COMMISSIONER OF INCOME-TAX VS KARUR VYSYA BANK LTD.
2001 P T D 392
[239 I T R 7]
[Madras High Court (India)]
Before R. Jayasimha Babu and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME‑TAX
versus
KARUR VYSYA BANK LTD.
Tax Case No. 182 of 1985 (Reference No.90 of 1985), decided on 05/03/1998.
Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Disallowance in respect of advertisement, publicity and sales promotion if it exceeds Rs.40,000‑‑‑Banking business‑‑ Determination of Bank's turnover or gross receipts for purpose of computation of disallowance‑‑‑Total amount received by Bank by way of deposits in a year are gross receipts‑‑‑Matter remanded to Tribunal to determine total deposits for computation of disallowance‑‑‑Indian Income Tax Act, 1961, S.37(3A).
As the banking business differs fundamentally from other types of business, the yardstick of turnover was not the appropriate one to be adopted for the purpose of section 37(3A) of the Income Tax Act, 1961. The more appropriate criterion to be adopted would be gross receipts: Gross receipts is not to be equated to profit or gross income.
The assessee, a bank, had incurred an expenditure of Rs.3,73,645 on advertisement, publicity and sales promotion in the assessment year 1979‑80. Therefore, the Income‑tax Officer disallowed 15 per cent. of the amount in excess of Rs.40,000 under section 37(3A). The Tribunal held that the turnover or gross receipts was to be determined by aggregating the loans, advances and investments, and when so determined the quarter per cent. of that turnover would be Rs.12,81,000, and therefore, the disallowance should be limited' to ten per cent. in excess of Rs.40,000. On a reference:
Held, reversing the order of the Tribunal, that gross receipts in the context of section 37(3A) in relation to a bank is to be understood as the total amount received by the bank by way of deposits in the relevant accounting years. Loans and advances granted with the aid of the deposits cannot be taken as part of the gross receipts and the repayment of the amount lent would also not constitute receipts for the purpose of determining the quantum of gross receipts for the purpose of section 37(3A) of the Act.
C.V. Rajan for the Commissioner.
R. Janakiraman for the Assessee.
JUDGMENT
R. JAYASIMHA BABU, J.‑‑‑At the instance of the Revenue, the question referred to us is as to whether the Tribunal was right in law in holding that the turnover or the gross receipts of the assessee‑bank would mean aggregate of the advances and banking investments and consequently only ten per cent of the adjusted expenditure should be .disallowed under section 37(3A)(i) of the Act. The assessment year with which , we are concerned in this reference is 1979‑80.
The assessee is a banking company, governed by the provisions of the Banking Regulation Act, 1949. It carries on the business of "banking" as that expression is defined in section 5(b) of the Act. The definition of "banking" in section 5 (b) of the Act reads as under:
" 'Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
The assessee bank also carries on other business which a banking company may engage in under section 6 of that Act, and which includes the borrowing or raising or taking up of money, the lending or advancing of money either upon or without security; and other activities set out in section 6(a) to (c) of the Act.
The company in the previous year relevant to the assessment year, had with it a sum of Rs.47,41,59,002.66 that sum being the aggregate of the amounts of fixed deposits from banks, savings bank deposits and balance in current accounts and contingency accounts, etc., and had earned interest of Rs.4,80,76,570.20 in that year. It had made advances in that year to the tune of Rs.32,02,64,813.88. These figures are the figures found in the balance -sheet of the bank as on December 31, 1978.
Section 37(3A) was introduced by the Finance Act, 1978, with effect from April 1, 1979, and reads as under:
"(3A) Notwithstanding anything contained in subsection (1) but without prejudice to the provisions of subsection (2B) 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 not exceed 1/4 per cent. of the turnover or, as the case may be, gross receipts of the business or profession | 10 per cent. of the adjusted expenditure; |
| (ii) where such aggregate expenditure exceeds 1/4 per cent. but does not exceed 1/2 percent. of the turnover or, as the case may be, gross receipts of the business or profession | 12‑1/2 per cent. of the adjusted expenditure; |
| (iii) where such aggregate expenditure exceeds" 1/2 per cent. of the turnover or, as the case may be, gross receipts of the business or profession | 15 per cent. of the adjusted expenditure. |
Explanation.‑‑‑For the purposes of this subsection,‑‑‑
(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 subsection (1) and as further reduced by so much of such expenditure as is not allowed under subsection (2B; or subsection (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."
The assessee's expenditure on advertisement publicity and sales promotion in that year having exceeded. Rs.40,000 the question before the Tribunal was the amount in excess of Rs.40,000 that was required to be disallowed under section 37(3A) of the Income‑tax Act.
The Income‑tax Officer had adopted the figure of Rs.4,80,76,570 as representing the gross receipts and on that basis had disallowed a portion of the expenditure claimed. The assessee had incurred an expenditure of Rs.3,73,645 on advertisement, publicity and promotion. The amount in excess of Rs.40,000 was disallowed by the Income‑tax Officer to the extent of 15 per cent. while it was the assessee's contention that only 10 per cent. was to be disallowed, as the expenditure on these three items did not exceed quarter per cent. of its turnover or gross receipts.
The assessee's case was that the turnover for gross receipts was to be determined by, aggregating the loans, advances and investments, and when so determined the quarter per cent. of that turnover would be Rs.12,81,000 and, therefore, the disallowance should be limited to ten per cent. in excess of Rs.40,000. The aggregate of the advances and investments for the year according to the assessee was Rs.51.25 crores. The Tribunal has upheld the claim so made by the assessee,
The question that is now required to be considered is as to the manner in which the bank's turnover or gross receipts is to be determined for the purpose of section 37(3A) of the Act.
The term 'turnover' is not normally associated with the business of banking, but is normally associated with manufacturing, trading and similar activities. It refers to the total value of all sales effected by a manufacturer, or trader, or the amount of money turnover in a business. In the case of bank, whose stock‑in‑trade is money, one possible view is to regard the loans and advances made during the year as the turnover of the bank. As the banking business differs fundamentally from other types of business, in our view, the yardstick of turnover is not the appropriate one to be adopted for the purpose of section 37(3A) of the Act. The more appropriate criterion to be adopted would be gross receipts. Gross receipts is not be equated to profit or gross income.
The business of the banking, as it is defined in section 5(b) of the Banking Regulation Act, 1949, means the accepting for the purpose of lending or investment, deposits of money from the public. The principal business of a banker is thus, acceptance of deposits and the use of those deposits by the bank for the purpose of the lending or investment. Gross receipts in the context of section 37(3A) in relation to a bank is to be understood as the total amount received by the bank by way of deposits in the relevant accounting years. Loans and advances granted with the aid of the deposits cannot be taken as part of the gross receipts and the repayment of the amount lent would also not constitute receipts for the purpose of determining the quantum of gross receipts for the purpose of section 37(3A) of the Act.
As the materials on record do not show the amount received by the bank during the year by way of deposits whether from other banks or from its customers, we remit the matter to the Tribunal to determine the figure of gross receipts after calling for the information from the assessee. The Tribunal shall thereafter determine the extent to which the expenditure on advertisement, sales promotion and publicity incurred by the assessee should be disallowed.
The question referred to us, therefore, is answered in the negative with a direction to the Tribunal to determine the total deposits received by the bank during the relevant previous year, and, thereafter determine the extent to which the adjustment of the expenditure in excess of Rs. 40,000 on advertisement publicity and sales promotion should be made under section 37(3A) of the Act Parties to bear their respective costs.
M.B.A./192/FC
Reference answered.