Commissioner of Income Tax vs Thangamaligai and Co.

Janarthanam, J.—This petition at the instance of the Commissioner of Income Tax, Tamil Nadu III, Madras, is for issuance of a direction to

the Tribunal to state a case and refer the question of law, as below, for the opinion of this court :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the chit incentive expenses and

chit expenses incurred by the assessee cannot be considered to be sales promotion expenditure liable to be disallowed u/s 37(3A) of the Income

Tax Act, 1961 ?

Arguments of Mrs. Chitra Venkataraman, learned counsel representing Mr. C. V. Rajan, learned junior standing counsel, for Income Tax cases

representing the Revenue, and Mrs. Pushya Sitaraman, learned counsel appearing for the assessee, were heard.

The assessee, it is said, is engaged in the business of purchase and sale of gold and silver ware. The assessment in question is relatable to the

assessment year 1985-86. The Tribunal said in its order that the same question was referred for the earlier year and it was rejected as a question

of fact and hence this question cannot be referred.

Sub-section (3A) of Section 37 of the Income Tax Act, 1961 (Act No. 43 of 1961-for short ""IT Act""), which was inserted by the Finance Act,

1983, with effect from April 1, 1984, and omitted by the Finance Act, 1985, with effect from April 1, 1986, reads as under :

(3A) Notwithstanding anything contained in Sub-section (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 Sub-section (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''.

Sub-section (SB) of Section 37 thereof, inserted by the Finance Act, 1983, with effect from April 1, 1984, and omitted by the Finance Act,

1985, with effect from April 1, 1986, reads as under :

(3B) The expenditure, referred to in Sub-section (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 Sub-sections (3A) and (3B),--

(a) the expenditure specified in Clause (i) to Clause (iii) of Sub-section (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 a company, conveyance allowance paid to its directors also.

A conjoint reading of Sub-sections (3A) and (3B) of Section 37 of the Income Tax Act, makes it crystal clear what shall not be allowed as a

deduction in computing the income chargeable under the head ""Profits and gains of business or profession"". If the correct expenditure incurred by

the assessee on any one or more of the items specified in Sub-section (3B) exceeds one hundred thousand rupees, then twenty per cent. of such

excess shall not be allowed as a deduction in computing the income chargeable under the head ""Profits and gains of business or profession"". It is

thus crystal clear that what shall not be allowed as a deduction in computing the income chargeable under the head ""Profits and gains of business or

profession"" is, after all, an ascertainment of fact from the accounts of the assessee-dealers and nothing further. Therefore, the order of the Tribunal

in rejecting the reference, not as a pure question of law, cannot at all be found fault with.

In this view of the matter, this reference application deserved to be dismissed and the same is accordingly dismissed.