Andhra Pradesh H.C : This reference raises a short but interesting question concerning the effect of s. 37(3A) of the IT Act, 1961 (” the Act “, for short).

Counsel Appeared

M. Suryanarayana Murthy, for the Revenue : A. Satyanarayana, for the Assessee

Y.V. ANJANEYULU, J.:

This reference raises a short but interesting question concerning the effect of s. 37(3A) of the IT Act, 1961 (” the Act “, for short). For the asst. yr. 1979-80, the assessee incurred, inter alia, the following expenditure on advertisement, publicity and sales promotion:

. Rs.
1. Advertisement in newspapers 3,274

2. Amount paid to M/s Mahaveer Trading Co., for art50 each

3. Glasses purchased from Black Diamond Glass 2,123/20.10 per doz. icles costing less than Rs. 32 doz. at the rate of Rs. 1,20,921   50,658

Total 1,74,853

(There is an item of Rs. 80,000 which was originally included under this head, but it was agreed eventually that this sum of Rs. 80,000 was covered by s. 37(3) of the Act.)

The assessee claimed deduction of the aforesaid sum in its entirety while computing its income for the assessment year under consideration. The ITO held that the expenditure being an expenditure on advertisement, publicity and sales promotion, it is liable to be governed by the limits specified in s. 37(3) of the Act r/w r. 6B of the Rules. The ITO first quantified the expenditure to be allowed on the above accounts by applying the limits specified in r. 6B and found that the aggregate expenditure on account of the above exceeded Rs. 40,000. He then applied the provisions of s. 37(3A) of the Act and worked out the expenditure qualifying for deduction. He eventually disallowed a sum of Rs.38,228.

The assessee filed an appeal to the CIT (Appeals). The contention urged before the CIT was that the expenditure incurred on presentation articles was less than Rs. 50 each and in terms of r. 6B, the entire expenditure should be allowed. There was no difficulty in accepting this part of the claim of the assessee, because the presentation articles supplied by Mahaveer Trading Company cost less than Rs. 50 each and so also the cost of glasses purchased from Black Diamond Glass per dozen. But then the CIT held that even though the expenditure incurred fell within the limits specified in r. 6B and no amount fell to be disallowed in terms of s. 37(3) of the Act, still the further limits specified in s. 37(3A) of the Act would apply. Doing so, the CIT found the order of the ITO to be in order and declined to interfere in the matter.

The assessee preferred a second appeal to the Tribunal. Before the Tribunal, the assessee reiterated the same argument and it was accepted by the Tribunal. The Commissioner is aggrieved by the decision of the Tribunal and accordingly sought a reference to this Court of the following question of law: ” Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the advertisement expenditure falling under s. 37(3) of the IT Act r/w r. 6B of the IT Rules does not come within the ambit of the words ‘aggregate expenditure’ or ‘adjusted expenditure’ within the meaning of s. 37(3A) of the IT Act, 1961? “

5. We have heard standing counsel for the Revenue and Sri A. Satyanarayana, learned counsel for the assessee. Having carefully looked into the provisions, we feel that the stand taken by the CIT and the ITO is correct and the Tribunal is in error. For the sake of reference, we may extract below the relevant provisions in the Act and the Rules : “Sec. 37. (1) Any expenditure (not being expenditure of the nature described in ss. 30 to 36 and s. 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or ‘profession’ … (3) Notwithstanding anything contained in sub-s. (1), any expenditure incurred by an assessee after the 31 st day of March, 1964, on advertisement or on maintenance of any residential accommodation including any accommodation in the nature of a guest-house or in connection with travelling by an employee or any other person (including hotel expenses or allowances paid in connection with such travelling) shall be allowed only to the extent, and subject to such conditions, if any, as may be prescribed. (3A) Notwithstanding anything contained in sub-s. (1) but without prejudice to the provisions of sub-s. 2(B) or sub-s. (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 12-1/2 per cent of the cent but does not exceed 1/2 per cent of the turnover or, adjusted expenditure; as the case may be, gross receipts of the business or profession (iii) where such aggregate expenditure exceeds 1/2 per 15per cent of the adjusted cent. of the turnover or, as the case may be,, gross expenditure. receipts of the business or profession Explanation.—For the purposes of this sub- section,— (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 sub-s. (1) and as further reduced by so much of such expenditure as is not allowed under sub-s. 2(B) or sub-s. (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. “

6. The intention of the Legislature was to restrict the colossal expenditure by taxpayers on advertisement, publicity and sales promotion. To achieve that object, provisions were incorporated in s. 37 of the Act limiting the expenditure on these items. The limits are specified in the Rules prescribed, vide r. 6B. Sec. 37(3) authorises an allowance of expenditure on these items as per the quantification made under r. 6B. If the matter ended there, there would have been no problem. But then, s. 37(3A) was devised in order to impose a further limit on the aggregate expenditure on account of the above items. Where, for instance, the aggregate expenditure to be allowed under s. 37(3) r/w r. 6B was less than Rs. 40,000, the assessee is entitled to claim full deduction of the sum. Where, however, the aggregate expenditure to be allowed under s. 37(3) r/w r. 6B exceeded the sum of Rs. 40,000, s. 37(3A) imposes a further limitation. We have extracted above s. 37(3A) and it is not necessary to reiterate the details concerning the limitation.

7. The contention of Sri A. Satyanarayana, learned counsel for the assessee, is that as far as the expenditure quantified under s. 37(3) r/w r. 6B is concerned, it is not subject to any further limitation under s. 37(3A), as is evident from the use of the expression in s. 37(3A) to the effect that it is without prejudice to the provisions contained in s. 37(3). Mr. Satyanarayana, therefore, contends that the entire extent of expenditure which is allowable under s. 37(3) r/w r. 6B should be allowed and it should not be subject to the further limitation specified in s. 37(3A) of the Act. We are unable to agree. The further limitation specified in s. 37(3A) are without prejudice to the provisions contained in s. 37(3). By saying so, the Legislature did not intend to ensure that whatever expenditure is allowable under s. 37(3) is allowed without subjecting the same to the further limitation under s. 37(3A). Indeed, the expression, “without prejudice” etc., in our opinion, indicates that the amount to be considered for the purpose of s. 37(3A) is not the actual expenditure incurred by the assessee but the expenditure as is quantified by the application of r. 6B which intention is made explicit by the definition of ‘adjusted expenditure’ in the Explanation to sub-s. (3A) of s. 37; otherwise, we do not see any situation in which sub-s. (3A) of s. 37 would become applicable and it would be a dead letter. We find no difficulty in the language employed in s. 37(3A) also. We, therefore,uphold the Revenue’s claim that the expenditure on account of advertisement, publicity and sales promotion should, in the first instance, be subject to the limitation specified in s. 37(3) and the aggregate of such expenditure should further be subject to the limitation in s. 37(3A) of the Act. Mr. Satyanarayana pointed out that this double limitation may cause jeopardy. It may be, but, that is obviously the intention of the Legislature. Instances of such dual limitations are not wanting in the IT Act. We may point out that in Chapter VI-A, while there is limitation in the matter of deduction under various heads, there is limitation on the total amount of deduction with reference to income of the assessee. If the Legislature in its wisdom thought that more than one limitation should be prescribed for the purpose of allowing the expenditure under tax law, it is not possible for this Court to intervene.

8. We accordingly answer the question in the negative, that is, in favour of the Revenue and against the assessee. No costs.

[Citation : 171 ITR 249]