TMI Blog1981 (8) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not cover the borrowals on which the assessee had paid interest. The ITO accordingly completed the assessment on the total income which included this addition. 3.The assessee appealed to the Commr. (Appeals), who was also of the view that the provisions of s.40A(8) was applicable to the asst.yr.1976-77 onwards and, therefore, the addition had to be sustained. He also agreed with the second reason that the security given for the loan, not being the property belonging to the assessee, the borrowals could not be considered to be exempt either. 4. In the further appeal before us, it was contended on behalf of the assessee that taking the legislative practice into account and also considering the introduction of several amendments in the IT Act, which referred to specific dates from which the amendments took effect, the provisions of s.40A(8) disallowing expenditure by way of interest, which came into effect from 1st April 1976, should be construed to apply only to such expenditure incurred after that date. It was submitted that in the circumstances since the previous year of the assessee, being the year ended 30th April, 1975, fell before the crucial date, the expenditure incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trust was created on behalf of the depositors, it is obvious that the assessee had not pledged any assets of its own. The Explanation to s.40A(8) defines a deposit as including any money borrowed by not including any amount received as a loan, which is secured by creation of a mortgage or pledge of any assets of the company. Since the undisputed position is that the assets of the assessee-company were not pledged, the loans in question cannot be excluded from the definition of "deposit" in the Explanation to s.40A(8). 7. The other argument of the assessee is that the word "expenditure" should be taken to refer the next expenditure after setting off interest income. This argument goes against the meaning of the word as commonly understood. For instance, in " A Dictionary for Accountants by Eric L. Kohler", the word "expenditure" is defined to mean- "the incurring of a liability, the payment of cash, or the transfer of property for the purpose of acquiring an asset or service or settling a loss. The amount of cash or property paid or to be paid for a service rendered, or an asset purchased." These indicate in the absence of a definition in the Act that expenditure means the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the effectiveness of the monetary policy is not blurred by unrestricted growth of deposits in the non-banking sector, the bill seeks to provide that 15 per cent, of the interest paid by non-banking non-financial companies on deposits received from the public will be disallowed in computing their taxable income". This clause was passed and became part of the Finance Act, 1975 which received the assent of the President on 12th May, 1975.The contention of the assessee is that though the section was inserted in the IT Act w.e.f. 1st April, 1976, even in 1975 the intention was that it should apply to expenditure incurred prospectively after 1st April, 1976 so as to put the assessee on notice and arrange their affairs accordingly. The contention of the Revenue on the other hand is that the amendment became part of the Income-tax Law applicable to the asst. yr. 1976-77 and, therefore, the date when the expenditure was incurred was irrelevant. 9. To appreciate these contentions, we should keep in mind the history of legislative practice especially with regard to the IT Act. It may be recalled that at the inception income-tax was a charge on the income of the assessment year itself. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year. However, binding that the finance Act may not be passed before the assessment year begins, the modern practice is to declare the rate of tax chargeable for the next subsequent assessment year by the finance Act of the previous year. This practice puts the assessees on notice as to the chargeability of their income for the next assessment year and is, therefore, equitable as it allows the assessees to so arrange their affairs after knowing the impact of the finance Act on the income of the previous year even when the income is earned. The result is that instead of the past practice of levying a charge on income already earned, the legislative practice is to specify the charge on the income even before it is earned. 11. Apart from this practice, we have also to bear in mind the difference between the charging sections and the other provisions of the IT Act. As noted above, the charge is in the IT Act and the rate at which the levy is to be made is declared by the respective finance Act. At the same time, there may be amendments of the provisions of the IT Act both regarding the charging provisions as well as the machinery provisions. It has been held by the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted out that such retrospective amendment of the law relevant to the assessment year being applied to the income already accrued in the previous year has been upheld by courts. But we find from a perusal of those cases that there was specific intention to charge income already accrued. In the case of Chatturam Horilram Ltd. vs. CIT 27 ITR 709, the Bihar Regulation IV of 1943 was promulgated retrospectively from 30th March, 1939 for Chota Nagpur. In the case of Maharajah of Pithapuram vs. CIT, Madras 13 ITR 221,sec.16(1)(c)amended by Income-tax Amendment Act,1939 specifically included income earned by another person as the income of the assessee. The case of CIT vs. India Cements Ltd. (1975) 98 ITR 69 (Mad) referred to statutory deduction of depreciation which is an allowance out of the income and does not create income by disallowance of expenditure as in the present case. That case also referred to overpayments to the managing agent and by reference to an agreement which provided for deducting the statutory deduction and does not refer to any direct retrospective charge of the IT Act itself. Again the case of R. Dalmia vs. CIT (1972) 84 ITR 661 (Del) referred to the amendment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffecting the assessees whose previous year is a financial year and who have been put on guard by an amendment earlier to the assessment year so as to arrange their affairs and avoid the impost. "An intention to produce an unreasonable result", said Danckwerts L.J. in Artemiou vs. Procopiou (1966)1 QB 878 (CA) "is not to be imputed to a statute if there is some other construction available." Where to apply words literally would "defeat the obvious intention of the legislation and produce a wholly unreasonable result" we must "do some violence to the words" and so achieve that obvious intention and produce a rational construction (Per Lord Reid in Luke vs. IRC (1963) AC 557 : (1964) 54 ITR 692 (House of Lords), 709 (EL). These words have been quoted with approval by the Supreme Court in the case of CIT vs. National Taj Traders (1980) 14 CTR (SC) 348 : (1980) 121 ITR 535 (SC). In the case of Seaford Court Estates Ltd. vs. Asher (1949-2 KB 481)it was observed: "Whenever a statute comes up for consideration it must be remembered that it is not within human powers to foresee that manifold sets of facts which may arise, and, even if it were, it is not possible to provide for them in ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .f. 1st April, 1972 and specifically applied to the previous year 1st April, 1972 by stating the limits of the deduction of salaries paid to employees. though these sub-sections are similar to the sub-section we are considering, there is no ambiguity in those sub-sections and they clearly refer to the previous year for different assessee unlike sub-s(8). Sub-s. (2) of s. 40A, which was introduced w.e.f. 1st April 1968 by Finance Act, 1968 itself creates no artificial income because it only enables the disallowance of expenditure which is unrelated to business Sec. 35A and Co-operate w.e.f. specific dates which are prospective in nature being allowances to be given in respect of expenditure incurred thereafter with reference to patent rights copy rights, and export market development. Sec. 35CC is also prospective in nature since it refers to an expenditure to be incurred with the approval of the prescribed authority for being entitled to rural development allowance. 35D and E also provided for extra deduction for expenditure incurred after specified dates, amortisation of preliminary expenses and prospecting for certain minerals. Sec. 37 (2A) also disallows advertisement expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st could not be intended to take effect from a date prior to the financial year 1976-77 19. From the foregoing discussion, we conclude that- (a) The literal construction of section 6 of the Finance Act,1975 with reference to the date of its coming into force leads to absurd and anomalous results; (b) there is nothing express in the section to state that the expenditure disallowed under that section would be deemed to be the income of the previous year; (c) the modern purposive approach is to consider the policy behind the enactment; (d) to avoid wholly unreasonable result and to actualise obvious intentions of the legislation, the proper construction of the section is to read it as enabling the disallowance of the expenditure incurred after 1st April, 1976; (e) this construction is consistent with the provisions of the Act and the definition of "interest" (f) two constructions of the section being possible, we are bound to adopt that which is in favour of the assessee. In the circumstances, we are of the considered opinion that the provisions of s. 40A(8) could be applied only for disallowance of interest incurred after 1st April, 1976 and since in the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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