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2016 (10) TMI 172 - HC - Income TaxDisallowance of certain advertisement expenses under Section 37 (3A) - whether the limit of ₹ 40,000/provided under Subsection (3A) ought to be increased proportionately.? - Held that - The amendment introduced by the Finance Act in terms of the tenth schedule indicates two things. Firstly, any increase in the previous year (over twelve months) would result into a hardship or anamoly if the amounts or limits specified in the provisions of the Act were not proportionately increased. Secondly, proportionate increase in the amounts was a legitimate relief in such cases. There is no reason why we should not adopt the same approach in dealing with the hardship or anamoly we are faced with in a case like the present. The hardships or anamolies which we have referred to above in relation to the interpretation of Section 37 (3A) of the Act, would require us to depart from a literal construction and adopt a reasonable and purposive construction requiring alteration of the limit of ₹ 40,000/provided in Subsection (3A) in proportion to the increase in the previous year. Such interpretation accords with the object and purpose of the provision and does away with the anamoly or hardship without really doing any violence to the words of the provision. We hold that there is a clear warrant for proportionately increasing the limit laid down in Section 37 (3A) as a result of increase in the previous year of the Applicant-Assessee from 12 months to 17 months. Question (a) is, accordingly, answered in the negative, i.e. in favour of the Applicant-tAssessee and against the Revenue. Disallowance of the amount deducted from the sale proceeds of alcohol and transferred out of the profit & loss account to storage fund for molasses and alcohol account under the Ethyl Alcohol (Price Control) Amendment Order, 1971. This question is already decided by a Division Bench of our Court in Somaiya Organo Chemicals Ltd. vs. CIT (1993 (12) TMI 3 - BOMBAY High Court) in favour of the Assessee Disallowance of interest paid to the current account of the director under Section 40A(8) - Held that - This question, it is accepted by the Assessee, is decided by our Court in CIT vs. Jhaveri Bros. & Co. Pvt.Ltd. 1994 (11) TMI 56 - BOMBAY High Court against the Assessee and in favour of the Revenue Treatment of the insurance claim received from the insurance company on account of loss of stocks-in-trade and other goods due to fire as business income of the Assessee - Held that - This question has been decided by our Court in CIT vs. Pfizer Ltd. (2010 (6) TMI 433 - Bombay High Court ) wherein our Court has held that an insurance claim is an indemnification and must stand on the same footing as the income that would have been realized by the assessee on the sale of the stock-in-trade. We, accordingly, answer Question in favour of the Revenue and against the Assessee.
Issues Involved:
1. Proportional increase of the limit in Section 37(3A) of the Income Tax Act, 1961. 2. Deductibility of amounts transferred to the Storage Fund for Molasses and Alcohol account. 3. Applicability of Section 40A(8) to interest paid on the director's current account. 4. Taxability of insurance claims received for loss of stock-in-trade as business income. Issue-wise Detailed Analysis: Re: Question (a): The primary issue here was whether the limit of ?40,000 stipulated in Section 37(3A) of the Income Tax Act, 1961, should be proportionately increased when the previous year is extended from twelve months to seventeen months. The court noted that Section 37(3A) refers to the aggregate expenditure on advertisement, publicity, and sales promotion for the previous year. The court reasoned that if the previous year is extended to 17 months, the expenditure limit should also be proportionately increased. This interpretation aligns with the object of the provision, which aims to curb extravagant expenditure at the cost of the Exchequer. The court emphasized that a literal interpretation leading to absurd results should be avoided, and a reasonable interpretation should be adopted. Consequently, the court held that the limit should be proportionately increased and answered the question in favor of the Applicant-Assessee. Re: Question (b): This issue pertained to the disallowance of an amount transferred from the Profit & Loss Account to the Storage Fund for Molasses and Alcohol account to meet statutory requirements. The court referred to a previous judgment in Somaiya Organo Chemicals Ltd. vs. CIT, which had already decided this issue in favor of the Assessee. Following that precedent, the court answered this question in the negative, favoring the Applicant-Assessee. Re: Question (c): The question here was whether the provisions of Section 40A(8) of the Income Tax Act, 1961, applied to interest paid on the director's current account. The court acknowledged that this issue had already been decided against the Assessee in CIT vs. Jhaveri Bros. & Co. Pvt. Ltd. Consequently, the court answered this question in the affirmative, in favor of the Revenue. Re: Question (d): This issue concerned whether an insurance claim received for the loss of stock-in-trade due to fire should be treated as business income. The court referred to its earlier decision in CIT vs. Pfizer Ltd., which held that an insurance claim is an indemnification and should be treated as income that would have been realized on the sale of the stock-in-trade. Therefore, the court answered this question in the affirmative, in favor of the Revenue. Conclusion: The court disposed of the reference accordingly, with no order as to costs.
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