1. The two questions that arise in this departmental appeal for the assessment year 1975-76 are dealt with as follows : Flats at Bombay - Whether guest house within the meaning of Section 37(4) of Income-tax Act, 1961.
It is for this point that this Special Bench is constituted. The assessee, a public limited company, manufactures textiles, cotton yarns, fertilizers and also owns coffee estates. The registered office is at Madras with factories at Tamil Nadu and Adoni in Karnataka. It has also some residential flats at Bombay where its directors and employees used to stay while on business tour in that city. When the expenditure of Rs. 37,088 for the maintenance of these flats was claimed as a deduction, the ITO invoked Section 37(4) of the Income-tax Act, 1961 ('the Act') and held that it is an expenditure on the maintenance of a guest house which has only to be disallowed under that sub-section. This question in the assessee's own case had come up before the Tribunal for the assessment years 1973-74 and 1974-75. There the Tribunal held that it is not a guest house and allowed the expenditure. So, the Commissioner (Appeals) for this year following those Tribunal's orders allowed the claim. Hence, this departmental appeal.
2. In the case of the sister concern, Kothari Sugars and Chemicals Limited, Madras, also this question arose before the Tribunal for the assessment years 1974-75 and 1976-77 in respect of its residential flats at Bombay. There also the Tribunal held in favour of the sister concern. Then for the assessment year 1975-76 the Commissioner (Appeals) held that the said concern had maintained these flats exclusively for the use of its directors and employees and that, therefore, such accommodation could not be called a guest house. So, the expenditure was allowed. Therefore, the department appealed. A Bench of the Tribunal then found that these flats are not located in the principal place of business or within the premises of the factory.
However, that Bench did not displace the finding of the Commissioner (Appeals) that it was maintained for the directors and employees. Nor did the Bench give a finding that these flats were intended also for the use of customers and strangers. Ultimately, the Bench held that the maintenance expenditure on these guest houses cannot be allowed as a deduction. It is because of this decision that the matter had to go before a Special Bench.
3. The position before 1970 as provided in Section 37(3) was that the expenditure on maintenance of any residential accommodation including any accommodation in the nature of a guest house will be allowed as a deduction only to the extent and subject to such condition, if any, as may be prescribed. Then Rule 6C of the Income-tax Rules, 1962, was prescribed to provide for the maintenance of certain registers. Only if those registers were maintained, the assessee can claim the deduction.
After the enactment of Section 37(4) by the Finance Act, 1970, with effect from 1-4-1970, the position changed. Thereafter, no expenditure at all will be allowed on the maintenance of a residential accommodation in the nature of guest house which for brevity is called a guest house. So, the question raised by the assessee for these years is that the flats at Bombay are not guest houses. In CIT v. Aruna Sugars Ltd.  123 ITR 619 (Mad.), it has been held that unless the guest house is intended for use by a complete stranger, it cannot be called a guest house. In Saraswati Industrial Syndicate Ltd. v. CIT  136 ITR 361 (Punj. & Har.), it has deen held that a guest house is a place for the reception of strangers, that the employees cannot be treated as strangers and unless the premises is intended for use by a complete stranger, it cannot be called a guest house.
4. These tests are not satisfied in this case on hand in respect of the flats at Bombay. The directors and employees have to go to Bombay on genuine business tour. So, they have to stay there. That fact is not disputed by the department. There is hardly any material to show that these flats are also intended for strangers or at least used by them.
What the department says is that it may be that it is not meant, established or maintained for persons other than directors and employees, but the fact remains that friends, relatives, strangers and customers also stay there sometimes with permission, sometimes without and sometimes on invitation. In our view, such authorised or unauthorised stay of others will not make it a guest house. The flats should have been established or maintained at Bombay for the use of others. Then only it becomes a guest house.
5. The department pointed out that it is common knowledge that prosperous business houses maintain, under colour of business interest, these types of residential accommodation only or mainly for use of their friends and relatives, customers and strangers and it is they who frequent it more than the employees and that is what the Parliament took note of and that is what the Parliament wanted to curb and prevent and that, therefore, the intention required by the two judgments cited to make it a guest house is manifest in the case and that the mischief sought to be avoided should not be perpetuated. We find it difficult to agree. So far as we know, no assessee used to maintain, residential accommodation wholly and exclusively for the use of others. What they used to do was to maintain residential accommodation for the ostensible business purpose and then use it for the comfort of others. It was this abuse that the Parliament wanted to curb. But the term 'guest house' which was the expression used to denote the mischief did not convey the desired meaning. That is what the two judgments held. That expression 'guest house' failed to cover a situation where residential accommodation established for employees was being regularly used for the accommodation of others, open or on the sly. So, the Parliament had to enact by the Finance Act, 1983, with retrospective effect from 1-4-1979, Sub-section 5 of Section 37 for the removal of doubts to include even such accommodation where directors and employees stay while on tour within the meaning of the expression 'guest house'. This is not clariflcatory in nature. The amendment was necessitated on account of the two cited judgments. When the two High Courts have held that 'guest house' did not take in these types of flats, we cannot ignore those and accept the argument of the departmental representative that the mischief sought to be avoided should not be perpetuated. So till 1-4-1979 it is not possible to say that such residential accommodation maintained for the directors and employees for their stay while on tour is a 'guest house'.
6. In the case of the sister concern, the Bench had neither disagreed with the Commissioner (Appeals) in his finding that it is meant for employees on tour nor recorded a finding that it was also intended for the others. Therefore, their conclusion that it is a 'guest house' goes against the cited judgments. That Bench seems to have taken it for granted that any residential accommodation which is not located either in the principal place of business or within the factory premises is automatically a 'guest house'. That view is not acceptable to us. There can be a guest house even in the principal place of business or within the factory premises provided it is established and maintained for others. Therefore, we cannot agree with that Bench decision. For these reasons, we hold that the residential flats at Bombay established for employees on tour is not a guest house. Ground rejected.