M. Fatima Beebi, Judicial Member -
(1.) THIS appeal by the assessee arises from the income-tax assessment in respect of the assessment year 1979-80. The ground of appeal relates to the disallowance under Section 37(3A) of the Income-tax Act, 1961 ('the Act'). The question that falls for consideration is whether the assessee is entitled to a basic allowance of Rs. 40,000 in the computation of the disallowance on the aggregate expenditure on advertisement, publicity and sales promotion incurred in India where such aggregate expenditure exceeds Rs. 40,000.
(2.) The assessee is a registered firm engaged in the business of film distribution, receiving commission based on collections of the pictures. During the previous year for the assessment year 1979-80, the assessee incurred expenditure on advertisement and publicity for purposes of its business. The aggregate expenditure exceeded half per cent of the gross receipts. The ITO made a disallowance of Rs. 29,002 working out the adjusted expenditure and computing 15 per cent thereof as the disallowance.
On appeal by the assessee, the AAC determined the adjusted expenditure at Rs. 53,028 as against Rs. 1,93,276 determined by the ITO. The AAC, however, rejected the contention of the assessee that a basic allowance of Rs. 40,000 is to be allowed in restricting the allowance under the provisions of Sub-section (3A) of Section 37 and sustained the disallowance at Rs. 7,953, being 15 per cent of the adjusted expenditure of Rs. 53,028.
(3.) BEING aggrieved by the order of the AAC the assessee is in further appeal before the Tribunal reiterating the claim. There is no controversy on the determination of the adjusted expenditure. Sub-section (3A), inserted in Section 37 by the Finance Act, 1978 with effect from 1-4-1979 provided thus :
(3A) Notwithstanding anything contained in Sub-section (1) but without prejudice to the provisions of Sub-section (3), where the aggregate expenditure incurred by an assessee on advertisement, publicity and sales promotion in India exceeds forty thousand rupees, so much of such aggregate expenditure as is equal to an amount calculated as provided hereunder shall not be allowed as a deduction, namely :-
(iii) where such aggregate expenditure exceeds 1/2 per cent of the turnover, as the case may be, gross receipts of the business or profession 15 per cent of the adjusted expenditure
Explanation : For the purposes of this sub-section,-
(a) 'adjusted expenditure' means the aggregate expenditure incurred by the assessee on advertisement, publicity and sales promotion in India as reduced by so much of such expenditure as is not allowed under Sub-section (1) and as further reduced by so much of such expenditure as is not allowed under Sub-section (3) ;
(b) 'turnover' and 'gross receipts' mean turnover or gross receipts, as the case may be, as reduced by any discount or rebate allowed by the assessee.
This provision restricting the business expenditure on advertisement, etc., was introduced for the first time in the assessment year 1979-80 and was in the statute book only for the two assessment years 1979-80 and 1980-81. The contention on behalf of the assessee is that the expression 'such aggregate expenditure' occurring in the clause 'so much of such aggregate expenditure as is equal to' means the aggregate expenditure in excess of Rs. 40,000 and, therefore, the disallowance to be made is only a percentage of that excess over Rs. 40,000, the assessee being thereby entitled to a basic allowance of Rs. 40,000. It is said that the literal interpretation of the provisions would produce a manifestly absurd and anomalous result and the clause has, therefore, to be reasonably construed to avoid such results. It is pointed out that in a case where the aggregate expenditure is only Rs. 40,000 the entire amount is to be allowed as business expenditure subject to the provisions in Sub-section (3). Where the expenditure is one rupee more, i.e., Rs. 40,001, the disallowance of Rs. 6,000 would have to be made, on a literal construction of the provision and such a result, it is stated, could not have been intended by the Legislature. Reliance for the proposition that the clause requires to be reasonably construed is placed on the decision of the Supreme Court in K.P. Varghese v. ITO  131 ITR 597. In that case the Supreme Court held that if in construing a statute any absurdity or mischief results that construction which would avoid absurdity or mischief must be preferred rather than literal interpretation which would produce a manifestly absurd and unjust result. According to the assessee's representative, the word 'such' in the expression 'such aggregate expenditure' refers to the aggregate expenditure in excess of Rs. 40,000. Mr. Rangamani referred to the interpretation of the word 'such' in Venkataramiya's Law Lexicon at page 1612, Mukherjee's Law Lexicon at page 568 and Strout's Judicial Dictionary, page 2662 and stated that 'such' generally refers to its last antecedents and indicates something just before mentioned and in this provision it refers to the 'aggregate' mentioned in the preceding clause, i.e., aggregate in excess of Rs. 40,000. It is submitted that the Commissioner (Appeals) in the case of S. Veeriah Reddiar and Bheema & Sons had accepted the contention on behalf of the assessees that the disallowance under Section 37(3A) is to be made on the amount in excess of Rs. 40,000 only. The assessee's representative adopting the reasoning of the Commissioner (Appeals) in those cases maintained that the words 'such aggregate' in the sub-section refers to the aggregate expenditure that exceeds Rs. 40,000 being the expenditure referred to in the immediate proximate phrase as far as the word 'such' is concerned;;