P.V.B. Rao, Judicial Member -
(1.) THIS is an appeal by the revenue. The first ground of appeal relates to relief under Section 35B of the Income-tax Act, 1961 ('the Act'), given by the Commissioner (Appeals) on a part of commission paid to directors. The ITO disallowed a part of the commission under Section 40(c) of the Act and, accordingly, he restricted the allowance under Section 35B also to that amount. The Commissioner (Appeals), on the other hand, took the view that the assessee is entitled to the claim under Section 35B in respect of entire commission paid to the directors.
(2.) It is argued by the learned departmental representative that once disallowance is made under Section 40(c) relating to the commission paid to the directors, a claim under Section 35B must be confined to that amount and not to the entire amount claimed by the assessee as expenditure incurred by it. The argument proceeds on the basis that when the Legislature has restricted the allowance of expenditure in a particular manner, the same standard or norm should be applied while giving weighted deduction under Section 35B. The learned departmental representative also contended that Section 40(c) opens with a non obstante clause wherein Sections 30 to 39 of the Act have been mentioned. In other words, Section 40(f) overrides the provision of Sections 30 to 39, which means Section 35B is also included therein.
Mr. Vyas, learned counsel for the assessee, on the other hand, submitted that in this particular case, there is no finding by the ITO that the expenditure was not incurred for the purpose of business but the disallowance was on account of the fact that there is a ceiling put on the remuneration payable to the directors under Section 40(c)- He has referred to the direction of the IAC given to the ITO under Section 144B of the Act while treating the entire commission as allowable but at the same time restricting the total expenditure to Rs. 72,000 for each director in view of Section 40(c). Mr. Vyas contended that the expenditure was incurred for the purpose of business, though in view of the statutory ceiling, a part of the expenditure was disallowed. So far as Section 35B is concerned, the entire expenditure incurred for business purposes is entitled to weighted deduction. According to Mr. Vyas, Section 40(c) operates on a different field and the situation contemplated therein can have no application to the situation arising under Section 35B.
He has further referred to us the following general principles which are to be kept in mind in construing the provisions of Section 35B and Section 40(c) :
(a) Section 35 B must be construed liberally as it postulates giving of relief to exporters.
(b) If there is a doubt to the correct meaning of the provisions of statute, the benefit of doubt must go to the taxpayer.
(c) The legal fiction envisaged under Section 40(c) cannot be extended beyond the purpose for which it was created.
(d) A court cannot add words and phrases to the language of the provision of the Act.
Section 35B, Mr. Vyas continued, was meant for giving a relief to the exporters in order to encourage export. It is a self-contained code by itself and cannot be hit by any other provision.
In reply, the learned departmental representative, equally referred to some general principles like (i) when there is no ambiguity in the language, of the statute, there is no question of giving any benefit of doubt to the taxpayer, (2) provision of a statute should be interpreted in such a manner that a particular section does not become redundant, (5) legislative intent can be discernible from the Finance Minister's speech while introducing the provision of a statute or from the notes on clauses, and (4) Section 40(c) is a special provision and it prevails over the general provisions which are enumerated in Sections 30 to 39, in which is included Section 35B.
We find that the commission paid to the directors amounted to Rs. 1,70,114. The ITO allowed weighted deduction in respect of Rs. 1,24,400, inasmuch as, the balance of Rs. 45,714 was disallowed by applying provisions of Section 40(c). The directions of the IAC bear testimony to this admitted position. In fact, the IAC held that the commission paid was reasonable. All the same, he directed the ITO to restrict the total expenditure to Rs. 72,000 for each director. Thus, it is clear that there is no finding that the expenditure was not incurred for the purpose of business. On the other hand, there is an implicit finding that the expenditure was entirely incurred for the purpose of business but in view of the statutory restriction, by having a ceiling of Rs. 72,000 the allowance was restricted to that amount. Thus, we see that thee ntire expenditure including commission is for the purpose of business.
(3.) THEN the question would be whether, in view of the ceiling put forth by virtue of Section 40(c) and the allowance of expenditure being restricted to Rs. 72,000 for each director, the claim for weighted deduction under Section 35B should be restricted in the same manner. In our opinion, the revenue is right in restricting the weighted deduction in accordance with the ceiling under Section 40(c). On a plain reading of the provision of Section 40(c), the relevant portion of which is reproduced below, it is clear that, irrespective of the provision of Sections 30 to 39, there is a restriction in regard to the deduction of expenditure referred to in Section 40(c) :
Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession' :-
It is also obvious that Section 35B occurs in-between Sections 30 to 39. Section 40(c) reads as follows :-
...In the case of any company-
(i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be,
(ii) any expenditure or allowance in respect of any assests of the company used by any person referred to in Sub-clause (i) either wholly or partly for his own purposes or benefit,
if in the opinion of the Income-tax Officer any such expenditure or allowance as is mentioned in Sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of anyone person referred to in Sub-clause (i) shall, in no case, exceed...
The restriction mentioned therein applies irrespective of the provisions of Sections 30 to 39 with regard to the deductions provided therein. Even if the expenditure is not excessive or unreasonable, there is an overall ceiling put on the expenditure to be allowed under Section 40(c). In fact, we have already held that the expenditure incurred by the assessee is reasonable and not excessive but by a statutory provision, there is a ceiling put on the expenditure to be allowed. Accordingly, the expenditure that can be allowed is only up to Rs. 72,000. But for Section 35B the assesse would be entitled to the expenditure of Rs. 72,000. Only by application of Section 35B, can it be said that the assessee is entitled to the entire expenditure-of-one-third of the same, ignoring the ceiling. We are clearly of the view that there cannot be a different standard for allowing the expenditure under Section 35B. It is not as though Rs. 72,000 is allowed as regular expenditure by applying Section 40(c) and additional expenditure of l/3rd is allowed under Section 35B. Section 35B envisages an allowance of expenditure to the extent of l/3rd. In the ordinary course the expenditure to be allowed would be under Section 37 of the Act but because Section 35B applies, Section 37 will be ruled out. This is clear from the wording of Section 37 itself. It begins "Any expenditure (not being expenditure of the nature described in Sections 30 to 36 ... .".
It means that if an expenditure comes under any other provisions, Section 37 will obviously have no application. Admittedly, here the expenditure comes under Section 35B. Now, if we carefully look to the provisions of Section 35B, what it says is that instead of allowing the expenditure incurred, an additional 1/3rd of the expenditure can be allowed. In other words, l/3rd of the expenditure can be allowed by virtue of the provisions of Section 35B. This allowance of l/3rd of the expenditure is nothing but a deduction to be allowed in computing the income and is, therefore, caught within the mischief of Section 40. (The relevant provisions have already been extracted above.)
Mr. Vyas tried to make a subtle distinction between the language employed in Section 35B and the language used in Section 40(c). According to him, Section 40 contemplates deduction of the amounts in computing the income chargeable, while Section 35B refers to a deduction of sum equal to 1/3rd of the expenditure incurred. What Mr. Vyas points out is that Section 35B contemplates a deduction of the specified amount and a measure having been formulated (sic) and not that the allowance of expenditure is contemplated as such. We are unable to see any distinction between the provisions of Section 40 and those of Section 35B. In Section 40(c), the expression used is "the following amounts shall not be deducted". In Section 35B, the assessee will be allowed a deduction of" ... ." (sic). Both contemplate deduction of amounts in computing chargeable income of the assessee. Section 35B is, undoubtedly, a provision by which a deduction is contemplated while computing the income of the assessee. The quantum of deduction of expenditure incurred is increased by l/3rd of the amount incurred. Therefore, once we get the restriction under Section 40(c) in regard to the allowance of expenditure, such restriction is automatically applicable in determining the deduction to be allowed under Section 35B. It is not that Section 35B does not speak of the measure of deduction of some amount on the basis of expenditure incurred but it is actually allowance of expenditure incurred and the only difference is that the expenditure to be allowed is increased by 1/3rd.
We have, therefore, come to the conclusion that the provisions of Section 40(c) are clear and there is no ambiguity at all in construing the same. The general principles relied on by both the sides are well known and whatever is decided is quite in consonance with those principles.;