1. These appeals are directed against the disallowance made under Section 37(3A) of the Income-tax Act, 1961 ('the Act').
2. The assessee is a registered firm. In the previous year ended 31-3-1979 relevant to the assessment year 1979-80, the assessee had incurred a sum of Rs. 1,72,922 under the head 'Advertisement expenses'.
This included a sum of Rs. 3,169 representing the value of two speakers supplied to mosques at Machilipatnam and Vijayawada. Under Section 37(1) only the expenditure wholly and exclusively laid out for the purposes of the business could be allowed to be deducted and expenditure of a personal nature has to be disallowed. Hence, this sum of Rs. 3,169 was disallowed. The balance of Rs. 1,72,753 was required to be considered for deduction. However, Section 37(3) states that notwithstanding anything contained in Section 37(1), any expenditure on advertisement shall be allowed only to the extent and subject to such conditions, if any, that may be prescribed. Rule 6B of the Income-tax Rules, 1962 ('the Rules') prescribes that the allowance in respect of the expenditure on advertisement shall not exceed in respect of articles intended for presentation, Rs. 50 on each such article. Out of the said sum of Rs. 1,72,753 a sum of Rs. 1,21,264 represented the value of presentation articles. But, since those articles were not individually in excess of Rs. 50, no disallowance was made under Section 37(3) read with Rule 6B. Section 37(3A) was introduced by the Finance Act, 1978, with effect from 1-4-1979 and it states that notwithstanding anything contained in Sub-section (1) but without prejudice to the provisions of Sub-section (2B) or Sub-section (3), where the aggregate expenditure on advertisement exceeds Rs. 40,000 such expenditure exceeding a percentage of the adjusted expenditure shall not be allowed as a deduction. The Explanation thereto defines 'adjusted expenditure' to mean the aggregate expenditure incurred by the assessee on advertisement, etc., as reduced by so much of such expenditure as is not allowed under Sub-section (1) and as further reduced by so much of such expenditure as is not allowed under Sub-section (2B) or Sub-section (3) or both. We may reduce it to a formula as follows :Adjusted expenditure : Aggregate expenditure minus [amount disallowed under Sub-section (1) plus amount disallowed Translated into figures in the present case, adjusted expenditure is equal to Rs. 1,72,922 minus Re. 0 (nil) [since no amount is disallowed under Sub-section (1), (2B) or (3)]. Accordingly, the appropriate percentage, namely, 12 1/2 per cent of this sum of Rs. 1,72,753 equivalent to Rs. 21,594 was disallowed under Section 37(3A).
Similarly, for the assessment year 1980-81, following the same process, a sum of Rs. 47,000 was disallowed out of the adjusted expenditure of Rs. 3,13,336. This was upheld by the Commissioner (Appeals).
3. In these appeals, the contention of the assessee is that for the assessment year 1979-80, the sum of Rs. 1,21,264 which was not disallowed under Section 37(3) read with Rule 6B should also be excluded from the adjusted expenditure so that the balance of Rs. 51,489 alone could be treated as adjusted expenditure. We are unable to see how this result could be achieved in the face of the self-evident provision of the definition of 'adjusted expenditure'. It only requires that the amount disallowed under the other sub-sections to be excluded from the aggregate expenditure to arrive at the adjusted expenditure.
What was not disallowed has no place in this formula.
4. The assessee then contended that since the term 'aggregate expenditure' has not been defined, it must be taken to mean so much of the expenditure as remaining to be considered for allowance after taking out the amount which has already been allowed under any other sub-section. Reference was made to the provisions of Section 37(3B) which provides that nothing contained in Sub-section (3A) shall apply in relation to any expenditure incurred on advertisement in small newspaper, etc. It was submitted that on the same analogy the expenditure incurred on presentation of articles less than Rs. 50, which is already allowed under Section 37(3), should also be excluded from the purview of Section 37(3A). We are unable to accept this argument also simply because Sub-section (3B) is a specific exclusion of certain items from the scope of Sub-section (3A) and we cannot add to that list.
5. It was then argued that what is allowed as a deduction under one Sub-section cannot again be considered for disallowance under another sub-section and, therefore, the expression 'aggregate expenditure' should be given a harmonious construction to mean expenditure remaining to be considered and could not mean total expenditure allowed on advertisement. This argument completely ignores the scheme of the provisions of Section 37. Section 37 originally contained Sub-section (1) providing for the allowance of all expenditure laid out for the purpose of the business except what was either capital in nature or was personal expenditure. Parliament then introduced Sub-section (2) which provided that even the expenditure could be allowed under Sub-section (1) subject to a ceiling with respect to entertainment expenditure.
Again Sub-section (3) was introduced to state that expenditure incurred by the assessee on advertisement or guest house or travelling would be subject to certain conditions and limits prescribed. Thereafter, Sub-section (3A) was introduced to provide an overall ceiling in respect of aggregate expenditure on advertisement, publicity and sales promotion. The words 'aggregate expenditure' have to be understood in the context of total expenditure laid out on advertisement, publicity and sales promotion and in the context the word 'aggregate' can only mean the sum total of the expenditure on these three items. It would be seen that while Sub-section (1) provided for the allowance of the expenditure positively, the other sub-sections provided negatively for disallowance of a part of the sum which could be allowed under Sub-section (1). Such disallowances may refer to individual items of expenditure as in Sub-section (2) or Sub-section (3). There can also be an overall ceiling prescribed such as Sub-section (2A) for entertainment expenditure and Sub-section (3A) for advertisement expenditure. It is only in this context to preserve the operation of the sections simultaneously that the expression 'without prejudice to the provisions of the other sections' has been used. While Sub-section (3) provides for individual limit in respect of presentation of articles as part of the advertisement expenditure, Sub-section (3A) provides for overall ceiling in respect of the entire advertisement expenditure. In order to see that there is no double disallowance, the overall ceiling is related to the adjusted expenditure which excludes expenditure which is already disallowed. At the same time, Sub-section (3A) provides that the fixation of a ceiling under that sub-section would not prevent the ITO from disallowing individual item of expenditure under Sub-section (3) with respect to the conditions prescribed.
6. Two illustrations would suffice to illustrate the two sides of the coin and demonstrate the fallacy in the argument of the assessee. By the simultaneous operation of these two sub-sections, while there would be no disallowance under Sub-section (3A), if the expenditure does not exceed Rs. 40,000, there would yet be a disallowance under Sub-section (3) if that amount of Rs. 40,000 has been spent on presentation of articles exceeding Rs. 50, thus, violating the prescribed rule under Rule 6B. In contrast even if the entire expenditure of the assessee on advertisement is within that rule and could not be disallowed under Sub-section (3), yet the overall ceiling under Sub-section (3A) would apply if the aggregate expenditure exceeds the limits. Thus, the assessee would not be able to get out of the overall ceiling prescribed under Sub-section (3A) by merely pointing out that individual items of expenditure were within the limits prescribed under Sub-section (3).
This is exactly the reason why the expression 'without prejudice to the provisions of Sub-section (3)' has been utilised in Sub-section (3A).
7. It was contended on behalf of the assessee that the expression 'without prejudice' should be understood to mean that the rights of the assessee have been preserved and that what is allowed as a deduction under Sub-section (3) could not be disallowed under Sub-section (3A).
Reference was made to paragraph 25 in the memorandum explaining the provisions in the Finance Bill, 1978-[1978] 111 ITR (St.) 158-reproduced below : The existing provisions will continue to apply in relation to such expenditure and the percentages of disallowance specified above will operate only in relation to the expenditure which remains to be allowed after the application of the aforesaid provisions.-[1978] 111 ITR (St.) 166 This memorandum merely reproduces the scheme explained above. Under the definition of 'adjusted expenditure' what is disallowed will not be again considered for the overall ceiling and what remains to be allowed is to be governed by the provisions of Sub-section (3A). This cannot mean that what has not been disallowed would escape the overall ceiling prescribed in Sub-section (3A). As we have noted before, Sub-sections (3) and (3A) refer only to the disallowances and the fact that the expenditure has not been disallowed under Sub-section (3) cannot be treated as if it had been allowed as a deduction and not liable to be governed by the ceiling prescribed under Sub-section (3A). The expression 'without prejudice' has to be understood only in the context and reading the words 'without prejudice' to the provisions of Sub-section (3), as a whole, it can only be understood as allowing the play of Sub-section (3) in addition to the operation of Sub-section (3A). In other words, the expenditure in question has to be governed by both the provisions and the fact that it is not disallowed under one of these sections cannot mean that it would escape from the operation of the other sub-sections. In the circumstances, we are not convinced by any of the arguments of the assessee and we have no hesitation in confirming the order of the Commissioner (Appeals). The appeals are dismissed.