1994 (6) TMI 8 - HC - Income Tax

Summary

Issues Involved:
1. Disallowance of advertisement expenses under Section 37(3) read with Rule 6B of the Income-tax Rules, 1962.
2. Applicability of Section 40A(3) versus Rule 6B(3) in regulating advertisement expenses.

Detailed Analysis:

1. Disallowance of Advertisement Expenses under Section 37(3) read with Rule 6B of the Income-tax Rules, 1962:
The core issue revolves around whether the Income-tax Officer correctly disallowed Rs. 2,750 and Rs. 6,188 as advertisement expenses. The assessee, a money-lender, distributed gift articles to customers and claimed these as deductible expenses. The Income-tax Officer disallowed Rs. 2,750 because the payment exceeded Rs. 2,500 and was not made by a crossed cheque or bank draft, as mandated by Rule 6B(3). The Officer also disallowed Rs. 6,188, arguing that the cost of each article exceeded Rs. 50, invoking Rule 6B(1)(a).

The Commissioner of Income-tax (Appeals) upheld the disallowance of Rs. 2,750 but reversed the disallowance of Rs. 6,188, noting that the value of each article did not exceed Rs. 50. The Tribunal, however, found that Rule 6B(3) is absolute with no saving clauses, while Section 40A(3) is less onerous and has mitigating provisions. Consequently, the Tribunal referred the matter back to the Income-tax Officer for reconsideration under Section 40A(3) and Rule 6DD.

2. Applicability of Section 40A(3) versus Rule 6B(3) in Regulating Advertisement Expenses:
The Tribunal and the High Court examined whether Rule 6B(3) or Section 40A(3) should govern the disallowance of advertisement expenses. Rule 6B(3) stipulates that any expenditure on advertisement exceeding Rs. 2,500 must be made by a crossed cheque or bank draft to be deductible. Section 40A(3) and Rule 6DD provide exceptions where payments in excess of Rs. 2,500 made otherwise than by a crossed cheque or bank draft may still be deductible under certain conditions, such as business expediency and the availability of banking facilities.

The High Court concluded that Section 40A(3) overrides Rule 6B(3) due to its less onerous nature and the presence of saving clauses. It emphasized that Section 40A(3) opens with the words, "The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head 'Profits and gains of business or profession'." Therefore, even if Rule 6B(3) imposes strict requirements, Section 40A(3) provides a more lenient framework that must be applied.

The High Court also noted that the Revenue's reliance on the case of CIT v. Carborundum Universal Ltd. [1977] 110 ITR 621 was misplaced, as that case did not consider Section 40A. The Court stated that a harmonious reading of Section 37(3) and Section 40A(3) leads to the conclusion that the latter should govern the disallowance of advertisement expenses, provided the assessee can demonstrate that it was not feasible to make payments by crossed cheque or bank draft due to business expediency or lack of banking facilities.

Conclusion:
The High Court answered both questions in favor of the assessee, directing the Income-tax Officer to reconsider the disallowance of Rs. 2,750 and Rs. 6,188 under Section 40A(3) and Rule 6DD, allowing the assessee to establish that the payments were genuine and made under circumstances that justified not using crossed cheques or bank drafts. The reference was answered accordingly, and the Tribunal's decision to refer the matter back to the Income-tax Officer was upheld.