The Hindu Business Line : There's a new ghost in the guest house

THE consciousness of being deemed dead is next to the presumable unpleasantness of being so in reality, rues Herman Melville. "One feels like his own ghost unlawfully tenanting a defunct carcass." Not an unusual condition, that is, for many bygone provisions of our statute books which all too often find a gush of consciousness in live litigation. One such is the Britannia Industries Ltd case, on which the apex court pronounced its verdict on October 5.

The dispute was about Rs 31 lakh that the company had claimed as expenditure for the assessment year 1994-1995 towards rent, repairs, depreciation and maintenance of a guest house which was purportedly used in connection with the business of the company. The taxman had refused to allow the same as business expenditure, and the Calcutta High Court too decided in favour of the Department. Similar cases before other High Courts had been decided, but differently, and so it was necessary for the Supreme Court "to resolve the anomalous situation".

For starters, different provisions in the Income-Tax Act govern deduction for rent, rates, taxes, repairs, insurance and depreciation in respect of premises and buildings used for business or profession. Of specific relevance to the case is Section 37, which begins by saying that any expenditure (other than capital or personal expenses) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head `profits and gains of business or profession'.

What a benign provision, you may extol, because you don't see what used to be in the Section before 1997. For instance, there was Sub-section (4), which was inserted in the statute book with effect from April 1, 1970, dis-allowing any expenditure incurred on the maintenance of any residential accommodation in the nature of guest house; nor was any depreciation permissible on any building used as a guest house or of any assets in the guest house.

"Doubts still remained regarding the nature of accommodation used as a guest house by the companies. Sub-section (5) was included in Section 37 by the Finance Act in 1983 with effect from April 1, 1979," states the text of the judgment, explaining how the guest house got crowded.

A gloomy guest fits not a wedding feast, says Friedrich Schiller. So too are gloomy provisions about guest houses felt the Finance Minister, Mr P. Chidambaram, in 1997. "These artificial restrictions are out of tune with the concept of real income," he said in his 1997-98 Budget Speech, removing all the ceilings in Section 37 and allowing the expenditure actually incurred for the purpose.

Debi Prasad Pal argued for the company, drawing earlier decisions as support. Such as, the Bombay High Court order in the Chase Bright Steel Ltd case, wherein it was held that business expenditure, such as rent for premises used as a guest house and amounts spent on repairs to furniture used therein, could not be disallowed under Section 37(3) of the Act, inasmuch as the same had been allowed under Sections 30 and 31 of the Act.

Another case that Pal depended on was Century Spinning and Manufacturing Co Ltd, wherein it was held that if any expenditure or allowance was made allowable in other sections of the Act, the same could not be withdrawn or denied to the assessee because of the prohibitory provisions of Sub-section (4) of Section 37. The Gujarat High Court's decision in the Ahmedabad Manufacturing and Calico Printing Co Ltd case, the Kerala High Court's ruling in the Travancore Cements Ltd case, and the Madras High Court's verdict in the South India Viscose Ltd case were also pressed into service by Pal.

He argued that but for two decisions of the Calcutta High Court — Kesoram Industries and Cotton Mills Ltd and Upper Ganges Sugar Mills Ltd — "the uniform decision of most of the High Courts appears to be that since the expenditure incurred for rents, rates, taxes, repairs and insurance of buildings and premises and furniture used for the purposes of business or profession, have been specifically provided for in Sections 30, 31 and 32 of the Act benefits thereof could not be denied to the assessee under the relevant provisions of Section 37 of the Act."

For Revenue, Rajeev Dutta argued that the very two decisions Pal depicted as aberrations were correct interpretation of law in this case. He urged that it was the clear intention of the Legislature to exclude the benefit of deduction in respect of guest houses which were being run and maintained by companies in a lavish manner, as one learns from the text of the judgment.

Dutta too had a few precedents to bank upon, such as, the Rajasthan High Court's decision in the Instrumentation Ltd case; the Madras High Court's order in the Mathurantakam Cooperative Sugar Mills Ltd case; and the Calcutta High Court's decision in the Biswanath Tea Co Ltd case.

Justices B. P. Singh, Tarun Chatterjee and Altamas Kabir of the Supreme Court studied 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 Section 37.

"While the two expressions can be similarly interpreted, a distinction has been sought to be introduced for the purposes of Section 37 by specifying the nature of building to be a guest house," they observed.

"In our view, the intention of the Legislature appears to be clear and unambiguous and was intended 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," ruled the court.

When the language of a statute is clear and unambiguous, the courts are to interpret the same in its literal sense and not to give it a meaning that would cause violence to the provisions of the statute, reminded the apex court.

"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 Sections 31 and 32 would have been sufficient for the said purpose," explained the court, dismissing the company's appeal.

On the 1997 development, the court had this to say: "It is another matter that at a subsequent point of time, the Legislature felt it necessary to omit the said provisions, but they were in the statute book at the relevant point of time. The rigours of the same, in our view, cannot be avoided in the instant case."

Beauty is everywhere a welcome guest, said Johann Wolfgang von Goethe. As for tax, the opposite should hold true. It is another matter that eight years later the same Finance Minister saw it right to fill the guest- house with a different ghost, FBT. You can find many occurrences of `guest house' in the 40-page FAQ from the CBDT.

For instance, Q 93 asks, "Whether expenditure on all guest houses is liable to FBT or restricted to expenditure on holiday homes?" and pat comes the answer: "In terms of the provisions of clause (K) of sub-section (2) of Section 115WB, FBT is payable on expenditure incurred for the purposes of maintenance of any accommodation in the nature of guest house other than accommodation used for training purposes. Therefore, expenditure on all guest houses is liable to FBT irrespective of whether they are used as holiday homes or not."

In Hamlet, the Bard has the prince exclaim, `Alas, poor ghost!' What may be appropriate for the case, though, is, `Alas, poor guest house!'

Tailpiece

"What is so base about tax base?"

"Tax!"

Detaxification@TheHindu.co.in

D. Murali

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