1. This appeal filed by the department raises the question whether under Section 40A(12) of the IT Act the limit of Rs. 10,000 prescribed thereunder is in respect of the expenditure incurred for every assessment year to which the proceedings relate or the limit is only an overall limit and nothing more than Rs. 10,000 can be allowed.Legal Charges Asst. yr.
Rs.To Khaitan Consultants Ltd.Re: Hearing before ITAT 1962-63 4,210Re: -Do- 1973-74 760Re: Ref. Application before ITAT 1974-75 760Re: Hearing before ITAT 1973-74 760Re: Ref. Appn, before ITAT 1974-75 760 before HC 1975-76 4,920Re: Withdrawal of Writ 1975-76 1,860 Section 256(2) 1976-77 3,949Re: Withdrawal of Writ 1976-77 1,860 -Do- 1977-78 2,657 -Do- 1978-79 1,978 -Do- 1979-80 1,923 -Do- 1981-82 1,860 Writ petn.
1982-83 28,513 Out of the above expenditure of Rs. 56,770, the ITO allowed only Rs. 10,000 and disallowed the balance. Apparently the ITO thought that Section 40A(12) authorised the allowance of only Rs. 10,000. The assessee contested the disallowance on the ground that under Section 40A(12) an amount of Rs. 10,000 is allowable in respect of each assessment year in respect of which the expenditure is incurred and the amount mentioned in the section is not the overall limit. The CIT (Appeals) noted that the words used in the section supported the assessee's stand and. therefore, directed the ITO to allow the entire expenditure. He, however, directed the ITO to maintain a record to ensure that expenditure above Rs. 10,000 in respect of each assessment year is not allowed to the assessee under Section 40A(12).
3. It is against the decision of the CIT (Appeals) that the department has preferred the appeal. The appeal relates to the assessment year 1986-87 for which the previous year ended on 31-3-1986. Section 40A(12) of the IT Act is as under: 40A(12): No deduction shall be allowed in excess often thousand rupees for any assessment year in respect of any expenditure incurred by the assessee by way of fees or other remuneration paid to any person (other than an employee of the assessee), -- (a) for services (not being services by way of preparation of return of income) in connection with any proceeding under this Act before any income-tax authority or the Commission constituted under Section 245B or a competent authority within the meaning of Clause (b) of Section 269A or the Appellate Tribunal or any court; (b) for services in connection with any other proceeding before any court, being a proceeding relating to tax, penalty, interest or any other matter under this Act; and (c) for any advice in connection with tax, penalty, interest or any other matter under this Act.
The above section was inserted by the Finance Act, 1985 with effect from 1-4-1986. Before the insertion of this section the expenditure incurred in connection with the proceedings under the IT Act was governed by the provisions of Section 80W of the Act. That section which was inserted by the Taxation Laws (Amendment) Act, 1975 with effect from 1 -4-1976 was in the statute book up to 31-3-1985. After the insertion of Section 40A(12) Section 80W was omitted. Section 80W read as under: Section 80W: In computing the total income of an assessee, there shall be allowed by way of deduction any expenditure incurred by him in the previous year in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any court relating to the determination of any liability under this Act; by way of tax, penalty or interest: Provided that no deduction under this section shall, in any case, exceed in the aggregate five thousand rupees.
4. The controversy arises because of the use of the word "for" before the words "any assessment year" in Section 40A(12) of the Act. That gives room for the view that a limit of Rs. 10,000 is prescribed in respect of each assessment year to which the proceedings relate and in respect of which the assessee incurs the expenditure of the nature described in Clauses (a) to (c) of the section. Mr. Lahiri, the learned departmental representative, referred to the Circular No. 421 dated 12-6-1985 issued by the Central Board of Direct Taxes and submitted that Section 40A(12) was inserted in substitution of the provisions of Section 80W and the purpose of inserting Section 40A(12) was to increase the limit of Rs. 5,000 prescribed by Section 80W to Rs. 10,000 and to give the benefit of the allowance only to those who had income from business. He submitted that the provisions of Section 40A(12) have to be interpreted in consonance with the object and purpose sought to be achieved and cannot be interpreted in a literal manner which would result in an absurd result. He submitted that we should prefer the interpretation which would avoid absurdity. According to him, where the plain literal meaning of the statutory provision produces a manifestly absurd and unjust result, which could never have been intended by the Legislature, the language should be modified so as to achieve the obvious intention of the Legislature in order to produce a rational construction. He invited our attention to the decision of the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131ITR 597 7 Taxman 13 on this aspect, specially the observations of the court with regard to the interpretation of statutory provisions appearing in page 604. He further submitted that the interpretation that appealed to the CIT (Appeals) would mean that even expenditure pertaining to the assessment years covered by the provisions of Section 80W will fall for consideration or allowance under Section 40A(12) which could not have been the intention of the Legislature. Mr. Lahiri also submitted that it was not expected of the ITO to maintain records showing whether the limit of Rs. 10,000 is exceeded for any assessment year and this itself would show that the intention of the Legislature was not to allow more than Rs. 10,000 even though the expenditure incurred in respect of the proceedings for each assessment year may be well within the said limit.
The learned counsel for the assessee submitted that the provisions of Section 40A(12) have to be interpreted on their own terms and that the circular does not throw any light on the interpretation of the provision or on the intention of the Legislature. He also submitted that difficulty in maintenance of the records cannot be a reason for not extending the benefit of the interpretation placed by the CIT (Appeals) on the provisions of Section 40A(12). He pointed out that even under the provisions dealing with the carry forward and set off of business loss and other allowances, the ITO is expected to maintain proper records and there was nothing strange or new if he is also asked to maintain proper records showing the amounts of expenditure in respect of each assessment year. He, therefore, canvassed for our acceptance the order of the CIT (Appeals).
5. We have carefully considered the rival submissions. We have gone through the relevant provisions of the statute and also the circular and the decision cited by Mr. Lahiri. under Section 37(1) of the IT Act prior to the insertion of Section 80W, the expenditure incurred by the assessee in respect of the proceedings under the IT Act, was allowable as revenue expenditure. The Madhya Pradesh High Court in the case of Binodiram Balchand v. CIT [1963] 48 ITR 548, held that sums paid by an assessee by way of professional fees to an income-tax adviser for services rendered during and for the conduct of assessment proceedings before the income-tax authorities were deductible under Section 10(2)(xv) of the Income-tax Act, 1922, as amended in 1939, in computing his assessable income. It was further held that a sum of money so paid in a particular year can be allowed in that year even if it related to previous accounting years. The court noticed the circular issued by the CBDT on 24-8-1928 stating that the cost of audit and similar operations conducted specially for income-tax purposes, whether in connection with assessments, or appeals or with revision petitions, cannot be allowed as a deduction from taxable profits was clearly not in accord with law.
In the case before the Madhya Pradesh High Court the assessment proceedings related to the assessment year 1953-54, wherein the assessee claimed to deduct a sum of Rs. 14,000 on account of professional fees paid to an income-tax adviser in connection with the services rendered by him in the assessment proceedings. It was an admitted fact that the fees related to more than one accounting year.
It was under those facts that the expenditure was held by the High Court to be allowable expenditure. A Full Bench of the Nagpur Bench of the Bombay High Court held in the case of R.B. Bansilal Abirchand Spg.
& Wvg. Mills v. CIT [1971] 81 ITR 34, that the expenses reasonably incurred by an assessee for preparation and conduct of income-tax proceedings before the Income-tax Officer or laid out in conducting appeals, including fees paid to the accountants and lawyers, would be expenditure allowable under Section 10(2)(xv) of the Indian IT Act, 1922. While rendering this decision the court agreed with the decision of the Madhya Pradesh High Court cited supra. The court further referred to the decision of the Hon'ble Calcutta High Court in the case of CIT v. Calcutta Landing & Shipping Co. Ltd. [1970] 77 ITR 575. The facts before the Calcutta High Court in that decision were that the assessee had agreed to pay a firm of chartered accountants a consolidated sum of Rs. 2,000 per year for 12 years for settling each year's income-tax assessment irrespective of whether there was an appeal or not in respect of any particular year. A sum of Rs. 8,000 which obviously related to 4 years was paid during the relevant accounting year and was allowed by the ITO. The balance of Rs. 16,000 was not allowed on the ground that they were fees paid not for appearance before the assessing authorities but was paid for conducting appeals. The Calcutta High Court held that the expenditure is justifiably necessary for increasing the assessee's net profits and for the carrying on of the business with larger funds at the disposal of the assessee, and from that point of view those expenses were incurred for the purposes of the business and were, therefore, allowable under Section 10(2)(xv) of the 1922 Act. The Bombay High Court agreed with the view expressed by the Calcutta High Court. In the case of CIT v.Birla Cotton Spg. and Wvg. Mills Ltd. [1971] 82 ITR 166 (SC), the decisions of the Madhya Pradesh High Court, the Full Bench of the Bombay High Court and the decision of the Calcutta High Court were all noticed by the Supreme Court. The facts before the Supreme Court were that during the assessment years 1952-53 to 1954-55, the assessee company spent moneys for representing its case before the Investigation Commission relating to the assessment years 1941 -42 to 1947-48. The question before the court was whether the expenditure was allowable under Section 10(2)(xv) of the old Act. The court approved the decision of the Hon'ble Calcutta High Court cited supra and held that the expenditure incurred by the assessee was for the purpose of preserving and protecting the assessee's business from such process which might have resulted in the reduction of its Income and profits and the same were actually and honestly incurred. The court further held that even otherwise the expenditure was incidental to the business and was necessitated by commercial expediency. The court noticed that the earning of profits and the payment of taxes are not isolated and independent activities of a business. These activities were continuous, taking place from year to year during the whole period for which the business continues. It was further held by the court that if the assessee takes any steps for reducing its liability to tax which results in more funds being left for the purpose of carrying on the business there is always the possibility of higher profits.
6. The above decisions would show that the expenses of the kind with which we are concerned in the present appeal are allowable under Section 10(2)(xv) of the old Act as business expenditure. The decisions would apply with equal force to the provisions of Section 37(1) of the IT Act, 1961 and this proposition cannot be disputed. Therefore, prior to the insertion of the provisions of Section 80W in the IT Act. 1961 with effect from 1-4-1976, the principles governing the allowance of the expenditure incurred in connection with the income-tax proceedings were those that have been laid down by the decisions cited above. The facts in the decisions of the Madhya Pradesh High Court, Calcutta High Court and the decision of the Supreme Court cited above would also show that even if the expenditure relates to more than one assessment year that does not militate against the claim being allowed if it is otherwise established that the expenditure was for the purpose of the business. When the Legislature introduced Section 80W, it should, therefore, be presumed to be aware of the principles governing the allowance of expenditure incurred by an assessee in connection with the income-tax proceedings. The effect of Section 80W was (i) that the deduction was available to all assessees, irrespective of whether they had income from business or not: since the deduction was from the gross total income and was not made part of the computation provisions of the IT Act and (ii) the amount of expenditure was restricted to Rs. 5,000.
It is significant to note that there was no mention that the amount of Rs. 5,000 was the limit in respect of the expenditure incurred in connection with the proceedings for each assessment year. The limit was therefore obviously an overall limit and it was not possible to raise any argument that the limit was related to the proceedings for each assessment year. The insertion of Section 40A(12) and the omission of Section 80W were simultaneous and showed as marked departure from the position obtaining prior to 1-4-1986. Whereas, as stated earlier, the provisions of Section 80W did not mention anything about the limit of the expenditure being related to proceedings for any particular assessment year, the provisions of Section 40A(12) expressly provided that "no deduction shall be allowed in excess of 10,000 rupees for any assessment year". Having regard to the position governing the allowability of such expenditure obtaining prior to the insertion of Section 80W of the IT Act, it appears clear that the intention of the Legislature was to restore the allowance of the expenditure in more liberal terms. We have already seen that prior to 1-4-1976 there was no bar on the allowance of such expenditure even though it related to the proceedings in connection with more than one assessment year. The only condition was that the expenditure should have been incurred in the accounting year relevant to the assessment year in question. The Legislature obviously thought that the provisions of Section 80W are unnecessarily stringent in the sense that the monetary limit was an overall limit, not related to the proceedings in connection with each assessment year. In our opinion, the introduction of Sub-section (12) of Section 40A clearly is a manifestation of the intention of the Legislature to broaden the allowance and to fix a limit of Rs. 10,000 in respect of each assessment year to which the proceedings relate. For example, if the assessee has, during the relevantyear of account, incurred Rs. 20,000 each as expenditure in respect of the proceedings relating to the earlier four assessment years, the total expenditure incurred by him would be Rs. 80,000 but under Section 40A(12) the expenditure allowable will be @ Rs. 10,000 for each, of the four assessment years to which the proceedings relate. That in our opinion, is the meaning to be attributed to the use of the words "for any assessment year" appearing in Section 40A(12). It is significant to note that the provisions of Section 37(1) were also correspondingly amended. When Section 40A(12) was inserted, the reference to Section 80W in Section 3.7(1) of the Act was also omitted. The result would be that expenditure incurred by an assessee in connection with the income-tax proceedings would be allowable as business expenditure under Section 37(1) of the Act subject only to the monetary ceiling fixed by Sub-section (12) of Section 40A. The original position prior to the insertion of Section 80W of the Act, was restored but apparently the Legislature thought that the expenditure, though allowable, cannot be allowed entirely but has to be regulated by fixing a monetary ceiling limit of Rs. 10.000 per assessment year to which the proceedings relate. According to us, this interpretation of Section 40A(12) would be in consonance with the intention of the Legislature and would also in accord with the express words used in the provision. The Legislature has advisedly used the expression "for any assessment year" in Section 40A(12) instead of using the words "in any assessment year". We are not, therefore, able to accept the submission of Mr. Lahiri for the department based on the principles of interpretation laid down by the Supreme Court in K.P. Varghese's case (supra). The plain literal meaning of Section 40A(12), does not produce any manifestly absurd or unjustified result which could never have been intended by the Legislature. The discussion above would show that, on the contrary, the words used in the provision are in consonance with the intention of the Legislature to broaden the allowance of the expenditure earlier governed by the provisions of Section 80W. Therefore, the CIT (Appeals), in our opinion, has taken the correct view of the section and we uphold the same.
7. The argument of Mr. Lahiri that if the interpretation of the CIT (Appeals) is to be accepted there will be overlaping of the expenditure governed by the provisions of Section 80Wbetween 1-4-1976 and 31-3-1986, and the expenditure to be allowed on and from the assessment year 1986-87 cannot be accepted. This argument is really based on the apprehension that the ITO will not be able to trace back the records for those periods and, therefore, he will not be able to ascertain whether a particular expenditure incurred by the assessee in connection with the assessment proceedings of a particular year has exceeded the limit of Rs. 10,000 or not. However, the difficulty in tracing out the records or the difficulty in ascertaining the correct sum allowed earlier cannot affect the interpretation to be placed by us on the statutory provision. As pointed out by the learned counsel for the assessee, such difficulty arises even in respect of matters concerning carry forward of losses and allowances. We are, therefore, unable to accept the argument of Mr. Lahiri on this aspect of the matter.
8. The result is that the expenditure to be allowed under Section 40A(12) of the Act is @ Rs. 10,000 for each of the assessment years to which the proceedings relate and in respect of which the assessee incurs the expenditure. We uphold the order of the CIT (Appeals) and dismiss the departmental appeal.