J.V. Gupta, J.
1. Income-tax References Nos. 50 to 52 of 1976 will be disposed of by this order as they arise out of one order of reference dated December 26, 1975 of the Income-tax Appellate Tribunal, Chandigarh Bench (hereinafter called 'the Tribunal'), in which the following questions of law have been referred for the opinion of this court under Section 256(1) of the I.T. Act (hereinafter called ' the Act').
'(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified, in law, in holding that the amount of Rs. 9,859 was chargeable to tax under Sub-section (1) of Section 41 of the Income-tax Act for the assessment year 1966-67 ?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified, in law, in holding that the amount of Rs. 12,103 was chargeable to tax under Sub-section (1) of Section 41 of the Income-tax Act for the assessment year 1969-70 ?
(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right, in law, in upholding the deletion of Rs. 29,237 by the Appellate Assistant Commissioner out of the guest house expenses for the assessment year 1969-70 ?'
2. As regards the first two questions, they stand concluded because of the view taken by this court in Income-tax References Nos. 29 and 30 of 1971 and 14 of 1972 (Commissioner of Income-tax v. Saraswati Industrial Syndicate Ltd.) decided on April 15, 1975, a copy each of which is annexs. I and F of the Income-tax References (reported as Appendix : See p. 366 infra). The said cases related to the assessment years 1964-65 and 1965-66 in which similar questions of law between the parties had arisen and were decided. In view of that decision, the learned counsel for the assessee conceded that the answer to the first two questions will be in the same terms, that is, against the assessee.
3. The facts relevant for the decision of question No. (iii) above are these. The assessee is a public limited company carrying on the business of manufacture and sale of sugar and machinery for sugar mills and other industries. For the assessment year 1969-70 of the assessee, the previous year ended on August 31, 1968. For that assessment year, the assessee claimed deductions in respect of, (i) Rs. 28,757 under the head 'Entertainment expenses', (ii) Rs. 58,474 under the head 'Guest house Expenses', and (iii) Rs. 3,000 under the head 'Sumptuary Allowance' (as paid to the managing director). The total of these three amounts came to Rs. 90,231. The break-up of Rs. 58,474, under the head 'Guest house Expenses', was as under:
(a) Rs. 34,082 for maintenance of three guest houses ; and
(b) Rs. 24,392 as expenses of the kitchen attached to one of the said guest houses, that is, the one at S. S. Mills.
4. Out of the break-up of Rs. 34,082 relating to the expenses on the maintenance of the three guest houses, the amount of Rs. 29,237 was allowed by the ITO as permissible under Section 37(3). Thus, out of the total amount of Rs. 90,231 under the abovesaid three heads, the amount of Rs. 60,994 was treated as pertaining to entertainment expenses under Section 37(2A)(i) of the Act by the ITO and he allowed the highest limit of Rs. 5,000 as a deduction.
5. On appeal, the AAC reduced the disallowance from Rs. 55,994 to Rs. 26,757, He supported his action on the two grounds, firstly, that there had been no disallowance in this respect in the past and, secondly, that there was no warrant for the ITO to treat a part of the guest house expenses as general entertainment expenses.
6. The revenue came up in appeal before the Tribunal. Vide order dated July 24, 1975, it held:
'There is no finding of the Income-tax Officer that any portion of the expenditure covered by the assessee's total claim of Rs. 90,231 was either not incurred or was not of the nature of allowable expenditure under Section 37(1). Again, Section 37(3) laid down no outside limit as to the allowable extent of expenditure incurred on maintenance of guest house in the case of a non-firm assessee. Thus, in view of full compliance of the conditions laid down in Rule 6C(3) of the Income-tax Rules, the full amount of Rs. 34,082 directly pertaining to maintenance of the three guest houses was clearly allowable.
So far as the expenses of kitchen attached to the S. S. Mills' guest house is concerned, the amount claimed by the assessee was Rs. 24,392. The details of this expenditure are not available on the record. The assessee contended that it covered the cost of normal food served to the assessee's directors, employees and customers and that no alcoholic drinks or any other lavish item was covered. It was also argued that in view of the prescribed register having been duly kept by the assessee, the said expenditure was clearly allowable under Section 37(3). Our attention was particularly drawn to the requirements of Rule 6C(3) that if any amount was paid by any employee or director of the assessee-company staying at the guest house, the particulars of such amount had to be entered in the prescribed register. From this, it was argued that the food expenses in question were covered by Section 37(3). We do not agree. Firstly, the particulars in the register maintained under Rule 6C(3) were not to cover such passengers at the guest house as were not directors or employees of the company. Thus, the question of any payment by the assessee's customers for the facility of lodging or boarding at the guest house is, in our view, irrelevant. Secondly, in any case, Rule 6C framed in exercise of the power under Section 37(3) could not be pressed into service for interpreting the scope of the expression ' on maintenance of any residential accommodation including any accommodation in the nature of a guest house' occurring in Section 37(3), Income-tax Act. Thus, it remains to be determined whether the kitchen or food expenses of Rs. 24,392 were of the nature of entertainment expenditure so as to attract the limit laid down in Section 37(2A). We have mentioned the absence of detailed material in this regard. We are of the opinion that as the allowability of the said expenditure under Section 37(1) is not disputed, it was for the department to prove its nature to be that of entertainment expenditure if the limit laid down in Section 37(2A) was intended to be applied. The department has failed to discharge the said onus.....'
7. The learned counsel for the revenue contended that the Tribunal was not justified, in law, in upholding the deletion of Rs. 24,392 as kitchen expenses by the AAC for the assessment year 1969-70, According to the learned counsel, it has been wrongly held by the Tribunal that the depart-ment had failed to discharge the onus of proving its nature to be that of an entertainment expenditure if the limit laid down in Section 37(2A) of the Act was intended to be applied. In support of his contention, he relied upon CIT v. Aruna Sugars Ltd. : 123ITR619(Mad) .
8. After hearing the learned counsel for the parties, we do not find any force in the contention raised on behalf of the revenue. In Aruna Sugars' case, it has been held that the meaning of the term 'guest house' as a place for reception of strangers has been accepted by the rule-making authority as the rules envisage employees staying in the premises. Accordingly employees cannot be treated as strangers. Hence, unless the guest house is intended for use by a complete stranger, it cannot be called a guest house which falls within the scope of Section 37(3) of the Act.
9. In Karnataka Exports Ltd. v. CIT : 121ITR154(KAR) , the Karnataka High Court has also taken the following view (p. 158):
'In our opinion, the use of the words 'any residential accommodation including any accommodation in the nature of a guest house' on the other hand clearly indicates that the allowances permitted under Sub-section (3) of Section 37 of the Act are not only in respect of residential accommodation provided but also any accommodation in the nature of a 'guest-house' because the meaning of the word 'guest-house' as given in the Concise Oxford Dictionary is 'superior boarding house' which necessarily includes providing of food and other facilities required for staying there. If the contention urged for the revenue is correct, the use of the words 'any accommodation in the nature of a guest house' in Sub-section (3) of Section 37 of the Act would be redundant, because the words 'residential accommodation' take in any residential accommodation provided even in a guest-house and separate mentioning of the words 'any accommodation' in the nature of a 'guesthouse' would have been unnecessary. Hence, it is not possible to accede to the submission made for the revenue that Sub-section (3) of Section 37 of the Act only covers any residential accommodation and not food and other amenities provided in a guest house.
This view also receives support from the understanding of the provision by the rule-making authority. Sub-rule (4) of Rule 6C provides that one of the items required to be entered in the register maintained under Sub-rule (3) is the amount, if any, paid by the guest towards his lodging and boarding in the guest house. Sub-rule (4) of Rule 6C of the Rules defines the words 'guest house' as including accommodation hired or reserved by the assessee in a hotel for a period exceeding one hundred and eighty-two days during the previous year. The above provisions also indicate that expenses towards food and other amenities are also included in the accommodation provided by an assessee in the nature of a guest house.'
10. The reasoning and the conclusions arrived at by the Karnataka High Court in the above said case seem to be quite logical and the learned counsel for the revenue has not been able to persuade us to take a different view. We, therefore, find overselves in respectful agreement with the said view, and that being so, we answer the question in the affirmative, that is, against the revenue.
11. The references stand answered accordingly with costs.