COMMISSIONER OF INCOME-TAX VS SWADESHI COTTON MILLS CO. LTD
2000 P T D 931
[232 I T R 618]
Allahabad High Court (India)]
Before Om Prakash and R. K. Gulati, JJ
COMMISSIONER OF INCOME-TAX
versus
SWADESHI COTTON MILLS CO. LTD.
Income-tax Reference No. 238 of 1981, decided on 02/09/1997.
(a) Income-tax---
----Business expenditure---Company---Entertainment expenditure-- Admissible expenditure must be calculated with reference to business income as a whole and not with reference to income of each unit of business---Indian Income Tax Act, 1961, S. 37(2).
(b) Interpretation of statutes--
---- Strict interpretation---No deduction on the basis of analogy.
The cardinal principle of law is that if the language of a provision of a fiscal law is clear and unambiguous, that has to be given full effect, without importing into it, any foreign word. In tax laws a deduction cannot be permitted on the analogy of another deduction, but deduction can be allowed only when it is provided under the Act explicitly. It is, by virtue of section 24 of the Income Tax Act, 1961, that deduction from income of each house property can be claimed in view of clauses (i) to (x) to subsection (1) of section 24. No analogous provision is there to claim deduction in respect of entertainment expenditure .in the case of an assessee-company. A company may have incurred expenditure of varying types, but no deduction can be claimed unless it is provided under the Act.
(c) Income-tax---
----New industrial undertaking---Special deduction---Special deduction must be calculated taking into account R.19A---Income Tax Act, 1961, S. 80J-- Indian Income Tax Rules, 1962, R. 19A.
Subsection (2) of section 37 is the only provision to allow deduction in respect of entrainment expenditure in the case of a company on gradation bases as set out in clauses (i), (ii), (iii) and (iv) of subsection (2) of section 37. The expression "in the case of company" occurring in sub section (2) of section 37 cannot be read as "in the case of a company and its units"- The units may have drawn up separate balance-sheets and profit and loss accounts and their income may have been computed by the Assessing Officer separately on the basis of their profit and loss accounts, yet the fact remains that the income of the units is the income of the assessee-companies, and, therefore, deduction in respect of entertainment expenditure has to be allowed under subsection (2) of section 37, which refers to a company and not to its units. Profits and gains of business are computed in Chapter IV-D of the Act. There is no provision in this Chapter to deduct entertainment expenditure from the total income of a unit of a company:
Held, (i) that the Supreme Court having clearly held in Lohia Machines Ltd. v. Union of India (1985) 152 ITR 308 that rule 19A of the Income Tax Rules, 1962, did not suffer from any infirmity and was valid in its entirety, relief under section 80J will have to be worked out, taking into consideration rule 19A.
Lohia Machines Ltd.,,-v. Union of India (1985) 152 ITR 308 (SC) fol.
(ii) that the Tribunal was correct in holding that the computation of admissible entertainment expenses under section 37(2) should be made with reference to the business income as a whole and not with reference to each unit of the business.
JUDGMENT
OM PRAKASH, J.---This Court directed the Income-tax Appellate Tribunal under section 256(2) of- the Income Tax Act, 1961 (briefly, "the Act"), to draw up a statement of the case and refer the following questions at the instance of the Revenue for the opinion of this Court for the assessment year 1970-71, the previous year for which was the calendar year 1969:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the computation of admissible entertainment expenses under section 37(2) be trade with reference to the business income as a whole and not with reference to each unit of the business (sic)?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in issuing general direction to the Inspecting Assistant Commissioner (Assessment) to compute deduction under section 80J after ignoring the rules to the extent to which they are inconsistent with or are in conflict with the parent enactment?"
The assessee-company in the relevant assessment year was engaged in the manufacture of rayon and textile goods. Besides having its main mill at Kanpur, the assessee had manufacturing. units at Pondicherry, Udaipur, Mau Nath Bhanjan and Naini.
First, we take up question No.l relating to entertainment expenses. The Assessing Officer held as under in this behalf:
"The assessee has claimed a sum of Rs.63,908 as entertainment expenses which includes a sum of Rs.17,800 as messing charges. The returned income of the assessee before allowing development rebate amounts to Rs.13,93,831. In view of the provisions of section 37(2)(i) a sum of only Rs.11,969 is permissible and balance of Rs.53,998 is to be disallowed."
The assessee appealed to the Appellate Assistant Commissioner and contended before him that the Assessing Officer should have considered the admissible claim for entertainment expenses in respect of each unit separately and that the method followed by the Assessing Officer resulted in total disallowance of the expenses, incurred in the manufacturing units. The assessee urged before the appellate authority that for each unit separate accounts. are maintained; separate balance-sheet and profit and loss account is drawn up and that each unit is independent and identifiable. It was also urged by the assessee that the Assessing Officer himself had computed the profits of each unit separately but for the purpose of finding out the extent of allowability of the claim of the entertainment expenses, he considered the overall income in the Kanpur unit. The submission was that when the profits of each unit were worked out separately, the claim of entertainment expenses should have been considered unitwise and not vis-a-vis the total income of the assessee company.
The Appellate Assistant Commissioner rejected the contention of the assessee and concurred with the Assessing Officer.
On further appeal, the Appellate Tribunal following its earlier order in the case of the assessee for the assessment year 1964-65 held that the entertainment expenses should have been worked out unit wise and not with reference to the total income of the assessee. In its order relating to the assessment year 1964-65, the Appellate Tribunal found as follows:
"On a consideration of the facts of the case and the submissions made before us, we are of the opinion that the approach made by the Departmental authorities is inconsistent and contradictory. When separate accounts have been maintained for each unit and separate balance sheets and profit and loss accounts have been drawn up and the Income-tax Officer himself has computed the profits of each unit separately, we fail to understand as to how only for entertainment expenses, the entire income is to be aggregated in Kanpur unit. Another aspect is that there can be various sources under the head business or for that matter of property. An assessee may be possessed of a number of immovable properties. While computing income from those properties, the Revenue would have to compute the same with reference to each property separately and allow deductions accordingly. In respect of each property, there would be a difference in the amount of tax payable and other statutory deductions. The entire income from all the properties cannot be aggregated before allowing deductions. In our opinion, the same is to be the approach in regard to various business carried on by an assessee and particularly in a case where the different units are entirely independent and identifiable as in the present case . . . In our opinion, therefore, the income of each unit is to be taken separately for considering the question of the allowance of entertainment expenses."
The controversy revolves round the true interpretation of section 37(2) of the Act, as it stood in the relevant assessment year, Subsection (2) starting with a non obstante clause says that notwithstanding anything contained in subsection (1), no expenditure in the nature of entertainment expenditure shall be allowed in the case of a company (emphasis supplied) which exceeds the aggregate amount computed in clauses (i), (ii), (iii) and (iv) of subsection (2) reproduction of which is not necessary for the decision of the case. No doubt, the units of the assessee company are independent and identifiable; separate balance sheets and profit and loss accounts for each unit have been drawn up and the income of each unit was computed by the Assessing Officer; nevertheless none of the units of the assessee-company is an assessee or a company. The statutory prohibition in subsection (2) which carves out an exception to subsection (1) of section 37 which allows an expenditure laid out or expended wholly and exclusively for the purposes of business is to be construed strictly. The cardinal principle of law is that in so far as the language of a provision of a fiscal law is clear and unambiguous, that has to be given full effect without importing into it any foreign word. If the contention of the assessee were accepted then the expression "in the case of a company", occurring in subsection (2) of section 37, will have to be read as "in the case of a company and its units" for which there is no justification. The assessee being a company is entitled to claim deduction in respect` of entertainment expenditure only under subsection (2) of section 37, as it stood in the relevant year. The income of the assessee-company is not only the income, which it derives from the Kanpur unit, but the. income of the assessee company is the total income, which it derives from the Kanpur unit as well as from other units, set up at Pondicherry, Udaipur, Mau Nath Bhanjan and Naini. The units may have drawn up separate balance-sheets and profit and loss accounts and their income may have been computed by the Assessing Officer separately on the basis of their profit and loss accounts, yet the fact remains that the income of the units is the income of the assessee-company and, therefore, deduction in respect of entertainment expenditure has to be allowed under subsection (2) of section 37, which refers to a company and not to its units. Profits and gains of business are computed in Chapter IV-D of the Act. There is no provision in this Chapter to deduct entertainment expenditure from the total income of an unit of a company and, therefore, the submission that the income of each unit has been computed separately on the basis of its profit and loss account is of no significance.
The company may have incurred expenditure of varying types, but no deduction can be claimed unless it is provided under the Act. Sub section (2) of section 37 is the only provision to allow deduction in respect of the entertainment expenditure in the case of a company on the gradation basis as set out in the clauses (i), (ii), (iii) and (iv) of subsection (2).
The Appellate Tribunal proceeded on the analogy of income from house property. The Tribunal was of the view that as the deduction for each house property is allowable under the Act, in the same way the claim for entertainment expenditure should have been worked out by the Assessing Officer unit wise and not in respect of the overall income of the assessee company. Sections 22 to 27 in Chapter IV-C relate to income from house property. Section 24 prescribes the deduction to be made from the income derived from house property and section 25 stipulates amounts not deductible from income from house property. These deductions from income from house property have to be made in accordance with the provisions of section 24. In tax laws a deduction cannot be permitted on the analogy of another deduction but deduction can be allowed only when it is provided under the Act explicitly. It is by virtue of section 24 that deduction from income from each house property can be claimed in view of clauses (i) to (x) of subsection (1) of section 24. No analogous provision is there to claim deduction in respect of entertainment expenditure in the case of an assessee company. Therefore, the reasoning given by the Appellate Tribunal does not commend us. to accept the contention of the assessee-company.
The contention of the assessee-company that when deductions are allowable in the case of each house property, each unit of the assessee company should also be entitled to claim deduction of entertainment expenditure, may look attractive on the face of it but that is not permissible by the clear language employed in subsection (2) of section 37 and, therefore, that has to be rejected.
Turning to question No.2. it is important to note that the assessee raised for the first time before the Appellate Assistant Commissioner the following ground:
"The learned Income-tax Officer has omitted to consider the appellant company's claim under section 80J of the Income Tax Act, 1961. On the facts, evidence and material on record, he should have considered the claim under section 80J and allowed it to be carried forward to the subsequent year. "
The above additional ground was admitted by the Appellate Assistant Commissioner, who observed in para. 21 of his order as follows.
"From the remand report reproduced above, it would be noticed that the Inspecting Assistant Commissioner who holds jurisdiction over the case at present has admitted that the appellant's claim was overlooked and that it would be properly considered after the receipt of the appellate order. Accordingly, I direct him to consider the appellant's claim for section 80J deduction and to allow the same as per rules." (underlining by the Court).
Before the Appellate Tribunal, counsel for the assessee-company urged that the direction of the Appellate Assistant Commissioner that deduction under section 80J should be worked out according to rules was wrong inasmuch as the rules in this behalf are inconsistent and in. conflict with the parent enactment and therefore, they deserve to be ignored.
The Appellate Tribunal thereupon found as follows:
"We have considered the rival submissions. It is by now well-settled and does not admit of any dispute that the rules to the extent to which they are in conflict with or are inconsistent with the parent enactment, should be ignored. We, therefore, see no reason why the assessee should be precluded from contending before the Income-tax Officer or before the Inspecting Assistant Commissioner at the time the relief under section 80J is computed that the rules to the extent to which they are inconsistent with or are in conflict with the parent enactment, should be ignored and the relief should be worked out accordingly. We, therefore, modify the direction of the Appellate Assistant Commissioner and direct the Inspecting Assistant Commissioner who holds jurisdiction over the case to consider the assessee's claim under section 80J on merits keeping in view our observations in this order."
In Lohia Machines Ltd. v. Union of India (1985) 152 ITR 308 (SC), the Supreme Court held that sub-rule (3) of 19A of the Income-tax Rules, 1962 (for short, the Rules), in so far as it -provided for exclusion of borrowed monies and debts and particularly long-term borrowings in the computation of the "capital employed" by a new industrial undertaking for purposes of tax exemption, could not be said to be outside the rule-making authority, conferred on the Central Board under section 80J (1) of the Income Tax Act, 1961, and was a perfectly valid piece of subordinate legislation. The Supreme Court having clearly held that rule 19A did not suffer from any infirmity and was valid in its entirety, relief under section 80J will be worked out taking into consideration rule 19A of the Rules and we, therefore, approve the direction given by the Appellate Assistant Commissioner in this behalf.
We, therefore, answer the abovementioned question No. 1 in-the negative, that is, in favour of the Revenue and against the assessee. So far as question No. 2 is concerned, it will suffice to say that relief claimed by the assessee under section 80J will be worked out considering rule 19A of the Rules. This question is answered accordingly.
M.B.A/3260/FCReference answered.