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Judgment
J. Kanakaraj, J.—T.C. No. 939 of 1983, arises out of a reference made at the instance of the assessee and the question posed for
consideration is as follows :
Whether, on the facts and in the circumstances of the case, the term ''expenditure'' u/s 40A(8) could refer to the net expenditure after the setting
off interest income of the assessee ?
T.C. No. 940 of 1983, arises out of a reference at the instance of the Revenue and the question posed for consideration is as follows :
Whether, on the facts and in the circumstances of the case, the provisions of section 40A(8), effect from April 1, 1976, applied only to
expenditure incurred after April 1, 1976, and not to computation of income for the assessment year 1976-77 ?
We will first take up the reference made at the instance of the Revenue comprised in T.C. No. 940 of 1983. Section 40A(8) was introduced by
the Finance Bill, 1975, in February, 1975. It received the assent of the President on May 12, 1975. Sub-section (8) which was introduced is as
follows (see [1975] 98 ITR 129) :
(8) Where the assessee, being a company other than a banking company or a financial company, incurs any expenditure by way of interest in
respect of any deposit received by it, fifteen per cent. of such expenditure shall not be allowed as a deduction.
The Finance Bill which introduced the said amendment says that it will apply with effect from April 1, 1976. We are concerned with the
assessment year 1976-77. Therefore, in computing the income of the previous year ended April 30, 1975, the assessee initially claimed to add a
sum of Rs. 37,427 as disallowable u/s 40A(8). But, later on, by letter dated August 14, 1977, claimed that the above was incorrect because
section 40A(8) could not be applied to the interest paid prior to April 1, 1976. It was, however, held by the Income Tax Officer that the claim
made by the assessee that the addition of Rs. 37,427 was by mistake, was not accepted and he proceeded to complete the assessment on the
total income which included the said addition. On appeal, the Commissioner of Income Tax (Appeals) upheld the view taken by the Income Tax
Officer and sustained the addition. When the matter came up before the Tribunal, the Tribunal held that the provisions of section 40A(8)
disallowing the expenditure by way of interest which came into effect from April 1, 1976, should be construed only to such expenditure incurred
after the said date of April 1, 1976. The Tribunal has given very many reasons for taking the above view. However, on the second question that
the word ""expenditure"" should be taken to refer to the net expenditure after setting off the interest income was not accepted by the Tribunal and the
Tribunal held that the expenditure by way of interest incurred by the assessee falls within the scope of section 40A(8) of the Act. In other words,
the argument that only the net interest has to be taken into account was not accepted. It is under those circumstances that the above tax cases arise
on the references made by the Tribunal.
On behalf of the Revenue Mr. C. V. Rajan, learned counsel, refers to the Notes on Clauses relating to the Finance Bill that the amendment was
in relation to the assessment year 1976-77 meaning thereby that the income from the previous accounting year has to be taken note of. The Notes
on Clauses are as follows (see [1975] 98 ITR 168) :
Sub-clause (b) seeks to insert new sub-section (8). Under the new sub-section (8) fifteen per cent. of the interest paid by non-banking non-
financial companies on deposits received by them from the public will'' be disallowed in computing their total income.
This amendment will take effect from April 1, 1976, and will, accordingly, apply in relation to the assessment year 1976-77 and subsequent years.
In the particular case, the assessee was closing its account on April 50, 1975, and therefore, the year ended on April 30, 1975, shall be the
previous year and the income thereof has to be assessed for the assessment year 1976-77. He also relies on several decisions to press the point
that the first day of April relating to the assessment year alone should be the criteria in applying the provisions of the Finance Bill. In K. Krishnaveni
Vs. Appellate Asst. Commissioner of Income Tax, ''C'' Range, Madras and Another, , a similar question arose before a Division Bench of this
court. The point of law which was raised before the Division Bench was answered in the following manner (page 92) :
Coming to the question as to whether the section is prospective or not, it is seen that in this case though the Legislature brought into force the
amended provision as and from April 1, 1976, that has to govern the previous year. In view of the fact that the amended law has come into force
on April 1, 1976, it naturally applies to one accounting year preceding that date. Therefore, in this case, the assessment has been finalised on the
basis of the law which was in force on April 1, 1976. Thus the statute itself has specifically declared that the law as on April 1, 1976, will govern
the income earned for the previous year and there is no question of the statute being given retrospective effect, because the Legislature felt that the
law enacted on a particular day should have effect from a prior date ...
In Srikakollu Subba Rao and Co. and Others Vs. Union of India and Others, , the same view was taken by making a reference to the Notes on
Clauses of the Finance Bill.
To the same effect are the decisions in Dollar Co. Private Ltd. Vs. Union of India and others, and in Maneklal Vallabhdas Parikh and Sons Vs.
Commissioner of Income Tax, .
As against this argument, learned counsel for the assessee refers to the reasonings of the Tribunal relating to the purport of the amendment.
According to the Tribunal, the curbing of the credit control can be only a matter of prospective planning and cannot have anything to do with
credits already obtained. The Tribunal also says that the curbing of credit has no ostensible connection with the deeming of an expenditure as
income With retrospective effect. We are of the view that the Tribunal was not right in holding that the Special Finance Bill deems an expenditure
as an income with retrospective effect. The Tribunal also felt that with reference to the above purpose and object of the Amendment Act, the
assessee must have sufficient time to arrange his affairs and he cannot be made liable for the transactions which had been completed by the year
April 30, 1975. It is also pointed out that the Finance Bill was introduced in February, 1975, and received the assent of the President only on May
12, 1975. According to learned counsel for intention of the Legislature. We are afraid we cannot accept this argument. The reason is, that in a
taxing law, one is not concerned with the policy of the Government relating to credit control, etc. The court has to go by the plain words in the
statute. The words in the statute say that the amendment will take effect from April 1, 1976, meaning thereby the assessment year 1976-77. We
have already referred to the Notes on Clauses to buttress our view that the amendment is relatable to the assessment year 1976-77. If that is so,
the income for the previous year ending April 30, 1975, alone has to be taken into account irrespective of the consequences. In this view of the
matter, we agree with learned counsel for the Revenue that the income for the year ended on April 30, 1975, was rightly taken into account by the
Income Tax Officer and the Commissioner of Income Tax (Appeals), while rejecting the claim of the assessee that the sum of Rs. 37,427 should
not have been added to the income for the assessment year 1976-77. In other words, we reverse the judgment of the Tribunal and answer the
point referred to us in the negative and against the assessee in so far as T.C. No. 940 of 1983 is concerned.
So far as the issue raised in T.C. No. 939 of 1983 is concerned, we agree with the Tribunal and the other officers that there is no scope for
taking into account the interest income of the assessee and setting off the same against the expenditure by way of interest, before applying section
40A(8) of the Act. This is because the section itself does not use the word ""net interest"". That apart, the decision cited by counsel for the assessee,
namely, Keshavji Ravji and Co. v. CIT : [1990]183ITR1(SC) does not really advance the case of the assessee. In that case, section 40 of the Act
was under interpretation and the Taxation Laws (Amendment) Act, 1984, had introduced certain Explanations. The Notes on Clauses was relied
oil by the Supreme Court of India and it was observed as follows (page 6) :
This clause seeks to insert three new Explanations to section 10(1)) of the Act, Explanation 1 seeks to provide that where interest is paid by a
firm to a partner who has also paid interest to the firm, the amount of interest to be disallowed u/s 40(b) of the Act shall be limited to the net
amount of interest paid by the firm to the partner, that is, the amount by which the payment of interest by the firm to the partner exceeds the
payment of interest by the partner to the firm.
The word used in the Notes on Clauses itself suggests that the net amount of interest paid by the firm to the partner had to be taken note of.
This judgment not only supports the view that the Explanation in the Notes on Clauses can be referred@to for the purpose of clarification, but also
indicates that in that particular case, ""net interest"" was taken only because of the specific clarification in the Notes on Clauses. In this view of the
matter, we are unable to take a decision different from the views expressed by the Tribunal and the lower authorities and hold that the assessee is
not entitled to refer to the net expenditure after setting off the interest income. In this view of the matter, the question referred to us ill T.C. No. 939
of 1983 is answered in the negative and against the assessee.