(a) Income‑tax‑‑

‑‑‑‑Business expenditure‑‑Disallowance‑‑‑Company‑‑‑Surtax‑‑‑Not deductible in computation of business income‑‑‑Indian Income Tax Act, 1961, S.40(a).

(b) Income‑tax‑‑‑

‑‑‑‑Business expenditure‑‑‑Expenditure for advertisement in souvenir incurred in previous year relevant to assessment year 1979‑80‑‑‑Introduction of S.37(2B) by Taxation Laws (Amendment) Act, 1978, with effect from 1‑4‑1979‑‑‑Applicable for assessment year 1979‑80‑‑‑Expenditure on advertisement in souvenir not allowable in assessment year 1979‑80‑‑‑Indian Income-Tax Act, (~61, S. 37(213)‑--

Held; (i) that the surtax levied under the Companies (Profits) Surtax Act, 1964, fell within the mischief of sub‑clause (ii) of clause (a) of section 40 of the Income Tax Act, 1961, and could not be allowed as a deduction while computing the business income of the assessee under the provisions of the Income Tax Act.

Smith Kline & French (I) Ltd. v. CIT (1996) 219 ITR 581 (SC) fol.

The law in force on the first day of April of the assessment year would be the law applicable for the allowability of the expenditure incurred in the previous year relevant for the assessment year.

The assessee incurred expenditure by way of advertisement in a souvenir of the Indian National Congress and claimed it as deduction in the assessment year 1979‑80:

Held, that though the expenditure on advertisement was incurred prior to April 1, 1979, the law to be applied was the law in force on the first day of April, 1979. Since section 37(213) of the Income Tax Act, 1961, came into force on April 1, 1979, section 37(213) of the Act would apply and the expenditure incurred by the assessee by way of advertisement in the souvenir published by the Indian National Congress was not allowable expenditure for the assessment year 1979‑80.

Reliance Jute and Industries Ltd. v. CIT(1979) 120 ITR 921 (SC) fol.

B. Raviraja for the Assessee.

C.V. Rajan for the Commissioner.

JUDGMENT

N.V. BALASUBRAMANIAN, J.‑‑‑This is a combined reference at the instance of the assessee as well as at the instance of the Department. The following questions of law have been referred for our consideration:

"(1) Whether, on the facts and circumstances of the case, the surtax paid by the assessee under the Companies (Profits) Surtax Act is an admissible deduction in computing the total income and Income Tax Act, 1961?

(2)Whether, on the facts and in the circumstances of the case and having regard to the provisions of subsection (213) of section 37 of the Income Tax Act, 1961, inserted by the Taxation Laws (Amendment) Act, 1978, with effect from April 1, 1979. the Appellate Tribunal was justified in holding that the said provisions are applicable only to the expenditure incurred during the accounting year 1979‑80 relevant to the assessment year 1980‑81 and not to the assessment year 1979‑80 itself?

(3)Whether, on the facts and in the circumstances of the case an having regard to the provisions of section 37(213) of the Income Tax Act, 1961, the Appellate Tribunal was right in law in holding that the expenditure incurred by the assessee by way of advertisement in the souvenir published by the Indian National Congress should be allowed as a deduction in computing the income for the assessment year 1979‑80?"

The year of assessment is common for both the references, viz., X1979‑80. In so far as the question of law referred to us at the instance of the assessee is concerned, it is fairly stated that the question is covered against the assessee by a recent decision of the Supreme Court in the case of Smith. Kline & French (India) Ltd. v. CIT (1996) 219 ITR 581, wherein the Supreme Court held that the surtax levied under the Commissioner (Profits) Surtax Act, 1964 falls within the mischief of sub‑clause (ii) of clause (a) of section 40 of the Income Tax Act, 1961, and cannot be allowed as a deduction while computing the business income of the assessee under the provisions of the Income‑tax Act. Following the said decision of the Supreme Court, we answer the question of law referred at the instance of the assessee in the affirmative, against the assessee and in favour of the Department

In so far as the questions of law referred at the instance of the Department are concerned, the Tribunal held that the provisions of section 37(213) of the Income Tax Act, 1961, which was introduced by the Taxation Laws (Amendment) Act, 1978, with effect from April 1, 1979, did not apply to the expenditure though incurred in the previous year relevant for assessment year 1979‑80 and subject to any disallowance since the expenditure was incurred prior to April 1, 1979. The reasoning of the Appellate Tribunal is that the law was introduced only with effect from April 1, 1979, and hence the provision would apply only to the expenditure incurred after April 1, 1979, and not for prior expenditure. Challenging that order of the Appellate Tribunal the Revenue has sought for a reference and two questions of law have been referred to us at the instance of the Revenue.

We are of the view that the view of the Appellate Tribunal is plainly erroneous as it is well‑settled by the several decisions of the apex Court as well as by decisions of this Court that the law in force on the first day of April of the assessment year would be the law applicable for the allowability of the expenditure incurred in the previous year relevant for the assessment year. If any authority is needed in support of the proposition, it is found in the judgment of the apex Court in Reliance Jute and Industries Ltd. v. CIT (1979) 120 ITR 921. There is no doubt that the expenditure was incurred during the previous year relevant for the assessment year 1979‑80 and though it was incurred prior to April 1, 1979, the law to be applied is the law in force on the first day of April of the assessment year and since section 37(28) of the Act came into full force on April 1, 1979, section 37(2B) of the Act would apply and the expenditure incurred by the assessee by way of advertisement in the souvenir published by the Indian National Congress is not allowable expenditure for the year 1979‑80. The amendment of law has not indicated anywhere any contrary intention making it inapplicable to the expenditure in question. Therefore, we are of the view that the Tribunal is not correct in holding that the provisions of section 37(28) of the Act did not apply to the expenditure incurred by the assessee. As per the amendment the expenditure is not allowable as a 'business expenditure.

Accordingly, we answer both the questions of law referred to us at the instance of the Revenue, in favour of the Department and against the assessee. No costs.

M.B.A./647/FCReference answered