1992 (9) TMI 118 - AT - Income Tax

Issues Involved:
1. Interpretation of Section 40A(12) of the IT Act regarding the limit of Rs. 10,000.
2. Whether the limit is per assessment year or an overall limit.
3. Applicability of Section 80VV and its relation to Section 40A(12).

Issue-wise Detailed Analysis:

1. Interpretation of Section 40A(12) of the IT Act regarding the limit of Rs. 10,000:

The primary issue in this appeal is the interpretation of Section 40A(12) of the Income Tax Act, which prescribes a limit of Rs. 10,000 for expenditure incurred by the assessee. The question is whether this limit applies to each assessment year individually or is an overall limit for all assessment years combined.

2. Whether the limit is per assessment year or an overall limit:

The assessee incurred a total expenditure of Rs. 56,770 on legal charges across multiple assessment years. The Income Tax Officer (ITO) allowed only Rs. 10,000, interpreting Section 40A(12) as an overall limit. However, the assessee contested this disallowance, arguing that the Rs. 10,000 limit should apply to each assessment year individually. The Commissioner of Income Tax (Appeals) [CIT(A)] supported the assessee's interpretation, directing the ITO to allow the entire expenditure while maintaining a record to ensure compliance with the Rs. 10,000 limit per assessment year.

3. Applicability of Section 80VV and its relation to Section 40A(12):

Before the insertion of Section 40A(12), the expenditure was governed by Section 80VV, which allowed a maximum deduction of Rs. 5,000. The controversy arises from the wording in Section 40A(12), which states, "No deduction shall be allowed in excess of ten thousand rupees for any assessment year." The department argued that this should be interpreted as an overall limit, while the assessee contended it should apply per assessment year.

The department's representative referred to Circular No. 421, suggesting that Section 40A(12) was meant to increase the limit from Rs. 5,000 to Rs. 10,000 and should be interpreted to avoid absurd results. He cited the Supreme Court's decision in K. P. Varghese v. ITO, emphasizing that statutory provisions should be interpreted to avoid absurdity.

The assessee's counsel argued that Section 40A(12) should be interpreted on its own terms, and the circular did not clarify the legislative intent. He also pointed out that maintaining records for each assessment year is feasible and should not be a reason to deny the benefit.

Judgment Analysis:

The Tribunal considered the rival submissions, relevant statutory provisions, and judicial precedents. It noted that prior to Section 80VV, expenses incurred in connection with income tax proceedings were allowable under Section 37(1) as revenue expenditure. The Tribunal cited several judicial decisions supporting this view, including the Madhya Pradesh High Court in Binodiram Balchand v. CIT, the Full Bench of the Nagpur Bench of the Bombay High Court in R. B. Bansilal Abirchand Spg. & Wvg. Mills v. CIT, and the Supreme Court in CIT v. Birla Cotton Spg. & Wvg. Mills Ltd.

The Tribunal concluded that the insertion of Section 40A(12) aimed to liberalize the allowance of such expenditure by fixing a limit of Rs. 10,000 per assessment year. It emphasized that the wording "for any assessment year" indicated a per-year limit rather than an overall limit. The Tribunal rejected the department's argument that maintaining records would be difficult, stating that such difficulties also arise in other tax matters like carry forward of losses.

Conclusion:

The Tribunal upheld the CIT(A)'s interpretation that the Rs. 10,000 limit under Section 40A(12) applies to each assessment year individually. It dismissed the departmental appeal, affirming that the expenditure should be allowed at Rs. 10,000 for each assessment year to which the proceedings relate.

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