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2016 (10) TMI 172 - BOMBAY HIGH COURT

2016 (10) TMI 172 - BOMBAY HIGH COURT - [2016] 388 ITR 423 - Disallowance of certain advertisement expenses under Section 37 (3A) - whether the limit of ₹ 40,000/provided under Subsection (3A) ought to be increased proportionately.? - Held that:- The amendment introduced by the Finance Act in terms of the tenth schedule indicates two things. Firstly, any increase in the previous year (over twelve months) would result into a hardship or anamoly if the amounts or limits specified in the prov .....

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ive construction requiring alteration of the limit of ₹ 40,000/provided in Subsection (3A) in proportion to the increase in 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 Appl .....

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d. 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] against the Assessee and in favour of the Revenue - Treatment of the insurance claim received from the insurance company on account of loss of stocks-in-trade an .....

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f 1998 - Dated:- 30-9-2016 - M. S. Sanklecha And S. C. Gupte, JJ. Mr. Nishant Thakkar with Ms. Jasmin Amalsadvala and Mr. Rajesh Poojary, i/b. Mulla & Mulla, for the Applicant None for the Respondent JUDGMENT ( Per S. C. GUPTE, J. ) By this Reference under Section 256(1) of the Income Tax Act, 1961 ( Act ), the Income Tax Appellate Tribunal ( Tribunal ) has referred the following questions of law for our opinion: (a) Whether on the facts and in the circumstances of the case, the Appellate Tr .....

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count to meet with the statutory requirements of Ethyl Alcohol (Price Control) Amendment Order, 1971, was not an admissible deduction in working out the business income? (c) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the provisions of Section 40A(8) of the Income Tax Act, 1961 also applied to the accounts of S.K. Somaiya (IND) which were claimed to be current accounts paid in these accounts, the disallowance as laid down in sec .....

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ction 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 incom .....

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penditure incurred by an assessee on advertisement, publicity and sales promotion in India exceeds forty thousand rupees, so much of such aggregate expenditure as is equal to an amount calculated as provided hereunder shall not be allowed as a deduction, namely: (i) Where such aggregate expenditure does not exceed 4 per cent of the turnover, or as the case may be, gross receipts of the business or profession 10 per cent of the adjusted expenditure; (ii) Where such aggregate expenditure exceeds & .....

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ange of its previous year. The ITO allowed the application with the result that the previous year of the Assessee got changed from 1st June, 1978 to 31st May, 1979 (12 months) to 1st June, 1978 to 31st October, 1979 (17 months). (iv) The Assessee inter alia claimed before the ITO in the course of the assessment proceedings that the limit for the purpose of disallowance under Section 37 (3A) of the Act should be increased proportionately from ₹ 40,000/to ₹ 56,660/, taking into account .....

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ture in excess over the limit of ₹ 40,000/, resulting in disallowance of ₹ 4,522/. (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 Se .....

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n (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 applicable to him except with the consent of the ITO and upon such conditions as the ITO may think fit to impose. In this case, admittedly, the ITO has permitted the Assessee to vary the previous year from the period of 12 .....

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g any particular provision of a statute, one must look at the other provisions in the statute for harmonious construction. He submits that if the statute contains any ambiguity, such ambiguity must be resolved in favour of the Assessee. He argues that it is permissible to take into account not only circulars issued by the Central Board of Direct Taxes, but also subsequent amendments in law for the purposes of such interpretation. Relying on the amendments introduced in the law subsequently in th .....

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6 ITR 323, CIT v/s. Gwalior Rayon Silk Manufacturing Co. 196 ITR 149, CIT v/s. Shri Ram Honda Power Equip 289 ITR 475in support of his submissions. 6 A plain reading of Subsection (3A) of Section 37 of the Act makes it clear that it refers to the aggregate expenditure incurred by the Assessee on advertisement, publicity and sales promotion. If the previous year of the Assessee consists of 17 months, it would refer to the aggregate expenditure incurred by the Assessee on these items over the peri .....

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lied 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 tra .....

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red by the Assessee by an amount of not less than 15% of the value so declared, the value of the consideration of the capital asset shall be taken to be its fair market value on the date of its transfer. The question before the Court was, whether the condition for applicability of Subsection (2) was attracted in the case of an honest and bona fide transaction where the consideration received by the Assessee had been correctly declared by him. The argument of the Revenue was that the Subsection s .....

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t observed that the task of interpretation of a statutory enactment was not a mechanical task; it was an attempt to discover the intent of the legislature from the language used by it; and the language being at best an imperfect instrument for expression of human thought, the statute would have to be interpreted having regard to the purpose or object which the statute sought to accomplish. If a strictly literal interpretation of the statute led to a manifestly unreasonable and absurd consequence .....

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extreme cases, which would arise when the plain meaning of the provision is so clear as not to admit of any other interpretation, the Court cannot apply this rule of reasonable interpretation. The observations of the Supreme Court are quoted hereinbelow: Now, 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 constr .....

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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 which is not there; indeed, it would amount t .....

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must always be remembered that language is at best an imperfect instrument for the expression of human thoughts and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to the drafted with divine prescience and perfect clarity . We can do no better than repeat the famous words of judge Learned Hand when he said: .... it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of .....

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setting in which it occurs. We cannot ignore the context and the collocation of the provisions in which s.52, subs. (2), appears because, as pointed out by judge Learned Hand in the most felicitous language: .... the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create. Keeping these observations in mind we may now approa .....

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re 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 interpretat .....

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to the statutory provision a condition which, though not expressed, is implicit as constituting the basic assumption underlying the statutory provision. We think that, having regard to this wellrecognized rule of interpretation, a fair and reasonable construction of s.52, subs. (2), would be read into it a condition that it would apply only where the consideration for the transfer is understated or, in other words, the assessee has actually received a larger consideration for the transfer than w .....

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of ₹ 40,000/provided under Subsection (3A) ought to be increased proportionately. The definition of previous year (Section 3, as then applicable) makes it clear that ordinarily a previous year implies a period of 12 months preceding the assessment year. The only exceptions are to be found in cases of newly set up businesses or professions and alterations made in the previous year with the permission of the ITO or according to the directions of the Board. In the case of a newly set up busin .....

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the period of previous year could be different from 12 months. It may be more than 12 months or less than 12 months. Barring these exceptions in all cases, the previous year would be a period of 12 months. The limit of ₹ 40,000/provided in Subsection (3A) can be said to be fixed keeping this ordinary period of 12 months in mind. In the exceptional cases referred to above, if the previous year is altered, either reduced or extended from the period of 12 months, the limit of ₹ 40,000/w .....

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he 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 su .....

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ve seen above, may mean 12 months (which is ordinarily the case) or anything between one day to less than two years (which is an exceptional case, as we have noted above). Can it possibly be suggested that the measure of the limit, namely, ₹ 40,000/, should be the same whether the previous year includes one month or twenty three months. The answer is obviously in the negative. Absurd consequences would follow, if it were in the positive, which cannot be said to be intended by the legislatu .....

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n 12 months. 10 This interpretation also accords with the rest of the Subsections introduced in Section 37 of the Act by the subject amendment. For example, Explanation I to Subsection (3B) (which gives relief in respect of advertisement in small newspapers) requires the average circulation of the newspaper to be calculated for the year in which the advertisements have been published. The Explanation provides that an advertisement shall be taken to be an advertisement in a small newspaper if the .....

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ed 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 I .....

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n (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 could be taken in one assessment, even so, in view of the clear provisions of Section 9, the chargeable income of the property would be only of 12 months and not 18 months. His contention was that under Section 9, the bona fide annual value of the property was the measure of the assessment and that value was the reasona .....

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can be only one previous year to a given year of assessment, the full period from the end of the previous year for the preceding year's assessment to the end of the new accounting date has to be taken into consideration. What all S.9 enjoins is that the bona fide annual value of the property shall be the measure of the assessment. The bona fide annual value or in other words the reasonably expected letting value for an year of 12 months being the standard for the accounting year of 12 month .....

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th of that year which is of 18 months. The method adopted cannot be said to be inconsistent with the provisions S.9. Thus, on the question referred to, we are of the view that when the ITO had allowed the change in the previous year as requested on condition that the income of whole period shall be brought to tax in one year and the previous year, as a result, for the accounting year in question, covered a period of more than 12 months, the total income for that period was chargeable to tax at t .....

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ths 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 .....

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hat though the expression previous year substantially meant an accounting year comprising of a period of 12 months and usually corresponding to a year preceding the year of assessment, the length of the previous year may not necessarily be of 12 calender months in each case. The court held that once the assessee exercises an option by choosing a previous year, the meaning of the expression previous year as applicable to him is determined and cannot be changed except with the consent of the ITO a .....

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of the revenue inasmuch as had the change been sanctioned on the footing that the previous year of the assessee in relation to the current assessment year would be the period of 12 months from 1 April to 31 March, the income of the preceding 9 months, i.e. from 1 July to 31 March, would have escaped taxation altogether. The assessee's alternative submission that the ITO could accord sanction to the change on the basis that the income for 21 months should be assessed at the rate applicable t .....

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rdance with the intended purpose of the legislature. Section 3 of the Act, which defines previous year substituted by the Direct Tax Laws (Amendment) Act, 1987 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 .....

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ous 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 the tenth schedule in the Act to make special provisions for such transitional previous year, which exceeds twelve months. The schedule inter alia .....

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e proportionately increased (i.e. in proportion to the increase in the year). Explanatory Notes to these provisions of the Direct Tax Law (Amendment) Act, 1987, contained in Circular No.549 dated 31st October, 1989 of C.B.D.T., explained that these amendments were made to remove hardships and anamolies which would result in respect of assessees whose transitional previous year would exceed twelve months. The amendment introduced by the Finance Act in terms of the tenth schedule indicates two thi .....

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e in relation to the interpretation of Section 37 (3A) of the Act, would require us to depart from a literal construction and adopt a reasonable and purposive construction requiring alteration of the limit of ₹ 40,000/provided in Subsection (3A) in proportion to the increase in 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. 15 The Supreme .....

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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, answ .....

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