Hon'ble Aditya Nath Mittal, J.
1. This appeal relates to income-tax assessment of M/s Modi Zerox Ltd-a company incorporated under the Companies Act, 1956 for the assessment year 1995-96. The appeal was admitted on 25.7.2007, on the questions of law as follows:-
"1. Whether on the facts and in the circumstances of the case, ld. ITAT is legally justified in holding that the deduction U/s 80-I is to be given with respect to the profit of two profit making units namely M/s Xerographic undertaking and M/s Toner, Developer, and Photo Receptor Unit, ignoring third unit M/s Service Trading & other which had suffered losses and without considering the business and profit of M/s Modi Zerox Ltd as a whole and in totality?
2.Whether on the facts in the circumstances of the case, ld. ITAT was legally justified in deleting the addition of Rs. 9, 54, 000/- paid to M/s Silver Tone India Ltd., as a rent for hiring certain premises ignoring that premises was being used as a guest house and the payment was in contravention of provisions of Section 37 (4) read with Section 37 (5) of the I.T. Act?
3.Whether on the fact and in the circumstances of the case ld. ITAT is legally justified in deleting the disallowance U/s 40A (2) (B) of I.T. Act amounting to Rs. 20, 00, 000/- out of payment made to M/s Modi Rubber Ltd. because the assessee failed to prove that the expenditure was made for the purpose of business and was commercially expedient?
4.Whether on the facts and in the circumstances of the case, ld. ITAT is legally justified in confirming the order of CIT (A) allowing assessee's claim of lease rentals/charges of Rs. 1, 18, 59, 000/- even though the zerox machine and equipment had not passed on to the lessors being purchaser of the same goods the assessee company for certain period and the lease charges were not directly connected with the user of the goods.
5.Whether on the fact and in the circumstances of the case, ld. ITAT is legally justified in deletion of addition of Rs. 5, 00, 000/- U/s 37 (4) being expenses on food & beverages/maintenance of guest house?
6. Whether on the fact and in the circumstances of the case, ld. ITAT is legally justified in holding that the claim of deduction U/s 80HH is allowable with respect to the total profit of two profit making units only, ignoring the losses suffered in the third unit?"
2. Learned counsels appearing for the revenue and respondent-assessee agree, that question nos. 1, 2, 3, 4 and 6 are covered by the judgment of this Court between the same parties in CIT & another vs. Modi Xerox Ltd (ITA No. 30 of 2001) decided on 15.4.2010.
3. In this appeal, we are concerned with only question no. 5, 'as to whether on the fact and circumstances of the case ITAT was legally justified in deletion of addition of Rs. 5, 00, 000/- under Section 37 (4) being expenses on food & beverages/maintenance of guest house.'
4. The AO made an adhoc disallowance of Rs. 15 lacs on account of expenditure alleged to have been incurred on maintenance and other expenses of the guest house of the assessee-company at Rampur. The CIT (A) restricted this disallowance to Rs. 5 lacs. It was submitted before the Tribunal that while deciding similar issue in appeal for assessment years 1993-94 and 1994-95, the Tribunal had deleted similar adhoc disallowance, as there was no basis for the same. The Tribunal found that the facts on this ground during the year in question were the same. There was no good reason as to why the training centre could not be treated as a guest house, and consequently deleted the addition, giving rise to this question in appeal by the revenue.
5. It is submitted by Shri R.K. Upadhyay appearing for the revenue, that Section 37, in Chapter IV- Computation of Business Income, provides for allowance of expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid down or expended wholly and exclusively for the purposes of the business or profession, to be allowed in computing the income chargeable under the head 'profits and gains of business or profession'. Sub-section (4), relevant for the assessment year in question in this appeal, was omitted by the Finance Act, 1997 w.e.f. 1.4.1998. Prior to its omission, sub-section (4) as inserted by Finance Act, 1970 w.e.f. 1.4.1970, read as under:-
"(4) Notwithstanding anything contained in sub-section (1) or sub-section (3)-
(i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of February, 1970, on the maintenance of any residential accommodation in the nature of a guest-house (such residential accommodation being hereafter in this sub-section referred to as "guest-house);
(ii) in relation to the assessment year commencing on the 1st day of April, 1971, or any subsequent assessment year, no allowance shall be made in respect of depreciation of any building used as a guest-house or depreciation of any assets in a guest-house;
Provided that the aggregate of the expenditure referred to in clause (i) and the amount of any depreciation referred to in clause (ii) shall, for the purposes of this sub-section, be reduced by the amount, if any, received from persons using the guest-house:
Provided further that nothing in this sub-section shall apply in relation to any guest-house maintained as a holiday home if such guest-house-
(a) is maintained by an assessee who has throughout the previous year employed not less than one hundred whole-time employees in a business or profession carried on by him; and
(b) is intended for the exclusive use of such employees while on leave.
Explanation.- For the purposes of this sub-section,-
(i) residential accommodation in the nature of a guest-house shall include accommodation hired or reserved by the assessee in a hotel for a period exceeding one hundred and eight-two days during the previous year; and
(ii) the expenditure incurred on the maintenance of a guest-house shall, in a case where the residential accommodation has been hired by the assessee, include also the rent paid in respect of such accommodation.'"
6. Sub-section (4) of Section 37, as it existed for the assessment year in question, disallowed expenditure after 28th February, 1970 on the maintenance of any residential accommodation in nature of a guest house. In the present case, the respondent-assessee had hired hotels to be used as guest house. The second proviso to Section 37 (4) included accommodation hired or reserved by the assessee in a hotel for a period exceeding 182 days during the previous year, as residential accommodation in the nature of a guest house. The expenditure incurred on the maintenance of a guest house, where the residential accommodation was hired by the assessee, was made inclusive of the rent paid in respect of such accommodation.
7. We are required to consider the question, 'as to whether the expenses on food and beverages will be included in the expenditure incurred on the maintenance of the guest house'. The question of the period of hiring the hotel was not raised before the authorities nor is an issue before us.
8. The word 'maintenance' is defined in Websters New Collegiate Dictionary as (i) the act of maintaining; the state of being maintained, support; (ii) something that maintains; (iii) the upkeep of property or equipment; (iv) an officious or unlawful inter-meddling in a legal suit by assisting either party, which means to carry it on.
9. The AO considered the reply of the assessee dated 10.3.1998 in which it was stated that the assessee company had taken a premise on rent from M/s Silvertone India (P) Ltd and was using the same for the purposes of running a training centre for its employees. This premise was not being used in the nature of guest house. Previously different locations were used to incur substantial expenses. The assessee was now able to provide training to its employees adjacent to its plant at Rampur by running the training centre. In the assessment year 1990-91 the tax auditor had indicated the guest house expenses in the audit report. The payment was made to M/s Modipur Hotels (P) Ltd. for training and seminars. Out of Rs. 9, 31, 218/-, Rs. 2, 46, 698/- was claimed towards food and beverages and Rs. 6, 84, 520/- towards rent. This expenditure was disallowed under Section 37 (4). In appeal the disallowance was confirmed on the ground that the assessee had failed to adduce any evidence that the training programmes were being conducted in the said premises. M/s Modipur Hotels (P) Ltd. is a unit of M/s Silvertone India (P) Ltd.. On the same grounds as in the assessment year 1990-91 the payment made to M/s Silvertone India (P) Ltd was disallowed.
10. The CIT (A) observed that Explanation (ii) to Section 37 (4) clearly states that the expenditure incurred on the maintenance of a guest house, in a case where the residential accommodation has been hired by the assessee will include the rent paid in respect of such accommodation. The disallowance of Rs. 9, 54, 000/- under Section 37 (4) was thus confirmed. The CIT (A), however, restricted the disallowance on maintenance; food & beverages to Rs. 5 lacs.
11. The Income Tax Appellate Tribunal, considering the issue in paragraphs 26 to 28 while discussing the ground no. 8, observed as follows:-
"26. Ground No. 8 of the grounds of appeal is on the ground that CIT (A) has erred in confirming disallowance to the extent of Rs. 5 lakh under Section 37 (4) of the Act in respect of expenditure on food beverages etc. alleged to have been incurred at the training centre at Modipur Hotels.
27.The facts of this ground of appeal is that AO made an ad-hoc disallowance of Rs. 15 lakhs on account of expenditure alleged to have been incurred on maintenance and other expenses of the guest house at Rampur.
28. The CIT (Appeals), however, restricted this disallowance to Rs. 5 lacs. In this connection, ld. A.R. submitted that while deciding the similar issue in appeal for A. Years 1993-94 and 1994-95 in the case of the assessee itself, the Tribunal deleted similar adhoc disallowance as there was no basis for the same. The facts of this ground of appeal during the year under appeal remaining the same, we do not find any reason as to how the Training Centre should be treated as a Guest House. Following our decision in the earlier assessment year, this addition is deleted."
12. The ITAT did not discuss the point and has not given any reason much less the reasoning to support its conclusion, that the training centre should not have been treated as guest house. The AO had not accepted the reply given by the assessee-company dated 10.3.1998, that the payments were made to M/s Silvertone India (P) Ltd, of which the premises were used as training centre. The AO had observed that the assessee failed to adduce any evidence of the training programmes in the hotel, except the names of the alleged participants in the claimed training programmes. In the previous years, the payments made to M/s Modipur Hotels Ltd were disallowed. The AO found that M/s Modipur Hotels Ltd is a unit of M/s Silvertone India (P) Ltd. The disallowance in the previous years by the AO were confirmed by the CIT (A) in the year 1992-93.
13. The AO had in fact confirmed the disallowance of Rs. 9, 54, 000/- under Section 37 (4). The CIT (A) did not discuss this issue and restricted the disallowance to Rs. 5 lacs. In para 5.2 of its order dated 26.3.1999, the findings of the Tribunal are, therefore, errorneous and have been arrived at by misreading of record. The ITAT, was thus not legally justified in deleting the addition of Rs. 5, 00, 000/- under Section 37 (4) of the Act being expenses on food and beverages/maintenance of the guest house.
14. The question of law no. 5 is thus decided in favour of revenue and against the assessee. The Income Tax Appeal is allowed. The department is accordingly directed to make computation of Income Tax.
Dt.06.8.2012 RKP/