Commissioner of Income-tax Vs. Raj Brothers - Court Judgment

Excerpt:
direct taxation - advertising expenses - sections 30, 37, 37 (1), 37 (3), 37 (3a) and 80vv of income tax act, 1961 and rule 6b of income tax rules, 1961 - assessee claimed deduction in respect of amount spend on advertisement, publicity and sale promotion under section 37 (3) and rule 6b - income tax officer contended that expenditure incurred by assessee should be disallowed in terms of section 37 (3a) - where aggregate expenditure to be allowed under section 37 (3) and rule 6b exceeds limit of rs. 40,000 - section 37 (3a) imposes further limitation - under section 37 (3a) amount to be considered was not the actual amount spent by assessee but expenditure quantified under rule 6b - held, assessee can claim deduction upto 40, 000 only. head note: income tax business deduction under s. 37(3a)--advertisement, publicity, sales promotion expenses--limit prescribed under s. 37(3) followed by s. 37(2a). held: the amount to be considered for the purpose of s. 37(3a) is not the actual expenditure incurred by the assessee but the expenditure as it quantified by the application of r. 6b which intention is made explicit by the definition of `adjusted expenditure' in the explanation to sub-s. (3a) of s. 37. note- sec. 37(3a) was omitted by the finance act, 1985 w.e.f. 1-4-1986. income tax act 1961 s.37(3a) - cantonments act[c.a. no. 41/2006]. section 346 & cantonment fund (servants rules, 1937, rules 13, 14 & 15: [h.l. gokhale, ag. cj, p.v. hardas, naresh h. patil, r.m. borde & r.m. savant, jj] jurisdiction of school tribunal constituted under maharashtra employees of private schools (conditions of service) regulations act, (3 of 1978) held, school run by the cantonment board is a primary school and it is not a school recognised by any such board comparable to the divisional board or the state board. the school tribunal constituted under section 8 of the maharashtra act cannot entertain appeals filed under section 9 by the employees working in schools which are established and administered by the cantonment board. teacher employed in the school run by cantonment board being covered under rule 2 (f) of the cantonment fund servants rules, 1937 can file appeal under rules 13, 14 and 15 to authorities provided therein against any order imposing any penalties etc. [deolali cantonment board v usha devidas dongre, 1993 mah. lj 74; 1993 lab ic 1858 overruled]. -- maharashtra employees of private schools (conditions of service) regulations act, 1978 [act no. 3/1978]. sections 9 & 2(21): jurisdiction of school tribunal whether a school run by cantonment board is not a recognised school within the meaning of section 2(21)? - held, the act is enacted to regulate recruitments and conditions of employees in certain private schools and provisions of the act shall apply to all private schools in the state whether receiving any grant-in-aid from the state government or not. private school is defined in section 2(2) of the act as a recognised school established or administered by a management other than the government or a local authority. recognised means recognised by director, the divisional board or state board. thus as far as the first part of the definition of being recognised is concerned, it includes, as stated above, four directors, the divisional boards and four state boards. the second part of this definition which comes after the comma refers to any officer authorised by director or by any of such boards. the question to be examined is whether school run by the cantonment board could be said to be one run by any such boards. a private school has to be recognised by the state or the divisional board or by any officer authorised in that behalf. when this phrase namely: recognised by any officer authorised by the director or by any such boards, is included in the latter part of section 2(21), such boards will be of the level of the state board or the divisional board. the boards referred to in the definition of the word recognised means the boards which deal with education at levels other than that of the level at which primary schools are operating. thus for being recognised, the school has to be recognised by the board and therefore, it has to be operating at a higher level i.e., secondary level. section 2(21) of the act defines the term recognised. the last clause therein is by any of such boards. the term such is defined in oxford dictionary as of the kind or degree indicated or implied by the context. therefore, the term such board will have to mean a divisional board of or the level of divisional board or the state board. the divisional board holds the examination and issues certificates after 10th and 12th standard examinations. the state board advises the state government on policy matters, ensures uniform pattern of secondary and higher secondary education, lays down principles for determining syllabi, prescribes text books, etc. the cantonment board does not discharge any of such duties nor is there any other board or body under the cantonments act discharging any such duties. the duties of the cantonment board are laid down in section 62 and amongst others, clause (xiv) lays down the duties of establishing and maintaining or assisting primary schools only. the cantonment board is not required to enter into the area of secondary education. therefore, school run by the cantonment board is a primary school and it is not a school recognised by any such board comparable to the divisional board or the state board. that being the position, it is not possible to accept it to be a recognised school for being a private school under the act. for the reasons state above, the school tribunal constituted under section 8 of the act cannot entertain appeals filed under section 9 by the employees working in schools which are established and administered by the cantonment board. [deolali cantonment board v usha devidas dongre, 1993 mah.lj 74; 1993 lab ic 1858 overruled]. - 1. this reference raises a short but interesting question concerning the effect of section 37(3a) of the income-tax act, 1961 ('the act',for short). for the assessment year 1979-80, the assessee incurred, inter alia, the following expenditure on advertisement, publicity and sales promotion :rs.y.v. anjaneyulu, j.1. this reference raises a short but interesting question concerning the effect of section 37(3a) of the income-tax act, 1961 ('the act', for short). for the assessment year 1979-80, the assessee incurred, inter alia, the following expenditure on advertisement, publicity and sales promotion : rs.1. advertisement in newspapers 3,2742. amount paid to m/s. mahaveer trading co., 1,20,921for articles costing less than rs. 50 each3. glasses purchased from black diamond glass2,132 doz. at the rate of rs. 23/20.10 per doz. 50,658------------1,74,853------------ (there is an item of rs. 80,000 which was originally included under this head, but it was agreed eventually that this sum of rs. 80,000 was covered by section 37(3) of the act.) 2. the assessee claimed deduction of the aforesaid sum in its entirety while computing its income for the assessment year under consideration. the income-tax officer held that the expenditure being an expenditure on advertisement, publicity, and sales promotion, it is liable to be governed by the limits specified in section 37(3) of the act read with rule 6b of the rules. the income-tax officer first quantified the expenditure to be allowed on the above exceeded rs. 40,000. he then applied the provisions of section 37(3a) of the act and worked out the expenditure qualifying for deduction. he eventually disallowed a sum of rs. 38,228. 3. the assessee filed an appeal to the commissioner of income-tax (appeals). the contention urged before the commissioner was that the expenditure incurred on presentation articles was less than rs. 50 each and in terms of rule 6b, the entire expenditure should be allowed. there was no difficulty in accepting this part of the claim of the assessee, because the presentation articles supplied by mahaveer trading company cost less than rs. 50 each and also the cost of glasses purchased from black diamond glass per dozen. but then the commissioner held that even though the expenditure incurred fell within the limits specified in rule 6b and no amount fell to be disallowed in terms of section 37(3) of the act, still the further limits specified in section 37(3a) of the act would apply. doing so, the commissioner found the order of the income-tax officer to be in order and declined to interfere in the matter. 4. the assessee preferred a second appeal to the tribunal. before the tribunal, the assessee reiterated the sum argument and it was accepted by the tribunal. the commissioner is aggrieved by the decision of the tribunal and accordingly sought a reference to this court of the following question of law : 'whether, on the facts and in the circumstances of the case, the appellate tribunal is justified in holding that the advertisement expenditure falling under section 37(3) of the income-tax act read with rule 6b of the income-tax rules does not come within the ambit of the words 'aggregate expenditure' or 'adjusted expenditure' within the meaning of section 37(3a) of the income-tax act, 1961 ?' 5. we have heard standing counsel for the revenue and sri a. satyanarayana, learned counsel for the assessee. having carefully looked into the provisions, we feel that the stand taken by the income-tax commissioner and the income-tax officer is correct and the tribunal is in error. for the sake of reference, we may extract below the relevant provisions in the act of the rules : 's. 37. (1) any expenditure (not being expenditure of the nature described in section 30 - 36 and section 80vv and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'profits and gains of business or profession'... (3) notwithstanding anything contained in sub-section (1), any expenditure incurred by an assessee after the 31st day of march, 1964, on advertisement or on maintenance of any residential accommodation including any accommodation in the nature of a guest-house or in connection with travelling by an employee or any other person (including hotel expenses or allowances paid in connection with such travelling) shall be allowed only to the extent, and subject to such conditions, if any, as may be prescribed. (3a) notwithstanding anything contained in sub-section (1) but without prejudice to the provisions of sub-section 2(b) or sub-section (3) where the aggregate expenditure 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 10% of the adjusted not exceed 1/4 per cent. of the turnover expenditure; or, as the case may be, gross receipts of the business or profession (ii) where such aggregate expenditure 12-1/2% of the exceeds 1/4 per cent. but does not exceed adjusted expenditu- 1/2 per cent. of the turnover or, as the re; case may be, gross receipts of the business or profession (iii) where such aggregate expenditure 15% of the adjust- exceeds 1/2 per cent. of the turnover ed expenditure. or, as the case may be, gross receipts of the business or profession explanation - for the purposes of this sub-section, - (a) 'adjusted expenditure' means the aggregate expenditure incurred by the assessee on advertisement, publicity and sales promotion in india 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 2(b) or sub-section (3) ; (b) 'turnover' and 'gross receipts' mean turnover or gross receipts, as the case may be, as reduced by any discount or rebate allowed by the assessee.' 6. the intention of the legislature was to restrict the colossal expenditure by taxpayers on advertisement, publicity and sales promotion. to achieve that object, provisions were incorporated in section 37 of the act limiting the expenditure on these items. the limits are specified in the rules prescribed, vide rule 6b. section 37(3) authorises an allowance of expenditure on these items as per the quantification made under rule 6b. if the matter ended there, there would have been no problem. but then, section 37(3a) was devised in order to impose a further limit on the aggregate expenditure on account of the above items. where, for instance, the aggregate expenditure to be allowed under section 37(3) read with rule 6b was less than rs. 40,000, the assessee is entitled to claim full deduction of the sum. where, however, the aggregate expenditure to be allowed under section 37(3) read with rule 6b exceeded the sum of rs. 40,000, section 37(3a) imposes a further limitation. we have extracted above section 37(3a) and it is not necessary to reiterate the details concerning the limitation. 7. the contention of sri a. satyanarayana, learned counsel for the assessee is that as far as the expenditure qualified under section 37(3) read with rule 6b is concerned, it is not subjected to any further limitation under section 37(3a), as is evident from the use of the expression in section 37(3a) to the effect that it is without prejudice to the provisions contained in section 37(3). mr. satyanarayana, therefore, contends that the entire extent of expenditure which is allowable under section 37(3) read with rule 6b should be allowed and it should not be subject to the further limitation specified in section 37(3a) of the act. we are unable to agree. the further limitation specified in section 37(3a) are without prejudice to the provisions contained in section 37(3). by saying so, the legislature did not intend to ensure that whatever expenditure is allowable under section 37(3) is allowed without subjecting the same to the further limitation under section 37(3a). indeed, the expression, 'without prejudice', etc., in our opinion, indicates that the amount to be considered for the purpose of section 37(3a) is not the actual expenditure incurred by the assessee by the expenditure as is quantified by the application of rule 6b which intention is made explicit by the definition of 'adjusted expenditure' in the explanation to sub-section (3a) of section 37; otherwise, we do not see any situation in which sub-section (3a) of section 37 would become applicable and it would be a dead letter. we find no difficulty in the language employed in section 37(3a) also. we, therefore, uphold the revenue's claim that the expenditure on account of advertisement, publicity and sales promotion should, in the first instance, be subject to the limitation specified in section 37(3) and the aggregate of such expenditure should further be subject to the limitation in section 37(3a) of the act. mr. satyanarayana pointed out that this double limitation may cause jeopardy. it may be, but, that is obviously the intention of the legislature. instances of such dual limitations are not wanting in the income-tax act. we may pointed out that in chapter vi-a, while there is limitation in the matter of deduction under various heads, there is limitation on the total amount of deduction with reference to income of the assessee. if the legislature in its wisdom thought that more than one limitations should be prescribed for the purpose of allowing the expenditure under tax law, it is not possible for this court to intervene. 8. we accordingly answer the question in the negative, that is, in favour of the revenue and against the assessee. no costs.