HIGH COURT OF ANDHRA PRADESH
Bakelite Hylam Ltd.
Commissioner of Income-tax
V.V.S. RAO AND B.N. RAO NALLA, JJ.
Referred Case. No. 152 of 1996
NOVEMBER 28, 2011
V.V.S. Rao, J.
This is a reference under section 256(1) of the Income-tax Act, 1961 (“the Act”). The following two questions have been referred to the opinion of this court at the instance of the assessee with reference to the assessment years 1985-86 and 1986-87.
Assessment year 1985-86
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the rentals amounting to Rs. 2,80,259 being the expenditure incurred for hiring space at various locations, shall be considered for the purposes of computation of disallowance under section 37(3A) of the Income-tax Act, 1961, despite the fact that rentals are allowance under section 30 of the Act ?
Assessment year 1986-87
Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that excise duty is a direct cost of manufacture even after recording a finding of fact that the moment goods are produced the levy is fastened ?
2. The second question has to be answered in favour of the Revenue and against the assessee in view of the decision of this court in a case of the assessee itself in R. C. No. 33 of 1995, dated June 9, 2006 (Bakelite Hylam Ltd. v. CIT) wherein a similar question was considered and answered against the assessee. The counsel does not dispute this. We are only required to consider the question with reference to the assessment year 1985-86.
3. The background facts to the barest may be noticed as follows. The assessee is a public limited company engaged in the business of manufacturing of industrial laminates, phenolic resins, phenolic moulding materials and industrial and decorative laminates. In their return of income-tax for the assessment year 1985-86, they admitted the total income of Rs. 1,32,28,400. Among others they claimed deduction of two items of expenditure, namely, (i) expenditure incurred on hired space on hoardings, and (ii) expenditure incurred on statutory advertisement like printing of technical data sheets, printing of stationery, etc., under the general head of advertisement and publicity. They claimed deduction under section 30 of the Act for the rental paid for hiring the space on hoardings. By an order dated March 25, 1988, the Assessing Officer disallowed the deduction and added back to the total income. In their appeal before the Commissioner of Income-tax (Appeals) (“the CIT(A)”), the assessee was partly successful to the extent of the expenditure incurred on statutory advertisement like printing technical data, printing of stationery, etc., to a tune of Rs. 58,213. In so far as the expenditure incurred for hiring space is concerned, the Commissioner of Income-tax (Appeals) disallowed the claim holding that it would not come under section 37(3A) read with sub-section (3B)(i). This view was confirmed by the Income-tax Appellate Tribunal as well, aggrieved by which the assessee sought reference of the second question as noticed hereinabove.
4. We have heard the counsel for the assessee and the junior standing counsel for Income-tax Department.
5. Hereinbelow, we quote sections 30 and 37 of the Act to the extent necessary as they existed at the relevant time in the Act.Online GST Certification Course by TaxGuru & MSME- Click here to Join
“30. Rent, rates, taxes, repairs and insurance for buildings.-In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deduction shall be allowed-
(a) where the premises are occupied by the assessee-
(i) as a tenant, the rent paid for such premises ; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs ;
(ii) otherwise than as a tenant, the amount paid by him on account of current repairs to the premises ;
(b) any sums paid on account of land revenue, local rates or municipal taxes ;
(c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the premises.
37. General.-(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80VV 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’.
Explanation.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
(Sub-sections (2), (2A), (2B) and (3) omitted here as not relevant).
(3A). Notwithstanding anything contained in sub-section (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in sub-section (3B) exceeds one hundred thousand rupees, twenty per cent. of such excess shall not be allowed as deduction in computing the income chargeable under the head ‘Profits and gains of business or profession’.
(3B). The expenditure referred to in sub-section (3A) is that incurred on-
(i) advertisement, publicity and sales promotion ; or
(ii) running and maintenance of aircraft and motor cars ; or
(iii) payments made to hotels.
Explanation.-For the purposes of sub-sections (3A) and (3B),-
(a) the expenditure specified in clause (i) to clause (iii) of sub-section (3B) shall be the aggregate amount of expenditure incurred by the assessee as reduced by so much of such expenditure as is not allowed under any other provision of this Act ;
(b) expenditure on advertisement, publicity and sales promotion shall not include remuneration paid to employees of the assessee engaged in one or more of the said activities ;
(c) expenditure on running and maintenance of aircraft and motor cars shall include,-
(i) expenditure incurred on chartering any aircraft and expenditure on hire charges for engaging cars plied for hire ;
(ii) conveyance allowance paid to employees and, where the assessee is a company conveyance allowed paid to its directors also.
(Sub-sections (3C), (3D), (4) and (5) omitted here as not relevant).”
6. The conspectus on the plain reading of the two provisions is as follows. In computing profits and gains of business or profession, if the assessee is a tenant in occupation of a premises for the business or profession, the rent paid for such premises and the cost of repairs incurred, if any, shall be allowed to be deducted. If the assessee is in occupation of a premises for the purpose of business of a premises otherwise as a tenant the amount paid by him on account of repairs to the premises shall be allowed. In addition, the sums paid on account of revenue, local rates or municipal taxes or insurance against risk of damage or destruction of the premises are also deductible. The crucial words in section 30 are “use of the premises for the purpose of business or profession”. By no stretch of imagination, it can be inferred that the hire charges paid for advertisement hoardings would also come within the ambit of use of the premises for the purpose of business. Section 30 has nothing to do with advertisement, publicity or sales promotion. Giving very plain meaning of the language in section 30, it has to be construed as dealing with the deduction of rent, rates, taxes, repairs and insurance paid for the premises used for the business or profession either as a tenant or otherwise as a tenant. It does not take within its fold expenditure incurred for advertisement or publicity. If section 30 is interpreted as also allowing deduction of the hire charges for the space for the purpose of advertisement, it would amount to supplying casus omissus.
7. A tax law has to be interpreted strictly. Whatever may be the hardship, nothing can be added nor something can be ignored. It must always be the endeavour of the court to give a plain meaning to the words used in the provision. In Principles of Statutory Interpretation by Justice G. P. Singh (tenth edition, 2006), the general principles of strict interpretation of fiscal statutes are summarized as below :
“A taxing statute is to be strictly construed. The well-established rule in the familiar words of Lord Wensleydale, reaffirmed by Lord Halsbury and Lord Simonds, means : ‘The subject is not to be taxed without clear words for that purpose ; and also that every Act of Parliament must be read according to the natural construction of its words’. In a classy passage Lord Cairns stated the principle thus : ‘If the person sought to be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however, apparently within the spirit of law the case might otherwise appear to be. In other words, if there be admissible in any statute, what is called an equitable, construction, certainly, such a construction is not admissible in a taxing statute where you can simply adhere to the words of the statute’. Viscount Simon quoted with approval a passage from Rowlatt J. expressing the principle in the following words : ‘In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used’. Relying upon this passage Lord Upjohn said : ‘Fiscal measures are not built upon any theory of taxation’.”
8. The above passage was quoted with approval in CIT v. Kasturi & Sons Ltd.  237 ITR 24. In State of West Bengal v. Kesoram Industries Ltd.  10 SCC 201, citing the same, the apex court summed up the following settled principles of interpretation (i) in interpreting a taxing statute, equitable considerations are entirely out of place. Taxing statutes cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in the light of what is clearly expressed ; it cannot imply anything which is not expressed ; it cannot import provisions in the statute so as to supply any deficiency ; (ii) before taxing any person it must be shown that he falls within the ambit of the charging section by clear words used in the section ; and (iii) if the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject. There is nothing unjust in the taxpayer escaping if the letter of the law fails to catch him on account of the Legislature’s failure to express itself clearly.
9. Sections 30 to 36 deal with the various deductions to be allowed while computing the profits and gains of business or profession. Section 37 is an additional provision which supplants sections 30 to 36. It has three sets of independently operating sub-sections. All of them deal with the deduction of general expenditure not covered by sections 30 to 36. Under sub-section (3A) read with sub-section (3B), where the expenditure of the assessee on advertisement, publicity and/or sales promotion, exceeds one hundred thousand rupees, 20 per cent. of such excess shall not be allowed as deduction in computing the income chargeable under the head “Profits and gains of business or profession”. Sub-sections (3A) and (3B) are attracted in respect of the expenditure incurred by an assessee either on advertisement or publicity or sales promotion. It does not in any manner deal with the expenditure for hiring space on hoardings.
10. As noticed by the Commissioner of Income-tax (Appeals), the expenditure under the head expenditure incurred on hired space in a sum of Rs. 2,80,259 does not come within the purview of publicity, advertisement or sales promotion. Section 37(3A) read with sub-section (3B) is very specific that it is only the expenditure incurred for advertisement, publicity and sales promotion which are to be given ordinary meaning. Mere hiring a space on hoardings cannot be treated as expenditure for advertisement or publicity or sales promotion.
11. In view of the above, we answer the reference in the affirmative in favour of the Revenue and against the assessee and dispose of the reference accordingly without any order as to costs.