COMMISSIONER OF INCOME-TAX VS NAVODAYA
1999 P T D 599
[225I T R 399]
[Kerala High Court (India)]
Before V. V. Kamat and K. Narayana Kurup, JJ
COMMISSIONER OF INCOME-TAX
Versus
NAVODAYA
Income-tax References Nos.88 of 1992 and 53 of 1991, decided on 02/09/1996.
(a) Income-tax---
----Business expenditure---Disallowance---Considerations applicable to S.37(I) not applicable to other subsection; of S.37---Advertisement, publicity, sales promotion, expenditure on motor cars and hotels---Whether expenditure capital or revenue not relevant for computing disallowance-- Indian Income Tax Act, 1961, S.37(3-A), (3-B).
(b) Income Tax-
----Income or capital---Subsidy---Film production subsidy given by State Government---Is income
Subsection (1) of section 37 of the Income Tax Act, 1961 enacts that expenditure laid out or expended wholly or exclusively for the purpose of business or profession, shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". There are exceptions to this kind of allowance contemplated in the statutory provision of section 37(1) of the Act. Such an expenditure must not be an expenditures of the nature described in sections 30 to 36 and section 80-VV of the Act. There is an additional requirement of such an expenditure not being in the nature of capital expenditure or personal expenses of the assessee.
Each of the subsequent subsections of section 37 is prefixed by the same non-obstante clause: "Notwithstanding anything contained in subsection (1). " These subsections have to be read de hors the statutory provisions of section 37(1). Each one of the subsections other than section 37(1) of the Act, would have to be understood as contemplating a separate and distinct head of deduction. Considerations, which are contemplated by section 37(1), are not applicable. Once it is found that a particular deduction is referable to the concerned subsection applicable to the factual matrix, deduction would be said to squarely fall within the provisions of the concerned subsection. Obviously, therefore, the situation whether the expenditure is of a capital nature 'or of a revenue nature would pale into insignificance and would obviously be wholly to be left out of consideration. This is the obvious meaning of the non-obstante clause, and in the context it would have to be emphasised that this non-obstante clause is a prefix to all the concerned subsections of section 37 of the Act.
Mohan Meakin Breweries Ltd. v. C.I.T. (1979) 118 ITR 101 (HP) applied
(The Court directed the authorities to determine and answer the application of the provisions of section 37(3-A) on the facts in the light of the observations of the Court).
Film production subsidy granted by the State Government is income
C.I.T. v. Udaya Pictures (P.) Ltd. (1997) 225.ITR 394 (Ker.) fol
Kesaria Tea Co. Ltd. v. C.I.T. (1989) 180 ITR 134 (Ker.) ref
P. K. R. Menon and N. R. K. Nair for the Commissioner.
Kochunni Nair for the Assessee
JUDGMENT
V. V. KAMAT, J.---These two references brought before us by the Revenue and the assessee, respectively, relate to the assessment years 1985-86 and 1984-85 in the same order. The questions expecting our answer in these two references, as they are differently worded, are being reproduced hereinbelow separately in the same order:
Income-tax Reference No.88 of 1992:
"(1)Whether, on the facts and in the circumstances of the case,---
(i)the interpretation of section 37(3-A) of the Income Tax Act, 1961, by the Tribunal is right in law?
(ii)the Tribunal is right in law and fact in holding that the expenditure on the cost of production up to the stage of the negative films is capital in nature and is outside the scope of section 37 and, therefore, section 37(3-A) of the Income Tax Act, 1961?
(iii)the assessee is entitled to deduction of Rs. 6,63,954 under section 37(3-A) of the Income Tax Act, 1961?
(2)Whether, on the facts and in the circumstances of the case, and also in the light of the decision of the Kerala High Court in Kesaria Tea Co. Ltd. v. C.I.T. (1989) 180 ITR 134, is not the subsidy received by the assessee income in the hands of the assessee?
(3)Whether, on the facts and in the circumstances of the case and in the absence of a claim for E.S.A. for the studio (or the main floor) before the First Appellate Authority and the same being not claimed at all before the Tribunal in accordance with law, the Tribunal is right and with jurisdiction in considering the claim by itself and in allowing the same for the 'main floor'?
Income-tax Reference No 53 of 1991:
"(1)Whether, on the facts and in the circumstances of the case, the cost of production of the film having been accepted as a stock-in-trade, the expenditure in respect of the ingredients embodied in the stock- in-trade and which merges into stock-in-trade could be isolated and the provisions of section 37(3-A) applied in respect of such bifurcated expenses?
(2)Whether, on the facts and in the circumstances of the case, it could not be held that the cost of production of the film including prerelease, advertisement having regard to rule 9-A or 9-B could not be termed as capital expenditure and, if so, whether any portion of it could be disallowed with a bifurcation under section 37(3-A)?"
Read in any way, on hearing learned counsel for the parties, one thing is certain and it is that, we have to understand and interpret the statutory provision of section 37(3-A) of the Income Tax Act, 1961. The question is whether the expenditure that comes up for consideration in the provisions of section 37(3-A) of the Act would require for consideration its connection with the nature of the expenditure, whether it is capital expenditure or whether it is revenue expenditure. In other words, in understanding the said statutory provision (section 37(3-A)), what would be the scope, extent and covering field of the non-obstante clause "not withstanding anything contained in subsection (1)" in understanding the rest of the provisions of section 37(3-A).
It will have to be seen that the statutory provisions relating to profits and gains of business or profession are found from section 28 onwards in the Income Tax Act, 1961. A bare perusal of these statutory provisions would show that they relate to consideration of certain allowances, depreciation and deduction. In the process one sees statutory provisions relating to deduction expenditure. Suffice it to say that the statutory provision under consideration (section 37) is the last one and even as such headed as "general" in the section itself.
A further reading of the statutory provision of section 37 would provide additional intrinsic material in the process of reasoning. Section 37(1) of the Act enacts that expenditure laid out or expended wholly or exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". There are exceptions to this kind of allowance contemplated in the statutory provision of section 37(1) of the Act. Such an expenditure has not to be an expenditure of the nature described in sections 30 to 36 and section 80-VV of the Act. There is an additional requirement of such an expenditure not being in the nature of capital expenditure or personal expenses of the assessee. It would appear that this mandate of allowing any expenditure is with the above statutory exceptions. Therefore, it would be seen that if the expenditure is in the nature of capital expenditure or personal expenses of the assessee, such expenditure shall not be allowed in computing the income chargeable under the head "Profits and gains of business or profession".
Apart therefrom, when the other statutory provisions are taken up for consideration, certain other situations would also appear as carving out the stated description therein from the general phrase "any expenditure" appearing in section 37(1). Illustratively, section 37(2) of the Act refers to entertainment expenditure and in regard thereto statutory provision specifying the limit and its excesses and their consequences.
Similarly section 37(2-A) of the Act also specifies a further added facet of entertainment expenditure. We also find the statutory provision of section 37(2-B) of the Act relating to the expenditure on advertisement as specified therein. Similarly, we also find section 37(3) of the Act relating to expenditure on advertisement or on maintenance of any residential accommodation specified specifically therein.
If other statutory provisions of section 37(1) of the Act are considered, for the purpose of understanding the true and correct legal import thereof, it will have to be emphasised that each of the subsequent subsections---section 37(2), 37(2-A), 37(2-B) and 37(3)--are prefixed by the same non-obstante clause "notwithstanding anything contained in sub -section (1)". In other words, the statutory language of section 37 brings on the 'statute book, firstly, in the language of section 37(1) of the Act, a general provision relating to expenditure laid out or expended wholly or exclusively for the purposes of the business, or profession requiring statutorily again its allowance in computing the income chargeable under the head "Profits and gains of business or profession". The exception being, as laid out hereinbefore, relating to expenditure described in section 30 to section 36 and section 80-VV and the expenditure being in the nature of capital expenditure or personal expenses of the assessee. In other words, the other clauses which are prefixed by the same and identical non-obstante clause will have to be read de hors the statutory provision of section 37(1) of the Act, in view of the position that each one of them is seen prefixed by the same non-obstante clause.
Proceeding in the same direction to understand the statutory provision of section 37(3-A) of the Act, it would be seen that it also relates to the expenditure, nay, the aggregate expenditure incurred by an assessee. The statutory provision requires further that this expenditure must be relatable to the items specified in subsection (3-B) end in that event it is further provided that any amount of such expenditure in excess of one hundred thousand rupees would meet with the statutory consequences. The statutory consequences are also available in the provision itself. It is provided that twenty percent of such excess amount shall not be allowed as deduction in computing the income chargeable under the head "Profits and gains of business or profession".
It is section 37(3-B), which provides particulars or rather the items to be governed by the statutory provision. Illustratively these items are: advertisement, publicity and sales promotion, or running and maintenance of aircraft and motor cars or payments made to hotels.
After reading the above statutory provisions with a sense of relevance, the real question is required to be posed. The question is as to whether in understanding the expenditure or the aggregate expenditure, the provisions of section 37(1) of the Act would have any occasion of inter-play.
In other words, the statutory requirements of section 37(1) of the Act analysed hereinbefore for the purposes of these references, whether the nature or the expenditure being of capital nature or personal expenses of the assessee would have any relevance in the application of the statutory provision (section 37(3-A) and (3-B) in question. Reading the plain language of all the statutory provisions other than section 37(1) of the Act, as we have pointed out hereinbefore, it would be obvious that each one of the subsequent provisions gets enacted with the same prefixed phrase "notwithstanding anything contained in subsection (1)". In other words, it would be clear that section 37 of the Act which is of a residuary character with reference to the earlier statutory provisions dealing with the aspect of deduction, except section 37(1) of the Act, all other statutory provisions legislatively speak of their independent and separate existence on the statute book.
In addition, it would also be clear that the statutory provision of section 37 of the Act relates to any expenditure in the process of computing the income chargeable under the head "Profits and gains of business or profession". Therefore, the question whether the assessee is engaged in a particular kind of business would be of utter irrelevance in the context. The situation of relevance would be whether the expenditure is relatable to the income chargeable. Additionally, the statutory provision also would make it amply clear that the other clauses, which we have considered hereinbefore would not be governed in any manner by the provisions of section 37(1) of the Act. It is stated so and the non-obstante clause which is the prefix of every subsection thereafter would make it abundantly clear in regard thereto.
It would be seen that as far as the understanding of the non-obstante clause, every other subsection of section 37 of the Act will have to be understood as equally placed controlling the respective statutory provisions of other subsections. Whether it is section 37(2), whether it is section 37(2-A), section 37(2-B) or even section 37(3), not to speak of section 37(3-A) separately. It would have to be understood even on the plain language that each one of the subsections other than section 37(1) of the Act would have to be understood as contemplating a separate and distinct head of deduction. We have already amplified hereinbefore that each of the above subsections deals with a different facet of expenditure with a common feature of the said expenditure being considered in the process of computation of the income chargeable under the head "Profits and gains of business or profession". This plain language of the statutory provision makes it clear, rather abundantly, that the considerations, which are contemplated by section 37(1) are not applicable. Once it is found that a particular deduction is referable to the concerned subsection applicable to the factual matrix, deduction would be said to squarely fall within the provisions of the concerned subsection. Obviously, therefore, the situation whether the expenditure is of a capital nature or of a revenue nature would pale into insignificance and would obviously be wholly to be left out of consideration. This is the obvious meaning of the non-obstante clause and in the context it would have to be emphasised that this non-obstante clause is a prefix to all the concerned subsections of section 37 of the Act.
Learned senior tax counsel sought aid of the decision of the Himachal Pradesh High Court in Mohan Meakin Breweries Ltd. v. C.I.T. (No.l) (1979) 118 ITR 101, wherein there was an occasion to consider section 37(3) of the Act. In Mohan Meakin's case (1979) 118 ITR 101, the Tribunal had fallen into an identical and similar error in the matter of the assessee, a public limited company, carrying on the business of manufacture and sale of beer, Indian made foreign liquor and other beverages. The Tribunal had taken the view that the expenditure incurred by the assessee on the installation of neon-signs being an expenditure of capital nature was not allowable as a deduction under section 37 of the Act. It is in this context the Himachal Pradesh High Court observed that the question whether it is of revenue or capital nature would not be the relevant consideration; but the relevant consideration would be the conditions and restrictions contemplated by section 37(3) itself. The use of the non-obstante clause clearly excludes the considerations, which are contemplated by section 37(1) of the Act and, therefore, when once it is found that a particular deduction can be considered on account of expenditure, the said deduction squarely falls within subsection (3), leaving the situation as to whether the expenditure is of a capital nature or of a revenue nature as wholly irrelevant for consideration in the context. In our judgment, the situation would not be different if the same non-obstante clause is taken up for consideration as to be found in section 37(3-A) of the Act.
This being the position, the question would be of application of the above legal position.
The Income-tax Officer for the year 1985-86 was concerned with the assessee before us as engaged in the production and exhibition of films. The assessee had computed the disallowance as follows:
| | Rs |
| "Advertisement | 7,52,569 |
| Publicity | 1,68, 361 |
| Publicity materials | 3,21,413 |
| Total | 12 42,343 |
On this, disallowance was worked out at the prescribed percentage, which came to Rs.2,28,468."
The Income-tax Officer considered some other items of expenditure for disallowance under section 37(3-A) and the particulars of those items are as follows:
| | Rs. |
| Pre-release advertisement | 1,92.027 |
| Payments to hotels under productionexpenses | 1,03,052 |
| Payments to hotels in respect of M.C. Punnose debited under travelling Expenses. | 10,213 |
| Repairs and petrol expenses under production expenses for 3 cars and one jeep | 3,68,875 |
| Expenses for fuel and petrol separately Debited | 5,010 |
| Car repairs expenses separately debited | 39,064 |
| Total | 7,18,241. " |
Consequently, the Income-tax Officer added the above amount of Rs.7,18,241 to the computed amount of the assessee at Rs.12,42,343 consequently leading to the situation that the total expenditure to be considered under the provisions of section 37(3-A) of the Act would have to be understood as Rs.19,60,584. In the process, the assessee suffered disallowance of Rs.3,60,687 as against Rs.2,38,468 as computed by him.
The First Appellate Authority fell into the legal error to expect that the nature of expenditure should be referable to its source being from the capital, observing that the provisions of section 37(3-A) of the Act would have to be understood as borrowing its colour from section 37(1) of the Act not expecting to deal with the expenditure of a capital nature. The First Appellate Authority, understanding the statutory provision in the above manner, excluded three items amounting to Rs.6,63,954. Their particulars are in the following manner:
| | Rs |
| "Pre-release advertisement | 1,92,027 |
| Payments to hotels under production expenses | 1.03,052 |
| Production expenses for 3 cars and one jeep | 3,68,875 |
| Total | 6,63, 954. " |
Thereafter, the First Appellate Authority directed to consider the question of disallowance at twenty per cent. allowing basic deduction in respect of other items.
The Income-tax Appellate Tribunal, Cochin Bench, was approached both by the assessee as well as by the Revenue. The Tribunal continued to fall into the legal trap of understanding the plain language of the statutory provisions discussed in detail hereinbefore by us. The Tribunal has again fallen into a consequential legal error in looking at the question from a special angle that the assessee is engaged in the production and exhibition of films. In our judgment, in fact that question as to whether the assessee is engaged in the production and exhibition of films would not be of any help to understand the statutory provision which is applicable to the question of deduction in relation to the expenditure not necessarily incurred in the production and exhibition of films alone. It is well-known that the Legislature provides for the situations of generality and they are not to be considered in the process of interpretation with special reference to a situation dealing with special features.
In fact, the discussion of the Tribunal has initiated with this erroneous approach illustratively in paragraph 6 onwards, after observing that section 37 is residuary head of deductions and certain situations of expenditure are excluded froth the purview of section 37(1) of the Act, the Tribunal committed an error that section 37 deals with revenue expenditure in computing the profits and gains of business. In our judgment, the Tribunal has not considered the plain and grammatical meaning of the non-obstante clause. The observation of the Tribunal that section 37(3-A) of the Act could only deal with such of these revenue expenditure as are prescribed is unsupportable, because it ignores the natural impact of the statutory provisions of the non-obstante clause. It is not possible to see and view the said reasoning in the teeth of the plain language of the statutory provision considered and discussed by us hereinbefore.
It is thereafter that the Tribunal has proceeded with consideration in the context of special reference to the situation that the expenditure incurred is in the course of production of a feature film. In our judgment, this is treading on the path of irrelevance in the context. In the process of reasoning the Tribunal has proceeded to consider the statutory provisions of rules, illustratively, rule 9-A of the Income-tax Rules specifically dealing with the question of cost of production in relation to a feature film such as preparation of positive prints, advertisement of the film after it is certified and such other provisions.
We have been taken through the further part of the reasoning of the Tribunal. In our judgment, this further part of the reasoning is a continuation in the process of commission of the initial legal error as pointed out hereinbefore. We find that the Tribunal has also taken the trouble of having a local inspection. The benefits of local inspection cannot be denied, but observations in regard thereto would hardly be of any advantage when the authority has to decide the language of the statutory provision. We find that the effect of the non-obstante clause continues to have its force in determining the true scope and legal effect of all the subsections as pointed out above. In the context of section 37(3-A) of the Act it is plain that the question whether it is capital expenditure or otherwise is not relevant because each of the subsequent subsections would have to be understood as independent and separate in existence and consequent enforcement in regard thereto.
The question of application of the provisions of section 37(3-A) of the Act would have to be determined and answered on the facts in the light of our above observations. The authorities will answer them accordingly.
There is yet another question awaiting our answer and it relates to the subsidy received by the assessee and as to whether it would be income in the hands of the assessee in the years in question. A Division Bench of this Court (of which one of us-myself-was a party) had an occasion to consider the same question in I. T. R. No. 30. of 1990 (C. I. T. v. Udaya Pictures (P.) Ltd. (1997) 225 ITR 394) receiving the answer in favour of the Revenue that it is income of the assessing during the assessment year in question. The question has been considered in detail with reference to the decisions of the Bombay High Court and of this Court also. We have no hesitation of following the said decision.
For the above reasons we answer the referred questions as follows;
Income-tax Reference No.88 of 1992:
Question No. 1 is answered in the negative, i.e., in favour of the Revenue and against the assessee. Question No.2 is also answered in the negative, in favour of the Revenue and against the assessee.
Income-tax Reference No.53 of 1991:
Question No. 1 is answered in the negative, in favour of the Revenue and against the assessee. Question No.2 is answered in the affirmative, in favour of the Revenue and against the assessee.
A copyof this judgment under the seal of the Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.
M.B.A./1725/FCOrder accordingly