The Commissioner of Income Tax vs Investment Trust of India Ltd.

N.V. Balasubramanian, J.—The Income Tax Appellate Tribunal, in pursuance of the order of this Court in T.C.P. No. 348 of 1996 dated

1.4.1997, has stated a case and referred the following questions of law:

Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee company is entitled to

investment allowance u/s 32A of the Act on machinery leased out in the course of its business of leasing?

Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the expenditure incurred on

advertisement inviting fixed deposits from public does not form part of the sales promotion expenses calling for disallowance u/s 37(3A) of the

Act?

The assessment year with which we are concerned is 1984-85 and as far as the first question of law referred to us is concerned, it is fairly

submitted by the learned counsel for the Revenue that the issue raised in the first question is covered against the Revenue by a decision of the

Supreme Court in the case of Commissioner of Income Tax, Karnataka, Bangalore Vs. M/s. Shaan Finance (P) Ltd., Bangalore, . Following the

decision of the Supreme Court in Commissioner of Income Tax, Karnataka, Bangalore Vs. M/s. Shaan Finance (P) Ltd., Bangalore, , the first

question of law is answered in the affirmative, against the Revenue and in favour of the assessee.

The second question deals with the allowability of the expenditure incurred by the assessee on advertisements inviting fixed deposits from the

public. The assessee claimed a total sum of Rs.2,93,340/- as advertisement expenditure for collecting fixed deposits. The Income Tax Officer

applied the provisions of sub-section 3A of section 37 of the Income Tax Act, 1961 and disallowed a portion of the expenditure as provided in the

section on the ground that the expenditure was incurred towards advertisements and towards sales promotion expenditure and hence, disallowance

has to be made u/s 37(3A) of the Income Tax Act. The Commissioner of Income Tax (Appeals), on appeal, allowed the claim of the assessee on

the ground that the expenses were sale promotion oriented expenses. The order of the Commissioner of Income Tax (Appeals) was confirmed by

the Appellate Tribunal, on appeal.

The case of the Revenue is that the assessee had incurred the expenditure on advertisements in newspapers inviting fixed deposits from the

public and the expenditure was incurred by way of advertisements and by way of sales promotion and therefore, the expenditure would qualify for

disallowance u/s 37(3A) of the Income Tax Act. learned counsel for the Revenue placed reliance on the decision of the Supreme Court in the case

of Eskayef (Now Known as Smithkline Beecham) Pharmaceuticals (India) Ltd. Vs. Commissioner of Income Tax, Karnataka-II Bangalore,

wherein the Supreme Court has held that the distribution of samples of drugs to the medical practitioners would tantamount to publicity and sales

promotion expenses falling within the scope of section 37(3A) of the Income Tax Act, subject to the limitations as to allowability therein contained.

Learned counsel for the Revenue therefore submitted that the Supreme Court referred to the decision of the Andhra Pradesh High Court in the

case of Commissioner of Income Tax Vs. J and J Dechane Laboratories (P) Ltd., and held that the distinction made by the High Court between

the expenditure that is essential to the running of the business and other expenditure is not correct and all the expenditure for publicity or sales

promotion would fall within the scope of section 37(3A) of the Income Tax Act. Learned counsel therefore submitted that since the expenditure

incurred was an advertisement expenditure and sales promotion expenditure, the entire expenditure is not allowable, but it is allowable subject to

the restrictions contained in section 37(3A) of the Income Tax Act. Learned counsel also relied upon the decision of the Supreme Court in the

case of M/s. Hindustan Aeronautics Ltd., Bangalore Vs. Commissioner of Income Tax, Karnataka- I, Bangalore, and submitted that the Supreme

Court has held that the circulars or instructions of the Central Board of Direct Taxes cannot override the view of the High Court or the Supreme

Court. Learned Counsel therefore submitted that the circular issued by the Central Board of Direct Taxes which has been relied upon by the

learned counsel for the assessee cannot override the law laid down by the Supreme Court in the case of Eskayef (Now Known as Smithkline

Beecham) Pharmaceuticals (India) Ltd. Vs. Commissioner of Income Tax, Karnataka-II Bangalore, . He therefore submitted that the view taken

by the Appellate Tribunal is not correct and not in consonance with the decision of the Supreme Court.

Mr. J. Narayanaswamy, learned counsel for the Revenue, on the other hand, submitted that the assessee had incurred expenditure on

advertisements in compliance of the provisions of section 58A of the Companies Act, 1956 and the amount spent on advertisements is allowable

as business expenditure. He submitted that the Central Board of Direct Taxes has issued the circular No. 240, dated 17.5.1978 explaining that the

provision of section 37(3A) of the Income Tax Act would not apply in relation to an expenditure incurred for publication in any newspaper of any

notice required to be published by or under any law. He therefore submitted that the Appellate Tribunal was correct in holding that the amount of

expenditure does not qualify for disallowance u/s 37(3A) of the Income Tax Act.

We carefully considered the submissions of the learned counsel for the Revenue and the learned counsel for the assessee. Section 37 of the Act

provides that any expenditure incurred, laid out or expended wholly and exclusively for the purpose of the business other than the capital

expenditure or personal expenditure is allowable as business expenditure. Sub-section 3A of section 37 of the Income Tax Act was inserted by

Finance Act, 1983 with effect from 1.4.1984 and u/s 37(3A), any expenditure incurred on advertisement, publicity and sales promotion would be

allowable subject to the disallowance provided in section 37(3A) of the Income Tax Act. Section 37(3A) of the Income Tax Act was subject

matter of consideration by the Supreme Court in Eskayef (Now Known as Smithkline Beecham) Pharmaceuticals (India) Ltd. Vs. Commissioner

of Income Tax, Karnataka-II Bangalore, and the Supreme Court was dealing with the case of an expenditure incurred by a pharmaceutical

company on distribution of free samples of drugs to the medical practitioners and the question arose whether the expenditure incurred by the

company would be an expenditure in the nature of publicity and sales promotion expenditure. The Supreme Court held that the expenditure

incurred by the company on distribution of free samples of drugs to the medical practitioners would be in the nature of publicity and sales

promotion expenditure and would fall within the scope of section 37(3A) of the Income Tax Act and would be subject to the limitation as to the

allowability therein contained.

The assessee herein had incurred the expenditure by way of advertisements in the newspapers for inviting deposits from the public. u/s 58-A of

the Companies Act, no company is permitted or allowed to invite deposits from the public unless the deposits are invited in accordance with the

Rules made under the section and the statutory advertisement should contain the statement showing the financial position of the company and the

advertisement shall be issued by the company in such form and in such manner as may be prescribed under the Rules. Sub-section (4) of section

58A of the Companies Act provides that if any deposit is accepted in contravention of the Rules, the company is required to return the amount of

deposit and further, if there is any contravention in relation to the deposit, the company is also punishable with fine which may extend to

Rs.1,00,000/- but shall not be less than Rs.5,000/-. In other words, the company desiring to invite deposits from the public has to comply with the

provisions of section 58A of the Companies Act and publish the advertisement in the form prescribed inviting deposits from the public. In other

words, it is not open to the company to invite deposits in any other form. The statutory form prescribed is fairly a lengthy one under the Companies

(Acceptance of Deposits) Rules, 1975 and it requires that the advertisement shall be made in a leading English newspaper and in one vernacular

newspaper circulating in the State in which the registered office of the company is situate. The text of the advertisement shall contain the information

regarding the name of the company, the date of incorporation of the company, the business carried on by the company and its subsidiaries, brief

particulars of the management of the company, names, addresses and occupations of the directors, the profits of the company before and after

making provision for tax for the three financial years immediately preceding the date of advertisement, the dividends declared by the company in

respect of the said years and a summarised financial position of the company as in the two audited balance sheets immediately preceding the date

of advertisement in the form prescribed in the Rules. We are therefore of the view that in view of the statutory provision contained in section 58A

of the Companies Act, the assessee company has to advertise the notice calling for deposits and if there is any breach, the company is liable to be

proceeded against under the relevant provisions of the Companies Act. Since there is a statutory compulsion on the assessee company to advertise

the notice calling for deposits from the public, we hold that the expenditure on advertisements is revenue in nature.

The only question is whether in view of the specific provision contained in section 37(3A) read with section 37(3B) of the Income Tax Act, the

expenditure incurred for the advertisements is allowable subject to the limitations of allowability as prescribed in section 37(3A) of the Income Tax

Act. We are of the view, when the assessee has complied with the statutory provisions and issued advertisements calling for deposits from the

public, it would not amount to sale promotion expenditure falling u/s 37(3A) of the Income Tax Act. It must be remembered that section 37(3A) of

the Income Tax Act was introduced to curb the extravagant and socially wasteful expenditure on advertisement at the cost of the exchequer.

Keeping in view of the object behind the introduction of sections 37(3A) and 37(B) of the Income Tax Act, we are of the view that the

advertisements effected by the assessee which the assessee was required to make under the provisions of a law cannot be regarded as an

expenditure falling within the scope and ambit of section 37(3A) read with section 37(3B) of the Income Tax Act. The Central Board of Direct

Taxes in Circular No. 240 dated 17.5.1978 has realised the position and issued the circular stating that the provision would not apply to the

expenditure incurred by the tax payer, inter alia, on the publication in any newspaper or any notice required to be published by or under any law.

The above circular was noticed by the Madhya Pradesh High Court in Commissioner of Income Tax Vs. Mohd. Ishaque Gulam, and the Court

held that the circular clarifies the meaning of the expression, publicity and sales promotion.

A similar question was considered by the Madhya Pradesh High Court in Commissioner of Income Tax Vs. M.P. State Handloom Weavers''

Co-operative Society, and in the case before the Madhya Pradesh High Court, the State Government has issued directions under 49C of the

Madhya Pradesh Co-operative Societies Act, 1960 to all Co-operative Societies in the State to popularise the co-operative movement by

effecting an advertisement and the Co-operative Society in question incurred certain expenditure towards propaganda and the question arose

whether the expenditure incurred by the assessee for propaganda would constitute advertisement on sales promotion within the meaning of section

37(3A) read with section 37(3B) of the Income Tax Act. The Madhya Pradesh High Court held that the directives of the State Government to the

Co-operative Societies were statutory in nature and in compliance of the directives, the expenditure was incurred by the assessee and hence, the

expenditure would constitute a business expenditure and the expenditure was not subject to the limitation of allowability prescribed in section

37(3A) of the Income Tax Act. We are in respectful agreement with the view expressed by the Madhya Pradesh High Court in M.P.S. Handloom

Weavers'' Co-operative Society''s case. The assessee had incurred expenditure on advertisements for collecting fixed deposits and the

advertisements were statutory advertisements and therefore the provisions of section 37(3A) read with section 37(3B) of the Income Tax Act do

not apply to the said expenditure.

As far as the decision of the Supreme Court in Eskayef (Now Known as Smithkline Beecham) Pharmaceuticals (India) Ltd. Vs. Commissioner

of Income Tax, Karnataka-II Bangalore, is concerned, the Supreme Court was dealing with a case of non-statutory expenditure and the

expenditure was incurred on the distribution of physician''s sample for the purpose of publicity and sales promotion and therefore, the decision in

Eskayef (Now Known as Smithkline Beecham) Pharmaceuticals (India) Ltd. Vs. Commissioner of Income Tax, Karnataka-II Bangalore, is not

applicable to the facts of the case.

Learned counsel for the Revenue relied upon the decision of the Supreme Court in M/s. Hindustan Aeronautics Ltd., Bangalore Vs.

Commissioner of Income Tax, Karnataka- I, Bangalore, wherein the Supreme Court held that the circular of the Central Board of Direct Taxes

cannot override the decision of the Supreme Court or the High Court. We are of the view that the above decision of the Supreme Court does not

assist the counsel for the Revenue as the Board has not issued the circular in contravention of the view expressed by the High Court or the

Supreme Court. On the other hand, the Supreme Court in Paper Products Ltd. Vs. Commissioner of Central Excise, has held that the circulars

issued by the Board would bind the department and the department is precluded from challenging the correctness of the circulars even on the

ground of the same being inconsistent with the statutory provision. Hence, the circular issued by the Central Board of Direct Taxes would bind the

department.

In the result, we hold that the Appellate Tribunal was correct in holding that the expenditure incurred for inviting deposits from the public does

not form part of the sales promotion expenses. Accordingly, we answer the second question of law referred to us in the affirmative, against the

Revenue and in favour of the assessee. However, in the circumstances, there will be no order as to costs.