TaxTMI 
TaxTMI 
2016 (10) TMI 172
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....es and Alcohol account 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 section 40A(B) of the Act was justified? (d) Whether on the facts and in the circumstances of the case, the Appellant Tribunal was justified in holding that the insurance claim of Rs. 4,17,472/received 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 ....
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....nths to 17 months; and that after increasing the limit thus and applying the provisions of Subsection 3A of the Act on the basis of such limit, no portion of the advertisement and publicity expenses should be disallowed under Section 37(3A) of the Act. (v) The Assessing Officer did not accept the contention of the Assessee. He applied the limit of Rs. 40,000/to the previous year consisting of 17 months and disallowed 10% of the expenditure in excess over the limit of Rs. 40,000/, resulting in disallowance of Rs. 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 Section 37 (3A), as it then stood, spoke of the expenses on advertisement, publicity and sales promotion exceeding Rs. 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, ....
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....g 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 period of 17 months. This is clear also from the formula of deduction laid down in Subsection (3A). If the aggregate expenditure over 17 months is to be taken into account or the formula for working out the disallowance is to be applied on that basis, there is no reason why the limit of Rs. 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 conside....
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....ts into doing of "some violence" to the language used by legislature. There is, of course, one caveat, and that is, if the Court's "hands are tied", it "cannot find any escape from the tyranny of literal interpretation". Only in such 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 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 th....
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....rity can ever obviate recourse to the setting in which all appear, and which all collectively create." Keeping these observations in mind we may now approach the construction of s. 52, subs. (2). The primary objection against the literal construction of s. 52, subs. (2), is that it leads to manifestly unreasonable and absurd consequences. It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision but it can certainly help 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 o....
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....ection 3 or permission by the ITO under Subsection (4) of Section 3, 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 Rs. 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 Rs. 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 Circul....
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....not exceed 15,000 copies. The number of copies mentioned as 15,000 will have to be reckoned clearly in relation to one year which would include 12 months. If it is less than one year, the number of copies will have to be proportionately reduced to consider the relevant average circulation. So also, exemption from any disallowance under Subsection (3A) provided in Subsection (3D) of the Act must be applied to the whole length of the previous years 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 i....
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....stion 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 the rates applicable to such total income. Even in relation to tax on property 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 de....
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....ce the length of the previous year is fixed and the income of the previous year is determined, that income must be charged at the rate specified in the Finance Act and in no other way. 14 There is another reason why the interpretation proposed by us can be said to be in accordance 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 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 wh....
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....tion 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 Court in the case of State of Bihar vs. S.K. Roy AIR 1966 SC 1995 has held that it is a well recognized principle that a subsequent legislation may be looked at whilst interpreting an earlier statute, where the earlier statute is capable of more than 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 negat....