Case: Commissioner of Income Tax, A.P Vs. Sirpur Paper Mills Limited

1966, respectively. The assessee maintained a guest house at Sirpur during each of the relevant account years and spent the respective sums of Rs. 44, 428, Rs. 26, 428 and Rs. 17, 025 on maintenance of the guest house. The question arose in the assessments of the assessee for the assessment years 1965-66, 1966-67 and 1967-68, whether these amounts expended by the assessee on maintaining the guest house were allowable as permissible deductions in computing the business income of the assessee. The claim of the assessee for deduction in each of the assessment years was negatived on the ground that the expenditure was in the nature of entertainment expenditure and was hence not allowable. The Appellate Assistant Commissioner also took the same view in appeal and the matter had to be carried in further appeal to the Tribunal. Now, it appears that a similar claim for deduction in respect of expenditure incurred on maintenace of the guest house was made in the assessment year 1961-62, and it was allowed by the Tribunal in Income-tax Appeal No. 9252 of 1967-68, and on a reference made at the instance of the revenue, the High Court, in Reference Case No. 93 of 1970, had taken the view that this amount was not in the nature of entertainment expenditure so as to fall within the ambit of the proviso to section 10(2)(xv) of the Indian Income-tax Act, 1922, and was, therefore, allowable as a permissible deduction. The appeals before the Tribunal in respect of the assessment years 1965-66, 1966-67 and 1967-68, came to be heard after the decision given by it in the appeal in respect of the assessment year 1961-62, but before Reference Case No. 93 of 1970 came to be decided by the High Court. The Tribunal, following its earlier decision in the appeal in respect of the assessment year 1961-62, held in each of the appeals before it that the expenditure incurred by the assessee on the maintenance of the guest house was not in the nature of entertainment-expenditure and was hence allowable as admissible expenditure. The revenue, being aggrieved by the order of the Tribunal, applied for a reference in each assessment year and on the application of the revenue the following question of law was referred by the Tribunal for the opinion of the High Court" Whether, on the facts and in the circumstances of the case, the amount expended by the assessee for the maintenance of a guest house at Sirpur for each of the assessment years 1965-66, 1966-67 and 1967-68 is not entertainment expenditure? "58. The High Court, following its earlier decision in Reference Case No. 93 of 1970, agreed with the view taken by the Tribunal that the expenditure incurred on the maintenance of the guest house was an allowable revenue expenditure and pointed out that it was common ground between the parties that that decision covered the present case. The High Court accordingly answered this question in favour of the assessee and against the revenue. The revenue thereupon preferred Civil Appeals Nos. 885, 886 and 887 of 1974 with special leave obtained from this court.59. Now, it is obvious that the only question referred by the Tribunal in regard to the expenditure incurred by the assessee on the maintenance of the guest house was whether such expenditure is not entertainment expenditure. The question proceeded on the assumption that if it is not entertainment expenditure, it would be allowable as a permissible deduction. It was not argued by the revenue before the Tribunal that even if such expenditure is not entertainment expenditure, it would still not be allowable under section 37 sub-section(3), of the Income-tax Act, 1961, and hence no question, in general terms, was raised as to whether such expenditure was allowable as a deduction. But the question was limited only to the issue as to whether it was not entertainment expenditure. Even before the High Court the only question raised was whether the expenditure on maintenance of the guest house was not entertainment expenditure and it was common ground between the parties that the decision of the High Court in Reference Case No. 93 of 1970 in respect of the assessment year 1961-62 governed the determination of the question arising before the Tribunal. It is indeed surprising that the learned counsel appearing on behalf of the revenue did not urge before the Tribunal and even before the High Court that the decision of the High Court in Reference Case No. 93 of 1970 had no application in the present case because that was a decison given under the Indian Income-tax Act, 1922, whereas the question in the present case arose under the Income-tax Act, 1961, where the relevant provision was entirely different. We are constrained to observe that this was nothing but gross negligence on the part of the learned advocate who represented the revenue before the Tribunal and the High Court. When the only contention raised by the revenue before the Tribunal was whether the expenditure incurred by the assessee on the maintenance of the guest house was or was not entertainment expenditure and the revenue conceded before the High Court that the determination of the question before it was concluded by the decision given in Reference Case No. 93 of 1970, it is difficult to see how the revenue can now be permitted to argue that this expenditure was not allowable as a permissible deduction under section 37, sub-section (3), of the Income-tax Act, 1961. It is not an aspect of the question which can be decided as a pure point of law because section 37, sub-section (3), provides that the expenditure incurred on the maintenance of the guest house shall be allowed "only to the extent and subject to such conditions, if any, as may be prescribed " and it would, therefore, have to be ascertained whether and to what extent the conditions prescribed by the Rules were satisfied in the present case and that would involve investigation of new facts.60.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]Now, it is obvious that the only question referred by the Tribunal in regard to the expenditure incurred by the assessee on the maintenance of the guest house was whether such expenditure is not entertainment expenditure. The question proceeded on the assumption that if it is not entertainment expenditure, it would be allowable as a permissible deduction. It was not argued by the revenue before the Tribunal that even if such expenditure is not entertainment expenditure, it would still not be allowable under section 37tax Act, 1961, and hence no question, in general terms, was raised as to whether such expenditure was allowable as a deduction. But the question was limited only to the issue as to whether it was not entertainment expenditure. Even before the High Court the only question raised was whether the expenditure on maintenance of the guest house was not entertainment expenditure and it was common ground between the parties that the decision of the High Court in Reference Case No. 93 of 1970 in respect of the assessment yeargoverned the determination of the question arising before the Tribunal. It is indeed surprising that the learned counsel appearing on behalf of the revenue did not urge before the Tribunal and even before the High Court that the decision of the High Court in Reference Case No. 93 of 1970 had no application in the present case because that was a decison given under the IndianAct, 1922, whereas the question in the present case arose under theAct, 1961, where the relevant provision was entirely different. We are constrained to observe that this was nothing but gross negligence on the part of the learned advocate who represented the revenue before the Tribunal and the High Court. When the only contention raised by the revenue before the Tribunal was whether the expenditure incurred by the assessee on the maintenance of the guest house was or was not entertainment expenditure and the revenue conceded before the High Court that the determination of the question before it was concluded by the decision given in Reference Case No. 93 of 1970, it is difficult to see how the revenue can now be permitted to argue that this expenditure was not allowable as a permissible deduction under section 37,(3), of theAct, 1961. It is not an aspect of the question which can be decided as a pure point of law because section 37,(3), provides that the expenditure incurred on the maintenance of the guest house shall be allowed "only to the extent and subject to such conditions, if any, as may be prescribed " and it would, therefore, have to be ascertained whether and to what extent the conditions prescribed by the Rules were satisfied in the present case and that would involve investigation of newapproach was rightly rejected both by the Appellate Assistant Commissioner and the Tribunal. Apart from the fact that such an approach is not justified under any provision of the Act, the view that the compensation reduce the cost of the machinery itself is of doubtful validity. The damaged machinery and the compensation together represented the total asset. The question of reduction in written down value cannot, therefore,contention then was that the amount of Rs. 7, 83, 207 represents really the business profit. We do not find any force in this contention also. To attract section 14 read with the relevant provision the income must arise from profits and gains of business. Surely, it cannot be argued and in fairness we must say that it was not argued that to set fire to the assets and get compensation from the insurance company can be said to be part of the business of the assessee. The Tribunal, in our view, rightly rejected such an56 also cannot be said to be attracted obviously because it is not an income from any other source. The hard fact is that a part of the asset was damaged by the fire for which compensation was received. The compensation, therefore, replaces the asset and is a substitute for the part of the asset damaged. It could not be doubted that if machinery was sold damaged or destroyed, the compensation received would be asset and not profit or gain in the business. The same thing applies to a part of the machinery damaged or destroyed. Merely because the assessee saved some amount out of compensation by adopting a device to repair the machinery instead of substituting it, we fail to see how that would alter, the nature of the compensation received for the part of the asset damaged. The amount left in the hands of the assessee would continue still to be compensation representing the capital and not revenue receivedIt is now well settled that if any injury is inflicted on the trading, making so to say a hole in the assessees profits and damages recovered could not be reasonably or appropriately put to any other purpose than to fill that hole, then the damages recovered would properly enter his profit and loss account for the year. On the other hand, if the capital or the assets themselves are damaged and the assessee received damages, there could be no doubt that the damages so recovered could not be entered in the profit and loss account because the destruction would be an injury inflicted not on his trading but on the capital assets of his trade making a hole in them, and the damages would, therefore, be used only to fill that hole : vide Burmah Steamship Company v. Commissioner of Inland Revenue [1930] 16 TC 67, 71 (C Sess)