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Judgment
Chandramauli Kumar Prasad, J.—In all these references, common questions of law with little variation of facts, arise and as such, they were heard together and are being disposed of by this common judgment.
Tax Cases Nos. 2 and 3 of 1991
The assessee, M/s. Alkem Laboratories (P.) Limited, is a private limited company deriving income from manufacturing and sale of medicines. The assessee claimed deduction under two heads, viz., Rs. 70,000 on account of repairs of rental premises and Rs. 10,998 spent on plumbing work. The Assessing Officer disallowed both the claims as he was of the opinion that these two items were capital expenditure of the assessee. The assessee then preferred an appeal, inter alia, contending that the expenses it claimed were purely of the nature of repairs and no new assets having come into being, the deduction is fit to be granted. The Commissioner of Income Tax (Appeals) allowed the deduction of the amount spent on the repairs but did not express any opinion in respect of the amount spent in plumbing work. While doing so, the Commissioner of Income Tax (Appeals) observed that repairing expenditure incurred by the assessee in respect of the tenanted building cannot be allowed unless there is an agreement between the landlord and the assessee in view of Section 30(a)(i) of the Income Tax Act, 1961, hereinafter referred to as "the Act". However, he was of the opinion that even if the expenditure of a tenanted building cannot be allowed u/s 30(a)(i) of the Act unless there is an agreement between the land lord and the assessee, but it can be allowed u/s 37 of the Act.
The Revenue, aggrieved by the same, preferred an appeal before the Patna Bench of the Income Tax Appellate Tribunal, hereinafter referred to as "the Tribunal". The Tribunal affirmed the order of the Commissioner of Income Tax (Appeals) in respect of Rs. 70,000 the amount spent in the repair of the rental premises.
On these facts, the Tribunal, at the instance of the Revenue, had referred the following question of law for our opinion.
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the disallowance made in respect of tenanted premises u/s 30(1)(ii) (sic 30(a)(i)) can be allowed u/s 37 of the Income Tax Act?
Tax Cases Nos. 11 and 12 of 1993.
In the light of the order dated January 13,1994, passed by this Court at the instance of the Revenue, Patna Bench of the Income Tax Appellate Tribunal had drawn the statement of the cases and referred the following common question of law as formulated by this Court:
Whether, on the facts and in the circumstance of the case, the Tribunal was right in law in holding that the disallowance made in respect of tenanted premises u/s 30(1)(ii) (sic 30(a)(i)) can be allowed u/s 37 of the Income Tax Act?
The assessee is a private limited company and derives income from manufacturing and sale of medicine. It claimed repairs and maintenance of rental premises to the extent of Rs. 1,59,026 for the assessment year 1983-84 and Rs. 2,24,918 for the assessment year 1984-85. The Assessing Officer disallowed Rs. 45,226 and Rs. 10,000 of the assessment years 1983-84 and 1984-85, respectively, as in his opinion, the expenses incurred were of capital nature.
The appeal yielded no result and the aforesaid order was affirmed by the Commissioner of Income Tax (Appeals). On these facts, at the direction of this Court u/s 256(2) of the Act, the aforesaid question has been referred for our opinion.
At the outset, Mr. A.K. Rastogi, appearing on behalf of the assessee, points out that the Central Board of Direct Taxes, vide Instruction No. 1903, dated October 28,1992, and Instruction No. 1777, dated November 4,1987, had put monetary Emits of Rs. 25,000 for Departmental appeals (in Income Tax matters) before the Appellate Tribunal, Rs. 50,000 for filing reference to the High Court and Rs. 1,50,000 for filing appeal to the Supreme Court. He further points but that later on, the aforesaid instructions were superseded by the Central Board of Direct Taxes, vide Instruction dated March 27, 2000, and it decided that appeals will be filed in cases where tax effect exceeds the revised monetary limit given as under:
---------------------------------------------------------------- Rs. (i) Appeal before the Appellate Tribunal, in Income Tax matters) 1,00,000 (ii) Appeal u/s 260A/reference/ u/s 256(2) 2,00,000 before the High Court (iii) Appeal before the Supreme Court 5,00,000 ----------------------------------------------------------------
In partial modification of the above instructions, by notification dated October 24, 2005, it has been decided that appeal will henceforth be filed only in cases where the tax effect exceeds the revised monetary limits given hereunder:
---------------------------------------------------------------- Rs. (i) Appeal before Appellate Tribunal 2,00,000 (ii) Appeal u/s 260A 4,00,000 (iii) Appeal before the Supreme Court 10,00,000. ----------------------------------------------------------------
The aforesaid instructions also provide that cases involving substantial question of law of importance as well as cases where same question of law is likely to repeatedly arise, such cases shall be considered on its own merits, without being hindered, by the monetary limits. The aforesaid instructions were to come into effect from October 31, 2005.
Mr. Rastogi points out that the tax effect in all these cases are within the monetary limit as prescribed by the Central Board of Direct Taxes and as such, the references be returned unanswered. He submits that although the instruction, dated March 27, 2000, and October 24, 2005, referred to above, came into being after the references were made or called, but that shall govern these cases also. In support of his submission he has placed reliance on a judgment of the Bombay High Court in the case of The Commissioner of Income Tax Vs. Pithwa Engg. Works, and our attention has been drawn to the following passage from the said judgment (page 520):
One fails to understand how the Revenue can contend that so far as new cases are concerned, the circular issued by the Board is binding on them and in compliance with the said instructions, they do not file references if the tax effect is less than Rs. 2 lakhs. But the same approach is not adopted with respect to the old referred cases even if the tax effect is less than Rs. 2 lakhs. In our view, there is no logic behind this approach.
This court can very well take judicial notice of the fact that by passage of time money value has gone down, the cost of litigation expenses has gone up, the assessees on the file of the Departments have increased ; consequently, the burden on the Department has also increased to a tremendous extent. The corridors of the superior courts are choked with huge pendency of cases. In this view of the matter, the Board has rightly taken a decision not to file references if the tax effect is less than Rs. 2 lakhs. The same policy for old matters needs to be adopted by the Department. In our view, the Board''s circular dated March 27, 2000, is very much applicable even to the old references which are still undecided. The Department is not justified in proceeding with the old references wherein the tax impact is minimal. Thus, there is no justification to proceed with decades old references having negligible tax effect.
We, for the above reasons, do not think it necessary to answer the reference made to this Court for the assessment year 1975-76 having negligible tax effect. Accordingly, reference stands returned unanswered with no order as to costs.
Mr. S.K. Sharan, standing counsel appearing on behalf of the Revenue, states that he has instruction to press these references. He submits that once the references have been made, the same are to be answered and cannot be returned without opinion.
Having appreciated the rival submissions, I am not inclined to return the references unanswered. The instruction of the Central Board of Direct Taxes fixing the monetary limit for filing appeals and references are administrative in nature, whereas the references made and called are statutory in nature. In my opinion, the administrative instructions issued by the Central Board of Direct Taxes, are for the guidance of the functionaries of the Income Tax Department. It is neither binding on the Tribunal nor the High Court or for that matter, the assessee. In my opinion, in case of conflict, the administrative instruction must give way to the statutory provision. Thus, on the first principle, the plea put forth by the assessee for return of the references, deserves to be rejected.
True it is that the judgment of the Bombay High Court in the case of The Commissioner of Income Tax Vs. Pithwa Engg. Works, supports the contention of the assessee, but the principle, which I have enunciated hereinbefore, prohibits me to charter that course and return the references unanswered. In fact, there are several precedents to the contrary. The Punjab and Haryana High Court had the occasion to consider the effect of the Board''s circular dated March 27, 2000, in the case of Rani Paliwal Vs. Commissioner of Income Tax, in which it has been held that the Tribunal is not bound to dismiss the appeals in view of the Board''s circular and it is not bound by any such instruction. It also held that once the appeal is filed, the Tribunal is bound to decide the same on the merits. The relevant portion of the judgment, reads as follows (page 222):
In any case, the Board''s circular is only an instruction issued to the Income Tax authorities not to file appeals where the tax effect is less than Rs. 1,00,000. The Tribunal is not bound by any such instruction and once the Department files an appeal, the Tribunal was bound to decide the same on the merits.
The Rajasthan High Court had the occasion to consider this question in the case of Commissioner of Income Tax Vs. Rajasthan Patrika Ltd., in which it has held that the circulars providing for filing the appeal in case the tax effect is less than indicated before various forums, are administrative in nature and in case, the Revenue prefers appeal or reference is made to the court, the same is not fit to be dismissed in the light of the administrative instruction. The relevant portion of the judgment, reads as follows (page 305):
These are administrative instructions and in spite of these administrative instructions if the Department prefers to file an appeal or make a reference to this Court, in our view, on such administrative instructions the appeal of the Department should not be dismissed or the reference should not be rejected. We do not find any infirmity in disposing the appeal on the merits.
The Delhi High Court in the case of Commissioner of Income Tax Vs. Blaze Advertising (Delhi) (P) Ltd., has held that the circular issued by the Board, in no way, prohibits or curtails the power of the Tribunal for making reference.
The Supreme Court in the case of Commissioner of Income Tax (CNTL), Ludhiana Vs. Hero Cycles Pvt. Ltd., Ludhiana, has held that the circular issued by the Central Board of Direct Taxes can bind the Income Tax Officer, but shall not bind the appellate authority or the Tribunal or the court or even the assessee.
The Punjab and Haryana High Court had the occasion to consider this question in the case of Commissioner of Income Tax-I Vs. Abhishek Industries Ltd., and contrary to the view of the Bombay High Court in the case of The Commissioner of Income Tax Vs. Pithwa Engg. Works, held that once the reference is before the court, the same has to be decided on its own merits. The relevant portion of the judgment reads as follows (page 29):
Accordingly, we do not deem it appropriate to restrain from discharging our judicial function, in hearing and deciding the appeal on the merits.
As far as the issue as to whether the circular prescribing limits for filing appeals before the courts or the Tribunals is concerned, different courts have taken different views as to whether in case an appeal is filed, which involves tax effect less than the amount prescribed in the circular for filing the appeals, still the court/Tribunal is bound to reject the same as such or to dispose of it on the merits.
In the light of the discussions aforesaid, I am not inclined to return the references unanswered.
Now, I proceed to consider the references on the merits.
Section 37(1) of the Act, at the relevant time, stood as follows:
37 General.-(1) Any expenditure not being expenditure of the nature described in Sections 30 to 36 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''.
Counsel representing the Revenue contend that in view of the plain language of Section 37 of the Act, the assessee shall be precluded from claiming benefit therein of the liability of the nature described in Sections 30 to 36 of the Act.
Counsel representing the assessee, however, contends that Section 37(1) of the Act shall not preclude the assessee for consideration of the claim which would have fallen under Sections 30 to 36 of the Act.
Having appreciated the rival submissions, I am inclined to accept the plea put forth by the assessee. In my opinion, Section 37(1) of the Act is a provision of residuary nature and once a provision is found to be residuary in nature, the mere fact that a claim does not fall under any of the Sections 30 to 36 of the Act, the same will not automatically, make the claim unsustainable u/s 37 of the Act. In my opinion, Section 37 of the Act is a general section for grant of deduction on certain accounts not enumerated in Sections 30 to 36 of the Act. I am further of the opinion that the expression "in the nature of" used in Section 37(1) of the Act does not intend to stultify a legitimate claim in accordance with the principles of accountancy and well established commercial practice. If the expenses are not deductible under Sections 30 to 36 of the Act but conditions prescribed under section. 37 are satisfied, then such expenses are required to be deducted while computing the income. Therefore, in my opinion, certain expenses may not be admissible u/s 30(a) (i) of the Act but can be admissible u/s 37(1) of the Act.
Various precedents support the view which I have taken. The Kerala High Court had the occasion to consider this question in the case of Commissioner of Income Tax Vs. High Land Produce Co. Ltd., in which it has been held as follows (page 807):
The residuary nature of the provision in Section 37(1) will, therefore, have to be given its full play. Bearing in mind the reason for the introduction of the words within the brackets ''not being expenditure of the nature described in Sections 30 to 36'' we have to remember that those words do not preclude certain species of liabilities but only exclude consideration of liabilities which would fall under any of those sections. We shall explain. Taking for instance, the liability for gratuity, the nature of the liability is a liability towards gratuity. It is . towards that liability provision has been made u/s 36(l)(v) of the Act. If the submission of counsel for the Revenue is accepted, only payments made to a fund such as contemplated by Section 36(1)(v) of the Act will be permissible as deductions towards gratuity liability for computing profits and gains. We cannot accept this contention. We cannot give a meaning to the words ''in the nature of so as to stultify a legitimate claim in accordance with the principles of accountancy and according to well-established commercial practice and which must be taken into account in ascertaining the true/profits and gains of business. Unless there be some statutory provisions which in clear terms or by necessary implication negatives against the adoption of such principles and practice, those principles and practice must be given their full play.
The judgment of the Kerala High in the case of Commissioner of Income Tax Vs. High Land Produce Co. Ltd., was assailed before the Supreme Court and following its earlier judgment in the case of Commissioner of Income Tax, Kerala Vs. High Land Produce Co. Ltd., it dismissed the appeal.
The Gujarat High Court had the occasion to consider this question in the case of Khimji Visram and Sons (Gujarat) Private Limited Vs. Commissioner of Income Tax, and it answered in the following words (page 1001):
Hence, if the expenses are not covered by the specific provisions of Sections 30 to 36 and yet the said expenses are laid out or expended wholly and exclusively for the purposes of the business or profession and they are not in the nature of capital expenditure or personal expenses of the assessee, then deduction is required to be given for the said expenses. It is quite possible that with regard to some expenses there may be overlapping between Sections 30 to 36 and Section 37. In that set of circumstances, if the expenses are deductible under Sections 30 to 36, then Section 37 is not to be resorted to. But if the said expenses are not deductible under Sections 30 to 36 and the conditions prescribed u/s 37 are satisfied, then the said expenses are required to be deducted while computing the income unless there is a specific prohibition.
The Punjab and Haryana High Court considered this question in the case of Commissioner of Income Tax Vs. Punjab Financial Corporation Ltd. and held as follows (page 512):
Sections 30 to 36 of the Act provides for various deductions which is available while computing the income from business and profession . Section 37 is a general section which provides for deduction of expenditure not included in any of the Sections 30 to 36 of the Act. The scope of Section 37 of the Act came up for consideration before the Kerala High Court in Commissioner of Income Tax Vs. High Land Produce Co. Ltd., wherein it was held that the provisions of Section 37 of the Act cannot be given a restricted meaning. Mere fact that the claim does not fall in any of the Sections 30 to 36 will not automatically make the claim unsustainable u/s 37(1) of the Act as well. Section 37 being a general section, is for grant of deduction on certain accounts not enumerated in Sections 30 to 36 of the Act.
The Allahabad High Court had the occasion to consider this question in the case of Girdhari Dass and Sons Vs. Commissioner of Income Tax, and answered the question in the following words (page 343):
We, accordingly, answer the question by saying that the sums of Rs. 10,859, Rs. 9,865 and Rs. 1,000 were admissible allowance not u/s 30(a)(i) but u/s 37 of the Act.
Accordingly, the question is answered in the affirmative against the Revenue and in favour of the assessee.
Let a copy of this opinion be forwarded to the Patna Bench of the Income Tax Tribunal.
Jayanandan Singh, J.
I agree.