DOLLAR CO. PRIVATE LTD. VS UNION OF INDIA
1995 P T D 228
[204 I T R 103]
[Madras High Court (India)]
Before Kanakaraj, J
DOLLAR CO. PRIVATE LTD.
Versus
UNION OF INDIA and others
Writ Petition No.7868 of 1983, decided on 09/12/1991.
Income-tax---
----Business expenditure---Expenditure on advertisement---Constitutional validity of ceiling on deduction of expenditure on advertisement---Subsections (3A) and (3B) of S.37 do not violate Art. 14---They are not discriminatory and do not interfere with freedom of trade and business---Provision is valid---Indian Income Tax Act, 1961, S.37(3A), (3B)---Constitution of India, Arts. 14 & 19, Sched. VII, List I, entry 82.
In substance, subsection (3A) of section 37 of the Income Tax Act, 1961, says that where the expenditure or the aggregate expenditure on any of the items specified in subsection (3B) exceeds Rs.l lakh, 20 per cent. of the said excess shall not be allowed as a deduction in computing the income chargeable under the head "Profits and gains of business or profession".
The income that is assessed to tax should not be measured by the expenditure. The income sought to be assessed is not the residual income that is available after deducting expenditure. The gross income is taxable subject to certain statutory deductions allowed by the Income Tax Act, 1961. Therefore, the deductions can be claimed only if they were provided by the statute. It would not be proper for Parliament to take note of the products manufactured by the assessee and make a distinction between those who require advertisement and those who do not require advertisement. On the other hand, Parliament has rightly grouped all advertisements under one head and has given a uniform allowance or disallowance. The fact that a ceiling has been fixed on the expenditure cannot make the subsection unconstitutional. Parliament has not banned advertisement as such nor has Parliament put a ceiling on expenditure. What the subsection stipulates is that any expenditure over and above the limit prescribed would not qualify for deduction for the purpose of computing the income. It is now well-settled that though taxing laws are not outside Article 14, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy, the Legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment, what is looked into 'is not its phraseology, but the real effect of its provisions. If there is equality and uniformity within each group, the law would not be discriminatory. Subsections (3A) and (3B) of section 37 do not violate Art.14 of the Constitution. The subsections only purport to group all advertisements under one head and have prescribed a uniform allowance or disallowance. An assessee cannot attack the validity only from the angle of the products manufactured by him and on the ground that the subsection benefits certain other manufacturers while it does not benefit him. The provision does not interfere with the freedom of trade and business guaranteed under Art. 19(1)(g). In any event, the provision is for the general public interest and is saved by Art.19(6) of the Constitution. The provisions are within the purview of entry 82 of List I of the Seventh Schedule to the Constitution and, therefore, they are within the legislative competence of Parliament. Subsections (3A) and (3B) of section 37 are valid.
Mysore Kirloskar Ltd. v. Union of India (1986) 160 ITR 50 (Kar.) fol.
British Electrical and Pumps (P.) Ltd. v. CIT (1977) 106 ITR 620 (Cal.); Federation of Hotel and Restaurant Association of India v. Union of India (1989) 178 ITR 97 (SC) and Hoechst Pharmaceuticals Ltd. v. State of Bihar (1985) 154 ITR 64 (SC) ref.
T. Srinivasamoorthy for Petitioner.
N.V. Balasubramanian for Respondents.
JUDGMENT
The petitioner is a company carrying on the business of manufacture end sale of certain specified medicinal products. The main products of the petitioner-company are "Hedensa" and "Eichensa". According to the petitioner, these products cannot be sold unless consumer awareness is created through advertisements and publicity. On an average, the petitioner-company is said to be spending 20 per cent. of the value of the net sales in year towards the advertisement. Section 37(3) of the Income Tax Act, 1961, and rule 6B of the Income Tax Rules, prescribe conditions as to the extent to which the expenditure on advertisements shall be allowed while computing the income chargeable under the head "Profits and gains of business or profession". With effect from April 1, 1979, subsections (3A), (3B), (3C) and (3D) were introduced in section 37 of the Act and they provided for disallowance of part of the expenditure on advertisements. However, with effect from April 1, 1981, those subsections were withdrawn. Again, with effect from April 1, 1984, the very same subsections have been introduced in a modified manner. Since the validity of these subsections is challenged in this writ petition, it would be convenient to extract those subsections:
"(3A) Notwithstanding anything contained in subsection (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in subsection (3B) exceeds one hundred thousand rupees, twenty per cent. of such excess shall not be allowed as deduction in computing the income chargeable under the head 'Profits and gains of business or profession'.
(3B) The expenditure referred to in subsection (3A) is that incurred on--
(i) advertisement, publicity and sales promotion; or
(ii)running and maintenance of aircraft and motor cars; or
(iii) payments made to hotels.
Explanation.---For the purposes of subsections (3A) and (3B),--
(a) the expenditure specified in clause (i) to clause (iii) of subsection (3B) shall be the aggregate amount of expenditure incurred by the assessee as reduced by so much of such expenditure as is not allowed under any other provision of this Act;
(b) expenditure on advertisement, publicity and sales promotion shall not include remuneration paid to employees of the assessee engaged in one or more of the said activities;
(c) expenditure on running and maintenance of aircraft and motor cars shall??????? include,--
(i) expenditure incurred on chartering any aircraft and expenditure on hire charges for engaging cars plied for hire;
(ii) conveyance allowance paid to employees and, where the assessee is company, conveyance allowance paid to its directors also.
(3C) Nothing contained in subsection (3A) shall apply in respect of expenditure incurred by an assessee, being a domestic company as defined in clause (2) of section 80B, or a person (other than a company), who is resident in India in respect of expenditure incurred wholly and exclusively on:---
(i) advertisement, publicity and sales promotion outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business;
(ii) running and maintenance of motor cars in any branch, office or agency maintained outside India for the promotion of the sale outside India of such goods, services or facilities.
(3D) No disallowance under subsection (3A) shall be made:---
(i) in the case of an assessee engaged in the business of operation of aircraft, in respect of expenditure incurred on running and maintenance of such aircraft;
(ii) in the case of an assessee engaged in the business of running motor cars on hire, in respect of expenditure incurred in running and maintenance of such motor cars. "
In substance, subsection (3A) of section 37 of the Act says that where the expenditure or the aggregate expenditure on any of the items specified in subsection (3B) exceeds Rs.l lakh, 20 per cent. of the said excess shall not be allowed as a deduction in computing the income chargeable under the head "Profits and gains of business or profession". The subsections are challenged on the ground that they do not reflect a rational classification in relation to the objects of the Act. The arguments of Mr. T. Srinivasamoorthy are as follows:
(1) By the application of the subsections, large established industries had been treated on par with small industries. Elaborating the arguments it is contended that industries producing steel, cement, sugar, etc., which really do not require any advertisement are entitled to the same benefits as small industries like that of the petitioner;
(2) The disallowance of expenditure on advertisements, irrespective of the products manufactured by a particular industry is said to be arbitrary;
(3) Assessees who have to cater to a market covering wide areas have been treated as equal to assessees whose market is restricted to a particular local area;
(4) The fixation of Rs. l lakh in subsection (3A) is arbitrary and has no nexus to the objects sought to be achieved by the Act. The Government had not kept in mind the distinction between the assessees who manufacture several products some of which require advertisements and some do not on the one hand and between the assessees who manufacture products which either require advertisement or do not require advertisement at all.
In respect of his arguments, Mr. T. Srinivasamoorthy relies on British Electrical and Pumps (P.) Ltd. v. CIT (1977) 106 ITR 620 (Cal). On going through the said decision, I am afraid that the same does not advance the case of the petitioner. In that case; the Tribunal had disallowed the claim of the assessee, under section 37 (1) of the Act, deduction of certain sums of money paid to the American Women's Club Welfare Fund and certain other such associations. The Tribunal had observed that the predominant motive for the payments was charity and the payments were not out of considerations of business. In a reference, the Calcutta High Court held that the expenditure was incurred or laid out by the assessee wholly and exclusively for the purpose of its trade.
The respondents have filed a detailed counter-affidavit where, in my opinion, the correct scope of the levy under the Income Tax Act, 1961, is explained. The income that is assessed to tax should not be measured by the expenditure. The income sought to be assessed is not the residual income that is available after expenditure, the gross income is taxable subject to certain statutory deductions allowed by the Income-tax Act. Therefore, the deductions can be claimed only if they are provided by the statute. It would not be proper for Parliament to take note of the products manufactured by the assessee and made a distinction between those who require advertisement and those who do not require advertisement. On the other hand, Parliament has rightly grouped all advertisements under one head and has given a uniform allowance or disallowance. The fact that a ceiling has been fixed on the expenditure cannot make the subsection unconstitutional. The fact that parliament has fixed a limit of Rs. 1 lakh without reference to the type of the product which is being advertised, is proof of the fact that a reasonable classification had been adopted. I am also in agreement with the arguments of learned counsel for the respondents that Parliament has not banned advertisement as such nor has Parliament put a ceiling on expenditure. What the subsection stipulates is that any expenditure over and above the limit prescribed would not qualify for deduction for the purpose of computing the income.
Learned counsel for the respondents has also cited the following decisions in opposition to the claim of the petitioner.
In Mysore Kirloskar Ltd. v. Union of India (1986) 160 ITR 50, the Karnataka High Court had occasion to test the validity of the very same subjection (3A) of section 37 of the Indian Income Tax Act, 1961. They held that the subsection uniformly provides for disallowance of 20 per cent. of the expenditure over and above a sum of Rs.l lakh incurred on advertisements, publicity and sales promotion, or running and maintenance of aircraft and motor cars or payments made to hotels. They held that the provision is not violative of Article 14 of the Constitution. They also held that the provision does not in any way interfere with the freedom of trade and business guaranteed under Article 19(1)(g) of the Constitution of India. In any event, they held that the provision is for the general public interest and is saved by Article 19 (6) of the Constitution. They also held that the provision is within the purview of entry 82 of List I of the Seventh Schedule to the Constitution and, therefore, they are within the legislative competence of Parliament. It is brought to my notice that the special leave petition preferred against this judgment had been dismissed on October 4, 1989.
In Federation of Hotel and Restaurant Association of India v. Union of India (1989) 178 ITR 97, the Supreme Court has pointed out the scope of the taxation power of Parliament. It observed (at page 121):
"It is now well-settled that though taxing laws are not outside Article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of fiscal policy, the Legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The test of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment, what is looked into is not its phraseology, but the real effect of its provisions. A Legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory. Decisions of this Court on the matter have permitted the Legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes."
In Hoechst Pharmaceuticals Ltd. v. State of Bihar (1985) 154 ITR 64, the Supreme Court points out that the economic wisdom of a tax is within the exclusive providence of the Legislature. To make the tax heavier on a large dealer who occupies a position of economic superiority, by reason of his greater volume of business, both absolutely and relatively is not arbitrary discrimination, but an attempt to proportion the payment to capacity to pay and thus to arrive in the end at a more genuine equality.
Having regard to the guidelines prescribed by the apex Court, I do not think that any of the complaints raised by the petitioner can be upheld. It appears to me that the impugned subsections only purport to group all advertisements under one head and have prescribed a uniform allowance or disallowance. The petitioner cannot attack the validity only from the angle of the products manufactured by him and on the ground that the subsection benefits certain other manufacturers while it does not benefit him. It would not be proper to invalidate a provision of law in the manners sought to be urged by the petitioner. Further, the Karnataka High Court has upheld the validity of the very same subsection and I am in agreement with the views expressed by the Karnataka High Court. Consequently, the writ petition fails and it is dismissed. There will, however, be no order as to costs.
M.B.A./256/T.F.????????????????????????????????????????????????????????????????????????????????? Petition dismissed.