High Court Of Andhra Pradesh
CIT Vs. Vijayawada Bottling Co. Ltd.
Assessment Years : 1981-82, 1982-83, 1985-86 And 1986-87
Section : 32A
V.V.S. Rao And B.N. Rao Nalla, JJ.
Referred Case Nos. 85 Of 1997 & 125 Of 1999
January 6, 2012
JUDGMENT
V.V.S. Rao, J. – In obedience to the orders dated February 10, 1995, of this court in I.T. C. No. 90 of 1990, the Income-tax Appellate Tribunal, Hyderabad, referred two questions for opinion of this court under section 256(2) of the Income-tax Act, 1961 (“the Act”, for brevity) in R. C. No. 85 of 1997. Likewise, as directed in I. T. C. No. 79 of 1997 on February 10, 1998, R. C. No. 125 of 1999 is referred. Both the references are at the instance of the Commissioner of Income-tax. Though the questions are couched in a different language, they convey the same purport and, therefore, required to be dealt with by the common order.
2. The two questions referred to this court in R. C. No. 85 of 1997 are as follows :
“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assessee has used only synthetic essence as flavouring agent in the manufacture of soft drinks and does not cover items of the Eleventh Schedule, even after the Explanation was added to item 5 by the Finance Act, 1987 ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the assessee is entitled for investment allowance under section 32A of the Income-tax Act even after the insertion of Explanation under item 5 of the Eleventh Schedule by the Finance Act, 1987, which is merely clarificatory in character and should govern the assessment prior to the assessment year 1988-89 also in view of the Andhra Pradesh High Court’s decision in the case of N. T. R.’s Estate v. CIT [1986] 157 ITR 285/[1985] 22 Taxman 194?”
3. The two questions referred to in R. C. No. 125 of 1999 are as follows :
“1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in deleting the disallowance of interest on the ground that the Revenue had failed to establish any nexus between the monies borrowed and advance made and relying on fresh evidence brought before Income-tax Appellate Tribunal ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee was entitled to claim deduction of investment allowance under section 32A of the Income-tax Act even after the insertion of Explanation to item 5 of the Eleventh Schedule by the Finance Act, 1987 ?”
4. The background facts in R. C. No. 85 of 1997 are as follows. The assessee, a public limited company, is engaged in the business of manufacture and sale of aerated waters and soft drinks. In their returns for the assessment years 1981-82 and 1982-83, the assessee claimed investment allowance under section 32A of the Act, which was allowed by the Income-tax Officer, but in the Department’s appeal, the Commissioner of Income-tax (Appeals) disallowed it on the ground that the items manufactured by the assessee are covered by item 5 of the Eleventh Schedule to the Act. The assessee’s contention that it manufactured aerated water and soft drinks called Goldspot, Thums Up, etc., with synthetic essences without using blended or flavoured concentrates, and, therefore, they are not precluded from claiming investment allowance under section 32A(2)(iii) of the Act, did not find favour with the Commissioner of Income-tax (Appeals). In further appeal, the Appellate Tribunal reversed the Commissioner of Income-tax (Appeals) and restored the original assessment order of the Income-tax Officer.
5. In R. C. No. 125 of 1999, the assessee is M/s. Sri Sarvaraya Sugars. They are carrying on the business, among others, of manufacture and sale of aerated waters and soft drinks. During the financial years relevant to the assessment years 1985-86 and 1986-87, they advanced an amount of Rs. 17 lakhs to their subsidiary company, namely, M/s. East Coast Salt and Chemicals (East Coast). These amounts remained outstanding during the accounting periods. The assessee provided interest due from the company at 15 per cent for the assessment years 1983-84 and 1984-85 but did not do so for the subsequent two assessment years. In addition, they also claimed investment allowance under section 32A. In so far as interest is concerned, the Assessing Officer disallowed the same observing that the assessee advanced amounts to its subsidiary from out of the borrowed amounts from banks. This was affirmed by the Commissioner of Income-tax (Appeals) but the Appellate Tribunal concluded in favour of the assessee holding that the Department failed to prove the nexus between the borrowed amounts and the advances made. The investment allowance was allowed by the Tribunal.
The fist issue
6. In both the cases, the Assessing Officer and the Commissioner of Income-tax (Appeals) disallowed the investment allowance on the ground that the assessees used synthetic essences in the manufacture of soft drinks and beverages. The senior standing counsel for income-tax relies on section 32A(2)(iii) and item 5 of the Eleventh Schedule, in arguing for an answer in favour of the Revenue. He also relies on the decisions of the Calcutta and the Madras High Courts in CIT v. Black Diamond Beverages Ltd. [1993] 201 ITR 48 and CIT v. Soft Beverages (P.) Ltd. [2005] 272 ITR 270. According to him, blended flavouring concentrates shall include and shall be deemed to have always included synthetic essences in any form. This Explanation is being clarificatory, he would urge that it must be interpreted to give retrospective operation as applicable to the assessments pertaining to the years prior to April 1, 1988.
7. The senior counsel for Sarvaraya Sugars and the counsel for Vijayawada Bottling, in opposition, made the following submissions. The Explanation to item 5 of the Eleventh Schedule to the Act having been inserted with effect from April 1, 1988, it cannot be given retrospective effect ; the assessees cannot be denied the benefit of investment allowance under section 32A(2)(iii) and though the Explanation is clarificatory it has to be construed as enlarging only the definition of blended flavouring concentrates and Parliament never intended to apply it to the assessment of the income during the year prior to April 1, 1988. According to them, the Explanation introduced a fiction to treat blended flavouring concentrates and synthetic essences in any form as equal for the purpose of item 5 of the Eleventh Schedule. Such fiction should be given a limited meaning as intended and cannot be pressed for any other purpose. They would urge that as per the charging section, income-tax shall be charged for the assessment year at the rate in accordance with the provisions of the Act in respect of total income of the previous year and, while doing so, an assessee will be entitled to various deductions and exemptions either in the computation of total income or in determining the tax. They relied on the Finance Act, 1987, the Notes on Clauses, the Memorandum Explaining the Provisions of the Bill and the Central Board of Direct Taxes Circular dated September 22, 1987.
Consideration and finding
8. The question to be addressed is whether the assessees are entitled for investment allowance under section 32A(1)(2)(iii) or they should be denied on the ground that they manufacture articles specified in item 5 of the Eleventh Schedule. The relevant provisions in this regard are quoted hereunder.
“32A. Investment allowance—(1) In respect of a ship or an aircraft or machinery or plant specified in sub-section (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction, in respect of the previous year in which the ship or aircraft was acquired or the machinery or plant was installed or, if the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty five per cent. of the actual cost of the ship, aircraft, machinery or plant to the assessee :
Provisos and Explanation omitted as not relevant for this case). (2) The ship or aircraft or machinery or plant referred to in sub-section (1) shall be the following, namely :
(a) a new ship or new aircraft acquired after the 31st day of March, 1976, by an assessee engaged in the business of operation of ships or aircraft ;
(b) any new machinery or plant installed after the 31st day of March, 1976-
(i) for the purposes of business of generation or distribution of electricity or any other form of power ; or
(ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing ; or
(iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule :
(Proviso and Explanation are omitted)
Eleventh Schedule
(Items 1 to 4 omitted as not relevant).
5. Aerated waters in the manufacture of which blended flavouring concentrates in any form are used.
Explanation. — ‘Blended flavouring concentrates’ shall include, and shall be deemed always to have included, synthetic essences in any form. (Items 6 to 29 omitted as not relevant).”
9. As per sections 28 and 29 of the Act, income from profits and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D. Section 28 describes various types of income chargeable to tax under the head “Profits and gains of business or profession” and sections 30 to 43D mandates the deduction of various items of expenditure incurred by the assessee in computing the income for the purpose of the tax. Section 32A permits an assessee to claim deduction to the extent of 25 per cent of actual cost incurred, inter alia, for the purpose of machinery or plant. As per sub-section (2) thereof, the purchase of machinery or plant shall have to be for the purpose of business of manufacture or production of any articles or things. If any of these articles or things are included in the Eleventh Schedule, the claim is denied. Item 5 as originally stood prior to April 1, 1988, mentioned aerated waters in the manufacture of which blended flavouring concentrates in any form are used. As per the Explanation inserted by the Finance Act, 1987, with effect from April 1, 1988, the synthetic essences in all forms are also included in the definition or description of “blended flavouring concentrates” by creating a fiction. The Explanation also contains a phrase “. . . shall be deemed always to have included . . .” which has given rise to a serious debate as to whether the Explanation is clarificatory, and if so whether it operates retrospectively or merely enlarges the definition/description of the blended flavouring concentrates.
10. In Black Diamond Beverages Ltd. (supra) the Calcutta High Court held that, “Explanation below item 5 makes it clear that use of synthetic essences shall attract the Schedule which is exclusive in nature,” and “it is only clarificatory in nature and should be referable for the purpose of resolving any doubt arising over the meaning and import of item 5 in the Eleventh Schedule”. In Soft Beverages (P.) Ltd. (supra) the Madras High Court held as follows (page 273) :
“The amendment, despite a particular date having been fixed as the date from which it will take effect, even when it is not made retrospective, if found to be clarificatory in the sense that even without the aid of that amendment the unamended provision was capable of comprehending what was sought to be made clear by the amendment, the amendment made subsequently does not have the effect of restricting the meaning of the original entry and the width of the entry remains the same. The facet of its content which had either been misconstrued or had not been recognized is only brought out when the clarificatory amendment is effected.
The fact that this amendment was made effective from April 1, 1988, therefore, does not in any way have the effect of denuding the original entry of a part of its content. The synthetic essence being but one form of a blended flavouring concentrate was a blended flavouring concentrate before the amendment as also after the amendment.”
11. The counsel for the assessees rely on ITO v. M. C. Ponnoose [1970] 75 ITR 174 (SC), Delhi Cloth & General Mills Co. Ltd. v. CIT [1994] 208 ITR 785/73 Taxman 43 (Delhi), CIT v. Rajasthan Mercantile Co. Ltd. [1995] 211 ITR 400 (Delhi), CIT v. Patel Bros. Co. Ltd. [1995] 215 ITR 165/81 Taxman 156 (SC) and CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308/172 Taxman 386 (SC) and argue that the Explanation below item 5 of the Eleventh Schedule has to be given effect to only from April 1, 1988, and has no application for previous assessment years.
Declaratory Acts
12. A Declaratory Act is an exception to the general rule of presumption against retrospectivity of a law. An express mention can only give retrospectivity and even in such a case, such law cannot be in violation of the fundamental rights, arbitrary or deprive the vested rights. Whether an Act is declaratory or clarificatory ? The enquiry must always commence by knowing whether there has been ambiguity in the law already existing, which was sought to be clarified and declared ? Often to remove doubts, the Legislature amends the law declaring the correct position without indicating as to whether it is retrospective. Bennion in Statutory Interpretation (2008 5th edn., Indian Reprint 2010, page 188) elucidates that, “the law so declared is taken always to have been operative or to have been operative since the commencement of the enactment as respects which the declaration is made”. The learned author further points out that a declaratory law contains statutory exposition without which the meaning of enactment is doubtful. The common law principle that declaratory and clarificatory laws are presumed to have retrospective effect, is, however, not an inflexible and universally applicable interpretative canon.
13. In R. Rajagopal Reddy v. Padmini Chandrasekharan [1995] 213 ITR 340/79 Taxman 92, the Supreme Court ruled that, “the language ‘shall be deemed always to have meant’ is declaratory and is in plain terms retrospective”. In CIT v. Agriculture Market Committee [2011] 337 ITR 299/[2012] 20 taxmann.com 421 (AP), a Division Bench of this court to which one of us is a member (VVSR J.) considered the effect of the declaratory/clarificatory enactments and summed up the following principles (page 308) :
(i) A Declaratory Act is intended to remove doubts regarding common law which are to be construed according to common law ;
(ii) Declaratory Acts are also made to rectify or clarify a gross mistake, or the omission in the former statute, in which event the latter statute relates back to the time when the former Act is made ;
(iii) The purpose of Declaratory Act is to remove a doubt as to the meaning of an existing law or to correct a construction considered erroneous by the Legislature. If a Declaratory Act is by way of an Explanatory Act, one should see whether it is intended to supply an obvious omission or clear up doubts as to the meaning of the previous Act. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous ;
(iv) If a statute is curative, or a mere declarative, retrospective operation is generally intended ; and
(v) In determining the nature of the Act, substance is more important than the form. If the provision is clear and unambiguous, the question of treating the amending Act as declaratory would not arise, even if the amending Act uses the expression “for the removal of doubts” which itself is not conclusive as to an amendment being clarificatory or declaratory in nature.
14. In Agriculture Market Committee (supra), this court, after referring to 1Brij Mohan v. CIT [1979] 120 ITR 1/2 Taxman 209 (SC), Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677/91 Taxman 205 (SC), Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753/91 Taxman 337 (SC), CIT v. Kanji Shivji Co. [2000] 242 ITR 124/108 Taxman 531 (SC), Zile Singh v. State of Haryana [2004] 8 SCC 1, CIT v. Suresh N. Gupta [2008] 297 ITR 322/166 Taxman 313 (SC), and CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306/185 Taxman 416 (SC), pointed the following conspectus of case law (page 315 of 337 ITR) :
“Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825/90 Taxman 41 (SC)Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753/91 Taxman 337 (SC) and CIT v. Kanji Shivji & Co. [2000] 242 ITR 124/108 Taxman 531 (SC) are decisions where the Supreme Court construed the provisions as declaratory of common law and, therefore, retrospective. Podar Cement(P.) Ltd. [1997] 226 ITR 625/92 Taxman 541 (SC) ; Allied Motors (P) Ltd. v. CIT [1997] 224 ITR 677/91 Taxman 205 (SC) and Suresh N. Gupta [2008] 297 ITR 322 (SC) dealt with the Finance Acts amending section 43B of the Act which enabled an assessee to claim deduction of any sum payable by way of tax, duty, cess or fee or whatever name called. These provisions were held to be retrospective on the ground that there was divergence of opinion among the High Courts and also as the provisions were clarificatory in nature. If the enforcement of an amended provision prospectively results in hardship and invidious discrimination among assessees, the said provision, as held in CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306/[2009] 319 ITR 306/185 Taxman 416 (SC), has to be read as retrospective being clarificatory in nature. From these decisions it follows that if any provision is amended by way of an insertion or substitution or enacting a new provision, while dealing with the question of retrospectivity, the court has to address the questions (i) whether the provision under consideration is by way of declaration of common law ; and (ii) whether it is intended to get over divergence of judicial opinion and to bring uniformity with a view to supply an omission which caused the unintended hardship to the assessees.”
15. The Explanation below item 5 of the Eleventh Schedule was not inserted by way of declaration of common law nor was it intended to get over divergence of judicial opinion. In our opinion, it was not even intended to bring uniformity but certainly it was inserted with a view to supply the omission, which caused prejudice to the interests of the Revenue. Did Parliament intend just to clarify blended flavouring concentrates as also including synthetic essences and stop there or did the lawmakers intended to deny for the yester years, the benefit of investment allowance to all those assessees who are indeed using synthetic essences in the manufacturing of aerated waters ?
16. We have no doubt that the Finance Act, 1987, has no retrospective effect of disqualifying those manufacturers of aerated waters using synthetic essences from claiming the investment allowance under section 32A(1). The language of the Explanation, however, has given the scope for the argument that clarificatory in nature should be given retrospective effect. This again begs the question whether retrospectivity is with regard to the construing the blended flavouring concentrates as always-in the past, present and future including synthetic essences or the retrospectivity was with reference to the effect of section 32A(2)(iii), which denied the investment allowance to all those manufacturers of articles or things enumerated in the Eleventh Schedule. We are convinced that the Explanation though clarificatory was never intended to deny the investment allowance during the assessment years prior to 1988-89 and it was only intended to clarify the definition to dispel any doubts as to what Parliament intended by blended flavouring concentrates.
External aids to Interpretation
17. The statement of objects and reasons, the memorandum or explanation on the clauses in the Bill, the speech of the Minister who piloted the Bill sometimes the debates in Parliament are external aids to interpret and construe the law. Though all of them absolutely do not always point to one direction, nevertheless a reference to all these is not totally precluded. Further, the bureaucratic/executive understanding of the law as manifested in the departmental circulars, instructions and guidelines or the subordinate legislation-contemporanea expositio are also important in understanding the intention of Parliament. This is especially so with regard to the circulars issued by the Central Board of Direct Taxes (CBDT) who conventionally come out with clarificatory guidelines in the form of a circular immediately after the passing of the Finance Bill by Parliament.
18. The senior counsel for income-tax is correct that when the language of the provision is clear, no interpretation is required. It is the literal construction which is golden rule. The Finance Act made in accordance with article 109 of the Constitution will be effective only from the assessment year which as per section 2(9) means the period of twelve months commencing from the first day of April every year and it cannot be for the “previous year” which as per section 3 of the Act means, the financial year immediately preceding the assessment year. If there are contentious issues emerge on this aspect, interpretation became inevitable. Further, an Explanation always is intended to define, clarify or enlarge the definition of restrict or enlarge the scope or remove doubt about the enacting provision. If such clarificatory explanation itself gives scope for interpretation as to its effect on the past/future assessment years, it is incumbent for the court to interpret the same. In such a situation, the external aids are certainly useful and resort to them is permissible (Indra Sawhney v. Union of India AIR 1993 SC 477, S. R. Bommai v. Union of India AIR 1994 SC 1918, Ms. Aruna Roy v. Union of India AIR 2002 SC 3176, K. P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC), Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC), Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC) and Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1/[1979] 2 Taxman 501 (SC).
19. We quote hereinbelow, from various legislative documents.
Notes on Clauses in the Finance Bill, 19872
‘Clause 75 seeks to amend items 5 and 22 of the Eleventh Schedule to the Income-tax Act.
Under item 5 of the Eleventh Schedule, aerated waters in the manufacture of which blended flavouring concentrates in any form are used are one of the non-priority articles or things to which section 32AB and other sections of the Act would not be applicable in certain cases. It is proposed to make a clarificatory amendment in the item to indicate that blended flavouring concentrates would include, and would have included, synthetic essences in any form.
The Explanation below item 22 of the Schedule defines ‘office machines and apparatus’ to include all machines and apparatus used in offices for data processing. It is proposed to make a clarificatory amendment to exclude computers from the expression ‘data processing’ so that the benefits of the provisions of section 32AB and other sections may be made available in respect of computers. It is also proposed to exclude office machines and apparatus used for transmission and reception of messages from the non-priority list of articles or things as contained in this item.
These amendments will take effect from 1st April, 1988, and will accordingly, apply in relation to the assessment year 1988-89 and subsequent years.” (Emphasis supplied)
Memorandum Explaining the Provisions in the Finance Bill, 19873
“Clarificatory amendment of definition of ‘aerated waters’ for the purposes of inclusion in the Eleventh Schedule.
43. Under item 5 of the Eleventh Schedule to the Income-tax Act, ‘aerated waters in the manufacture of which blended flavouring concentrates in any form are used’ are one of the non-priority articles or things to which benefits of the provisions of section 32AB and other sections of the Act would not be applicable.
It has been found that certain taxpayers manufacturing aerated waters in which synthetic essence is being used, are claiming the above benefits on the ground that the synthetic essence cannot be included in the expression ‘blended flavouring concentrates in any form’.
As this was never the legislative intent, with a view to counteracting the tax avoidance and placing the matter beyond doubt, the proposed amendment seeks to provide that the blended flavouring concentrate appearing in item 5 would include synthetic essence in any form.
The amendment will take effect from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years.” (emphasis supplied)
Finance Act4
“73. Amendment of the Eleventh Schedule-In the Eleventh Schedule to the Income-tax Act, with effect from the 1st day of April, 1988,-
(a) in item 5, the following Explanation shall be inserted at the end, namely :-
‘Explanation.-“Blended flavouring concentrates” shall include, and shall be deemed always to have included, synthetic essences in any form’. (Emphasis supplied)
Central Board of Direct Taxes Circular No. 495, dated September 22, 19875
“Amendment of the Eleventh Schedule to the Income-tax Act
43.1 The Eleventh Schedule to the Income-tax Act lists non-priority products. The manufacturers of these products are denied tax concessions under section 32AB and other sections of the Act. Item No. 5 of the Eleventh Schedule relates to ‘aerated waters’ in the manufacture of which ‘blended flavouring concentrates in any form are used”. It has been found that certain persons manufacturing aerated waters are using synthetic essence and are claiming the benefit on the ground that synthetic essence cannot be included in the expression ‘blended flavouring concentrates in any form’. As this was not the intention of the Legislature, the Amending Act has inserted an Explanation to item 5 of the Eleventh Schedule which clarifies that blended flavouring concentrates would include the synthetic essences in any form . . .
43.3 This amendment will come into force from 1st April, 1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years.’ (Emphasis supplied).
20. The deduction of investment allowance under section 32A was denied as non-priority articles or things. However, the Government experienced that the manufacturers of aerated waters using synthetic essences also claimed the benefit on the ground that synthetic essence cannot be included in the expression, “blended flavouring concentrates in any form”, though it was not legislative intent. With a view to prevent tax avoidance and placing the matter beyond doubt, the amendment was proposed seeking to clarify that the blended flavouring concentrates, as always to include synthetic essence in any form. This was also found mentioned in clause 75 of the Notes on Clauses, which was ultimately enacted as section 73 of the Finance Act, 1987. In the Memorandum, the Notes on Clauses as well as the Finance Act, Parliament categorically held that the amendment will come into force from April 1, 1988, and will accordingly apply in relation to the assessment year 1988-89 and subsequent years. The Central Board of Direct Taxes in their circular further clarified the same. Thus, though the Explanation was inserted for the purpose of, “placing the matter beyond doubt”, the amendment was intended not to be retrospective. It was to come into effect from the assessment year 1988-89 and subsequent years only.
Case law
21. An amendment to an Act may contain that it is clarificatory or declaratory. The use of phrases like “hereby clarified”, “hereby declared”, “deemed to include” or “shall be deemed always to have included” is not always conclusive to render an amendment clarificatory/declaratory or always retrospective in operation. The court has to analyse the nature of amendment to arrive at a conclusion. The day from which the amendment is made operative is also not conclusive. The court has to examine the scheme of the amendment prior to the amendment and subsequent amendment to determine whether the amendment is clarificatory Gold Coin Health Food (P.) Ltd. (supra).
22. In M.C. Ponnoose (supra) the facts are these. Section 2(44) of the Income-tax Act which came into effect from April 1, 1962, defined the expression “Tax Recovery Officer”. Section 4 of the Finance Act, 1963, substituted a new definition for the original definition providing that the new definition “shall be and shall be deemed always to have been substituted”. The amended provision enabled any land revenue officer to exercise the powers of Tax Recovery Officer. When the Income-tax Officer initiated recovery proceedings through Tahsildar by attaching the assessee’s shares, a writ petition was filed questioning the powers of the land revenue officials to attach the shares. The challenge was upheld by the High Court of Kerala, who declined to give retrospective effect to notification empowering the Tahsildar. In the appeal, the Revenue contended before the Supreme Court that the State Government could invest the Tahsildar with the powers of the Tax Recovery Officer with effect from the date prior to the date of notification, i.e., retroactively or retrospectively. Observing that the courts will not ascribe retrospectivity to new laws affecting rights unless by express words or necessary implication it appears that such was the intention of the Legislature, rejected the plea of the Revenue and held (page 178 of 75 ITR) :
“It may next be considered whether by saying the new definition of ‘Tax Recovery Officer’ substituted by section 4 of the Finance Act, 1963, ‘shall be and shall be deemed always to have been substituted’, it could be said that by necessary implication or intendment the State Government had been authorized to invest the officers mentioned in the notification with the powers of a Tax Recovery Officer with retrospective effect. The only effect of the substitution made by the Finance Act was to make the new definition a part of the Act from the date it was enacted. The legal fiction could not be extended beyond its legitimate field and the aforesaid words occurring in section 4 of the Finance Act, 1963, could not be construed to embody conferment of a power for a retrospective authorization by the State in the absence of any express provision in section 2(44) of the Act itself.” (Emphasis supplied).
23. In Rajasthan Mercantile Co. Ltd. (supra) the Division Bench of the Delhi High Court considered the question of retrospective application of the Explanation to section 37(2A) inserted by the Finance Act, 1968, with effect from April 1, 1968, and Explanation 2 to section 37(2B) inserted by the Finance Act, 1970, with effect from April 1, 1976. The plea that the Explanation being clarificatory or declaratory in nature is not effected by any rule against retrospectivity, was rejected by the court. It was held that, Explanation 2 to section 37(2B) will apply to the assessments with effect from April 1, 1976, and that except widening the concept of “entertainment expenditure by including in its scope such expenditures which is otherwise traditionally understood as routine business expenditure, it cannot be extended to the past periods when the amended Explanation was not in operation”.
24. The Supreme Court in Patel Brothers & Co. Ltd. (supra) considered Explanation 2 to below section 37(2A). The said Explanation “declared” that for the purpose of section 37(2A) and (2B) entertainment expenditure includes expenditure on provisions of hospitality of every kind by the assessee to any person whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade. Construing the said provision, the Supreme Court while approving Rajasthan Mercantile Co. Ltd. (supra), held as under (page 173).
“In our opinion, the construction we have made of the provision as it existed during the relevant period flows not merely from the language of the provision but also matches with the object thereof. It means that the expenditure incurred by the assessees in providing ordinary meals to outstation customers according to established business practice, was a permissible deduction in spite of sub-section (2A) of section 37, to which the assessees were entitled in the computation of their total income for the purpose of payment of tax under the Income-tax Act, 1961, during the relevant period prior to April 1, 1976.”
Explanation below item 5 of the Eleventh Schedule
25. Applying the above principles, we are of the considered opinion that the phrase “shall be deemed always to have included” in the Explanation to item 5 only clarifies that blended flavouring concentrates shall include synthetic essences. It is a fiction which has limited effect. Construing section 4 of the Finance Act, 1963, which contain the similar phrase, i.e., “shall be and shall be deemed always to have been substituted”, the Supreme Court in M. C. Ponnoose (supra) held that legal fiction could not be extended beyond its legitimate field and the said words could not be construed to embody conferment of power retrospectively.
26. The recent decision of the Full Bench of this court in T. Rev. No. 233 of 2010 and batch, dated June 27, 2011, to which one of us (VVSR J.) is a member, summed up the effect of legal fiction while construing a statute.
“A legal fiction is created only for some definite purpose. The fiction is to be limited to the purpose for which it was created, and should not be extended beyond that legitimate field. A legal fiction presupposes the existence of the state of facts which may not exist, and then works out the consequences which flow from that state of facts. Such consequences have got to be worked out only to their logical extent having due regard to the purpose for which the legal fiction has been created. Stretching the consequences beyond what logically follows amounts to an illegitimate extension of the purpose of the legal fiction. A legal fiction should not be extended beyond the language by which it is created. A deeming provision cannot be pushed too far so as to result in an anomalous or absurd position. The fiction enacted by the Legislature must be restricted by the plain terms of the statute. The legal fiction is not to be extended beyond the purpose for which it is created, or beyond the language of the section by which it is created. A legal fiction cannot be extended by the court on analogy or by addition or deleting words not contemplated by the legislature.” (internal quotations omitted). (Emphasis supplied)
27. We respectfully differ from the view taken by the Calcutta and Madras High Courts in Black Diamond Beverages Ltd. (supra) and Soft Beverages (P.) Ltd. (supra) respectively. The Explanation under consideration has to be construed as expanding description or definition of “blended flavouring concentrates” so as to include synthetic essences in any form. If the blended flavouring concentrates includes synthetic essences by fiction, it is logical that such fiction would have applied even from the date anterior to the expression of intention by Parliament. The words “shall be deemed always to have included”, therefore, have to be given a limited meaning of understanding the blended flavouring concentrates as always including the synthetic essences. In so far as denying the benefit of investment allowance under section 32A(2)(iii) is concerned, it can only be with effect from April 1, 1988. We, therefore, answer this issue in favour of the assessee. The second issue.
28. The first question in R. C. No. 125 of 1999 is regarding disallowance of interest by the Assessing Officer. In their return of income, the assessee provided interest at 15 per cent. This was disallowed on the ground that the assessee failed to establish nexus between the monies borrowed and advance made. The objection raised by the Revenue is that the Tribunal’s finding is based on the fresh material brought before the Income-tax Appellate Tribunal and, therefore, it could not have allowed such evidence. The senior counsel for income-tax would rely on rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 (“the ITAT Rules”, for brevity). Per contra, the senior counsel for Sarvaraya Sugars submits that it is a question of fact, which does not require any consideration by the High Court under section 256(2). According to him, when a question of fact on which a finding has been recorded by the Tribunal, the jurisdiction of the High Court to express opinion is barred. He relied on India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC), M. A. Jabbar v. CIT [1968] 68 ITR 493 (SC), Karnani Properties Ltd. v. CIT [1971] 82 ITR 547 (SC), CIT v. Park Hotel (P.) Ltd. [1996] 218 ITR 221/84 Taxman 430 and Thiru Arooran Sugars Ltd. v. CIT [1997] 227 ITR 432/93 Taxman 579 (SC).
29. In the return of income for 1985-86, Sarvaraya Sugars claimed Rs. 17 lakhs interest payment on the secured and unsecured loans obtained by it from the banks. Section 36(1)(iii) allows the deduction of amount of interest paid in respect of capital borrowed for the purpose of business in computing the income under section 28. If an assessee-it is not denied-borrows the money ostensibly for the purpose of business but lends or advances it to another company, the deduction cannot be allowed because such borrowing presumptively is not for the purpose of business. Therefore, in a case where the assessee borrowed for the purpose on which he pays interest and also earns interest by lending the surplus out of their profits to another, the assessee has to demonstrate that there is no nexus as regards the money borrowed and the money advanced to another person. Sarvaraya Sugars is a manufacturing company. It is not in the business of advancing loans. It is seen from the record that M/s. East Coast Salt and Chemicals Ltd. is subsidiary of Sarvaraya Sugars. Therefore, the question is whether there is any nexus between the monies borrowed and advances made by the assessee.
30. During the scrutiny of the return of income before the Income-tax Officer, the assessee asserted that the money lent to East Coast was from out of its profits and not out of borrowed monies. Observing that the details are not furnished in this regard, the Assessing Officer made an addition of Rs. 2,99,689 being the interest on the advance. The Commissioner of Income-tax (Appeals) confirmed the addition observing that the assessee was not in a position to give break up of different details to show that the amount advanced to East Coast was from the cash balance at its disposal and did not comprise the substantial loan borrowed by them. The Appellate Tribunal reversed this observing that the Department failed to establish any nexus between the monies borrowed and the advances made and that the assessee has advanced monies not from the borrowed funds but from its own sources. In doing so, the Appellate Tribunal verified the details of accounts produced before them by way of paper book compilation. Thus, a clear finding of fact is recorded that the assessee did not advance monies to East Coast from out of borrowed funds.
31. Whether such finding of fact can be a subject matter of reference under section 256(1) or 256(2) ? This has to be considered with reference to the question framed. The question referred is whether the Income-tax Appellate Tribunal was right in deleting the disallowance relying on the fresh allowance brought before Income-tax Appellate Tribunal. Rule 29 of the Income-tax (Appellate Tribunal) Rules bars the parties to the appeal from producing additional evidence either oral or documentary. This is not a rigid rule. If the Tribunal requires any document to be produced or any witness to be examined, or if the income-tax authorities decided a case without giving an opportunity to the assessee to adduce evidence, the Tribunal can always allow production of additional evidence. It is within the discretion of the Appellate Tribunal to permit additional evidence and if anybody has any objection, it should be taken before the Tribunal and not before the reference court. From the reading of the order of the appellate Tribunal, we do not find any objection to have been taken by the Revenue nor did they raise any plea that they were not supplied the paper book compilation, to which the attention of the Tribunal was drawn.
32. In a reference under section 256, the High Court must accept the finding of fact reached by the Appellate Tribunal India Cements Ltd. (supra). If a question of fact is examined, while answering reference, the High Court would be acting in excess of jurisdiction M. A. Jabbar (supra). Every question referred to the High Court ordinarily contains a phrase “. . . in the facts and circumstances of the case” or “. . . in the circumstances of the case”. This means the question of law referred to in the background of the facts found by the Appellate Tribunal and not facts which are to be fished out by the High Court at the instance of either of the parties Karnani Properties Ltd. (supra). The Appellate Tribunal is a final finding authority. The High Court cannot go beyond the facts found by the Tribunal. Whether it is an assessee or the Revenue, all questions of fact have to be raised at the time of hearing of the appeal before the Tribunal and in the reference, no fresh hearing of disputed questions of fact is possible nor permissible Thiru Arooran Sugars Ltd. (supra) Applying these principles, the view taken by the Tribunal with reference to the question of fact is final and the question of law would not arise for opinion under section 256(2) of the Act.
33. In the result, the questions in R.C. No. 85 of 1997 as well as R.C. No. 125 of 1999 are answered in affirmative in favour of the assessee and against the Revenue.
34. The reference cases are accordingly disposed of. There shall be no order as to costs.
[Citation :Â 356 ITR 625]
