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TMI Blog2013 (10) TMI 1081X X X X Extracts X X X X X X X X Extracts X X X X ..... Black Diamond Beverages Ltd. [1992 (2) TMI 17 - CALCUTTA High Court] and CIT v. Soft Beverages P. Ltd. [2003 (12) TMI 5 - MADRAS High Court ] distinguished - Decided against the Revenue. Disallowance of interest - the question was whether there is any nexus between the monies borrowed and advances made by the assessee - ITAT did not allow the revenue to produce additional evidence and decided in favor of assessee - Whether finding of fact can be a subject matter of reference under section 256(1) or 256(2) – Held that:- In a reference under section 256, the High Court must accept the finding of fact reached by the Appellate Tribunal - If a question of fact is examined, while answering reference, the High Court would be acting in excess of jurisdiction - Every question referred to the High Court ordinarily contains a phrase ". . . in the facts and circumstances of the case" or ". . . in the circumstances of the case". This means the question of law referred to in the background of the facts found by the Appellate Tribunal and not facts which are to be fished out by the High Court at the instance of either of the parties - The Appellate Tribunal is a final fact finding authority. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case, the Income-tax Appellate Tribunal was right in law in deleting the disallowance of interest on the ground that the Revenue had failed to establish any nexus between the monies borrowed and advance made and relying on fresh evidence brought before Income-tax Appellate Tribunal ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee was entitled to claim deduction of investment allowance under section 32A of the Income-tax Act even after the insertion of Explanation to item 5 of the Eleventh Schedule by the Finance Act, 1987?" The background facts in R. C. No. 85 of 1997 are as follows. The assessee, a public limited company, is engaged in the business of manufacture and sale of aerated waters and soft drinks. In their returns for the assessment years 1981-82 and 1982-83, the assessee claimed investment allowance under section 32A of the Act, which was allowed by the Income-tax Officer, but in the Department's appeal, the Commissioner of Income-tax (Appeals) disallowed it on the ground that the items manufactured by the assessee are covered by item 5 of the Eleventh Schedule to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys included synthetic essences in any form. This Explanation is being clarificatory, he would urge that it must be interpreted to give retrospective operation as applicable to the assessments pertaining to the years prior to April 1, 1988. The senior counsel for Sarvaraya Sugars and the counsel for Vijayawada Bottling, in opposition, made the following submissions. The Explanation to item 5 of the Eleventh Schedule to the Act having been inserted with effect from April 1, 1988, it cannot be given retrospective effect ; the assessees cannot be denied the benefit of investment allowance under section 32A(2)(iii) and though the Explanation is clarificatory it has to be construed as enlarging only the definition of blended flavouring concentrates and Parliament never intended to apply it to the assessment of the income during the year prior to April 1, 1988. According to them, the Explanation introduced a fiction to treat blended flavouring concentrates and synthetic essences in any form as equal for the purpose of item 5 of the Eleventh Schedule. Such fiction should be given a limited meaning as intended and cannot be pressed for any other purpose. They would urge that as per the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecified in the list in the Eleventh Schedule : (Proviso and Explanation are omitted) Eleventh Schedule (Items 1 to 4 omitted as not relevant). 5. Aerated waters in the manufacture of which blended flavouring concentrates in any form are used. Explanation.-'Blended flavouring concentrates' shall include, and shall be deemed always to have included, synthetic essences in any form. (Items 6 to 29 omitted as not relevant)." As per sections 28 and 29 of the Act, income from profits and gains of business shall be computed in accordance with the provisions contained in sections 30 to 43D. Section 28 describes various types of income chargeable to tax under the head "Profits and gains of business or profession" and sections 30 to 43D mandates the deduction of various items of expenditure incurred by the assessee in computing the income for the purpose of the tax. Section 32A permits an assessee to claim deduction to the extent of 25 percent of actual cost incurred, inter alia, for the purpose of machinery or plant. As per sub-section (2) thereof, the purchase of machinery or plant shall have to be for the purpose of business of manufacture or production of any articles or thin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. CIT [1994] 208 ITR 785 (Delhi), CIT v. Rajasthan Mercantile Co. Ltd. [1995] 211 ITR 400 (Delhi), CIT v. Patel Brothers and Co. Ltd. [1995] 215 ITR 165 (SC) and CIT v. Gold Coin Health Food P. Ltd. [2008] 304 ITR 308 (SC) and argue that the Explanation below item 5 of the Eleventh Schedule has to be given effect to only from April 1, 1988, and has no application for previous \ assessment years. Declaratory Acts A Declaratory Act is an exception to the general rule of presumption against retrospectivity of a law. An express mention can only give retrospectivity and even in such a case, such law cannot be in violation of the fundamental rights, arbitrary or deprive the vested rights. Whether an Act is declaratory or clarificatory? The enquiry must always commence by knowing whether there has been ambiguity in the law already existing, which was sought to be clarified and declared? Often to remove doubts, the Legislature amends the law declaring the correct position without indicating as to whether it is retrospective. Bennion in Statutory Interpretation (2008 5th edn., Indian Reprint 2010, page 188) elucidates that, "the law so declared is taken always to have been operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IR 1979 SC 1897, Allied Motors P. Ltd. v. CIT [1997] 224 ITR 677 (SC) ; [1997] 3 SCC 472, Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753 (SC), CIT v. Kanji Shivji and Co. [2000] 242 ITR 124 (SC) ; [2000] 2 SCC 253, Zile Singh v. State of Haryana [2004] 8 SCC 1, CIT v. Suresh N. Gupta [2008] 297 ITR 322 (SC) ; [2008] 4 SCC 362 ; AIR 2008 SC 572 and CIT v. Alom Extrusions Ltd. [2009] 319 ITR 306 (SC) ; [2010] 1 SCC 489 pointed the following conspectus of case law (page 315 of 337 ITR) : "Brij Mohan Das [1997] 223 ITR 825 (SC) Suwalal [1997] 224 ITR 753 (SC) and Kanji Shivji and Co. [2000] 242 ITR 124 (SC) are decisions where the Supreme Court construed the provisions as declaratory of common law and, therefore, retrospective. Podar Cement (P.) Ltd. [1997] 226 ITR 625 (SC) ; Allied Motors (P) Ltd. [1997] 224 ITR 677 (SC) and Suresh N. Gupta [2008] 297 ITR 322 (SC) dealt with the Finance Acts amending section 43B of the Act which enabled an assessee to claim deduction of any sum payable by way of tax, duty, cess or fee or whatever name called. These provisions were held to be retrospective on the ground that there was divergence of opinion among the High Courts and also as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to deny the investment allowance during the assessment years prior to 1988-89 and it was only intended to clarify the definition to dispel any doubts as to what Parliament intended by blended flavouring concentrates. External aids to Interpretation The statement of objects and reasons, the memorandum or explanation on the clauses in the Bill, the speech of the Minister who piloted the Bill sometimes the debates in Parliament are external aids to interpret and construe the law. Though all of them absolutely do not always point to one direction, nevertheless a reference to all these is not totally precluded. Further, the bureaucratic/executive understanding of the law as manifested in the departmental circulars, instructions and guidelines or the subordinate legislation-contemporanea expositio are also important in understanding the intention of Parliament. This is especially so with regard to the circulars issued by the Central Board of Direct Taxes (CBDT) who conventionally come out with clarificatory guidelines in the form of a circular immediately after the passing of the Finance Bill by Parliament. The senior counsel for income-tax is correct that when the language of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data processing. It is proposed to make a clarificatory amendment to exclude computers from the expression 'data processing' so that the benefits of the provisions of section 32AB and other sections may be made available in respect of computers. It is also proposed to exclude office machines and apparatus used for transmission and reception of messages from the non-priority list of articles or things as contained in this item. These amendments will take effect from 1st April, 1988, and will accordingly, apply in relation to the assessment year 1988-89 and subsequent years." (emphasis supplied) Memorandum Explaining the Provisions in the Finance Bill, 1987 ([1987] 165 ITR (St.) 174) "Clarificatory amendment of definition of 'aerated waters' for the purposes of inclusion in the Eleventh Schedule. 43. Under item 5 of the Eleventh Schedule to the Income-tax Act, 'aerated waters in the manufacture of which blended flavouring concentrates in any form are used' are one of the non-priority articles or things to which benefits of the provisions of section 32AB and other sections of the Act would not be applicable. It has been found that certain taxpayers manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturers of aerated waters using synthetic essences also claimed the benefit on the ground that synthetic essence cannot be included in the expression, "blended flavouring concentrates in any form", though it was not legislative intent. With a view to prevent tax avoidance and placing the matter beyond doubt, the amendment was proposed seeking to clarify that the blended flavouring concentrates, as always to include synthetic essence in any form. This was also found mentioned in clause 75 of the Notes on Clauses, which was ultimately enacted as section 73 of the Finance Act, 1987. In the Memorandum, the Notes on Clauses as well as the Finance Act, Parliament categorically held that the amendment will come into force from April 1, 1988, and will accordingly apply in relation to the assessment year 1988-89 and subsequent years. The Central Board of Direct Taxes in their circular further clarified the same. Thus, though the Explanation was inserted for the purpose of, "placing the matter beyond doubt", the amendment was intended not to be retrospective. It was to come into effect from the assessment year 1988-89 and subsequent years only. Case law An amendment to an Act may co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the substitution made by the Finance Act was to make the new definition a part of the Act from the date it was enacted. The legal fiction could not be extended beyond its legitimate field and the aforesaid words occurring in section 4 of the Finance Act, 1963, could not be construed to embody conferment of a power for a retrospective authorization by the State in the absence of any express provision in section 2(44) of the Act itself." (emphasis supplied) In Rajasthan Mercantile Co. Ltd., the Division Bench of the Delhi High Court considered the question of retrospective application of the Explanation to section 37(2A) inserted by the Finance Act, 1968, with effect from April 1, 1968, and Explanation 2 to section 37(2B) inserted by the Finance Act, 1970, with effect from April 1, 1976. The plea that the Explanation being clarificatory or declaratory in nature is not effected by any rule against retrospectivity, was rejected by the court. It was held that, Explanation 2 to section 37(2B) will apply to the assessments with effect from April 1, 1976, and that except widening the concept of "entertainment expenditure by including in its scope such expenditures which is otherwise tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose for which it was created, and should not be extended beyond that legitimate field. A legal fiction presupposes the existence of the state of facts which may not exist, and then works out the consequences which flow from that state of facts. Such consequences have got to be worked out only to their logical extent having due regard to the purpose for which the legal fiction has been created. Stretching the consequences beyond what logically follows amounts to an illegitimate extension of the purpose of the legal fiction. A legal fiction should not be extended beyond the language by which it is created. A deeming provision cannot be pushed too far so as to result in an anomalous or absurd position. The fiction enacted by the Legislature must be restricted by the plain terms of the statute. The legal fiction is not to be extended beyond the purpose for which it is created, or beyond the language of the section by which it is created. A legal fiction cannot be extended by the court on analogy or by addition or deleting words not contemplated by the legislature." (internal quotations omitted). (emphasis supplied) We respectfully differ from the view taken by the Calcutta and Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrowed for the purpose of business in computing the income under section 28. If an assessee-it is not deniedborrows the money ostensibly for the purpose of business but lends or advances it to another company, the deduction cannot be allowed because such borrowing presumptively is not for the purpose of business. Therefore, in a case where the assessee borrowed for the purpose on which he pays interest and also earns interest by lending the surplus out of their profits to another, the assessee has to demonstrate that there is no nexus as regards the money borrowed and the money advanced to another person. Sarvaraya Sugars is a manufacturing company. It is not in the business of advancing loans. It is seen from the record that M/s. East Coast Salt and Chemicals Ltd. is subsidiary of Sarvaraya Sugars. Therefore, the question is whether there is any nexus between the monies borrowed and advances made by the assessee. During the scrutiny of the return of income before the Income-tax Officer, the assessee asserted that the money lent to East Coast was from out of its profits and not out of borrowed monies. Observing that the details are not furnished in this regard, the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court ordinarily contains a phrase ". . . in the facts and circumstances of the case" or ". . . in the circumstances of the case". This means the question of law referred to in the background of the facts found by the Appellate Tribunal and not facts which are to be fished out by the High Court at the instance of either of the parties (Karnani Properties). The Appellate Tribunal is a final finding authority. The High Court cannot go beyond the facts found by the Tribunal. Whether it is an assessee or the Revenue, all questions of fact have to be raised at the time of hearing of the appeal before the Tribunal and in the reference, no fresh hearing of disputed questions of fact is possible nor permissible (Thiru Arooran Sugars). Applying these principles, the view taken by the Tribunal with reference to the question of fact is final and the question of law would not arise for opinion under section 256(2) of the Act. In the result, the questions in R. C. No. 85 of 1997 as well as R. C. No. 125 of 1999 are answered in affirmative in favour of the assessee and against the Revenue. The reference cases are accordingly disposed of. There shall be no order as to costs. - - TaxTMI - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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