 32 of the Act, guest houses  had been separately categorized for the purposes of Section 37 which  would be quite evident from the manner in which expenses, including  rent and maintenance, were sought to be withdrawn in respect of such  guest houses.   Mr. Dutta submitted that the intention of the  Legislature would be further clear from the insertion of Sub-section  (5) which brought within the scope and ambit of Section 37(4) all  accommodation by whatever name called in the nature of a guest  house.         In support of his submissions, Mr. Dutta referred to the decision  of Rajasthan High Court in Commissioner of Income Tax vs.  Instrumentation Ltd. reported in (2002) 258 ITR 513, where upon  considering the views expressed by the Bombay High Court and the  Gujarat High Court  in the cases of Chase Bright Steel Ltd. and  Ahmedabad Mfg. And Calico Printing  Co. Ltd. (supra),  it was urged  that expenditure incurred towards rent and maintenance of guest  houses after 28th February 1970, was not deductible in view of Section  37(4) of the Act.         Reference has also been made to a decision of the Madras High  Court in Commissioner of Income Tax vs. Mathurantakam Co- operative Sugar Mills Ltd., reported in (2000) 241 ITR 817; wherein  certain expenses, which came within the mischief of Section 37(4) of  the Act were disallowed. Other similar decisions of the Madras and the Rajasthan High  Courts were also referred to.         Mr. Dutta lastly referred to another decision of the Calcutta  High Court in the case of Commissioner of Income Tax vs. Biswanath  Tea Co. Ltd. (2003) 264 ITR 166 to which one of us (Hon’ble  Altamas Kabir, J) was a party.   In the said case the Calcutta High

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Court had occasion to consider the various decisions which have also  been cited by Dr. Pal in the instant case and upon a consideration of  the language of Section 37(4), it was held that having regard to the  unambiguous bar incorporated under Sub-section (4) of Section 37,  the benefits indicated in Sections 30 to 36 although, independent of  Section 37, could not be related to the guest house maintained by the  assessee.   It was held that apart from the view taken in Upper Ganges  Sugar Mills Ltd. and Kesoram Industries and Cotton Mills Ltd., any  other interpretation would negate the object of the prohibition  engrafted in Sub-Section (4).         The only question which we are called upon to consider in the  instant case is whether the expression ’premises and buildings’  referred to in Sections 30 and 32 and used for the purposes of the  business or profession would include within its scope and ambit the  expression ’residential accommodation including any accommodation  in the nature of guest house’ used in Sub-sections (3), (4) and (5) of  Section 37 of the Act.  While the two expressions can be similarly  interpreted, a distinction has been sought to be introduced for the  purposes of Section 37 by specifying the nature of building to be a  guest house.   In our view, the intention of the Legislature appears to  be clear and unambiguous and was intended to exclude the expenses  towards rents, repairs and also maintenance of  premises/accommodation used for the purposes of a guest house of the  nature indicated in Sub-section (4) of Section 37.   When the language  of a statue is clear and unambiguous, the courts are to interpret the  same in its literal  sense and not to give it a meaning which would  cause violence to the provisions of the statute.  If the Legislature had  intended that deduction would be allowable in respect of all types of  buildings/accommodations used for the purposes of business or  profession, then it would not have felt the need to amend the  provisions of Section 37 so as to make a definite distinction with  regard to buildings used as guest houses as defined in Sub-section (5)  

of Section 37 and the provisions of Sections 31 and 32 would have  been sufficient for the said purpose.   The decisions cited by Dr. Pal  contemplate situations where specific provision had been made in  Sections 30 to 36 of the Act and it was felt that what had been  specifically provided  therein could not be excluded under Section 37.   The clarification introduced by way of Sub-section (5) to Section 37  was also not considered in the said case.

       As mentioned in the decision of the Calcutta High Court in the  case of Biswanath Tea Co. Ltd. (supra), any other interpretation  would negate the very purpose of Sub-section (4) of Section 37.

       It is another matter that at a subsequent point of time, the  Legislature felt it necessary to omit the said provisions, but they were  in the statute book at the relevant point of time.   The rigours of the  same,  in our view, cannot be avoided in the instant case.

       The appeal is accordingly dismissed, but without any order as  to costs.