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Issues: (i) Whether the assessee's deposit-linked incentive scheme was a prohibited money circulation scheme, so that the related expenditure was deemed not to have been incurred for the purpose of business and was not deductible under section 37 of the Income-tax Act, 1961; (ii) Whether the matter had to be remanded to the Tribunal in view of the retrospective insertion of the Explanation to section 37 of the Income-tax Act, 1961.
Issue (i): Whether the assessee's deposit-linked incentive scheme was a prohibited money circulation scheme, so that the related expenditure was deemed not to have been incurred for the purpose of business and was not deductible under section 37 of the Income-tax Act, 1961.
Analysis: The scheme required subscribers to make deposits, receive free goods of substantial value, and leave the balance with the assessee for a fixed period without interest. The Court held that the arrangement had the essential features of a money circulation scheme within the meaning of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, because it enabled the promoter to mobilise funds by offering quick or easy gain linked to enrolment on the prescribed terms. Once the scheme was treated as one prohibited by law, the Explanation to section 37 operated to deny deduction for expenditure incurred for that purpose.
Conclusion: The issue was answered in the affirmative against the assessee and in favour of the Revenue.
Issue (ii): Whether the matter had to be remanded to the Tribunal in view of the retrospective insertion of the Explanation to section 37 of the Income-tax Act, 1961.
Analysis: The question referred was wide enough to permit application of the amended law, and the retrospective amendment could be applied by the Court without sending the matter back to the Tribunal. The Court followed the settled principle that, where a law is amended with retrospective effect during the pendency of a reference, the High Court must decide the reference on the basis of the amended law if no fresh factual investigation is required.
Conclusion: The issue was answered against the assessee and in favour of the Revenue, and remand was refused.
Final Conclusion: The reference was disposed of on the footing that the expenditure connected with the scheme was not deductible, and the amended law was applied directly without remand.
Ratio Decidendi: Expenditure incurred in furtherance of a scheme that is prohibited by law is not deemed to be incurred for the purpose of business under section 37, and a retrospective amendment to the governing provision can be applied by the High Court in a pending reference if the referred question is broad enough and no fresh facts are required.
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