Jagannatha Shetty, J.
1. The common question referred by the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore, in all these references under s. 256(1) of the I.T. Act, 1961 (shortly called 'the Act'), is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the expenditure in maintaining the flats in Bombay and Delhi was disallowable under section 37(4) of the Income-tax Act, 1961 ?'
2. The assessee is a public limited company. For the assessment years 1973-74 to 1975-76, it claimed deduction of expenses incurred in relation to the maintenance of two flats, one in Delhi and another in Bombay. The ITO disallowed the claim in view of the provisions of s. 37(4) of the Act. The deduction disallowed was affirmed by the AAC and also by the Appellate Tribunal.
3. The short question that arises for consideration is, whether s. 37(4) of the Act is a bar to claim the expenditure incurred in the maintenance of these flats.
4. Section 37 of the Act is the residuary and general provision extending the allowances to items of business expenditure not covered by the preceding sections. This section covers cases of business expenditure only.
5. Sub-s. (3) deal with three types of expenditure :
(i) on advertisement;
(ii) on maintenance of any residential accommodation (including guest-houses);
(ii) expenses in connection with the travelling of an employee or any other person (including hotel expenses).
6. Sub-s. (4) of s. 37 was introduced by the Finance Act, 1970, with effect from April 1, 1970. It prohibits totally any allowances in respect of any expenses on the maintenance of a quest-house incurred after February 28, 1970, and further prohibits any depreciation allowance in respect of any building used as a guest-house or any assets therein unless the guest-house is maintained exclusively as a holiday home for employees.
7. Section 37(4) reads :-
'S. 37(4) Notwithstanding anything contained in sub-section (1) or sub-section (3), -
(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,
(First proviso omitted)
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 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.'
8. Before s. 37 was inserted into the Act, r. 6C of the I.T. Rules, 1962, provided for the allowance of expenditure on maintenance of guest-house as provided in the said Rules.
9. From a perusal of these provisions, one thing becomes clear that the Legislature deliberately omitted the provisions relating to expenditure incurred on maintenance of guest-houses after April 1, 1972. Under r. 6C, such allowance was limited to expenditure on the maintenance of one or more guest-houses only at the places and at the rates specified under the rule. In addition to this, the expenditure on one or more holiday homes maintained mainly for the use of employees, was also permitted up to March 31, 1972, whereas now, as per the law governing this subject, it is absolute in the sense that no such expenditure, except that incurred as provided in the second proviso to s. 37(4), is allowed.
10. Against this background of the legislative provisions, the claim of the assessee in this case which has maintained two flats, one at Bombay and another at Delhi, for the use of the company, will have to be considered both on facts as well as on law governing such allowances.
11. It is not in dispute that the flats have been maintained as guest-houses for the use of the company. The nature of expenses was the rent paid for these flats and also the salary paid to the care-taker. The employees of the company were and are allowed to stay in these flats when they visit the places on official business on payment of nominal charges. They are, therefore, properly considered as 'guest-houses'.
12. Sri G. Sarangan, learned counsel for the company, relying upon the decisions in CIT v. Aruna Sugars Ltd. : 123ITR619(Mad) and in Saraswati Industrial Syndicate Ltd. v. CIT contended that unless the accommodation is made available to strangers for their lodging or boarding, it cannot be considered as a guest-house. Since predominantly the employees of the company used to occupy the flats during their business tour, s. 37(4) is no bar claiming the expenditure incurred in maintaining these flats. The learned counsel, in other words, wants us to hold that the flats generally occupied by or maintained for the employees of the assessee, must not be considered as guest-houses.
13. In Aruna Sugar's case : 123ITR619(Mad) the Madras High Court, while considering the scope of s. 37(3) of the Act, observed that 'guest-house' must be understood to be a place for reception of strangers and if it is intended for the use of the employees of the assessee, then it cannot be called a guest-house. Similar was the view taken by the Punjab and Haryana High Court in Saraswati Industrial Syndicate Ltd.'s case . In fact, the decision in Aruna Sugars' case : 123ITR619(Mad) was expressly referred to and approved by the Punjab and Haryana High Court.
14. Both these decisions largely rest on the language of r. 6C of the I.T. Rules, 1962, and are, therefore, not of much assistance to the case on hand. Rule 6C has been deleted on the coming into force of the Finance Act, 1969, with effect from April 1, 1970.
15. There is no evidence on record that the assessee's guest-houses at Delhi and Bombay are meant exclusively for the use of employees while on leave, as a holiday home. In the absence of any such evidence, we fail to understand how the prohibition contained in s. 37(4) is not applicable to the assessee. The company maintained the flats as guest-houses. There is no dispute on this fact. It may be that the company's employees while on business tour mighty have occupied the flats. But the use of the flats even predominantly by such employees does not make the flats any the less guest-houses.
16. Nor could we accept the submission that a guest-house is a place where only total strangers are required to be accommodated and not the employees of the assessee.'Guest', in its ordinary connotation refers, to a person entertained at another's premises. He may be an utter stranger to, or a close friend of, the host. He may be invited or uninvited. The Indian culture makes no difference between the invited and uninvited guests.
17. The facts that are found by the authorities below are to the effect that the flats were mainly used by the employees of the assesses company for their stay while on tour on company's business and occasionally the flats were also used by some Government officials on payment of a uniform rate of Rs. 10 per day. The flats, therefore, have been maintained in the nature of guest-houses.
18. In the result, we answer the question in the affirmative and against the assessee in all the cases.