M.G. Pictures (Madras) Limited vs Assistant Commissioner of Income Tax

V.S. Sirpurkar, J.—This appeal is directed at the instance of the assessee against the order passed by the Income Tax Appellate Tribunal,

Madras ''B'' Bench. It seems to have been admitted for motion hearing on the basis on the following substantial question of law:

Whether on the facts and in the circumstances of the case, the Appellate Tribunal is correct in holding that the amended provisions if Section

40A(3) is not applicable to the facts of the case and that the entire amount added has to be sustained and not only 20% of the amount paid?

Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in holding that the amendment to the provisions of

Section 40A(3) is not a procedural one but a substantive one?

Following facts would be necessary to appreciate the controversy involved.

The assessee company, which was incorporated on 9-12-1992, is engaged in production and distribution of motion pictures mainly in Tamil

language. There was a search under Sec. 132 of the Income Tax Act at the business premises of the assessee on 13-9-1996 during which, certain

books of accounts and documents were found and seized. Till the date of search, the assessee company had produced five Tamil films and

distributed a few Hindi films. In this search, a number of notebooks were seized which were in the form of cash book and ledger. They were in

respect of three films produced. It was apparent that the assessee had maintained another set of books for Income Tax purposes and from the

books which were seized, it was apparent they were in respect of production of some films for which payments were made to the artists,

technicians, etc. and other expenditure made including the shooting expenses. The payments were made out of the cash recorded in the names of

M.G. Sekar, S. Santhanam and G. Vijayakumar, who are the Directors in the assessee company. A notice came to be issued under Sec. 158BC

of the Income Tax Act. In response, the assessee filed its return income for the block period suggesting that the ''undisclosed income'' was ''nil''.

Questionnaires were issued and written submissions were also filed along with the answers. The statements of number of persons were recorded.

All the particulars were given by supplying the copies of the statement and also by giving the copies of the documents which were asked for by the

assessee. The Block Period under Chapter XIV-B is between 1-4-1986 and 31-3-1996 and 1-4-1996 and 13-9-1996.

The assessee company had filed its regular returns of income for the assessment years 1994-95 and 1995-96 prior to the search whereas the

returns for the assessment year 1995-96 were filed after the date of search. On the basis of the evidence, the assessment authorities came to the

conclusion that all the expenses which were shown in those account-books, which were unearthed during the search, amounted to ''income'' as all

the transactions were the business transactions of the assessee. The assessing officer thoroughly went through the notebooks and found that

number of payments were made for the production of the three Tamil films. The assessing officer also came to the conclusion that all the amounts

which were shown to have been spent were actually spent and the assessing officer held these amounts to be the ''income''. Initially it was tried to

be pleaded that these were the handloans given and they would have been received back before the completion of the respective films. However,

that plea was also negatived. It was, therefore, held that they were outgoings recorded towards the fulfilment of the contractual obligation towards

the remuneration or wages and they were expenditure relatable to the income earned by the assessee. The assessing authority then pointed out that

they being expenses, they were liable to be allowed logically. However, they could not be so allowed practically all the payments were hit by the

provisions of Sec. 40A(3) as each of the payment was more than Rs. 10,000/- and was not paid by cash. The assessing authority, therefore,

disallowed all the expenses though he agreed that otherwise the expenses could have been allowed as they were the expenses during the course of

profession or business. The assessing authority also pointed out that there was no question of the application of Rule 6DD(j) so as to condone the

payments in cash and not by cheque. Ultimately, the assessing authority noted:

while the payments outgoings recorded in the seized notebooks are allowed as deductions against the income of .... in the names of Directors and

others recorded in the seized notebooks, the payments mentioned hereinabove are disallowed in accordance with the provisions of Sec. 40A(3).

Thus the income assessed gets absorbed by allowance of the expneses in the first instance while the disallowance ....undisclosed income of the

assessee in the respective financial year which is brought to tax account for assessment

Ultimately, the total undisclosed income was arrived at Rs. 1,26,84,400/- and, therefore, the tax liability was found at Rs. 87,52,236/-.

An appeal came to be filed against this decision before the Commissioner of Income Tax (Appeals). The appellate authority confirmed the order

and so also the Income Tax Appellate Tribunal. It is now in this appeal that all these concurrent decisions are being assailed on the questions of law

which we have quoted earlier.

Shri Jayakumar, learned counsel appearing on behalf of the assessee by way of his first submission invited our attention to the definition of the

term ""undisclosed income"". He points out that the words ""or any expenses, deductions or allowances claimed under this Act, which is found to be

false"" were added with effect from 1-7-1995. The contention is that these words were with retrospective effect and, therefore, they would be

applicable to the assessment of the block period, which is obviously prior to the date of amendment. He raises a very interesting point on the basis

of this amendment which has not been raised before the Tribunal or before any of the authorities for the obvious reason that this amendment was

not available on the day when the Tribunal decided the appeal. The point is that if all the expenses disclosed from the accounts were in reality made

and were not the false expenses, these expenses could not be said to be the undisclosed income. Learned counsel then points out that the

assessment made under this chapter is independent and in addition to the regular assessment, which is apparent from the language of Sec. 158BC.

The further argument is that in this Chapter, the primary task of the assessing authority is to find out the undisclosed income of the block period and

if that was so, the expenditure which was found as a genuine expenditure could not be said to be the ""undisclosed income"" and, therefore, was out

of the consideration of the assessing authority. He further points out that even the language of Sec. 158BC(b) suggests that the assessing authority

has to determine the undisclosed income of the block period and since the expenditure was found to be the actual expenditure made during the

course of business, there could be no question of the assessing authority dubbing this expenditure, which was a genuine expenditure as undisclosed

income. This amendment was brought in by the Finance Act 2002 with retrospective effect from 1-7-1995. Learned counsel suggests that since

the date of search was 13-9-1996 and the part of the block assessment period falls, it would be applicable to all the assessment years under the

block period. Though we would have ordinarily not allowed this point to be raised, this being a tax appeal, which could be entertained only on the

substantial question of law, we permitted the argument only in view of the fact that the said amendment itself came in the year 2002 by the Finance

Act 2002.

The argument is quite incorrect. If the argument is accepted, it would lead to the absurd result that even if the assessee is found to have

suppressed certain expenditures which became unearthed during the search proceedings, merely because the assessee is able to show that he has

actually spent the amount, the whole expenditures have to be ignored. Such cannot be the import of the law. What is provided is that if some

expenditures are falsely claimed to be the expenditures made in pursuance of the business or profession then, such expenditure would become the

undisclosed income. Its antitheses, however, is not logical and correct. Therefore, all the expenditure, which have actually been made, would

automatically come out of the undisclosed income. In our opinion, in canvassing this, learned counsel is doing harm to the logic and is seeking to

read something which is not there in the section. If some expenditures made are unearthed during the search are proved to be the genuine

expenditure, they would still have to be assessed in the light of the other provisions and cannot be completely ignored merely because they ceased

to become undisclosed income. It will be seen Sec. 158BH specifically provides that excepting those provisions which have specifically been made

inapplicable, all the other provisions of the Act apply to the assessment made under this chapter. Therefore, all such expenditure which even if

proved to be genuine would have to be taken into consideration while arriving at the tax liability of the assessee and it cannot just be ignored on the

broad principle that since it is the genuine expenditure made, it ceased to be undisclosed income. There could be the cases where even genuine

expenditure which remains undisclosed and which is unearthed because of the search could be taken as an income on the part of the assessee so

as to increase his tax liability. If we accept the contention then, it would obtain absurd results and all the expenditures unearthed which were not

disclosed by the assessee would automatically have to be left out of consideration on the broad ground that they cannot be undisclosed income. In

short, though the hypotheses is established by the amendment, its antitheses, which is tried to be argued by the learned counsel, is not correct. We,

therefore, reject this argument and hold that while making the assessment of the block period, such expenditure will have to be taken into

consideration in the light of the other provisions in the Act as per Sec. 158BH. The plain meaning of the amendment is only to the extent of the

words added and no further inferences can be drawn on that basis as is being tried by the learned counsel. The first contention is, therefore,

rejected.

The next contention of the learned counsel was in respect of Sec. 40A(3) of the Act. He assails the finding of Income Tax Appellate Tribunal in

so far as it pertains to some films which were produced prior to the amendment to Sec. 40A(3). It will be seen that the Tribunal had allowed the

appeal in respect of the expenditure incurred in respect of the film ''Thirumoorthy'' on the ground that the relevant assessment year in respect of the

income derived from that film would be 1996-97. The contention was that in respect of such payments, which were made in breach of Sec.

40A(3), the disallowance of the expenditure would be only 20% and thus the rest of 80% would be the allowable expenditure. According to the

learned counsel from the language of Sec. 40A(3), the amendments made thereto and from the language of second proviso to that section, the

Tribunal should not have restricted the disallowance to 20% only in respect of a movie made after the amendment to the section. He further

contends that the amendment to the section is in the nature of a procedural amendment and, therefore, it would apply to all the earlier payments

made by cash (not by cheques as provided by the section). Learned counsel assails the interpretation put forward by the Tribunal that the

amendment to Sec. 40A(3) is not procedural in nature and is, therefore, not retrospective. Indeed, the Tribunal has held this amendment to be

prospective and, therefore, has given the benefit of this amendment only in respect of the Tamil movie ''Thirumoorthy'', the relevant year for which

is 1996-97. Before proceeding to appreciate the argument, it will be better to see the relevant portion of the section:

40A Expenses or payments not deductible in certain circumstances.

... ... ...

(3) Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March,

1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding twenty thousand

rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, twenty per cent of such expenditure shall not be allowed

as a deduction.

Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of

April 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes

any payment in respect thereof in a sum exceeding twenty thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed

bank draft, the allowance originally made shall be deemed to have been wrongly made and the Assessing Officer may recompute the total income

of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154

shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the

assessment year next following the previous year in which the payment was so made:

Provided further that no disallowance under this sub-section shall be made where any payment in a sum exceeding twenty thousand rupees is made

otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, insuch cases and under such circumstances as may be

prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.

... ... ...

It will be seen that Sec. 40A(3) came to be amended by Finance Act 1995 with effect from 1-4-1996. Previously the wordings in the section

was ""such expenditure shall not be allowed as a deduction"". That was substituted by the words ""20% of such expenditure shall not be allowed as a

deduction"". With the result that if any payment is made after the amendment in contravention of Sec. 40A(3) then, 20% of such expenditure would

be disallowed and shall be taken into account for computation of income. It is relevant to note that clause (j) of Rule 6DD was deleted. By that

clause, a discretion lay in the assessing authority to ignore the breach of the section if the assessee was able to convince that it was not feasible or

possible to make the payments by cheques. It will be seen in this behalf that from 1-4-1968 to 31-3-1989 any payment more than Rs. 2,500/-

was required to be made by cheque and all such payments were disallowed completely. This position continued up to 31-3-1989 from 1-4-1989.

The limit of Rs. 2,500/- was increased to Rs. 10,000/-. However, any payments made in breach of the section entirely were liable to be

disallowed. This position continued up to 1-4-1996 when the amendment was brought in where the limit was retained to Rs. 10,000/-. However, it

was provided that in contradistinction to all the expenditure not being allowed 20% of the expenditure would not be allowed meaning thereby that

the authority had discretion to allow such expenditure to the extent of 80% (subject of course to other relevant provisions). From 1-4-1997, the

limit of Rs. 10,000/- was increased to Rs. 20,000/-. However, the per centage of disallowance was retained at 20%.

Learned counsel seeks to argue that the amendment brought in with effect from 1-4-1996 being a retrospective amendment would relate back

to all the earlier payments made including the payments made in the block period and, therefore, the unallowable expenditure could be to the extent

of 20% of the payments exceeding the payment of Rs. 10,000/-. In short, the contention is that out of this expenses, 80% of the expenses should

be allowed by way of allowable expenditure under Sec. 37. For this purpose, learned counsel relied on a decision of the Punjab High Court in

Attar Singh Gurmukh Singh Vs. Income Tax Officer, . As against this, the learned standing counsel for the Department reiterated that firstly the

amendment cannot be said to be a procedural amendment and by the very nature of it and the language thereof, it cannot apply to the payments

made earlier during the block assessment period. The further argument is that the plain language of the amended provision is clearly prospective

and, therefore, the interpretation putforth is clearly erroneous.

On this backdrop, we will have to consider the first argument that the amendment is retrospective and as such, it would take into its mischief all

the payments. We have deliberately quoted the provision above. The basic argument of the learned counsel is that this is only a ""procedural

amendment"" and being as such, it would always be deemed to be retrospective. An amendment must have in its language something pointing

towards its retrospectivity. In order to hold a statute retrospective, it should be specifically so provided. When we see the language of Sec.

40A(3), it is clear that the language does not in any manner suggests in favour of retrospectivity. On the other hand, considering the tense used in

the section, the amendment appears to be only prospective. In order to hold the provision to be having retrospective operation then, it would have

to be shown that it is of a procedural nature. It is for this purpose that the decision referred to in Attar Singh Gurmukh Singh case, cited supra, is

very heavily relied upon by the learned counsel. Section 40A(3) (as it then was) came up for consideration in that case before the Division Bench

of the Punjab High Court where the constitutional validity of this section was challenged on the ground that the section is unreasonable and

arbitrary. The argument raised was that the income of the assessee would be the difference between the price of the purchased material and the

price at which the same is sold. It was contended that if the price of the purchased material was not adjusted as against the sale price of the

material so sold, in that case the Income Tax levied would not be on the income, rather it would be arbitrarily levied on an assumed income. The

learned Judges observed as follows:

we are of the opinion that the said provision is more a rule of procedure, rather than creating any substantial hindrance in the way of an assessee

who wants to have deduction on the genuine purchase transactions.

The learned Judges referred to subrule (j) of Rule 6DD and pointed out that the said rule provided for all the eventualities which may occur due to

exceptional and unavoidable circumstances. The Bench held that the provision has been made to safeguard the revenues of the State and if the

measures were taken to check the evasion of Income Tax, it could not be said that the said measure was ultra vires on the ground of arbitrariness

and being violative of Art. 14 of the Constitution. The learned Judges then observed:

The said provision, in our view, has been introduced only to regulate the business activities and prevent unaccounted money being used for

clandestine transactions and it was in the interest of revenue and national economy that the restriction imposed in this provision has been enacted.

The provision in no way can be held to curtail the freedom of trade or business. As already observed, the said provision is more of a procedure

than to be of taking away any right of an assessee and the said procedure has been prescribed with a view to avoid evasion of tax to which the

revenue legitimately is entitled. The provision, therefore, cannot be in any manner termed to be arbitrary.

Learned counsel very heavily relied on the sentence that the provision is more a rule of procedure and, therefore, contends that being an

amendment of procedural nature, the provision would be presumed to be of retrospective nature.

We do not agree. In the first place, the question of retrospectivity was not before the learned Judges in the reported decision. The learned

Judges were only considering the argument that the provision was arbitrary and created unreasonable restrictions in the trade by insisting upon the

payments being made only by way of cheques where the payments was more than Rs. 2,500/-. The second and the most important difference is

that the present amendment is entirely different from the one which fell for consideration of the learned Judges. The provision under the

consideration of the learned Judges suggested that any payment made for more than Rs. 2,500/- would be totally disallowable thereby it could be

said that the provision as it stood then really provided the modality for making the payments and further provided that if payments were not made

by cheque that expenditure would be totally disallowed. A sea-change has now been brought by the present amendment wherein any expenditure

now made beyond the limit of Rs. 20,000/-, then 20% of such expenditure would not be entitled for being allowed as expenditure meaning thereby

that remaining expenditure could be allowed as expenditure. This is a major departure from the earlier provision. The earlier provision has been

quoted in the said decision from which it is clear that such expenditure as was made in breach of Sec. 40A(3) was not to be allowed at all as a

deduction whereas now the position has completely changed and for those words, the words ""20% of such expenditure shall not be allowed as a

deduction"" have been substituted. While in the earlier provision there was no right in favour of the assessee, now it is clear that in place of the

whole expenditure 20% is not to be allowed as deduction. This certainly changes the whole scenario. Therefore, by this amendment, which is

assessee-friendly, the assessee stands benefited and gains a right inasmuch as instead of the whole expenditure being disallowed, the amendment

provides for the compulsory disallowance of 20% expenditure only. This would change the very nature of the amendment and therefore the

observations made by the learned Judges in respect of the nature of the amendment would not be applicable to the present provision as it now

stand. Such amendment which limits the discretion of the assessing authorities and creates a right in the assessee to plead for the remaining 80%

expenditure as an allowable expenditure cannot be viewed as a mere procedural provision. It will have to be held as a provision dealing with

substantive right of the assessee. Therefore, considering the language of the amended provision and the import thereof, we are of the clear opinion

that this amended provision is not of the retrospective nature. In our view, the Tribunal was right in holding that the amended provision was only

prospective. We agree with the order of the Tribunal in that behalf.

In The Land Acquisition Officer-cum-DSWO, Andhra Pradesh Vs. B.V. Reddy and Sons, , the Supreme Court has reiterated again that the

substantive provision cannot be retrospective in nature unless the provision itself indicates the same. It held the amended provision of Sec. 25 of

the Land Acquisition Act to be prospective.

In that view we have taken, we hold that the tax case appeal is devoid of any merit and deserves to be dismissed. It is accordingly ordered to

be dismissed. No costs.