The Commissioner Of Income Tax, Visakhapatnam v. $ M/S.vijayawada Bottling Co., Limited,Vijayawada

THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE B.N.RAO NALLA REFERRED CASE Nos.85 OF 1997 AND 125 OF 1999 % 06.01.2012 The Commissioner of Income Tax, Visakhapatnam. VERSUS ... Petitioner $ M/s.Vijayawada Bottling Co., Limited,Vijayawada < GIST: ...Respondents > HEAD NOTE: ! Counsel for Petitioner: Sri S.R.Ashok, Standing Counsel for IT ^Counsel for Respondents: Sri C.Kondandaram (R.C.No.125 of 1999) Sri Y.Ratnakar (R.C.No.85 of 1997) ? Cases referred1. [1993] 201 ITR 482. [2005] 272 ITR 2703. [1970] 75 ITR 1744. [1994] 208 ITR 785 (Del)5. [1995] 211 ITR 400 (Del)6. [1995] 215 ITR 165 (SC)7. [2008] 304 ITR 308 (SC)8. (1995) 2 SCC 630 : AIR 1996 SC 2389. (2011) 337 ITR 299 (AP)10. [1979] 120 ITR 1 (SC) = (1979) 4 SCC 118 = AIR 1979 SC 189711. [1997] 224 ITR 677 (SC) : (1997) 3 SCC 47212. [1997] 224 ITR 753 (SC)13. (2000) 2 SCC 25314. (2004) 8 SCC 115. [2008] 297 ITR 322 (SC) : (2008) 4 SCC 362 : AIR 2008 SC 57216. (2010) 1 SCC 48917. AIR 1993 SC 477 : (1992) Supp (3) SCC 21718. AIR 1994 SC 1918 : (1994) 3 SCC 119. AIR 2002 SC 3176 : (2002) 7 SCC 36820. [1981] 131 ITR 597 (SC) : (1981) 4 SCC 173 : AIR 1981 SC 192221. [1975] 101 ITR 234 (SC) : (1976) 1 SCC 25422. [1975] 101 ITR 796 (SC) : (1976) 1 SCC 32423. [1980] 121 ITR 1 (SC) : (1980) 2 SCC 3124. [1997] 165 ITR St. 14425. [1997] 165 ITR St. 17126. [1987] 166 ITR St 36 27. [1987] 168 ITR St 87 at 16828. [1966] 60 ITR 52 (SC)29. [1968] 68 ITR 493 (SC)30. [1971] 82 ITR 547 : (1971) 3 SCC 56831. (1996) 2 SCC 1532. [1997] 227 ITR 432 (SC) THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE B.N.RAO NALLA REFERRED CASE Nos.85 OF 1997 AND 125 OF 1999 06.01.2012 Between: The Commissioner of Income Tax, Visakhapatnam AND …. Petitioner M/s.Vijayawada Bottling Co., Limited,Vijayawada … RespondentTHE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE B.N.RAO NALLA REFERRED CASE Nos.85 OF 1997 AND 125 OF 1999 COMMON ORDER(Per Hon’ble Sri Justice V.V.S.Rao): In obedience to the orders dated 10.02.1995 of this Court inI.T.C.No.90 of 1990, the Income Tax Appellate Tribunal, Hyderabadreferred two questions for opinion of this Court under Section 256(2) ofthe 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 10.02.1998, R.C.No.125of 1995 is referred. Both the references are at the instance of theCommissioner of Income Tax. Though the questions are couched in adifferent language, they convey the same purport and therefore, required to be dealt with by the common order. 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 theassessee has used only synthetic essence as flavouringagent in the manufacture of soft drinks and does not coveritems of the eleventh Schedule, even after explanation wasadded to Item-5 by the Finance Act, 1987”.the Appellate Tribunal is right in law in holding that theassessee has used only synthetic essence as flavouringagent in the manufacture of soft drinks and does not coveritems of the eleventh Schedule, even after explanation wasadded to Item-5 by the Finance Act, 1987”. required to be dealt with by the common order. 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 theassessee has used only synthetic essence as flavouringagent in the manufacture of soft drinks and does not coveritems of the eleventh Schedule, even after explanation wasadded to Item-5 by the Finance Act, 1987”.the Appellate Tribunal is right in law in holding that theassessee has used only synthetic essence as flavouringagent in the manufacture of soft drinks and does not coveritems of the eleventh Schedule, even after explanation wasadded 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 theassessee is entitled for investment allowance under Section32A of the Income Tax Act even after the insertion ofExplanation under Item-5 of Eleventh Schedule by FinanceAct, 1987, which is merely clarificatory in character andshould govern the assessment prior to assessment year1988-89 also in view of A.P.High Court’s decision in thecase of N.T.R.Estate v CIT reported in 157 ITR 285”?the Appellate Tribunal is justified in holding that theassessee is entitled for investment allowance under Section32A of the Income Tax Act even after the insertion ofExplanation under Item-5 of Eleventh Schedule by FinanceAct, 1987, which is merely clarificatory in character andshould govern the assessment prior to assessment year1988-89 also in view of A.P.High Court’s decision in thecase of N.T.R.Estate v CIT reported in 157 ITR 285”? 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 thecase, the ITAT was right in law in deleting the disallowanceof interest on the ground that the Revenue had failed toestablish any nexus between the monies borrowed andadvance made and relying on fresh evidence brought beforeITAT?case, the ITAT was right in law in deleting the disallowanceof interest on the ground that the Revenue had failed toestablish any nexus between the monies borrowed andadvance made and relying on fresh evidence brought beforeITAT? 2.Whether, on the facts and in the circumstances of thecase, the Appellate Tribunal was right in law in holding thatthe assessee was entitled to claim deduction of InvestmentAllowance under Section 32A of the Income Tax Act evenafter the insertion of Explanation to item-5 of the EleventhSchedule by the Finance Act, 1987”?case, the Appellate Tribunal was right in law in holding thatthe assessee was entitled to claim deduction of InvestmentAllowance under Section 32A of the Income Tax Act evenafter the insertion of Explanation to item-5 of the EleventhSchedule by the Finance Act, 1987”? The background facts in R.C.No.85 of 1997 are as follows. Theassessee – a public limited company; is engaged in the business ofmanufacture and sale of aerated waters and soft drinks. In their returnsfor the assessment years 1981-1982 and 1982-1983, the assesseeclaimed investment allowance under Section 32A of the Act, which wasallowed by the Income Tax Officer, but in Department’s appeal, the CIT(A) disallowed it on the ground that the items manufactured by theassessee are covered by the item No.5 of the Eleventh Schedule of theAct. The assessee’s contention that it manufactured aerated water and soft drinks called Goldspot, Thums Up etc., with synthetic essenceswithout using blended or flavoured concentrates, and therefore, theyare not precluded from claiming investment allowance under Section32A(2)(iii) of the Act, did not find favour with the CIT(A). In furtherappeal, the appellate Tribunal reversed the CIT(A) and restored theoriginal assessment order of the Income Tax Officer. soft drinks called Goldspot, Thums Up etc., with synthetic essenceswithout using blended or flavoured concentrates, and therefore, theyare not precluded from claiming investment allowance under Section32A(2)(iii) of the Act, did not find favour with the CIT(A). In furtherappeal, the appellate Tribunal reversed the CIT(A) and restored theoriginal assessment order of the Income Tax Officer. In R.C.No.125 of 1999, the assessee is M/s.Sri SarvarayaSugars. They are carrying on business - among others; of manufactureand sale of aerated waters and soft drinks. During financial yearsrelevant to the assessment years 1985-86 and 1986-87, they advancedan amount of Rs.17 lakhs to their subsidiary company, namely,M/s.East Coast Salt and Chemicals (East Coast). These amountsremained outstanding during the accounting periods. The assesseeprovided interest due from the company at 15% for the assessmentyears 1983-84 and 1984-85 but did not do so for the subsequent twoassessment years. In addition, they also claimed investment allowanceunder Section 32A. Insofar as interest is concerned, the assessingofficer disallowed the same observing that the assessee advancedamounts to its subsidiary from out of the borrowed amounts fromBanks. This was affirmed by the CIT(A) but the appellate Tribunalconcluded in favour of the assessee holding that the Department failedto prove the nexus between the borrowed amounts and the advancesmade. The investment allowance was allowed by the Tribunal. The Fist Issue In both the cases, the assessing officer and the CIT(A)disallowed investment allowance on the ground that the assesseesused synthetic essences in the manufacture of soft drinks andbeverages. The senior standing counsel for Income Tax relies onSection 32A(2)(iii) and item 5 of Eleventh Schedule, in arguing for ananswer in favour of the revenue. He also relies on the decisions of theCalcutta and Madras High Courts in Commissioner of Income Tax v Black Diamond Beverages[[1]]and Commissioner of Income Tax v Soft Beverages Private Limited[[2]]. According to him, blended flavouring concentratesshall include and shall be deemed to have always included syntheticessences in any form. This Explanation is being clarificatory, he wouldurge that it must be interpreted to give retrospective operation asapplicable to the assessments pertaining to the years prior to01.04.1988. The senior counsel for Sarvaraya Sugars and the counsel forVijayawada Bottling, in opposition, made the following submissions. TheExplanation to item 5 of Eleventh Schedule of the Act having beeninserted with effect from 01.04.1988, it cannot be given retrospectiveeffect; the assesses cannot be denied the benefit of investmentallowance under Section 32A(2)(iii) and though the Explanation isclarificatory it has to be construed as enlarging only the definition ofblended flavouring concentrates and the Parliament never intended toapply it to the assessment of the income during the year prior to01.04.1988. According to them, the Explanation introduced a fiction totreat blended flavouring concentrates and synthetic essences in anyform as equal for the purpose of item 5 of Eleventh Schedule. Suchfiction should be given a limited meaning as intended and cannot bepressed for any other purpose. They would urge that as per thecharging Section, income tax shall be charged for the assessment yearat the rate in accordance with the provisions of the Act in respect oftotal income of previous year and while doing so, an assessee will beentitled to various deductions and exemptions either in the computationof total income or in determining the tax. They relied on the FinanceAct, 1987, the notes on clauses, the memorandum explaining theprovisions of the Bill and the CBDT Circular dated 22.09.1987. Consideration and Finding Consideration and Finding The question to be addressed is whether the assessees areentitled for investment allowance under Section 32A(1)(2)(iii) or theyshould be denied on the ground that they manufacture articles specifiedin item 5 of the Eleventh Schedule. The relevant provisions in thisregard are quoted hereunder. 32A(1) In respect of a ship or an aircraft or machinery orplant specified in sub-section (2), which is owned by the assesseeand is wholly used for the purposes of the business carried on byhim, there shall, in accordance with and subject to the provisions ofthis section, be allowed a deduction, in respect of the previous yearin which the ship or aircraft was acquired or the machinery or plantwas installed or, if the ship, aircraft, machinery or plant is first put touse in the immediately succeeding previous year, then, in respectof that previous year, of a sum by way of investment allowanceequal 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 new aircraft or machinery or plant referred toin sub-section (1) shall be the following, namely:- (a) a new ship or new aircraft acquired after the 31[st] day ofMarch, 1976, by an assessee engaged in the business of operationof ships or aircraft; (b) any new machinery or plant installed after the 31[st] day ofMarch, 1976,- (i) for the purposes of business of generation or distribution ofelectricity or any other form of power; or (ii) in a small-scale industrial undertaking for the purposes ofbusiness of manufacture or production of any article or thing; or (iii) in any other industrial undertaking for the purposes ofbusiness of construction, manufacture or production of any articleor thing, not being an article or thing specified in the list in theEleventh Schedule: (Proviso and Explanation are omitted) Eleventh Schedule (Items 1 to 4 omitted as not relevant). 5. Aerated waters in the manufacture of which blendedflavouring concentrates in any form are used. Explanation.- “Blended flavouring concentrates” shallinclude, and shall be deemed always to have included, syntheticessences in any form. (Items 6 to 29 omitted as not relevant). As per the Sections 28 and 29 of the Act, income from profitsand gains of business shall be computed in accordance with theprovisions contained in Section 30 to 43D. Section 28 describes various types of income chargeable to tax under the head profits andgains of business or profession and Sections 30 to 43D mandates thededuction of various items of expenditure incurred by the assessee incomputing the income for the purpose of the tax. Section 32A permitsan assessee to claim deduction to the extent of 25% of actual costincurred inter alia for the purpose of machinery or plant. As per sub-section (2) thereof, the purchase of machinery or plant shall have to befor the purpose of business of manufacture or production of any articlesor things. If any of these articles or things are included in EleventhSchedule, the claim is denied. Item 5 as originally stood prior to01.04.1988 mentioned aerated waters in the manufacture of whichblended flavouring concentrates in any form are used. As per theExplanation inserted by the Finance Act, 1987 with effect from01.04.1988, the synthetic essences in all forms are also included in thedefinition or description of “blended flavouring concentrates” by creatinga fiction. The Explanation also contains a phrase “… shall be deemedalways to have included …” which has given rise to a serious debate asto whether the Explanation is clarificatory, and if so whether it operatesretrospectively or merely enlarges the definition/description of theblended flavouring concentrates. In Black Diamond Beverages, the Calcutta High Court held that,“explanation below item 5 makes it clear that use of synthetic essencesshall attract the schedule which is exclusive in nature,” and “it is onlyclarificatory in nature and be referable for the purpose of resolving any”doubt arising over the meaning and import of item 5 in Eleventh Schedules. In Soft Beverages, Madras High Court held as follows. The amendment, despite a particular date having been fixedas the date from which it will take effect, even when it is not maderetrospective, if found to be clarificatory in the sense that evenwithout the aid of that amendment the unamended provision wascapable of comprehending what was sought to be made clear bythe amendment, the amendment made subsequently does not havethe effect of restricting the meaning of the original entry and thewidth of the entry remains the same. The facet of its content whichhad 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 April1, 1988, therefore, does not in any way have the effect of denudingthe original entry of a part of its content. The synthetic essencebeing but one form of a blended flavouring concentrate was ablended flavouring concentrate before the amendment as also afterthe amendment. The counsel for the assessees rely on Income Tax Officer vM.C.Ponnoose[[3]], Delhi Cloth and General Mills Company Limited v CIT[[4]], CIT v Rajasthan Mercantile Co., Ltd.,[[5]]CIT v Patel Brothers[[6]]and [7]Commissioner of Income Tax v Gold Coin Health Food Private Limitedand argue that the Explanation below item 5 of the Eleventh Schedulehas to be given effect to only from 01.04.1988 and has no applicationfor previous assessment years. Declaratory Acts A Declaratory Act is an exception to the general rule ofpresumption against retrospectivity of a law. An express mention canonly give retrospectivity and even in such a case, such law cannot bein violation of the fundamental rights, arbitrary or deprive the vestedrights. Whether an Act is declaratory or clarificatory? The enquiry mustalways commence by knowing whether there has been ambiguity in thelaw already existing, which was sought to be clarified and declared?Often to remove doubts, the legislature amends the law declaring thecorrect position without indicating as to whether it is retrospective.Bennion in ‘Statutory Interpretation’ (2008 5[th] edn., Indian Reprint 2010p.188) elucidates that, “the law so declared is taken always to have beenoperative or to have been operative since the commencement of theenactment as respects which the declaration is made”. The learned authorfurther points out that a declaratory law contains statutory expositionwithout which the meaning of enactment is doubtful. The Common lawprinciple that declaratory and clarificatory laws are presumed to haveretrospective effect, is however not an inflexible and universally applicable interpretative canon. In R.Rajagopal Reddy v Padmini Chandrasekharan[[8]], the SupremeCourt ruled that, “the language ‘shall be deemed always to have meant’ isdeclaratory and is in plain terms retrospective”. In CIT v Agriculture Market Committee[[9]], a Division Bench of this Court to which one of us is amember (VVSR,J) considered the effect of the declaratory/clarificatory enactments and summed up the following principles. (i)A Declaratory Act is intended to remove doubts regardingcommon law which are to be construed according to common law;common law which are to be construed according to common law;(ii)Declaratory Acts are also made to rectify or clarify a grossmistake, or the omission in the former statute, in which event thelatter statute relates back to the time when the former Act is made;mistake, or the omission in the former statute, in which event thelatter statute relates back to the time when the former Act is made; Committee[[9]], a Division Bench of this Court to which one of us is amember (VVSR,J) considered the effect of the declaratory/clarificatory enactments and summed up the following principles. (i)A Declaratory Act is intended to remove doubts regardingcommon law which are to be construed according to common law;common law which are to be construed according to common law;(ii)Declaratory Acts are also made to rectify or clarify a grossmistake, or the omission in the former statute, in which event thelatter statute relates back to the time when the former Act is made;mistake, or the omission in the former statute, in which event thelatter 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 themeaning of an existing law or to correct a construction considerederroneous by the legislature. If a Declaratory Act is by way of anExplanatory Act, one should see whether it is intended to supply anobvious omission or clear up doubts as to the meaning of theprevious Act. In the absence of clear words indicating that theamending Act is declaratory, it would not be so construed when thepre-amended provision was clear and unambiguous;meaning of an existing law or to correct a construction considerederroneous by the legislature. If a Declaratory Act is by way of anExplanatory Act, one should see whether it is intended to supply anobvious omission or clear up doubts as to the meaning of theprevious Act. In the absence of clear words indicating that theamending Act is declaratory, it would not be so construed when thepre-amended provision was clear and unambiguous; (iv)If a statute is curative, or a mere declarative, retrospectiveoperation is generally intended; and (v)In determining the nature of the Act, substance is more importantthan the form. If the provision is clear and unambiguous, thequestion of treating the amending Act as declaratory would notarise, even if the amending Act uses the expression “for theremoval of doubts” which itself is not conclusive as to anamendment being clarificatory or declaratory in nature.than the form. If the provision is clear and unambiguous, thequestion of treating the amending Act as declaratory would notarise, even if the amending Act uses the expression “for theremoval of doubts” which itself is not conclusive as to anamendment being clarificatory or declaratory in nature. In Agriculture Market Committee, this Court after referring to Brij Mohan v Commissioner of Income Tax[[10]],Allied Motors (P) Ltd v CIT[[11]], Suwala Anandilal Jain v CIT[[12]], CIT v Khanji Shivji & Co[[13]], Zile Singh v[14][15]State of Haryana, CIT v Suresh N.GuptaandCIT v Alom Extrusions[[16]]pointed the following conspectus of case law. Brij Mohan Das, Suwala and Khanji Shivji are decisionswhere the Supreme Court construed the provisions as declaratoryof common law and, therefore, retrospective. Podar Cement (P)Ltd, Allied Motor (P) Ltd and Suresh N.Gupta dealt with theFinance Acts amending Section 43B of the Act which enabled anassessee to claim deduction of any sum payable by way of tax,duty, cess or fee or whatever name called. These provisions wereheld to be retrospective on the ground that there was divergence of opinion among the High Courts and also as the provisions wereclarificatory in nature. If the enforcement of an amended provisionprospectively results in hardship and invidious discriminationamong assesses, the said provision, as held in Alom Extrusions,has to be read as retrospective being clarificatory in nature. Fromthese decisions it follows that if any provision is amended by way ofan insertion or substitution or enacting a new provision, whiledealing with the question of retrospectivity, the Court has to addressthe questions (i) whether the provision under consideration is byway of declaration of common law; and (ii) whether it is intended toget over divergence of judicial opinion and to bring uniformity with aview to supply an omission which caused unintended hardship tothe assesses. opinion among the High Courts and also as the provisions wereclarificatory in nature. If the enforcement of an amended provisionprospectively results in hardship and invidious discriminationamong assesses, the said provision, as held in Alom Extrusions,has to be read as retrospective being clarificatory in nature. Fromthese decisions it follows that if any provision is amended by way ofan insertion or substitution or enacting a new provision, whiledealing with the question of retrospectivity, the Court has to addressthe questions (i) whether the provision under consideration is byway of declaration of common law; and (ii) whether it is intended toget over divergence of judicial opinion and to bring uniformity with aview to supply an omission which caused unintended hardship tothe assesses. The Explanation below item 5 of the Eleventh Schedule was notinserted by way of declaration of common law nor was it intended to getover divergence of judicial opinion. In our opinion, it was not evenintended to bring uniformity but certainly it was inserted with a view tosupply the omission, which caused prejudice to the interest of therevenue. Did the Parliament intend just to clarify blended flavouringconcentrates as also including synthetic essences and stop there or didthe lawmakers intended to deny for the yester years, the benefit ofinvestment allowance to all those assessees who are indeed usingsynthetic essences in the manufacturing of aerated waters? We have no doubt that the Finance Act, 1987 has noretrospective effect of disqualifying those manufacturers of aeratedwaters using synthetic essences from claiming the investmentallowance under Section 32A(1). The language of Explanation, however,has given the scope for the argument that clarificatory in nature shouldbe given retrospective effect. This again begs the question whetherretrospectivity is with regard to the construing the blended flavouringconcentrates as always – in the past, present and future includingsynthetic essences or the retrospectivity was with reference to theeffect of Section 32A (2)(iii), which denied the investment allowance toall those manufacturers of articles or things enumerated in EleventhSchedule. We are convinced that the Explanation though clarificatorywas never intended to deny the investment allowance during the assessment years prior to 1988-89 and it was only intended to clarifythe definition to dispel any doubts as to what the Parliament intended byblended flavouring concentrates. External aids to Interpretation The statement of objects and reasons, the memorandum orexplanation on the clauses in the Bill, the speech of the Minister whopiloted the Bill sometimes the debates in the Parliament are externalaids to interpret and construe the law. Though all of them absolutely donot always point to one direction, nevertheless a reference to all theseis not totally precluded. Further, the bureaucratic/ executiveunderstanding of the law as manifested in the departmental circulars,instructions and guidelines or the subordinate legislation –contemporanea expositio are also important in understanding theintention of the Parliament. This is especially so with regard to thecirculars issued by the Central Board of Direct Taxes (CBDT) whoconventionally come out with clarificatory guidelines in the form of acircular immediately after the passing of the Finance Bill by theParliament. The senior counsel for Income Tax is correct that when thelanguage of the provision is clear, no interpretation is required. It is theliteral construction which is golden rule. The Finance Act made inaccordance with the Article 109 of the Constitution will be effective onlyfrom the assessment year which as per Section 2(9) means the periodof twelve months commencing from the first day of April every year andit cannot be for the “previous year” which as per Section 3 of the Actmeans, the financial year immediately preceding the assessment year.If there are contentious issues emerge on this aspect, interpretationbecame inevitable. Further, an explanation always is intended to define,clarify or enlarge the definition of restrict or enlarge the scope orremove doubt about the enacting provision. If such clarificatoryexplanation itself gives scope for interpretation as to its effect on the past/future assessment years, it is incumbent for the Court to interpretthe same. In such a situation, the external aids are certainly useful and[17]resort to them is permissible (Indra Sawhney v Union of India,[18][19]S.R.Bommai v Union of India, Aruna Roy v Union of India,[20][21]K.P.Varghese v ITO, Sole Trustee, Loka Shikshana Trust v CIT, IndianChamber of Commerce v CIT[[22]]and Addl. CIT v Surat Art Silk ClothManufacturers Association[[23]]). We quote hereinbelow, from various legislative documents. [24]Notes on clauses in Finance Bill 1987 Clause 75 seeks to amend items 5 and 22 of the EleventhSchedule to the Income Tax Act. Under item 5 of the eleventh Schedule, aerated waters in themanufacture of which blended flavouring concentrates in any formare used are one of the non-priority articles or things to whichSection 32AB and other sections of the Act would not be applicablein certain cases. It is proposed to make a clarificatory amendmentin the item to indicate that blended flavouring concentrates wouldinclude, and would have included, synthetic essences in any form. The Explanation below item 22 of the Schedule defines “officemachines and apparatus” to include all machines and apparatusused in offices for data processing. It is proposed to make aclarificatory amendment to exclude computers from the expression“data processing” so that the benefits of the provisions of Section32AB and other sections may be made available in respect ofcomputers. It is also proposed to exclude office machines andapparatus used for transmission and reception of messages fromthe non-priority list of articles or things as contained in this item. These amendments will take effect from 1[st] April, 1988and will accordingly, apply in relation to the assessment year1988-89 and subsequent years. (emphasis supplied) [25] Memorandum explaining provisions in Finance Bill, 1987 Clarificatory amendment of definition of “aerated waters” for thepurposes of inclusion in the Eleventh Schedule 43. Under item 5 of the Eleventh Schedule to the Income TaxAct, “aerated waters in the manufacture of which blended flavouringconcentrates in any form are used” are one of the non-priorityarticles or things to which benefits of the provisions of section 32ABand 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, areclaiming the above benefits on the ground that the syntheticessence cannot be included in the expression “blended flavouringconcentrates in any form”. As this was never the legislative intent, with a view tocounteracting the tax avoidance and placing the matter beyonddoubt, the proposed amendment seeks to provide that the blendedflavouring concentrate appearing in item 5 would include syntheticessence in any form. The amendment will take effect from 1[st] April, 1988, andwill, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. (emphasis supplied) [26]Finance Act It has been found that certain taxpayers manufacturing aerated waters in which synthetic essence is being used, areclaiming the above benefits on the ground that the syntheticessence cannot be included in the expression “blended flavouringconcentrates in any form”. As this was never the legislative intent, with a view tocounteracting the tax avoidance and placing the matter beyonddoubt, the proposed amendment seeks to provide that the blendedflavouring concentrate appearing in item 5 would include syntheticessence in any form. The amendment will take effect from 1[st] April, 1988, andwill, accordingly, apply in relation to the assessment year 1988-89 and subsequent years. (emphasis supplied) [26]Finance Act 73. Amendment of the eleventh Schedule – in the eleventhSchedule to the Income Tax Act, with effect from the 1[st] day ofApril, 1988,- (a) in item 5, the following Explanation shall be inserted at theend, namely:- ‘Explanation.- “Blended flavouring concentrates” shall include,and shall be deemed always to have included, synthetic essencesin any form’. (emphasis supplied) [27]CBDT Circular No.495, dated 22.09.1987 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 deniedtax concessions under section 32AB and other sections of the Act.Item No.5 of the Eleventh Schedule relates to “aerated waters” inthe manufacture of which “blended flavouring concentrates in anyform are used”. It has been found that certain personsmanufacturing aerated waters are using synthetic essence and areclaiming the benefit on the ground that synthetic essence cannot beincluded in the expression “blended flavouring concentrates in anyform”. As this was not the intention of the Legislature, the AmendingAct has inserted an Explanation to item 5 of the Eleventh Schedulewhich clarifies that blended flavouring concentrates would includethe synthetic essences in any form. 43.3 This amendment will come into force from 1[st] April,1988, and will, accordingly, apply in relation to the assessmentyear 1988-89 and subsequent years. (emphasis supplied) The deduction of investment allowance under Section 32A wasdenied as non-priority articles or things. However, the Government experienced that the manufacturers of aerated waters using syntheticessences also claimed the benefit on the ground that synthetic essencecannot be included in the expression, “blended flavouring concentrates inany form”, though it was not legislative intent. With a view to prevent taxavoidance and placing the matter beyond doubt, the amendment wasproposed seeking to clarify that the blended flavouring concentrates, asalways to include synthetic essence in any form. This was also foundmentioned in clause 75 of the Notes on Clauses, which was ultimatelyenacted as Section 73 of the Finance Act, 1987. In the Memorandum,the notes on clauses as well as the Finance Act, the Parliamentcategorically held that the amendment will come into force from01.04.1988 and will accordingly apply in relation to the assessmentyear 1988-89 and subsequent years. The CBDT in their circular furtherclarified the same. Thus, though the explanation was inserted for thepurpose of, “placing the matter beyond doubt”, the amendment wasintended not to be retrospective. It was to come into effect from theassessment year 1988-89 and subsequent years only. Case Law Case Law An amendment to an Act may contain that it is clarificatory ordeclaratory. The use of phrases like “hereby clarified”, “hereby declared”,“deemed to include” or “shall be deemed always to have included” is notalways conclusive to render an amendment clarificatory/declaratory oralways retrospective in operation. The Court has to analyse the natureof amendment to arrive at a conclusion. The day from which theamendment is made operative is also not conclusive. The Court has toexamine the scheme of the amendment prior to the amendment andsubsequent amendment to determine whether the amendment isclarificatory (Gold Coin Health Food). I n M.C.Ponnoose, the facts are these. Section 2(44) of theIncome Tax Act which came into effect from 01.04.1962 defined theexpression “Tax Recovery Officer”. Section 4 of the Finance Act, 1963 substituted a new definition for the original definition providing that thenew definition “shall be and shall be deemed always to have beensubstituted”. The amended provision enabled any land revenue officer toexercise the powers of tax recovery officer. When the ITO initiatedrecovery proceedings through Tahsildar by attaching assessee’sshares, a writ petition was filed questioning the powers of the landrevenue officials to attach the shares. The challenge was upheld by theHigh Court of Kerala, who declined to give retrospective effect tonotification empowering the Tahsildar. In the appeal, revenue contendedbefore the Supreme Court that the State Government could invest theTahsildar with the powers of the Tax Recovery Officer with effect fromthe date prior to the date of notification i.e., retroactively orretrospectively. Observing that the Courts will not ascriberetrospectivity to new laws affecting rights unless by express words ornecessary implication it appears that such was the intention of thelegislature, rejected the plea of the revenue and held. It may next be considered whether by saying the newdefinition of “Tax Recovery Officer” substituted by section 4 of theFinance Act, 1963, “shall be and shall be deemed always to havebeen substituted”, it could be said that by necessary implication orintendment the State Government had been authorized to invest theofficers mentioned in the notification with the powers of a TaxRecovery Officer with retrospective effect. The only effect of thesubstitution made by the Finance Act was to make the newdefinition a part of the Act from the date it was enacted. The legalfiction could not be extended beyond its legitimate field andthe aforesaid words occurring in section 4 of the Finance Act,1963, could not be construed to embody conferment of apower for a retrospective authorization by the State in theabsence of any express provision in section 2(44) of the Actitself. (emphasis supplied) In Rajasthan Mercantile Company Limited, the Division Bench ofDelhi High Court considered the question of retrospective application ofthe Explanation to Section 37(2A) inserted by the Finance Act, 1968with effect from 01.04.1968 and Explanation 2 to Section 37(2B)inserted by the Finance Act, 1970 with effect from 01.04.1976. The plea that the Explanation being clarificatory or declaratory in nature is noteffected by any rule against retrospectivity, was rejected by the Court.It was held that, the Explanation 2 to Section 37(2B) will apply to theassessments with effect from 01.04.1976 and that except widening theconcept of “entertainment expenditure by including in its scope suchexpenditures which is otherwise traditionally understood as routinebusiness expenditure, it cannot be extended to the past periods when theamended Explanation was not in operation”. that the Explanation being clarificatory or declaratory in nature is noteffected by any rule against retrospectivity, was rejected by the Court.It was held that, the Explanation 2 to Section 37(2B) will apply to theassessments with effect from 01.04.1976 and that except widening theconcept of “entertainment expenditure by including in its scope suchexpenditures which is otherwise traditionally understood as routinebusiness expenditure, it cannot be extended to the past periods when theamended Explanation was not in operation”. The Supreme Court in Patel Brothers considered Explanation 2 tobelow Section 37(2A). The said explanation “declared” that for thepurpose of Section 37(2A) and (2B) entertainment expenditure includesexpenditure on provisions of hospitality of every kind by the assesseeto any person whether by way of provision of food or beverages or inany other manner whatsoever and whether or not such provision ismade by reason of any express or implied contract or custom or usageof trade. Construing the said provision, the Supreme Court while approving Rajasthan Mercantile,held as under. In our opinion, the construction we have made of theprovision as it existed during the relevant period flows not merelyfrom the language of the provision but also matches with the objectthereof. It means that the expenditure incurred by the assessees inproviding ordinary meals to outstation customers according toestablished business practice, was a permissible deduction in spiteof sub-section (2A) of section 37, to which the assessees wereentitled in the computation of their total income for the purpose ofpayment of tax under the Income Tax Act, 1961, during the relevantperiod prior to April 1, 1976. Explanation below item 5 of Eleventh Schedule Applying the above principles, we are of the considered opinionthat the phrase “shall be deemed always to have included” in theExplanation to item 5 only clarifies that blended flavouring concentratesshall include synthetic essences. It is a fiction which has limited effect.Construing Section 4 of the Finance Act, 1963 which contain the similarphrase i.e., “shall be and shall be deemed always to have been substituted”, the Supreme Court in Ponnose held that legal fiction couldnot be extended beyond its legitimate field and the said words could notbe construed to embody conferment of power retrospectively. The recent decision of the Full Bench of this Court inT.Rev.No.233 of 2010 and batch, dated 27.06.2011, to which one of us(VVSR,J) is a member, summed up the effect of legal fiction whileconstruing a statute. A legal fiction is created only for some definite purpose. Thefiction is to be limited to the purpose for which it was created, andshould not be extended beyond that legitimate field. A legal fictionpresupposes the existence of the state of facts which may notexist, and then works out the consequences which flow from thatstate of facts. Such consequences have got to be worked out onlyto their logical extent having due regard to the purpose for which thelegal fiction has been created. Stretching the consequences beyondwhat logically follows amounts to an illegitimate extension of thepurpose of the legal fiction. A legal fiction should not be extendedbeyond the language by which it is created. A deeming provisioncannot be pushed too far so as to result in an anomalous or absurdposition. The fiction enacted by the legislature must be restricted bythe plain terms of the statute. The legal fiction is not to beextended beyond the purpose for which it is created, orbeyond the language of the Section by which it is created. Alegal fiction cannot be extended by the court on analogy or byaddition or deleting words not contemplated by the legislature.(internal quotations omitted). (emphasis supplied) (emphasis supplied) We respectfully differ from the view taken by the Calcutta and MadrasHigh Courts in Black Diamond Beverages a n d SoftBeveragesrespectively. The Explanation under consideration has to be construedas expanding description or definition of “blended flavouringconcentrates” so as to include synthetic essences in any form. If theblended flavouring concentrates includes synthetic essences by fiction,it is logical that such fiction would have applied even from the dateanterior to the expression of intention by the Parliament. The words“shall be deemed always to have included”, therefore have to be given alimited meaning of understanding the blended flavouring concentratesas always including the synthetic essences. Insofar as denying the benefit of investment allowance under Section 32A(2)(iii) is concerned,it can only be with effect from 01.04.1988. We, therefore, answer thisissue in favour of the assessee. The second issue The first question in R.C.No.125 of 1999 is regardingdisallowance of interest by the assessing officer. In their return ofincome, the assessee provided interest at 15%. This was disallowed onthe ground that the assessee failed to establish nexus between themonies borrowed and advance made. The objection raised by therevenue is that the Tribunal’s finding is based on the fresh materialbrought before the ITAT and therefore, it could not have allowed suchevidence. The senior counsel for IT would rely on Rule 29 of theIncome Tax (Appellate Tribunal) Rules, 1963 (ITAT Rules, for brevity).Per contra, the senior counsel for Sarvaraya Sugars submits that it isa question of fact, which does not require any consideration by the HighCourt under Section 256(2). According to him, when a question of facton which a finding has been recorded by the Tribunal, the jurisdiction ofthe High Court to express opinion is barred. He relied on India Cementsv CIT[[28]], M.A.Jabbar v CIT[[29]], Karani Properties Ltd v CIT[[30]], CIT v ParkHotel Private Limited[[31]]and Thiru Arooran Sugars Limited v CIT[[32]]. In the return of income for 1985-86, Sarvaraya Sugars claimedRs.17 lakhs interest payment on the secured and unsecured loansobtained by it from the Banks. Section 36(1)(iii) allows the deduction ofamount of interest paid in respect of capital borrowed for the purpose ofbusiness in computing the income under Section 28. If an assessee – itis not denied – borrows the money ostensibly for the purpose ofbusiness but lends or advances it to another company, the deductioncannot be allowed because such borrowing presumptively is not for thepurpose of business. Therefore, in a case where assessee borrowedfor the purpose on which he pays interest and also earns interest by lending the surplus out of their profits to another, the assessee has todemonstrate that there is no nexus as regards the money borrowed andthe money advanced to another person. Sarvaraya Sugars is amanufacturing company. It is not in the business of advancing loans. Itis seen from the record that M/s.East Coast Salt and ChemicalsLimited is subsidiary of Sarvaraya Sugars. Therefore, the question iswhether there is any nexus between the monies borrowed andadvances made by the assessee. lending the surplus out of their profits to another, the assessee has todemonstrate that there is no nexus as regards the money borrowed andthe money advanced to another person. Sarvaraya Sugars is amanufacturing company. It is not in the business of advancing loans. Itis seen from the record that M/s.East Coast Salt and ChemicalsLimited is subsidiary of Sarvaraya Sugars. Therefore, the question iswhether there is any nexus between the monies borrowed andadvances made by the assessee. During the scrutiny of the return of income before the ITO, theassessee asserted that the money lent to East Coast was from out ofits profits and not out of borrowed monies. Observing that the detailsare not furnished in this regard, the assessing officer made an additionof Rs.2,99,689/- being the interest on the advance. The CIT(A)confirmed the addition observing that the assessee was not in aposition to give break up of different details to show that the amountadvanced to East Coast was from the cash balance at its disposal anddid not comprise the substantial loan borrowed by them. The appellateTribunal reversed this observing that the Department failed to establishany nexus between the monies borrowed and the advances made andthat the assessee has advanced monies not from the bor