Rc/152/1996 Of M/S. Bakelite Hylam Ltd v. The Commissioner Of Income Tax

* THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE B.N.RAO NALLA +REFERRED CASE No.152 OF 1996 % 28.11.2011 M/s.Bakelite Hylam Limited, Hyderabad .. ApplicantAnd $The Commissioner of Income Tax, Andhra Pradesh, Hyderabad .. Respondent ! Counsel for the petitioner: Sri A.V.Raghuram Counsel for the Respondent: Sri S.Sasidhar Reddy < Gist : > Head Note: ? Cases referred ? Citations:1.(1999) 3 SCC 346 : AIR 1999 SC 12752. (2004) 10 SCC 201 (para 106)THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE B.N.RAO NALLA REFERRED CASE No.152 OF 1996 Dated:28.11.2011 Between: M/s.Bakelite Hylam Limited,Hyderabad.. Applicant And The Commissioner of Income-tax, Andhra Pradesh, Hyderabad .. Respondent THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE B.N.RAO NALLA REFERRED CASE No.152 OF 1996 ORDER:(Per Hon’ble Sri Justice V.V.S.Rao) This is a reference under Section 256(1) of the Income TaxAct, 1961 (the Act). The following two questions have beenreferred to the opinion of this Court at the instance of theassessee with reference to the assessment years 1985-1986 and 1986-1987. -Assessment Year 19851986 Whether on the facts and in the circumstances of thecase, the Appellate Tribunal was correct in law in holding thatthe rentals amounting to Rs.2,80,259/- being the expenditureincurred for hiring space at various locations, shall beconsidered for the purposes of computation of disallowanceu/s.37(3A) of the Income Tax Act, 1961, despite the fact thatrentals are allowance u/s.30 of the Act? -Assessment Year 19861987 Whether on the facts and in the circumstances of thecase, the Tribunal was correct in holding that excise duty is adirect cost of manufacture even after recording a finding offact that the moment goods are produced the levy isfastened? The second question has to be answered in favour of theRevenue and against the assessee in view of the decision of thisCourt in a case of the assessee itself in R.C.No.33 of 1995, dated09.06.2006 (Bakelite Hylam Limited v Commissioner of IncomeTax) wherein a similar question was considered and answeredagainst the assessee. The counsel does not dispute this. We areonly required to consider the question with reference to theassessment year 1985-1986. The background facts to the barest may be noticed asfollows. The assessee is a Public Limited Company engaged inthe business of manufacturing of industrial laminates, phenolicresins, phenolic moulding material and industrial and decorativelaminates. In their return of income tax for the assessment year1985-1986, they admitted the total income of Rs.1,32,28,400/-. Among others they claimed deduction of two items of expenditure,namely, (i) expenditure incurred on hired space on hoardings and(ii) expenditure incurred on statutory advertisement like printing oftechnical data sheets, printing of stationery etc. under the generalhead of advertisement and publicity. They claimed deductionunder Section 30 of the Act for the rental paid for hiring the spaceon hoardings. By an order dated 25.03.1988, the AssessingOfficer disallowed the deduction and added back to the totalincome. In their appeal before the Commissioner of Income Tax(Appeals) (CIT (A)), the assessee was partly successful to theextent of the expenditure incurred on statutory advertisement likeprinting technical data, printing stationary etc to a tune ofRs.58,213/-. In so far as the expenditure incurred for hiring spaceis concerned, the CIT (A) disallowed the claim holding that it wouldnot come under Section 37(3A) read with (3B)(i). This view wasconfirmed by the Income Tax Appellate Tribunal as well, aggrievedby which the assessee sought reference of the second question asnoticed hereinabove. We have heard the counsel for the assessee and the JuniorStanding Counsel for Income Tax Department. Herein below, we quote Sections 30 and 37 of the Act to the extent necessary as they existed at the relevant time in the Act. 30. Rent, rates, taxes, repairs and insurance forbuildings: In respect of rent, rates, taxes, repairs andinsurance for premises, used for the purposes of the businessor profession, the following deduction shall be allowed- (a)where the premises are occupied by the assessee- (i)as a tenant, the rent paid for such premises;and further if he has undertaken to bear thecost of repairs to the premises, the amountpaid on account of such repairs; (ii)otherwise than as a tenant, the amount paidby him on account of current repairs to thepremises; (b)any sums paid on account of land revenue, local rates ormunicipal taxes;municipal taxes; (c)the amount of any premium paid in respect of insuranceagainst risk of damage or destruction of the premises.against risk of damage or destruction of the premises. 37. General – (1) Any expenditure (not being expenditure ofthe nature described in sections 30 to 36 and section 80VVand not being in the nature of capital expenditure or personalexpenses of the assessee), laid out or expended wholly andexclusively for the purposes of the business or professionshall be allowed in computing the income chargeable underthe head “Profits and gains of business or profession”. Explanation.—For the removal of doubts, it is hereby declaredthat any expenditure incurred by an assessee for any purposewhich is an offence or which is prohibited by law shall not bedeemed to have been incurred for the purpose of business orprofession and no deduction or allowance shall be made inrespect of such expenditure. (Sub-sections (2), (2A), (2B) and (3) omitted here as not relevant). (3A). Notwithstanding anything contained in sub-section (1),where the expenditure or, as the case may be, the aggregateexpenditure incurred by an assessee on any one or more ofthe items specified in sub-section (3B) exceeds one hundredthousand rupees, twenty percent of such excess shall not beallowed as deduction in computing the income chargeableunder the head “Profits and gains of business or profession”. (3B). The expenditure referred to in sub-section (3A) is thatincurred on – (i)advertisement, publicity and sales promotion; or (ii)running and maintenance of aircraft andmotor cars; ormotor 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 ofexpenditure incurred by the assessee as reduced by so muchof such expenditure as is not allowed under any otherprovision of this Act; (b) expenditure on advertisement, publicity and sales promotion shall not include remuneration paid to employees ofthe assessee engaged in one or more of the said activities; (c) expenditure on running and maintenance ofaircraft and motor cars shall include, -- (Sub-sections (3C), (3D), (4) and (5) omitted here as not relevant). (i)advertisement, publicity and sales promotion; or (ii)running and maintenance of aircraft andmotor cars; ormotor 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 ofexpenditure incurred by the assessee as reduced by so muchof such expenditure as is not allowed under any otherprovision of this Act; (b) expenditure on advertisement, publicity and sales promotion shall not include remuneration paid to employees ofthe assessee engaged in one or more of the said activities; (c) expenditure on running and maintenance ofaircraft and motor cars shall include, -- (Sub-sections (3C), (3D), (4) and (5) omitted here as not relevant). The conspectus on the plain reading of the two provisions isas follows. In computing profits and gains of business orprofession, if the assessee is a tenant in occupation of a premisefor the business or profession, the rent paid for such premises andthe cost of repairs incurred if any shall be allowed to be deducted. If the assessee is in occupation of a premises for the purpose ofbusiness of a premises otherwise as a tenant the amount paid byhim on account of repairs to the premises shall be allowed. Inaddition, the sums paid on account of revenue, local rates ormunicipal taxes or insurance against risk of damage or destructionof the premises are also deductible. The crucial words in Section30 are “use of the premises for the purpose of business orprofession”. By no stretch of imagination, it can be inferred thatthe hire charges paid for advertisement hoardings would alsocome within the ambit of use of the premises for the purpose ofbusiness. Section 30 has nothing to do with advertisement,publicity or sales promotion. Giving very plain meaning of thelanguage in Section 30, it has to be construed as dealing with thededuction of rent, rates, taxes, repairs and insurance paid for thepremises used for the business or profession either as a tenant orotherwise as a tenant. It does not take within its fold expenditure incurred for advertisement or publicity. If Section 30 is interpretedas also allowing deduction of the hire charges for the space for thepurpose of advertisement, it would amount to supplying casusomissus. A tax law has to be interpreted strictly. Whatever may bethe hardship, nothing can be added nor something can be ignored. It must always be the endeavour of the Court to give plain meaningto the words used in the provision. In ‘Principles of StatutoryInterpretation’ by Justice G.P.Singh (Tenth edn., 2006), thegeneral principles of strict interpretation of fiscal statutes aresummarized as below. incurred for advertisement or publicity. If Section 30 is interpretedas also allowing deduction of the hire charges for the space for thepurpose of advertisement, it would amount to supplying casusomissus. A tax law has to be interpreted strictly. Whatever may bethe hardship, nothing can be added nor something can be ignored. It must always be the endeavour of the Court to give plain meaningto the words used in the provision. In ‘Principles of StatutoryInterpretation’ by Justice G.P.Singh (Tenth edn., 2006), thegeneral principles of strict interpretation of fiscal statutes aresummarized as below. A taxing statute is to be strictly construed. The well-established rule in the familiar words of LORDWENSLEYDALE, reaffirmed by LORD HALSBURY andLORD SIMONDS, means: “The subject is not to be taxedwithout clear words for that purpose; and also that every Actof Parliament must be read according to the naturalconstruction of its words”. In a classy passage LORDCAIRNS stated the principle thus: “If the person sought to betaxed, however great the hardship may appear to the judicialmind to be. On the other hand, if the Crown seeking torecover the tax, cannot bring the subject within the letter of thelaw, the subject is free, however, apparently within the spirit oflaw the case might otherwise appear to be. In other words, ifthere be admissible in any statute, what is called an equitable,construction, certainly, such a construction is not admissiblein a taxing statute where you can simply adhere to the wordsof the statute”. VISCOUNT SIMON quoted with approval apassage from ROWLATT, J. expressing the principle in thefollowing words: “In a taxing Act one has to look merely atwhat is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as totax. Nothing is to be read in, nothing is to be implied. Onecan only look fairly at the language used”. Relying upon thispassage LORD UPJOHN said: “Fiscal measures are not builtupon any theory of taxation”. The above passage was quoted with approval inCommissioner of Income Tax v Kasturi and Sons Ltd.[[1]]. In Stateof West Bengal v Kesoram Industries Ltd.[[2]], citing the same, the apex Court summed up the following settled principles ofinterpretation (i) In interpreting a taxing statute, equitableconsiderations are entirely out of place. Taxing statutes cannot beinterpreted on any presumption or assumption. A taxing statutehas to be interpreted in the light of what is clearly expressed; itcannot imply anything which is not expressed; it cannot importprovisions in the statute so as to supply any deficiency; (ii) Beforetaxing any person it must be shown that he falls within the ambit ofthe charging section by clear words used in the section; and (iii) Ifthe words are ambiguous and open to two interpretations, thebenefit of interpretation is given to the subject. There is nothingunjust in the taxpayer escaping if the letter of the law fails to catchhim on account of the legislature’s failure to express itself clearly. Sections 30 to 36 deal with the various deductions to beallowed while computing the profits and gains of business orprofession. Section 37 is an additional provision which supplantsSections 30 to 36. It has three sets of independently operatingsub-sections. All of them deal with the deduction of generalexpenditure not covered by Sections 30 to 36. Under sub-section(3A) read with (3B), where the expenditure of the assessee onadvertisement, publicity and/or sales promotion, exceeds onehundred thousand rupees, 20% of such excess shall not beallowed as deduction in computing the income chargeable underthe head “Profits and gains of business or profession”. Sub-sections (3A) and (3B) are attracted in respect of the expenditureincurred by an assessee either on advertisement or publicity orsales promotion. It does not in any manner deal with theexpenditure for hiring space on hoardings. As noticed by the CIT (A), the expenditure under the headexpenditure incurred on hired space in a sum of Rs.2,80,259/- As noticed by the CIT (A), the expenditure under the headexpenditure incurred on hired space in a sum of Rs.2,80,259/- does not come within the purview of publicity, advertisement orsales promotion. Section 37 (3A) read with (3B) is very specificthat it is only the expenditure incurred for advertisement, publicityand sales promotion which are to be given ordinary meaning. Mere hiring a space on hoardings cannot be treated as expenditurefor advertisement or publicity or sales promotion. In view of the above, we answer the reference in theaffirmative in favour of the Revenue and against the assessee anddispose of the reference accordingly without any order as to costs. ________________ (V.V.S. RAO, J) _____________________ (B.N.RAO NALLA, J) 28.11.2011 Note:- L.R. Copy be marked. (B/o) KH [1](1999) 3 SCC 346 : AIR 1999 SC 1275(1999) 3 SCC 346 : AIR 1999 SC 1275 [2](2004) 10 SCC 201 (para 106)(2004) 10 SCC 201 (para 106)