TMI Blog2016 (10) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year. Such interpretation accords with the object and purpose of the provision and does away with the anamoly or hardship without really doing any violence to the words of the provision. We hold that there is a clear warrant for proportionately increasing the limit laid down in Section 37 (3A) as a result of increase in the previous year of the Applicant-Assessee from 12 months to 17 months. Question (a) is, accordingly, answered in the negative, i.e. in favour of the Applicant-tAssessee and against the Revenue. Disallowance of the amount deducted from the sale proceeds of alcohol and transferred out of the profit & loss account to storage fund for molasses and alcohol account under the Ethyl Alcohol (Price Control) Amendment Order, 1971. This question is already decided by a Division Bench of our Court in Somaiya Organo Chemicals Ltd. vs. CIT (1993 (12) TMI 3 - BOMBAY High Court) in favour of the Assessee Disallowance of interest paid to the current account of the director under Section 40A(8) - Held that:- This question, it is accepted by the Assessee, is decided by our Court in CIT vs. Jhaveri Bros. & Co. Pvt.Ltd. [1994 (11) TMI 56 - BOMBAY High Court] ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived from the insurance company on account of loss of stocksintrade and other goods due to fire was the assessee's business income liable to tax? 2 This Reference relates to Assessment Year 1980-81. Re: Question (a): 3 Question (a) relates to disallowance of certain advertisement expenses under Section 37 (3A) of the Act. The short controversy may be stated thus: (i) Section 37 of the Act generally deals with expenditure laid out or incurred wholly and exclusively for the purpose of business or profession which is allowed as a deduction while computing income chargeable to tax under the head 'profit and gains of business or profession'. Expenses incurred by an assessee on advertisement, publicity and sales promotion would accordingly be allowed as deduction whilst computing income under this Section. (ii) Section 37 was amended in the previous year relevant to A. Y. 198081 inter alia by introduction of Subsection (3A) therein, which provided for a limit of expenditure on advertisement etc. beyond which portions of such expenditure, were to be disallowed as provided therein. Subsection 3A reads as under: Subsection 3A: Notwithstanding anythin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 522/. (vi) In Appeal, the Commissioner of Income Tax (Appeals) [ CIT(A) ] held that there was no provision in the Act for proportionate increase of allowances, when the previous year was increased to more than 12 months. On that basis, the Assessee's appeal was rejected by CIT(A). (vii) The matter was carried by the Assessee in appeal before the Tribunal. The Tribunal rejected the appeal, holding that Section 37 (3A), as it then stood, spoke of the expenses on advertisement, publicity and sales promotion exceeding ₹ 40,000/for any previous year; that it was irrelevant whether the previous year consisted of only one month or more than 12 months. 4 At the outset, it is important to note that the definition of previous year , as applicable at the relevant time, inter alia provides for different previous years in terms of clauses (a) to (g) of Subsection (1) of Section 3 of the Act. Subsection (4) inter alia provides for a case of change or variation of the previous year. Under this Subsection, the Assessee, having once been assessed on the basis of, or exercised his option of choosing, his previous year, is not entitled to vary the meaning of the previous year as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the formula for working out the disallowance is to be applied on that basis, there is no reason why the limit of ₹ 40,000/should not be proportionately increased to cover the entire period of 17 months. What is necessary to consider, however, is whether such interpretation, which accords with plain reason, ought to be applied in the present case, particularly considering that we are concerned here with a taxing statute. 7 In K. P. Varghese (supra), the Supreme Court was concerned with Section 52 of the Income Tax Act, as it then applied, which provided for fair market value of a capital asset to be taken into account for computing capital gain, in cases of understatement of consideration. Under Subsection (1), where a person acquired a capital asset from an Assessee and the ITO had reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the Assessee for payment of capital gains tax, the consideration for such transfer could be taken to be the fair market value of the capital asset as on the date of the transfer. Subsection (2) had a deeming provision which provided that if in the opinion of the ITO, the fair market val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, on these provisions the question arises as to what is the true interpretation of s.52 subs.( 2). The argument of the revenue was, and this argument found favour with the majority judges of the Full Bench, that on a plain and natural construction of the language of s.52, subs.( 2), the only condition for attracting the applicability of that provision was that the fair market value of the capital asset transferred by the assessee as on the date of the transfer exceeded the full value of the consideration declared by the assessee in respect of the transfer by an amount of not less than 15% of the value so declared. Once the ITO is satisfied that this condition exists, can proceed to invoke the provision in s. 52, subs.( 2), and take the fair market value of the capital asset transferred by the assessee as on the date of the transfer as representing the full value of the consideration for the transfer of the capital asset and complete the capital gains on that basis. No more is necessary to be proved, contended the revenue. To introduce any further condition such as understatement of consideration in respect of the transfer would be to read into the statutory provision something whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to fix its meaning. It is a wellrecognised rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. There are many situations where the construction suggested on behalf of the revenue would lead to a wholly unreasonable result which could never have been intended by the Legislature . .... We must, therefore, eschew literalness in the interpretation of s.52, subs.( 2) and try to arrive at an interpretation which avoids this absurdity and mischief and makes the provision rational and sensible, unless of course, our hands are tied and we cannot find any escape from the tyranny of the literal interpretation. It is now a wellsettled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction: Vide Luke v. IRC [1963] AC 557; [1964] 54 ITR 692. The court may also in such a case read into the statuto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar is altered, either reduced or extended from the period of 12 months, the limit of ₹ 40,000/will have to be proportionately reduced or extended, just as the aggregate expenditure would get reduced or extended, depending on the period over which it is to be applied. That would be in keeping with the object and purpose of the provision and any other interpretation would lead to unreasonable and absurd consequences as pointed out below. 9 The object and purpose of the limit provided in Subsection (3A) are to restrict wasteful expenditure on advertisement, publicity and sales promotion at the cost of the Exchequer. Explanatory Notes to the provisions relating to direct taxes in the Finance Act, 1978, to be found in Circular No.240 dated 17 May 1978, explain the object of introduction of Subsection (3A) in the following words: In order to place a curb on extravagant and specially wasteful expenditure on advertisement, publicity and sales promotion at the cost of the Exchequer, the Finance Act has inserted new Subsection (3A) in Section 37 of the Act for disallowance of a part of such expenditure in the computation of taxable profits. If that is the object or purpose of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs referred to therein in respect of new industrial undertakings. If any previous year exceeds 12 months, whatever increased expenditure made over such extended period would be entitled to such exemption and not expenditure relatable only to 12 months. 11 It is pertinent to note that such construction has been applied to the term previous year in the particular context of its length in quite a few cases. The High Court of Andhra Pradesh in Ardeshir H.J. Hormasji vs. Commissioner of Income Tax (1966) 59 ITR 0057 has considered the income of a period of 18 months being the total income for the previous year determined with reference to an assessment year in which the same was brought to tax. The assessee in that case had inter alia derived income from property. Section 9 of the Act, as applicable then, enjoined that the tax shall be payable by the assessee under the head Income from property in respect of the bona fide annual value of the property. The annual value of the property under subsection (2) was deemed to be the sum for which the property might reasonably be expected to let from year to year. The assessee contended that though in principle 18 months' income cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year in this case being of 18 months be expected letting value of the property for such year would be the measure of assessment of the income for that year. We are also of opinion that s.9 which provides for levy of tax not on actual but on the notional income of the property and fixes the measure as annual value cannot be constructed to mean that even though the previous year may be of a longer period, only 12 months notional income shall be taken into account for taxation. 12 The Gujarat High Court in the case of VXL India Ltd. vs. Income Tax Officer (1987) 66 CTR 0089 considered the condition laid down by the ITO for permitting the assessee to change his previous year from 12 months to 15 months, which required the assessee to claim deduction towards depreciation allowance, development rebate, etc. applicable only to the previous year. The Court held the condition imposed by the ITO to be arbitrary and against the spirit of the Act, resulting into denial of lawful deductions to the assessee. The Court held that these deductions had to be proportionately increased (i.e. in the proportion of 15 : 12). 13 In Esthuri Aswathaiah vs. Commissioner of Income Tax (1966) 60 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with effect from 1.4.1989, in effect did away with varying meanings of the term previous year and defined it as 'the financial year immediately preceding the assessment year'. In cases of newly set up business or profession, such previous year was to begin with the date of setting up of the business or profession, as the case may be, and end with the financial year. It, however, had a transitionary provision in relation to the assessment year commencing on the 1st day of April, 1989 (when the new Section came into force) for the assessees who had adopted different previous year/s for earlier assessment years. In case of such assessees, the previous year in relation to the assessment year commencing from 1.4.1989 was defined as the period which began with the date immediately following the last day of their relevant previous year/s relevant to the assessment year commencing on 1.4.1998 and ending on 31st March, 1999. This transitional provision led to the definite possibility of the previous year in case of some assessees exceeding the period of twelve months. The legislature realized the hardship that would follow as a sequitur to this extended period, and introduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n one interpretation. Following that judgment, a Division Bench of our Court (to which one of us, M.S. Sanklecha J, was a party) in CIT vs. Knight Frank (India) Pvt.Ltd. ITA 247/2014 decided on 16-8-2016 made use of subsequent amendment introduced in the Act to interpret a previously existing provision concerning service tax. In the present case, the interpretation adopted by us is in keeping with the amendment made by the Direct Tax Law (Amendment) Act, 1987. 16 In the light of the foregoing discussion, we hold that there is a clear warrant for proportionately increasing the limit laid down in Section 37 (3A) as a result of increase in the previous year of the ApplicantAssessee from 12 months to 17 months. Question (a) is, accordingly, answered in the negative, i.e. in favour of the ApplicantAssessee and against the Revenue. Re : Question (b) : 17 Question (2) deals with disallowance of the amount deducted from the sale proceeds of alcohol and transferred out of the profit loss account to storage fund for molasses and alcohol account under the Ethyl Alcohol (Price Control) Amendment Order, 1971. This question is already decided by a Division Bench of our Court in Somaiy ..... X X X X Extracts X X X X X X X X Extracts X X X X
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