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income-tax Officer Vs. Pratappur Sugar and Industries - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Kolkata
Decided On
Judge
Reported in(1985)13ITD753(Kol.)
Appellantincome-tax Officer
RespondentPratappur Sugar and Industries
Excerpt:
.....tribunal may be rectified in view of the retrospective application of the above section for the assessment year 1979-80. the assessment year in question is 1979-80.2. from the order of the ito, it is seen that the assessee followed the mercantile method of accounting and the accounting period ended on 31-10-1978. the assessment order was made under section 143(3) of the act on 30-8-1982. in this order, the ito disallowed 50 per cent of the claim of the assessee relating to guest-house expenditure under section 37(4) for rs. 10,798. the assessee took up the matter before the commissioner, who deleted the addition following the ratio of the decision of the hon'ble madras high court in the case of cit v. aruna sugars ltd. [1980] 123 1tr 619. the departmental appeal was that the.....
Judgment:
1. This is the miscellaneous application filed by the revenue contending that in the order of the Tribunal dated 24-5-1984 in IT Appeal No. 893 (Cal.) of 1983 filed by the department, there is a mistake apparent on record inasmuch as the provision of Sub-section (5) of Section 37 of the Income-tax Act, 1961 ('the Act') concerning the guest-house expenses have not been considered while disposing of the appeal by the revenue. It is stated that the above sub-section was inserted by the Finance Act, 1983, with retrospective effect from 1-4-1979, as relied on by the revenue. It is prayed that the above order of the Tribunal may be rectified in view of the retrospective application of the above section for the assessment year 1979-80. The assessment year in question is 1979-80.

2. From the order of the ITO, it is seen that the assessee followed the mercantile method of accounting and the accounting period ended on 31-10-1978. The assessment order was made under Section 143(3) of the Act on 30-8-1982. In this order, the ITO disallowed 50 per cent of the claim of the assessee relating to guest-house expenditure under Section 37(4) for Rs. 10,798. The assessee took up the matter before the Commissioner, who deleted the addition following the ratio of the decision of the Hon'ble Madras High Court in the case of CIT v. Aruna Sugars Ltd. [1980] 123 1TR 619. The departmental appeal was that the Commissioner (Appeals) erred in law and on the facts in making the above deletion on account of guest-house expenses. The Tribunal heard both the sides noting that before the Commissioner (Appeals), it was pointed out that the accommodation was only for the directors and the employees of the assessee. He gave a finding that the mill of the assessee is located in the remote rural area and the rest house was maintained, if not exclusively, for the use of the directors or the head office staff of the assessee. The findings of the Commissioner (Appeals) have not been controverted by the revenue. The Tribunal on the facts available, was of the opinion that the Commissioner (Appeals) was justified in allowing the claim of the assessee. Thereafter, the revenue has filed this present miscellaneous application seeking for modification of the Tribunal's order having regard to the retrospective effect of Sub-section (5) of Section 37 as mentioned earlier. It is urged on behalf of the revenue that the rectification may accordingly be made as the relevant provision has been made effective with effect from the assessment year 1979-80.

3. The assessee's learned Counsel submits that there is no merits in the present miscellaneous application by the revenue, stating that this point raised by the department had not been raised at the time of hearing of the appeals itself, as otherwise, the assessee would have met the point earlier. It is stated that the narration given in the order of the Tribunal will testify that. It is also being urged that the Tribunal has given a finding that the findings given by the Commissioner (Appeals) in his order, had not been controverted by the revenue. It is urged, therefore, on the facts of the case, the claim of the revenue in the present miscellaneous application cannot be accepted. It is also urged that it has to be kept in mind that the accounting year of the assessee ended on 31-10-1978, whereas Sub-section (5) of Section 37 was made effective from 1-4-1979 and, therefore, even on that score, the rectification cannot be made as there was no mistake apparent on record as claimed. It is argued that it is not the assessment that has to be taken into account, but details as provided in the sub-sections concerned.

4. We have heard both the sides and have perused the order of the authorities below and also that of the Tribunal dated 24-5-1984. The case of the revenue in the present miscellaneous application is that there was an mistake apparent on record in view of the retrospective application of Sub-section (5) of Section 37. True, in such a situation, the provision of Sub-section (5) of Section 37 would have to be deemed to have come into force from 1-4-1979 and would have to be deemed to have been included in the Act itself for all purposes, in view of the decision of the Hon'ble Supreme Court in the case of M.K.Venkatachalam, ITO v. Bombay Dyeing & Mfg. Co. Ltd. [1958] 34 ITR 143.

In fact, the ITO could have taken resort to Section 154 of the Act in such a situation, provided the orders of rectification were passed within the prescribed period as held by the Hon'ble Supreme Court in the case of IAC v. V.M. Ravi Namboodiripad [1974] 96 ITR 73.

5. If there is any error in the order, the authorities concerned would be obliged to take rectificatory steps to correct the order as per the provisions concerned and no one would get a vested right in an erroneous order. In a slightly different situation, the Hon'ble Gauhati High Court in the case of CIT v. Smt. Eva Raha [1980] 121 ITR 293 held on the facts of that case that the Tribunal had the power to rectify its final order. This decision was also valid by the Hon'ble Calcutta High Court in the case of CIT v. Kelvin Jute Co. Ltd. [1980] 126 ITR 679. Similar view was expressed by the Hon'ble Madras High Court in the case of Mrs. K.T.M.S. Umma Salma v. CIT [1983] 144 ITR 890 and by the Hon'ble Andhra Pradesh High Court in the case of CIT v. R.M. & Co.

[1984] 148 ITR 353.

6. But we have to take into account the contentions made on behalf of the assessee to the effect that the accounting year of the assessee ended on 31-10-1978, that is, well before 1-4-1979, on which date the above Sub-section was made effective, Section 37 itself speaks and deals with expenditure incurred. Expenditure would mean spending or paying out of money. Section 37 implies that the word 'expenditure' would have to be genuine and that it should be lawful. Sub-section (5) of Section 37 has been introduced by the Finance Act, 1983, with retrospective effect from 1-4-1979, for the purpose of removal of doubts. It was declared that any accommodation maintained by the assessee to any person including an employee or directors of such assessees, on tour or visit to a place and such accommodation is situated, is accommodation in the nature of guest-house as provided under Sub-section (4). But Sub-section (4) itself provides that no allowance shall be made in respect of any expenditure incurred by the assessee after 28-2-1970, on the maintenance of residential accommodation in the nature of a guest-house. Thus, from a mere reading of the Sub-section, it is clear that no allowance shall be made in respect of expenditure incurred on account of guest-house, after the date specified in the sub-sections. But as indicated earlier, Sub-section (5) was made operative with effect from 1-4-1979, i.e., after the close of the accounts of the assessee.

7. In our opinion, Sub-section (5) is in the nature of an Explanation to Sub-section (3), which has been made operative from 1-4-1979. On the facts of the present case before us, the above Sub-section (5) would not be applicable although the relevant assessment year was 1979-80, in view of our discussions made in the preceding paragraphs. In the circumstances, we do not find any merit in the miscellaneous application of the revenue in the present case. Even otherwise, the claim of the revenue that the above Sub-section (5) would be applicable to the assessment year 1979-80 onwards, would be debatable issue on the facts of the present case before us as discussed. In any view of the matter, we find no mistake which calls for rectification in the present case.

8. In the result, the miscellaneous application by the revenue is rejected.

1. I am afraid I have not been able to persuade myself to agree with the conclusion arrived at by my learned brother. The relevant amendment in the law as made by the Finance Act, 1983 reads as under : (c) after Sub-section (4), the following sub-section shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1979, namely :-- (5) For the removal of doubts, it is hereby declared that any accommodation, by whatever name called, maintained, hired, 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).

2. A perusal of the same would show that the intention of the Legislature was that Sub-section (5) as quoted above was to be deemed to have been inserted with effect from 1-4-1979. In other words, the position would be the same as if this amendment had been made by the Finance Act, 1979, which would have received the President's assent sometime in March 1979. Clause (c) of Section 17 of the relevant Finance Bill is also to the same effect.

3. Now if this amendment had been made by the Finance Act, 1979, obviously, the amended law would have been applicable to the cases taken up during the relevant assessment year. The period of accounting would be immaterial because, in fact, according to Sub-section (3) of Section 37, any expenditure incurred by the assessee after 31-3-1964 for 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) was to be allowed only to the extent, and subject to such conditions, if any, as may be prescribed. In other words, the disallowance would have to be made in relation to the expenditure incurred in this behalf after 31-3-1964. Sub-section (5) was only introduced for the removal of doubts. In other words it was to overrule the interpretation placed on the earlier provisions by the Courts which the Legislature thought was not in accordance with its real intention. They wanted to say that the proper interpretation ought to be to the contrary and the same should be with effect from 1-4-1979, which means the assessment year 1979-80.

The day of incurring the expenditure, to my mind, would not be material.

4. Consequently, I am of the opinion that the miscellaneous application should be allowed, the expenditure incurred by the assessee on guesthouse should be allowed in accordance with Section 37(4) and the departmental appeal in this behalf should be accepted.

1. The appellate order in this case was passed on 24-5-1984, inter alia, confirming the order of the Commissioner (Appeals) in allowing the assessee's claim for deduction in respect of guest-house expenses amounting to Rs. 10,798. Both the Commissioner (Appeals) and the Tribunal had followed the Madras High Court's decision in Aruna Sugars Ltd.'s case (supra), where their Lordships have held that unless the guest-house is intended for use by a complete stranger other than its employees and directors, it cannot be called a guest-house within the meaning of Section 37(3). It is evident that the Tribunal has not taken note of the insertion of Sub-section (5) in Section 37 by the Finance Act, 1983, with retrospective effect from 1-4-1979.

2. Subsequently, Shri K. Subbarao, the senior authorised representative for the department, filed a miscellaneous application dated 10-10-1984 on 11-10-1984 on the ground that the order of the Tribunal suffered from an apparent mistake from the record inasmuch as the Tribunal has not considered the provisions of Sub-section (5) of Section 37, which were relied upon at the time of the hearing. The miscellaneous application thereafter came to be heard by the same Bench consisting of Shri H.S. Ahluwalia and Egbert Singh. Both the learned Members have agreed that in view of the retrospective insertion of Sub-section (5) in Section 37 by the Finance Act with retrospective effect from 1-4-1979, the sub-section will have to be treated as included in the Act, with effect from 1-4-1979, as held by the Supreme Court in the case of M.K. Venkatachalam (supra). However, while according to the learned Accountant Member, the assessee's previous year having ended on 31-10-1978 and Sub-section (5) having been inserted with effect from 1-4-1979, Sub-section (5) was not applicable in the case of the assessee, the learned Judicial Member is of the view that the insertion with effect from 1-4-1979 means that it is effective for the assessment year 1979-80 irrespective of the previous year. It is in these circumstances that the learned Members have stated their point of difference as under; Whether, Sub-section (5) inserted in Section 37 of the Income-tax Act, 1961 by the Finance Act, 1983, with retrospective effect from 1-4-1979 will apply to the present case The President having assigned the case under Section 255(4) of the Act to himself, the matter has come up for hearing before me as Third Member.

3. Shri S.K. Lahiri has appeared before me for the Department. He has strongly relied on the Delhi High Court decision in the case of Addl.

CIT v. Delhi Cloth & General Mills Co. Ltd. [1983] 144 ITR 275 and the Board's Circular No. 372 dated 8-12-1983 [146 ITR (St.) 9 at p. 34] for the proposition that the provisions as on 1st April of a year govern the particular assessment year irrespective of the previous year. It is pointed out that their Lordships of the Delhi High Court have followed three decisions of the Supreme Court in the cases of CIT v. Isthmian Steamship Lines [1951] 20 ITR 572, Karimtharuvi Tea Estate Ltd. v.State of Kerala [1966] 60 ITR 262 and Reliance Jute & Industries Ltd. v. Ltd. [1979] 120 ITR 921 in this regard. That the circular issued by the Board soon after the Finance Act was passed providing guidelines to its officers is or can be treated as an authoritative interpretation of the Amending Act finds support from the observations of the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597, the relevant observations being at p. 599.

4. Shri K.K. Jain, the learned Counsel for the assessee has, on the other hand, stated that Sub-section (5) of Section 37 was inserted with effect from 1-4-1979 and, therefore, the reasonable interpretation would be that any expenditure in the nature of guest-house expenses within the meaning of Sub-section (5) incurred after 1-4-1979, will be disallowed. For this purpose, Shri Jain has invited my attention to the Finance Act, which consists of a number of provisions which are effective from the date itself. The Finance Act, 1983 is reported in 142 ITR (St.) 13, the relevant provision is at p. 20. The Madras High Court decision in the case of CIT v. Best & Co. (P.) Ltd. [1979] 119 ITR 830 is relied upon for the purpose of showing that when a particular date is given, the provision is effective from that date and not for the assessment year commencing from that date. Alternatively, Shri Jain submits that, at best, the question whether Sub-section (5) is applicable to the assessment year 1979-80 is debatable and, therefore, as held by the Supreme Court in the case of T.S Balaram, ITO v. Volkart Bros. [1971] 82 ITR 50, the order cannot be rectified in proceedings taken by way of miscellaneous application under Section 254(2) of the Act.

5. I have heard the parties and have gone through the Finance Act carefully. It is true that Sub-section (2) of Section 1 of the Finance Act provides that "save as otherwise provided in this Act, Sections 2 to 43 and Section 59 shall be deemed to have come into force on the 1st day of April, 1983". The section by which Sub-section (5) has been inserted in Section 37 of the 1961 Act is Section 17 of the Finance Act and the particular provision thereunder reads as : (c) after Sub-section (4), the following sub-section 'shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1979, namely :-- (5) For the removal of doubts, it is hereby declared that any accommodation, by whatever name called, maintained, hired, 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), or 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).

There cannot, thus, be any dispute that Sub-section (5) is an exception to Sub-section (2) of Section 1 of the Finance Act inasmuch as it is deemed to have been inserted with effect from 1-4-1979 as distinct from 1-4-1983. In other words, the Legislature has clearly provided that Sub-section (5) stands inserted in Section 37, with effect from 1-4-1979.

6. The next question that arises for consideration is what is the implication of the insertion of Sub-section (5) in Section 37, with effect from 1-4-1979 As held by the Delhi High Court in the case of Delhi Cloth & General Mills Co. Ltd. (supra), which is based on the three decisions of the Supreme Court in the cases of Isthmian Steamship Lines (supra), Karimtharuvi Tea Estate Ltd. (supra) and Reliance Jute & Industries Ltd. (supra), the Act as amended on 1st April of a financial year is to apply to the assessment for that year even though the subject of the charge is the income of the previous year. No doubt, the Madras High Court has, in its decision in the case of Best & Co. (P.) Ltd. (supra) held, in connection with Clause (iii) inserted in Section 40(c) of the Act by the Finance Act, 1963 as from 1-3-1963, that the said provision thereunder was not linked to any particular assessment year as such or even the previous year and was to apply to the payments made after 1-3-1963. However, this is so because of the specific provision in the amending section itself. In the circumstances, I do not agree with the learned Counsel that the Madras High Court decision is not applicable to the facts of this case. The provision, as held by the Delhi High Court, is applicable to the assessment year 1979-80 irrespective of the period the previous year was covering.

7. The fact that the insertion of Sub-section (5) in Section 37, with effect from 1-4-1979 was not considered by the Tribunal in its appellate order is glaring and obvious. Once that mistake is apparent, the Tribunal is bound to rectify the mistake. It is not as if debatable issue is not considered originally never be considered through miscellaneous application. In any event, so far as this provision is concerned, having regard to the decisions of the Supreme Court, it is not even debatable. Section 37(5) is applicable to the year under appeal and, if so, it has got to be held that the guesthouse expenses amounting to Rs. 10,798 have to be disallowed. In this view of the matter, I agree with the learned Judicial Member.

8. The order will now go to the Bench for decision according to the majority view.


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