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Interpretation of Section 37(3A) of the Income-tax Act, 1961 regarding the disallowance on aggregate expenditure on advertisement, publicity, and sales promotion exceeding Rs. 40,000. Detailed Analysis: The appeal in this case arises from the income-tax assessment for the assessment year 1979-80, specifically related to the disallowance under section 37(3A) of the Income-tax Act, 1961. The main issue 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 exceeding Rs. 40,000. The assessee, a film distribution firm, incurred expenditure on advertisement and publicity during the relevant year. The Income Tax Officer (ITO) disallowed Rs. 29,002, while the Appellate Authority Commissioner (AAC) determined the adjusted expenditure at Rs. 53,028 and disallowed Rs. 7,953. The appeal before the Tribunal revolves around the interpretation of sub-section (3A) of section 37, inserted in 1979, which restricts business expenditure on advertisement, etc., when it exceeds Rs. 40,000. The contention of the assessee is that the expression 'such aggregate expenditure' in the statute refers to the aggregate expenditure in excess of Rs. 40,000, entitling the assessee to a basic allowance of Rs. 40,000. However, the department argues that 'such' expenditure means the total expenditure on advertisement, etc., exceeding Rs. 40,000, and a percentage of the total expenditure should be disallowed. The Tribunal analyzed the legislative history and the plain language of the statute to determine the true construction of sub-section (3A) of section 37. It concluded that the disallowance should be a specified percentage of the adjusted expenditure, which is the aggregate expenditure incurred by the assessee on advertisement, publicity, and sales promotion in India. The Tribunal held that the assessee is not entitled to any basic allowance of Rs. 40,000, and the total expenditure incurred must be considered for the purpose of disallowance. Ultimately, the Tribunal dismissed the appeal, upholding the order of the AAC. The decision was based on the clear language of sub-section (3A) and the legislative intent to curb extravagant expenses in business and profession by disallowing a percentage of the aggregate expenditure exceeding Rs. 40,000.
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