2024 (7) TMI 1188 - HC - Income Tax

Guest house expenses including municipal taxes and maintenance not deductible under Sections 30 and 32, food and beverages treated as entertainment expenditure

The Bombay HC ruled on business expenditure deductions. Following SC precedent in Britannia Industries Ltd., the court held that municipal taxes, ... Allowable business expenditure - expenses incurred in respect of municipal taxes, maintenance and repair of rest / guest house - HELD THAT:- Issue answered against the assessee in assessee’s own case for the assessment year 1993-94 [2008 (8) TMI 1029 - BOMABY HIGH COURT], wherein, this Court following the decision of Britannia Industries Ltd. [2005 (10) TMI 30 - SUPREME COURT] held that the expenses incurred by the assessee towards municipal taxes, maintenance and repairs of guest-house could not be allowed as a deduction. In Britannia Industries Ltd. [2005 (10) TMI 30 - SUPREME COURT] the question which fell for consideration of the Supreme Court was 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. The Supreme Court rejected the assessee’s contention to hold that the intention of the legislature appeared to be clear and unambiguous, so as 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. It was observed that 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 Section 31 and 32 would have been sufficient for the said purpose. Hence this question of law stands concluded against the appellant and in favour of the Revenue. Expenses incurred in respect of provisions of food and beverages and employee’s salary for providing food and beverages at rest / guest house - deduction u/s 37(2) - CIT (A) was of a contrary view from the one taken by the AO, when he reached to a conclusion that such expenditure was the normal expenses on routine courtesy and hospitality. He accordingly, allowed the claim of the assessee for deduction of the amount. The proceedings in such circumstances reached the High Court. The High Court considering the provisions of Section 37 (2A) and the enlargement of the meaning of “entertainment expenditure” by insertion of Explanation 2 to sub-section (2A) of section 37 of the Act by Finance Act, 1983 with the retrospective effect from 1 April 1976, held that by such “explanation”, the meaning of the words “entertainment expenditure” in sub-section (2A) of Section 37 had stood enlarged to include expenditure on provision of hospitality of every kind, by the assessee to any person whether by way of provision of food and beverages or in any other manner. The Court accordingly upheld the view taken by the AO and held it to be in consonance with Section 37 (2A) read with Explanation 2 to hold that the deduction could not be allowed in respect of such expenses as “entertainment expenditure” u/s 37 (1) and accordingly, set aside the orders passed by the tribunal which had held that the assessee was entitled to deduction of such expenses. In these circumstances, question No. 2 would stand covered by the decision in the case of Indian Plastics Ltd. [1999 (8) TMI 49 - BOMBAY HIGH COURT] and would be required to be answered in the negative and against the appellant-assessee and in favour of the revenue. Expenses being 50% of the expenses incurred in organising conference of dealers is allowable as deduction - HELD THAT:- Since the assessee’s guest house was small, accommodation was arranged in hotels and clubs. The assessee had claimed that the expenditure incurred in arranging the seminar should be allowed as business expenditure. The Court held that the seminar was arranged in connection with the assessee’s business and therefore, the expenditure incurred for travel, boarding, lodging of the assessees distributors, attending the seminar and the expenditure involved in giving presentation articles to the assessee’s foreign distributors was expenditure incurred in connection with the assessee’s business and was allowable as deduction. The Court held that such items of expenditure could be considered as entertainment expenditure. It was held that such question thus needs to be answered in favour of the assessee and against the Revenue. The position is not different in the facts and circumstances of the present case accordingly, we answer this question in the affirmative in favour of the appellant-assessee and against the Revenue. Expenses incurred in buying presentation articles - HELD THAT:- In West Coast Paper Mills Ltd. [2000 (2) TMI 30 - BOMBAY HIGH COURT] wherein the Court answered such question in the affirmative in favour of the appellant and against the Revenue, when it was held that the amounts which were expended to buy presentation articles was allowable as a deduction. We may also refer to another decision of West Coast Papers Mills Ltd. [2000 (2) TMI 30 - BOMBAY HIGH COURT] wherein expenses incurred by the assessee in buying presentation articles was allowed as advertisement expenses by the Tribunal which in the nature of articles like sarees, dress materials, dry fruits, silver glass etc. The view of the Tribunal was upheld by this Court in such decision. This question would stand answered in favour of the appellant and against Revenue. Issues:1. Allowability of expenses incurred in respect of municipal taxes, maintenance, and repair of rest/guest house as deduction.2. Allowability of expenses incurred in respect of provisions of food and beverages and employee's salary for providing food and beverages at rest/guest house as deduction under section 37(2) of the Act.3. Allowability of expenses incurred in organizing a conference of dealers as deduction.4. Allowability of expenses incurred in buying presentation articles as deduction.Analysis:Issue 1:The court referred to a previous judgment in Britannia Industries Ltd. case where it was held that expenses towards municipal taxes, maintenance, and repairs of a guest house cannot be allowed as a deduction. The court concluded that the intention of the legislature was clear in excluding such expenses from deductions, based on the specific provisions of the Income Tax Act. Therefore, the first issue was answered against the appellant and in favor of the Revenue.Issue 2:The court cited the case of Commissioner of Income-Tax v. Indian Plastics Ltd. where it was determined that expenses on provision of hospitality, including food and beverages, were not allowable as deductions under Section 37(2A) of the Income Tax Act. The court upheld the Assessing Officer's decision in disallowing such expenses as entertainment expenditure. Consequently, the second issue was answered against the appellant and in favor of the Revenue.Issue 3:Referring to the case of Commissioner of Income-Tax v. Kirloskar Oil Engines Ltd., the court noted that expenditure incurred in organizing a seminar for business promotion was considered allowable as a deduction. The court held that such expenses were incurred in connection with the business and could be categorized as entertainment expenditure. Therefore, the third issue was answered in favor of the appellant-assessee and against the Revenue.Issue 4:The court relied on previous judgments in the appellant's own case where expenses incurred in buying presentation articles were allowed as deductions. The court emphasized that such expenses were considered advertisement expenses and were permissible deductions. Therefore, the fourth issue was answered in favor of the appellant and against the Revenue.Based on the above analysis and the judgments cited, the court disposed of the appeal, concluding that the questions of law were answered as discussed in the judgment.