Vildirect: IncomeTax-caselaws-1986-VIL-74-ITAT-

1986-VIL-74-ITAT-

Equivalent Citation: ITD 018, 226, TTJ 026, 214,

Income Tax Appellate Tribunal BOMBAY

Date: 30.05.1986

GLAXO LABORATORIES (INDIA) LTD.

SECOND INCOME-TAX OFFICER

BENCH

Member(s) : T. D. SUGLA., K. S. VISHWANATHAN., RAJENDRA.

JUDGMENT

Per Shri Rejendra, Accountant Member - This Special Bench was constituted to consider the question whether provisions of section 40A (8) of the Income-tax Act, 1961 ('the Act') are applicable to assessment year 1976-77, irrespective of previous year followed by the assessee. A Bombay Bench had expressed the opinion that it would, while a Madras Bench and had held that section 40A (8) would apply only to expenditure on interest incurred after 1-4-1976.

2. The assessee-company manufactures pharmaceuticals, drugs and milk products. Its accounting year ended on 30-6-1975 which is relevant for the assessment year 1976-77 (year under consideration). The ITO had disallowed under section 40A (8) Rs. 3,11,040. The only discussion in the assessment order as per paragraph 10 is that (assessee) has correctly shown disallowance at the rate of 15 per cent of Rs. 20,73,598 (out of interest paid) amounting to Rs. 3,22,040. Before the Commissioner (Appeals), the assessee raised an additional ground challenging the disallowance under section 40A (8) on the ground that section 40A (8), having been introduced with effect from 1-4-1976, would, therefore, be applicable to expenditure incurred on payment of interest on deposits from that date and not to interest paid prior to that date and as the assessee's previous year relating to the assessment year 1976-77 ended on 30-6-1975, provisions of section 40A (8) were inapplicable to this year. The assessee relied on the Tribunal Madras Bench 'D' decision in A. P. P. Ltd. [IT Appeal No. 952 (Mad.) of 1980] for the assessment year 1976-77. The Commissioner (Appeals), without discussion the matter, rejected the assessee's contention and confirmed the ITO's order.

3. At the hearing before us, the learned counsel for the assessee again relied on he aforesaid decision of the Tribunal Madras Bench 'D' and emphasized that provisions of section 40A (8) operate only in respect of expenditure on interest incurred after 1-4-1976. In the Madras High Court case, the accounting year ended on 30-4-1975, while in the case before us the accounting year ended on 30-6-1975. It was thus urged that the Madras High Court decision squarely applied in the assessee's case.

4. The learned departmental representative urge that section 40A (8) had been introduced by the Finance Bill, 1975 with effect from 1-4-1976. He also referred to memorandum explaining the provisions of the Finance Bill, 1975 where it was indicated that 'the proposed amendment will take effect from 1st April, 1976, and will accordingly apply in relation to the assessment year 1976-77, and subsequent years'. Similar were the observations under 'Notes on clauses'. It was emphasized by the departmental representative that there was nothing in the aforesaid amendment or the Notes on clauses or in the memorandum to suggest that previous year had any relevance and that it was clear that disallowance of 15 per cent of the interest was to be made out of expenditure on interest incurred in the assessment year 1976-77 irrespective of different previous years followed by the diverse assessee. It was further urged that it was an elementary principle of income-tax law that the law to be applied is that in force in the assessment year and it is immaterial what previous year the assessee follows. It was urged that any amendment which is in force at the beginning of the relevant assessment year must govern the case after the income under assessment is earned. It was also urged that the Legislature had given one year's advance notice of the applicability of the new provision [section 40A (8)].

5. The revenue's case is supported by good authority. Kanga & Palkhivala in Law & Practice of Income-tax, Seventh edn., Vol. 1 at p. 83 under the head 'Law to be applied is that in force in assessment year' observed : "Though the subject of the charge is the income of the previous year, the law to be applied is that in force in the assessment year, unless otherwise stated or implied." These observations are based on CIT v. Isthmian Steamship Lines [1951] 20 ITR 572, 577 (SC) and M. K. R. Deivanayagam Pillai v. Second Addl. ITO [1959] 35 ITR 549, 551 (Mad.). The learned commentators further observed : "Any amendment which is in force at the beginning of the relevant assessment year must govern the case though the amendment is made after the income under assessments is earned. In other words, the Income-tax Act as it stands amended on the 1st April of a financial year must apply to the assessment for that year." These observations are again based on a number of decisions given in footnotes 12-13 on the same page. We will refer to these decisions later.

6. Similar are the observations by Sampat Iyengar in Law of Income-tax, Seventh edn., Vol. 1 at pages 450-451 under the head "14. Levy of change according to the provisions of the Income-tax Act as they stand on the first day of April each year." The learned commentator, relying on Isthmian Steamship Line's case observed that the Supreme Court pointed out that "It is a cardinal principal of tax law that the law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implication. But, it has been held, the subject of charge is not the income of the year of assessment, but the income of the previous year. As the Finance Acts come into force on the first day of April each year, therefore, the laws to apply is the law in force at the commencement of the year of assessment, i.e., the first day of April each year." The commentator relied on Maharahjah of Pithapuram v. CIT [1945] 13 ITR 221 (PC) as also on M. K. R. Deivanayagam Pillai's case. The commentator further observed in the same para : "Thus, as a charge on the income of the previous year, the substantive law of that year must be applied." The commentator. The commentator relied on CIT v. Madhusudan Agarwalla [1978] 111 ITR 525 (Cal.) further observed that "applying the above rule, the Supreme Court in CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 declined to allow retrospective operation to be given to fourth proviso the section 10(2) (vii) inserted by the Income-tax (Amendment) Act, 1946 which had been brought into forced on 5-5-1946.

7. Similar are the observations of Chaturvedi and Pithisaria in Income-tax Law, Third edn., Vol. 1 at p. 193 under the head 'Law applicable to income-tax assessments'. These commentators have also relied on a.number of decisions.

8. The Supreme Court in Isthmian Steamship Lines' case at p. 577 clearly observed : "The first question to be answered is whether these dated [1-4-1940 when amendment to section 10(2) (vii) of the Indian Income-tax Act, 1922 took effect and 1-4-1939 mentioned in the amended proviso] are to apply to the accounting year or the year of assessment. They must be held to the assessment year, because in income-tax matter, the law to be applied is the law in force in the assessment year unless so otherwise stated or implied."

9. Earlier, the Privy Council in Maharajah of Pithapuram's case observed that under the express terms of section 3 of the Indian Income-tax Act, 1922 ('the 1922 Act') the subject of charge is not the income of the year of assessment but the income of the previous year. In that case, section 16(1) (c) of the 1922 Act, which was amended by the Income-tax (Amendment) Act, 1939, was held to apply to the assessment year 1939-40 although the subject of charge was the income of the accounting year 1938-39. Section 16(1) (c) applied to revocable transfers of assets-whether they were effect before or after the commencement of the Income-tax (Amendment) Act. The assessee by certain deeds of trust and settlement dated 5-4-1933 had settled properties on his daughters with a provision reserving to himself powers to revoke the settlements and the question was whether for the assessment year 1939-40, the income of accounting year 1938-39 derived from such assets was assessable under section 16(1) (c) and the assessee urged that only transfers effected after 1-4-1939 were hit by section 16(1) (c) but the Privy Council repelled that contention and held that the law as amended would apply to the assessee.

10. To the same effect is the decision of the Chief Court of Sind in CIT v. Sind Hindu Provident Funds Society (1940) 8 ITR 467 where it was held that law and statutory rules applicable for determining an assessment are the law and statutory rules in force the year of assessment and not those which were in force during the (accounting) year the income of which is sought to be assessed. Thus, for the assessment year 1936-37, the Government notifications of 2-11-1935 and 4-4-1936, limiting the exemption of interest on securities purchased through the post offices was applicable though the income assessable was for the accounting year ending 31-3-1936.

11. In Rai Bahadur H. P. Banerjee v. CIT [1941] 9 ITR 137 (Pat.), the question was whether the provisions of section 16(3) (a) (iii) inserted by section 2 of the Income-tax (Amendment) Act, 1937 applied to the assessment year 1937-38 in respect of income from assets transferred by husband to his wife otherwise than for adequate consideration before 1-4-1937 and it was held that the said provision applied to the transfers made before 1-4-1937. The Court, thus, repelled the contention that the amending section would not apply to transactions entered into before the amendment.

12. There is thus a catena of decisions laying down, what has by now become a well established rule of interpretation, that any amendment which is in force at the beginning of the relevant assessment year must govern the case though the amendment is made after the income under assessment is earned in the accounting year which has since closed. The Calcutta High Court in Madhusudan Agarwalla's case followed the earlier decisions mentioned above and reaffirmed the said principle of construction of statutes. Similar view had been taken by the Gujarat High Court in Maneklal Vallabhdas Parikh & Sons v. CIT [1969] 72 ITR 637.

13. The Madras High Court in M. K. R. Deivanayagam Pillai's case while dealing with double taxation relief under India & Burmah Income-tax Relief Order, 1936, held that the law to apply to the claim of the assessee in this case was the law as it stood in the year of assessment, namely, 1947-48. It was observed that only where there was a change in laws even within the course of the assessment year, it was the law in the force at the commencement of the assessment year that should apply in the absence of any statutory provision to the contrary.

14. The Delhi High Court in R. Dalmia v. CIT [1972] 84 ITR 661 observed that it was well recognized that specific dates in the 1961 Act and the Finance Act, 1955, had reference to assessment years and had nothing to do with the accounting years of an assessee which might differ from persons to person. Thus, the amendment contained in the Finance Act was held applicable to the assessment year 1955-56.

15. The Madras High Court in CIT v. Best & Co. (P.) Ltd. [1979] 119 ITR 830 observed at p. 834 that it was a well settled proposition in the income tax law that in income-tax matters, the law to be applied is the law in force in the assessment year unless otherwise stated or implied. The Madras High Court followed the Supreme Court decision in Isthmian Steamship Lines' case.

16. The Supreme Court in Reliance Jute & Industries Ltd. v. CIT [1979] 120 ITR 921 reiterated that it was a cardinal principle of tax law that the law to be applied is that in force in the assessment year unless otherwise provide expressly or by necessary implication. They followed their decisions in Isthmian Steamship Lines' case and Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966] 60 ITR 262 (SC).

17. The Supreme Court in Union of India v. Madan Gopal Kabra [1954] 25 ITR 58 was considering the applicability of the Finance Act, 1950 to 'United States of Rajasthan' for the assessment year 1950-51 and they observed that the income for the assessment year 1950-51 became assessable to Indian income-tax in respect of the previous year 1949-50. They rejected the contention that as the Constitution of India had come into force only on 26-1-1950, the income of the previous year before 26-1-1950 was not taxable to Indian Income-tax. At page 70, they observed that "The case is thus one where the statute purports to operate only prospectively, but such operation has, under the scheme of the Indian Income-tax law, taken into account income earned before the statute came into force. Such an enactment cannot, strictly speaking, be said to be retroactive legislation, though its operation may affect acts done in the past."

18. The Supreme Court in Karimtharuvi Tea Estate Ltd.'s case observed : "It is well settled that the Income-tax Act as it stands amended on the first day of April of any financial year must apply to the assessment of that year." However, dealing with amendment coming into force after 1st April, they observed "Any amendments in the Act which comes into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force." The Supreme Court explained that its earlier decision in Isthmian Steamship Lines' case had laid down that the amended Act as on 1st April applied to assessment year and accounting year had no relevance, and that though subject of charge was income of the previous year, law to be applied was that in force in the assessment year.

19. The Punjab & Haryana High Court in L. Rajeshwar Pershad v. CIT [1986] 52 CTR 305 (Punj & Har.) were dealing with the assessability it to capital gains of sale of ornaments in the financial year 1972-73 in view of amendment of section 2(14) (ii) of the Act made effective from 1-4-1973 by including jewellery in the definition of 'capital assets'. Question before the Court was whether the said amendment governed the assessment year 1973-74 following Karimtharuvi Tea Estate Ltd's case the High Court held that the sale of jewellery in the financial year 1972-73 was assessable in the assessment year 1973-74. The High Court thus rejected the assessee's contention that as the sale of jewellery was made before the amendment, the amendment did not apply to his case.

20. In J. K. K. Angappan & Bros. v. CIT [1973] 91 ITR 513 (Mad.), while dealing with voluntary disclosure under the Finance (No. 2) Act, 1967, the Madras High Court observed that it was a well settled rule of interpretation that in construing the scope of legal fiction it would be proper and even necessary to assume all those facts on which alone the fiction can operate and a construction which defeats the very object sought to be achieved by the Legislature must, if possible, be avoided.

21. Applying the aforesaid ratio to the facts of the case before us, the Legislature having declared that section 40A (8) would operate from the assessment year 1976-77, it has to be assumed as necessary corollary that the said section would operate for the previous year relevant for the assessment year 1976-77 and to hold that the said section would operate only in respect of expenditure incurred on or after 1-4-1976, as contended by the assessee, would nullify the Legislature's intention to apply the said section with effect from the assessment year 1976-77. We may observe that arguments advanced regarding interpretation of section 64 of the Act, similar to those urged before us by the assessee company, that the taxing provisions would apply only prospectively and would not affect transactions already completed, were rejected in a number of decisions where it was held that section 64(1) concerns the income from transferred assets and not the date of transfer and if the income form transferred assets (to the wife or minor child without adequate consideration) arose in the accounting year relevant to the assessment year, the income was assessable. A number of cases are enumerated at page 1835 of Chaturvedi and Pithisaria's Income-tax, Third edn., Vol. 2. Similar are the observations at p. 2379 of Sampath Iyengar's Law of Income-tax Seventh edn., Vol. 3.

22. In this context, we have to refer to CIT v. Bombay Photo Stores (P.) Ltd. [1970] 76 ITR 84 (Cal.) on which the assessee has relied in support of his proposition that only the law in force in the accounting year should be applied. In the case, the company's accounting year had ended on 30-6-1959 and it had declared dividend in March 1960 when the statutory percentages of total income under section 23A of the 1922 Act for declaration of dividend (within 12 months of close of previous year) were 45 per cent in the case of manufacturing, processing, etc., and 60 per cent in the case of trading. However, by section 11 of the Finance Act, 1959, the said statutory percentages were amended to 50 per cent and 65 per cent respectively, with effect from 1-4-1960.

23. The controversy was whether the revised percentages would apply in the assessee's case in respect of assessment year 1960-61 for which the ITO had made the assessment on 17-3-1961. The Calcutta High Court held that as the divided was to be declared within 12 months following the expiry of the previous year, the statutory percentages operative in the previous year only have to be considered and not the revised percentages. The Court came to this conclusion on analysing the language of section 23A as well as the amendment introduced by the Finance Act, 1959 which, according to the High Court, intended the revised percentages to be applicable only prospectively from 1-4-1960. The Court further observed that tax cannot be levied by implication. The Court, therefore, was of the opinion that the revised percentages would not be applicable and only percentages operative in the previous year would be operative in that case.

24. Thus, the said case was decided on the language of section 23A of the 1922 Act and of the Finance Act, 1959 and does not lay down any general proposition regarding the applicability of law as on 1st April to the assessment year (irrespective of the previous year followed by the assessee).

25. In CIT v. Sundaram Industries (P.) Ltd. [1969] 71 ITR 380 (Mad.) it was held the amended section 23A which had become applicable from 1-4-1954 would apply in the assessee's case whose accounting year ended on 31-5-1954 (relevant for the assessment year 1955-56). Thus, the Madras High Court's view is different than that of the Calcutta High Court.

26. The scheme of levy of additional income-tax on undistributed profits of private limited companies under section 104 of the 1961 Act (and section 23A of the 1922 Act) is entirely different from levy of income-tax on income or allowance of expenditure. Under the aforesaid provisions, a private company must distribute out of its total income statutory percentages as dividend within 12 months of expiry of its previous year, otherwise, it will have to pay additional income-tax. Thus, the law applicable would be as obtaining immediately on close of the previous year. The proposition regarding applicability of income-tax laws as on 1st April being applicable in assessment year would, therefore, not be applicable while considering the special provision of levy of income-tax on undistributed income. That is why the case law relevant to the controversy before us, namely, of law existing on 1st April being applicable to assessment year was neither cited nor considered by the Calcutta High Court in Bombay Photo Stores (P.) Ltd.'s case. We may point out that the assessee had to take positive action of declaring dividend with a time framework, i.e., immediately after the close of accounting year an in any case before the expiry of 12 months thereafter so as to avoid levy of additional income-tax. If the assessee did not declare dividend of statutory percentages of total income, then additional income-tax was to be levied by the ITO. However, in the case before us, no positive action on the part of the assessee is contemplated and only at the time of computation of the total income, the ITO has to disallow part of certain expenditure (on payment of interest) in the light of law obtaining as on 1st April of the assessment year in question.

27. Let us now analyse the assessee's arguments based on A. P. P. Ltd.'s case. The first argument is that though there is nothing in section 40A (8) to say that the amount disallowed under that section shall be deemed to be the income of the assessee but the said section by implication treated the disallowed expenditure on interest as part of the income. Thus, there was implied deeming of the disallowed interest as income and the implied deeming of income did not have any retrospective effect as the Legislature's usual practice was of giving the assessee a chance to arrange its affairs. It was admitted that section 40A (8) was introduced by the Finance Act, 1975 with effect from the assessment year 1976-77, thus, giving one year's advance notice, still it was claimed that sufficient notice was not giving to the assessees to arrange their affairs. Though the revenue contended that the Legislature was competent even to retrospectively amend the law and, thus, assess income with had already accrued in the earlier years, the assessee urged that for retrospective legislation, there must be specific intention expressed by the Legislature and that in the present case, there was no express declaration of such intention by the Legislature. It was urged that holding that section 40A (8) operated from the assessment year 1976-77, irrespective of the previous year, would lead to absurd and anomalous results and applying the modern 'purposive approach' by considering the policy behind the enactment of curbing credits by non-banking concerns, the curb could only be on taking fresh interest-bearing deposits after 1-4-1976.

28. We have given very careful and anxious consideration to this matter and we find ourselves unable to accept the assessee's contentions. There is no warrant for equating the disallowed expenditure on interest with deemed income. Income and expenditure are two different and diametrically opposite concepts. Income is what comes in, while expenditure is what goes out. Thus, to treat income as interchangeable with expenditure would be confusing the issue. We, therefore, cannot accept the proposition that disallowed expenditure becomes deemed income.

29. Regarding given the assessee a chance to arranges its affairs, we are unable to find any such rule of construction f statutes. When the Parliament has full and plenary powers even to make laws retrospective in operation, we do not see anything wrong with the Legislature introducing section 40A (8) by the Finance Act, 1975 and making it effective only one year later, i.e., from 1-4-1976 which would thus be operative in the assessment year 1976-77. The Privy Council in Maharajah of Pithapuram's at p. 223 observed "under the express terms of section 3 of the Indian Income-tax Act, 1922, the subject of charge is not the income of the year of assessment, but the income of the previous year. This is in direct contrast with the English Income-tax Acts, under which the subject of assessment is the income of the year of assessment, though the amount is measured by yardstick based on previous years." Similarly, the Delhi High Court in R. Dalmia's case at p. 665 observed : "It was contended by the learned counsel for the assessee that section 2(6C) (iii) came into force on April 1, 1955, while the previous year relevant to the assessment year in question was from October 1, 1953 to September 30, 1954. Section 2(6C) (iii), therefore, did not apply to the case. The contention is not well founded. Further, it is well recognized that the specific dates which are mentioned in the Income-tax Act have reference to the assessment years and have nothing to do with the accounting years of an assessee which may differ from person to person. The amendment continue in the Finance Act, 1955, in respect of section 2(6C) (iii) was thus applicable to the assessment year 1955-56 and was rightly invoked by the Income-tax Officer."

30. We are unable to accept Shri Dastur's contention that there was any ambiguity regarding the applicability of provisions of section 40A (8) or that the applicability of the said provisions to the assessment year 1976-77 would lead to manifestly absurd and anomalous results. When the intention of the Legislature is clear and unequivocal, there is no room for trying to go behind the clear language of the section.

31. Maxwell on Interpretation of Statutes, Twelfth edn. observes at p. 28 under Chapter 2 while discussing the general principles of interpretation that the primary rule is of literal construction. The rule of construction is 'to intend the Legislature to have meant what they have actually expressed.' "Where the language is plain and admits of but one meaning, the task of interpretation can hardly be said to arise."

32. Odgers' Construction of Deeds and Statutes, Fifth end. at p. 260 under the head '8. Statute, if clear, must be enforced' observes "if the language of a statute is clear, it must be enforced though the result may seem harsh of unfair and inconvenient". Reliance is placed on Re. Robb's Contract [1941] Ch. 463 at p. 478 per Lord Greene M. R.

33. Craies on Statute Law, Seventh end. at p. 64 under Chapter 'Construction where the meaning is plain' under the heading 'Meaning and legal effect distinguished' observes : "There is no place for interpretation or construction except where the words of the statute admit of two meanings." As Scot L. J. said : "Where the words of an Act of Parliament are clear, there is no room for applying any of the principles of interpretation which are merely presumptions in cases of ambiguity in the statute." Under the heading 'Construction according to intention' (on the same page) the author observed : "The cardinal rule for the construction of Acts of the Parliament is that they should be construed according to the intention expressed in the Acts themselves. If the words of the statute are themselves precise and unambiguous, then no more can be necessary than to expound those words in their ordinary and natural sense. The words themselves alone do in such a case best declare the intention of the law-giver." It was further observed (on p. 65) that the primary rule is the literal rule and that the intention of the Legislature is not be speculated on.

34. Bindra on Interpretation of Statutes, Fifth edn. at pages 552-553 under the heading 'Rule to determine tax liability' noted that the Lord Cairns observed in Partington v. Attorney General [1869] LR 4 HL 100 : As I understand the principle of all fiscal legislation, it is this : if the person sought to be taxed comes within the letter of the law, he must be taxed, however, great the hardship may be appear to the judicial mind to be." Similarly, Collins M. R. in Attorney General v. Earl of Selborne said : "Therefore, the Crown fails if the case is not brought within the words of the statute, interpreted according to their natural meaning." At p. 554 under the head 'Literal construction of words used', the author observed : "It is no doubt true that in construing fiscal statuses and in determining the liability of a subject to tax, one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed." At p. 559, under the head 'Considerations of reason and justice not material', it was noted that in Morley v. Hall, Tounten, J. observed with reference to stamp law that it "imports nothing of reason and justice but depends entirely upon the language of the Legislature". The author further observed on the basis of A. S. Krishna & Co. v. State of Andhra AIR 1957 AP 706, 710. "In case of a taxing statute, the court should be guided by the general scope of the enactment and the express provisions of the statute and not by considerations which might weigh in a case arising under the statute of frauds or similar statutes". At p. 560, the author noted that in the case of a fiscal enactment, one has to look at what is clearly said. There is no room for any 'intendment'. No argument based on hardship or inconvenience can be entertained. Rule of strict construction does not mean that the language of the provisions should be tortured into meaning something artificial, if its natural meaning is not impugnant to reason. Thus, the rules of interpretation of statutes are quite emphatic that where the language of a statute is clear, effect should be given to it, however, hard the case of the taxpayer may appear to be.

35. Applying the said rule to the case before us, we do not see how the provision for disallowance of interest under section 40A (8) is not applicable to the assessment year 1976-77. We are, therefore, unable to accept Shri Dastur's argument that literal construction of section 40A (8) would lead to absurd and anomalous results. Shri Dastur has not spelt out what absurd or anomalous results he visualised and we are unable to see any such results. According to us, the provisions of section 40A (8) do not lead to any absurd or anomalous results and the intention of the Legislature is quite clear that the said provisions are to apply in the assessment year 1976-77 and, therefore, the said provisions would apply, irrespective of the facts as to which previous year the particular assessee follows and so long as the previous year followed by the assessee would be relevant for the assessment year 1976-77, the provisions of section 40A (8) would apply to that particular assessee. we have already noted that the Legislature had given the assesses one year's notice by introducing the said provision in the Finance Act, 1975 though it was applicable for the assessment year 1976-77. Therefore, the submission of Shri Dastur that an assessee should be given adequate notice to arrange his affairs, though legally not correct, is still factually invalid because the Parliament did give one year's advance notice to the assessee to arrange their affairs. The Parliament has plenary powers to legislate prospectively as well as retrospectively and there is no limitation on the Parliament's power to direct from which date a particular fiscal provision would operate. It is true that in some cases the Parliament does specify a date from which date the said provision is to come into force. For example, under section 40A (3) in respect of disallowance of payment of Rs. 2,500 or more not paid by a crossed cheque, the Parliament did specify that payments made after 31-3-1969 would be hit by the said provision. However, the Parliament has also specified in respect of a number of other fiscal provisions, particularly annual amendments to the 1961 Act brought through the Finance Acts that certain provisions would be applicable with effect from specified assessment years. This is a well recognised and much used method of amendment of the Act. We cannot arrogate to ourselves the power to sit in judgment over the wisdom of introducing a particular fiscal provision with effect from a particular assessment year and we have to give effect to the clear legislative intention as expressed by the Parliament through the amendment to the Act. It is not for us to twist the fiscal provision on the ground that literal construction of the fiscal provision would result in hardship or that the particular assessee did not get sufficient advance notice to arrange his affairs in the light of the amendment. Nor can we import 'purposive approach' to hold that though section 40A (8) was clearly directed to be operative with effect from 1-4-1976 for the assessment year 1976-77, yet, according to us, it would apply only to expenditure on interest incurred after 1-4-1976. For the foregoing reasons, we are, therefore, unable to accept the assessee's contentions based on the view taken by the Madras Bench.

36. In the result, we uphold the Commissioner (Appeals)'s order that section 40A (8) was applicable in the assessment year 1976-77 and, therefore, the disallowance made by the ITO stands upheld.

37. We now deal with the other grounds raised in this appeal.

38. Ground Nos. 2-3 are regarding assessability of reimbursement of medical expenses and applicability of sections 40A (5) /40(c) of the Act. The ITO in paragraph 3 of the assessment order observed as under :

"3. Disallowance under section 40A (5) and under section 40(c). -Assessee has worked out this disallowance at Rs. 2,60,659 without taking into account reimbursement of medical expenses. The same has been considered as perquisites while arriving at the above disallowance. The correct disallowance works out to Rs. 2,84,151."

The Commissioner (Appeals) in paragraph 7 noted the assessee's grievance against ITO's treating reimbursement of medical expenses as perquisite. He upheld the ITO's action in applying section 40A (5) which finding, according to us, was unnecessary as there was no controversy regarding the disallowance of expenses of Rs. 2,60,659 and the only controversy before the Commissioner (Appeals) was regarding the treatment of reimbursement of medical expenses as perquisite by the ITO. Hence, ground No. 2 raising the point whether section 40A (5) or section 40(c) applied to director employees being academic is rejected. Salaries of all the directors were above Rs. 72,000 and, therefore, it is immaterial whether section 40(c) or proviso to section 40A (5) applies in the case of director employees.

39. The Commissioner (Appeals) further held that cash reimbursement of expenses constituted a distinct addition to the salary of the director employees. He thus varied the ITO's findings because the ITO had treated the reimbursement of medical expenses as perquisite. The assessee-company as per Annexure XIII (paper book, page 31) had worked out the disallowance under section 40A (5) in respect of other employees at Rs. 32,235 and the total disallowance at Rs. 2,60,659 and had given a note that the medical expenses reimbursed to the employees and directors had not been considered as perquisite while computing the aforesaid disallowance. The company furnished details of medical expenses (PB 32) of directors at Rs. 13,608 and all other employees at Rs. 10,233 totalling Rs. 23,841 and it is this amount which the ITO added as 'disallowance under section 40A (5) and 40(c)'.

40. Thus, the controversy before us is whether the Commissioner (Appeals) was right in treating the reimbursement of medical expenses as part of salary.

41. We may straightaway note that the matter is covered squarely by a decision of the Bombay Special Bench in Blackie & Sons (India) Ltd. v. ITO [1983] 3 SOT 72, where in paragraph 19 the Bench noted that Explanation 2 to section 40A (5) defined not only 'perquisite' but also defined 'salary' by stating that 'salary' has the meaning assigned to it in section 17(1), read with section 17(3), of the act subject to certain modifications, namely, that perquisite was omitted from section 17(1) (iv). The Bench noted that 'profits in lieu of or in addition to salary or wages' was not omitted from the same clause and that section 17(3) (ii) defining 'profits in lieu of salary' included 'any payment ... received by an assessee from an employer'.

42. The Special Bench observed that "the words 'any payment' again is wide enough to cover every payment made by the employer to the employee irrespective of the context in which or the purpose for which the payment is made ... In other words, it would also include a payment made by the employer to the employee which is in the nature of payment made for reimbursement of expenses."

43. The Bench then arrived at the conclusion that 'salary as defined in Explanation 2 includes every cash payment due to or received by an employee'. The Bench was considering reimbursement by the employer to the employee medical expenses and lunch expense.

44. At the hearing before us, the learned counsel for the assessee urged for reconsideration of the aforesaid Special Bench decision. He relied on the Tribunal Bench 'A's order in the assessee's case for the assessment year 1977-78 where the Bench had held in paragraphs 10 and 10(a) that cash reimbursement made by the assessee-company to its employees was not hit by section 40A (5) in case of employees and by section 40(c) in the case of directors and employee-directors. The Bench in paragraph 8 noted the assessee's contention that medical reimbursement was a perquisite but in view of expression 'whether convertible into money or not' qualifying perquisite in section 40A (5) (a) (ii), cash payment could not be covered by the said sub-clause. Support was taken from CIT v. Indokem (P.) Ltd. [1981] 132 ITR 125 (Bom.) where, following CIT v. Kanan Devan Hills Produce Co. Ltd. [1979] 119 ITR 431 (Cal.) and CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150 (Mad.), the Bombay High Court held that amount paid by way of bonus and commission in cash by the assessee-company to employees was not a perquisite within the meaning of section 40(c) (ii) in view of the said term 'whether convertible into money or not' used in the said section (which was operative in the assessment year 1964-65). The Bench accepting this contention held that medical reimbursement paid in cash was not a perquisite, as section 40A (5) (a) (ii) contemplated disallowance of payment in kind only by the employer to the employee. The Bench noted that similar view had been taken in CIT v. Tecalemit (Hind) Ltd. [1982] 137 ITR 285 (Cal.) which had followed its earlier decision in Kanan Devan Hills Produce Co. Ltd.'s case while interpreting provisions of section 40(c) (ii) in respect of motor car allowance paid in cash to employees.

45. For holding further that the reimbursement of medical expenses was not even part of salary, the said Bench 'A' relied on the Tribunal, Hyderabad Bench's decision in IT appeal nos. 676-679 (Hyd.) of 1980 dated 30-3-1981 (PB 33-34).

46. We have persued the said decision of the Hyderabad Bench where for holding that the cash allowance are not perquisites, reliance was placed on Manjushree Plantations Ltd.'s case and CIT v. Mysore Commercial Union Ltd. [1980] 126 ITR 340 (Kar.). However, the Hyderabad Bench further observed that medical reimbursement was not a 'remuneration' within the meaning of section 40(c) nor was a 'benefit or amenity'. The Bench for taking this view relied on some earlier decision which has not been made available to us. Thus the Hyderabad Bench's decision is no authority for holding that cash reimbursements by the employer to the employee are not part of salary. We have already noted above detailed discussion by the Special Bench in Blackie & Sons (India) Ltd.'s case for holding the cash payments by the employer to the employee are covered by salary.

47. The learned counsel for the assessee next urged that the expression 'whether convertible into money or not' occurring in section 40A (5) (a) (ii) qualifying 'perquisite' excludes cash payment as was held in Indokem (P.) Ltd.'s case. It is next urged that the definition of 'perquisite' in Explanation 2(b) to said section is exhaustive and that clauses (i) to (v) thereof do not contemplate cash payment.

48. Accepting the above argument of the assessee should imply that cash payments being not covered by the definition of 'perquisite' under Explanation 2(b), should be fall under Explanation 2(a) in view of inclusive definition of 'salary' as per section 17(1) which has been adopted by Explanation 2(a) but the learned counsel for the assessee even disputes this proposition on the ground that the ordinary meaning and connotation of 'perquisite' should not be ignored, and while ordinary meaning of 'salary' does not include reimbursement of expenses, ordinary meaning of 'perquisite' would take in reimbursement of expenses. For the proposition, he refers to discussion under the head 'Perquisite' in Kanga & Palkhivala's Law and Practice of Income-tax, Seventh edn. under section 17 which reads as follows :

"'Perquisite'-'Perquisite' is defined in the Oxford English Dictionary as 'any causal employment, fee, or profit, attached to an office or position in addition to salary or wages'. 'Perquisite' denotes a personal advantage; it is something that benefits a man by going 'into his own pocket' : it does not cover a mere reimbursement (be it by way of allowance) of travelling or other expenditure incidental to the employment. Thus, transport facilities made available to an employee for going from home to office and back, should not be regarded as a perquisite".

49. The assessee relied on CGT v. N. S. Getti Chettiar [1971] 82 ITR 599 where the Supreme Court approved the following observations of Craies on Statute Law, Sixth edn. at p. 213 :

"... An interpretation clause which extends the meaning of a word does not take away its ordinary meaning. An interpretation clause is not meant to prevent the word receiving its ordinary, popular and natural sense whenever that would be properly applicable, but to enable the word as used in the Act, when there is nothing in the context or the subject-matter to the contrary, to be applied to some things to which it would not ordinarily be applicable."

Reliance was also placed on CGT v. Dr. R. B. Kamdin [1974] 95 ITR 476 at p. 481 where the Bombay High Court extracted the observations of the Supreme Court in Barsi Light Railways Co. Ltd. v. Joglekar AIR 1957 SC 121 to the effect that there must be compelling words in the statute to show a meaning different from or in excess of the ordinary meaning was intended and where within the framework of the ordinary acceptation of a word, every single requirement of the definition clause was fulfilled, it would be wrong to take the definition as destroying the 'essential meaning' of that word.

50. The revenue's contention was that the purpose of introduction of section 40A (5) was given in the Finance Minister's Budged Speech for 1971-72 which reads :

"I am firmly of the view that the fiscal instrument must be deployed to discourage payment of high salaries and remunerations which go ill with the norms of egalitarian society. I accordingly propose to impose a ceiling on the remuneration of company employees which would be deductible in the computation of taxable profits. The ceiling is being set at Rs. 5,000 per month. Together with the existing ceiling of Rs. 1,000 per month in the case of perquisites, for purposes of taxation, will be at Rs. 6,000 per month ..."

It was, therefore, urged for the revenue that section 40A (5) was a complete code covering the payments by the company to its employees in the form of salary, remuneration and perquisites and, therefore, no item could be said to fall outside these categories. It was emphasized that while 'perquisite' was given an exhaustive definition by Explanation 2(b) to section 40A (5) by using the expression 'perquisite means', the term 'salary' was not given an exhaustive definition by Explanation 2(b) and only the inclusive definition of section 17(1) was grafted in the said Explanation and, therefore, whatever does not fall under the head 'perquisite' would be covered under the inclusive definition of 'salary. It was urged that in this context the ordinary meaning of the word 'perquisite' cannot take away the force of an enactment nor defeat its object. Reliance was also placed on notes on Clauses in the Finance (No. 2) Bill, 1971 where dealing with clause 10 it was observed :

"... 'salary' is being defined broadly on the lines of the provision in section 17 of the Income-tax Act, subject to certain modifications. The expression 'salary' will include wages; any annuity or pension; any gratuity, any fees, commissions or profits in lieu of or in addition to any salary or wages ... It will, however, not include perquisites ..."

It was, therefore, urged that reimbursement of medical expenses having been held to be not perquisite in view of the expression 'whether convertible into money or not' governing the expression 'perquisite' in section 40A (5) (a) (ii) and thus restricting its ordinary meaning, the cash reimbursement would necessarily fall under 'salary' in view of the inclusive and wide definition of 'salary' in section 17(1), read with section 17(3) and in view of the clear enunciation of law by the Tribunal, Special Bench, Bombay in Blackie & Sons. (India) Ltd.'s case.

51. We see merit in the revenue's contentions. While definitions of 'salary' and 'perquisite' in section 17(1) are inclusive, in Explanation 2(b) to section 40A (5) an exclusive and exhaustive definition of 'perquisite' was given as per clause (b) covering only five categories enumerated therein, but in respect of 'salary', the inclusive definition of section 17(1) was adopted, which means that what is not covered by five categories of 'perquisite' would fall in the net of 'salary' in view of 'salary's' inclusive definition in section 17(1). We have already noted that section 17(3) defining 'profits in lieu of salary' includes under sub-clause (ii) any payment due to or received by the employee from the employer. Thus, all payments by the employer to the employee, which are held to be not perquisite like reimbursement of medical expenses, would necessarily be covered under 'salary. In this connection, the revenue is right in relying on the Finance Minister's speech as well as notes on clauses to show the Legislature's intention in introduction section 40A (5) to put a curb on salaries, remunerations and perquisites paid by companies to its high executives. The 'mischief rule' as an enunciated in Heydon's case 3 Co. Rep. 7a, of Maxwell on Interpretation of Statutes, Twelfth edn. is :

"... that for the sure and true interpretation of all statutes in general (be they penal or beneficial, restrictive or enlarging of the common law) four things are to be discerned and considered : (1st) What was the common law before the making of the Act. (2nd) What was the mischief and defect for which the common law did not provide. (3rd) What remedy that Parliament had resolved and appointed to cure the disease of the commonwealth. And, (4th) The true reason of the remedy; and then the office of all the Judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of the mischief, and pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico ...".

52. Thus, in view of the declared intention of the Legislature to curb the high salaries and perquisites of senior executives of the companies, we have to interpret section 40A (5) so as to advance the remedy and to suppress subtle inventions and evasions for continuance of the mischief, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act. Thus, to hold that reimbursement of medical expenses would neither be covered under 'salary' nor under 'perquisite' would be to defeat the purpose of the legislation.

53. Maxwell on Interpretation of Statutes under the head 'Construction ut res magis valeat quam pereat' observed :

"If the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility and should rather accept the bolder construction based on the view that Parliament would legislate only for the purpose of bringing about an effective result.' 'Where alternative constructions are equally open, that alternative is to be chosen which will be consistent with the smooth working of the system which the statute purports to be regulating; and that alternative is to be rejected which will introduce uncertainty, friction or confusion into the working of the system." Applying the above principle, we have to avoid an interpretation which would make the provisions of section 40A (5) ineffective in curbing the mischief which the Legislature intended.

54. Sampath Iyengar in Law of Income-tax, Seventh edn., Vol. 1 under section 17 under the head "4. 'Perquisites' sub-section (2). -'Perquisite', meaning of ", observed :

"Formerly, the word 'perquisite' was used to denote emoluments not fixed generally and granted mostly ex gratia, whether in cash or in kind, it denoted a benefit, amounts or advantage mostly in kind enjoyed by the employee at the cost of the employer, generally in addition to the salary or wages to which he is entitled. Perquisites are, in many cases, in the nature of voluntary payments attached to an office or employment, such as the fee of any clerk serving under a barrister, but in some cases, there may also be legal obligate to pay, though, in common parlance, one rarely used the term 'perquisites' where the payment is claimable as of right. Voluntary or not, when actually paid, they fall to be taxed. Their characteristic is that they are payable only during the continuance of employment and are directly dependent upon service. They cease when the employment ceases."

55. At the same page, the commentator noted that 'the grant or allowance of perquisites has become a regular feature of almost all employment, The statutory definition of salary and wages had, therefore, to be enlarged as to comprehend the most common forms of advantages and benefits enjoyed by an employee ...'

56. While dealing with 'profits in lieu of salary' under section 17(3) at page 983 under paragraph 14(c) 'other payments received from employer-clause (ii)', the commentator noted that "any payment due to or received by an assessee from his employer is taxable as 'profits in lieu of salary'."

"... This is a comprehensive provision by virtue of which all payments made by an employer to an employee whether made in pursuance of a legal obligation or voluntarily are brought under 'profits in lieu of salary."

57. We further note that the Kerala High Court in Travancore Tea Estates Co. Ltd. v. CIT [1985] 153 ITR 444 observed at p. 455 that cash payments made by the employer to the employee as cash allowance was not covered under definition of 'perquisite' as per clause (b) (iv) of Explanation 2 to section 40A (5) and that the said expenditure was expenditure or payment coming under section 40A (5) (a) (i) which covers any expenditure which results directly or indirectly in the payment of any salary to employee. The Court, therefore, held that car allowance was, thus, a cash payment periodically made in addition to salary, and, therefore, partook of the nature of salary.

58. In this context, we also note that the Delhi High Court in Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 457 was dealing with disallowance under section 40(a) (v) of reimbursement by employer company of medical expenses incurred by managing director in the assessment year 1969-70 and 1970-71 when the said provision was in force. [Section 40(a) (v) was deleted and substituted by section 40A (5) with effect from 1-4-1972] The Delhi High Court dissented from the full Bench decision of the Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19 where it was held that house rent Delhi High Court in allowance paid by the employer company to its employee was a perquisite and the words 'whether convertible into money or not' qualifying the words 'benefit, amenity or perquisite' would not exclude cash payments by the employer to the employee and a contrary construction accepted by the Karnataka, Calcutta and Madras High Courts was irrational defeating the very purpose of section 40(a) (v). The Kerala High Court, therefore, held that house rent allowance received by an employee from an employer was covered by section 40(a)(v).

59. The Delhi High Court, however, fell in line with the aforesaid three High Courts, who, in Mysore Commercial Union Ltd.'s case, Kanan Devan Hills Produce Co. Ltd.'s case and Manjushree Plantations Ltd.'s case had taken the view that the expression 'whether convertible into money or not' qualifying the words 'benefit, amenity or perquisite' excluded cash payments made by the employer to the employee. The Delhi High Court in this context had noted at page 462 the contentions by the assessee's counsel : 'According to him, any cash payment made by the company to its employee would be part of the salary. The High Court at page 465 observed : 'Any cash payment could well be part of the salary as given in section 17 of the Act'. The Delhi High Court accordingly held that reimbursement of medical expenditure of the managing director was not a 'benefit, amenity or perquisite', whether convertible into money or not, and, therefore, section 40(a)(v) did not apply to cash payments by the employer to the employee. [The question regarding medical reimbursement expenses being part of salary was not referred to the Delhi High Court as under section 40(a) (v) fell only expenditure on provision of benefit, amenity or perquisite]. We may elucidate by referring to legislative chances. Section 40(c)(iii), as amended by the Finance Act, 1964, put a ceiling of one-fifth of salary, on all expenditure on employees resulting in benefit, amenity or perquisite. This clause was substituted by section 40(a) (v) with effect from 1-4-1969 which put a further ceiling of Rs. 1,000 per month on expenditure on benefit, amenity or perquisite to an employee. Section 40(a)(v) was substituted by section 40A (5) with effect from 1-4-1972 which put a ceiling on salary to employees of Rs. 5,000 per month, besides ceiling on perquisites of Rs. 1,000 per month and one-fifth of salary. Similarly, on the directors of the company, overall ceiling of Rs. 72,000 was imposed with effect from 1-4-1972 under section 40(c) in respect of expenditure on remuneration, benefit, amenity, etc. Thus, before 1-4-1972, there was no controversy whether an expenditure was covered by salary or perquisite. In case of an employee of company, the Legislature was concerned only with curbing perquisites, benefits or amenities. The Legislature was not concerned about quantum of salary of employees. In respect of director of a company, the Legislature was concerned only with reasonableness of total expenditure on director as remuneration, benefit, amenity or expenditure or allowance in respect of company's assets.

60. In this context, we may also note that the head-note in Mysore Commercial Union Ltd.'s case is incorrect insofar as it is indicated that house rent allowance is not a perquisite 'or part of salary. All that the High Court held at page 342 was that payment of house rent allowance or bonus is not a perquisite because of the expression 'whether convertible into money or not' qualifying the words 'benefit, amenity or perquisite'.

61. We are, therefore, of the view that the reimbursement of medical expenses being a cash payment by the employer to the employee would fall under 'salary' in view of the very wide and inclusive definition of 'salary' as per section 17(1) which is adopted by clause (a) of Explanation 2 of section 40A (5), in contradistinction to only five enumerated categories being covered under 'perquisite' as per clause (b) of said Explanation 2 to section 40A(5). Thus, salary would cover any perquisite not falling in the said five categories of perquisites and particularly a cash payment [being hit by the expression 'whether convertible into money or not' qualifying 'perquisite' in section 40A(5)(a) (ii)]. We have already noted above the view taken by the Special Bench in Blackie & Sons. India Ltd.'s case that section 17(3) by giving inclusive definition of 'profits in lieu of salary' [appearing in section 17(1)(iv)] covered in its sub-clause (ii) any payment due to or received by an employee from an employer. We note that the said sub-clause excluded from purview of salary, following payments :

(A) death-cum-retirement gratuity-section 10(10) of the Act

(B) payment in commutation of pension-section 10(10A)

(D) payment from a provident fund to which Provident Funds Act, 1925 applies-section 10(1).

(E) accumulated balance in provident fund becoming payable to employee-section 10(12)

(F) house rent allowance-section 10(13A).

However, under the said sub-clause, payments from provident fund or other fund (not being approved superannuation fund) are included under salary to the extent it does not consist of contributions by employee or interest on such contributions.

62. From the above narration, it would be clear that but for the exclusion provided in the said sub-clause, the said payments would have been treated as salary though taking ordinary meaning of payments 'in lieu of salary', nobody would consider such payments to be in lieu of or instead of or in substitution of salary. This shows that the said section 17(3) (ii) was very wide in its sweep, despite its rather deceptive or inelegant descriptions as 'profits in lieu of salary'.

63. We further observe that clause (iv) of section 17(1) besides taking in its sweep 'profits in lieu of salary', also covers 'profits in addition to any salary'. Thus, any payments received by an employee from his employer under terms of service contract or otherwise would be fully caught in the net of 'profits in addition to any salary'.

64. We further note that clause (i) of section 40A (5) (a) covers 'any expenditure which results directly or indirectly in the payments of any salary'. Salary is recompense for the services rendered. While salary (paid periodically) is the direct payment : any benefit or advantage or amenity received by the employee from employer would be the direct payment of salary and would thus be clearly covered by the said clause (i) of section 40A (5) (a).

65. For the above reasons, we see no ground to depart from the view taken by the Special Bench, Bombay, in Blackie & Sons' case. We would accordingly hold that reimbursement of medical expenses being a cash payment was rightly treated as part of salary for computing the disallowance under section 40A (5). Position is different wile assessing perquisite of medical reimbursement in hands of employee under section 17 in view of the CBDT circulars. Circular No. 336 dated 16-4-1982 directed that only medical reimbursement in excess of one month's salary is to be included in hands of employee. Circular No. 376 dated 6-1-1984 clarified that only reimbursement in excess of Rs. 5,000 was includible. However, Circular No. 445 dated 31-12-1985 exempted all expenditure in a recognised public hospital in India.

66. We may further observe that the position under section 40(c) is clearly against the assessee as the above argument is not available to the assessee because the word 'perquisite' does not appear in section 40(c) (i) which only uses the words 'remuneration or benefit or amenity'. Further, the restrictive phrases 'whether convertible into cash or not' is missing in the said clause. Under these circumstances, the reimbursement of medical expenses to a director by employer company should clearly be hit by section 40(c) (i) because it is an expenditure which results directly or indirectly in the provision of 'remuneration or benefit or amenity' to a director.

67. Thus, both under section 40A (5) as well as under section 40(c), reimbursement of medical expenses by the employer company to the employer would form part of remuneration of the employee and in case of a director, any payment in excess of Rs. 72,000 would have to be disallowed. In case of employees simpliciter, provisions of section 40A (5) would apply and, therefore, considering the medical reimbursement as part of the salary, perquisites in excess on one-fifth of salary have to be disallowed. AS from the computation given to us, it is to clear how the disallowance has been computed by the ITO, we direct the ITO to examine if any recomputation of disallowance is called for in the light of our directions above.

Ground No. 1 :

68. The assessee is aggrieved against disallowance of depreciation on assets used by the assessee for conducting scientific research. These assets were installed in the earlier years for which deduction equivalent to full cost has already been allowed to the assessee under section 35 of the Act. The ITO rejected the assessee's claim for depreciation and the Commissioner (Appeals) upheld it in view of the amendment of section 35(2) (iv) by the Finance (No. 2) Act, 1980. Under similar circumstances, the Madras High Court in CIT v. Lucas TVS Ltd. [1984] 149 ITR 771 has held that depreciation cannot be granted for the subsequent year on the assets on which the relief under section 35(2) equivalent to the full cost has already been allowed. The assessee, however, contends that the constitutionality of the aforesaid amendment in 1980 is under challenge before the Supreme Court and, therefore, the ITO be directed to abide by the decision of the Supreme Court. We direct accordingly.

Ground No. 4 :

69. Foreign travel expenses of Rs. 19,783 of Mrs. Bhoothalingam, wife of chairman of board of directors of the assessee-company, was disallowed by the ITO after observing that the assessee was unable to produce any resolution of board of directors to sanction the said visit by the wife who accompanied her husband on the foreign visit and, thus, according to the ITO, there was no evidence that her visit and, thus, according to the ITO, there was no evidence that her visit served the business interest of the assessee-company. The Commissioner (Appeals) vide paragraph 9 noted the assessee's contention that Mr. Bhoothalingam had gone abroad for business discussion with the assessee-company's British Associates and had also visited France and Italy where the assessee-company had also its associates and that on such visits it was customary for meeting at social level that the chairman should be accompanied by his wife. The Commissioner (Appeals), however, rejected the assessee's contention on the ground that the business connection of the wife's visit was too far-fetched.

70. AT the hearing before us, our attention was drawn to the companies application to Reserve Bank of India for release of foreign exchange for the chairman and his wife and the application form indicated that they were proceeding abroad for business purposes. Reserve Bank of India sanctioned on 7-5-1975 foreign exchange of pounds 840 for Mr. Bhoothalingam and pounds 210 for his wife for their stay of 40/42 days in UK, Italy and France. The learned counsel for the assessee reiterated that the wife accompanying the husband (chairman) was in business interest. Reference was made to company's application dated 18-4-1975 to the Assistant Controller, Exchange Control Department, Reserve Bank of India, indicating that chairman and chief executive of 'Glaxo Holdings' had extended invitation to Mr. & Mrs. Bhoothalingam and that the wife was accompanying her husband as a number of social engagements were included in the programme. Reliance was placed on Taxes & Planning dated 15-7-1984 a decision of the Tribunal Bombay Bench in ITO v. XYZ & Co. India Ltd. [IT Appeal Nos. 2606 and 2607 (Bom.) of 1982] where in paragraph 22 the Bench upheld the Commissioner (Appeals)'s order that wife accompanying the husband abroad (who is a director of the company) was in business interest.

71. The revenue relied on CIT v. T. S. Hajee Moosa & Co. [1985] 153 ITR 422 (Mad.) and Bombay Mineral Supply Co. (P.) Ltd. v. CIT [1985] 153 ITR 437 (Guj.). In the first case, wife had accompanied the husband on foreign tour. The husband was a partner of the firm and the wife had accompanied him because of the husband's indifferent health. The Madras High Court held that the wife's travelling expenses were in the nature of personal expenses and even assuming that the expenditure related to business purposes, the expenditure had a dual and twin purpose and served not only purposes of business but also a personal or private purpose and as the expenditure did not exclusively serve the business, it was not allowable under section 37(1) of the Act. In the second case, the Gujarat High Court was considering the case of a director of a company keeping indifferent health and his wife accompanying him on the foreign tour. It was urged before the Gujarat High Court that in case the wife has not accompanied the husband, the company would have had to engage a nurse. The High Court still held that expenses being personal, were not allowable as the wife was not a qualified or trained nurse.

72. In both the above cases, the assessees were unable to prove that the wife accompanied the husband for business consideration. The case before us is, therefore, entirely different where it is claimed that the wife accompanied the husband because considerations. In the modern age, and more so in the Western countries, the senior executives are, as a matter of social custom, accompanied by their wives when the visit, though for business purposes, has necessarily some social aspects also. Under these circumstances, we hold that the expenditure of Rs. 19,783 which includes air-fare of Rs. 15,656 and foreign exchange of Rs. 4,022 equivalent to pounds 210 is an allowable expenditure.

Ground No. 5 :

73. The ITO rejected the assessee's claim of deduction of surtax and the Commissioner (Appeals), following the Tribunal Special Bench, Bombay decision in Amar Dye-Chem Ltd. v. ITO [1983] 3 SOT 384, upheld the disallowance. In Molins of India Ltd. v. CIT [1983] 144 ITR 317 (Cal.), A. V. Thomas & Co. Ltd. v. CIT [1986] 159 ITR 431 (Ker.) and Sundaram Industries Ltd. v. CIT [1986] 26 Taxman 187 (Mad.), similar view has been taken. We, accordingly, uphold the orders of lower authorities on this point.

74. In the result, the appeal is partly allowed.

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