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TMI Blog2006 (1) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness or profession". - One cannot travel outside the provisions of the Income-tax Act and deny the benefit of deduction under that section on the ground that the payment is unauthorised or has been prohibited by some statute. - - - - - Dated:- 31-1-2006 - Judge(s) : H. L. DATTU., A. S. BOPANNA. JUDGMENT The judgment of the court was delivered by H.L. Dattu J.-In all these reference cases, the question of law and the facts referred by the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore, for our consideration and decision are common and similar, and therefore, all these cases are taken up together, heard and disposed of by this common order. The facts in ITRC No. 48/1999 are noticed in this judgment for disposal of these reference cases. The assessee has her own proprietary business "M/s. Manjog Home" and also gets share income from firms. For the assessment year 1985-86, the assessee is assessed in the status of individual". M/s. Manjog Home was dealing in home appliances like refrigerators, television sets, electric and electronic goods, etc. The assessee as a proprietrix of M/s. Manjog Home had launched a sales promotion scheme known as "deposit linked i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a trader. The other observation of the Income-tax Officer that the collection of deposits was not a business activity is again incorrect. The appellant needed money for expanding the turnover; the appellant had several methods of obtaining this finance, e.g., from borrowals, etc. The appellant however chose to obtain deposits and to lure these deposits, offered the articles free to the gullible public on condition that by taking away these articles worth 75 per cent, of the deposit, the depositor has been sufficiently recompensed for making the deposit free of interest. I would observe that by setting out Rs. 27 lakhs of incentives, the appellant was able to mobilise deposits of Rs. 42 lakhs. I would also observe that these incentives of Rs. 27 lakhs are but a small fraction of the total turnover in this case of Rs. 143 lakhs. 9. Had the deposits been taken for interest, the appellant would have had to pay interest every year on the deposits. On the other hand, instead of making this annual payment of interest, the appellant has incurred a one-time expenditure of Rs. 27 lakhs. Can this setting out of expenditure of Rs. 27 lakhs, be then said to be not for the purposes of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceeding further, learned counsel would contend, that the matter need not be remanded by this court to the Income-tax Appellate Tribunal, since the legal issue referred for consideration and decision by the Tribunal can be decided by this court with reference to the amended provision, namely, the insertion of the Explanation to section 37 of the Act with retrospective effect, i.e., with effect from April 1, 1962. In aid of this submission, learned counsel for the Revenue relies on the observations made by this court in the case of Sterling Foods v. CIT [1991] 190 ITR 275, wherein this court by relying on the observations made by the apex court in the case of CST v. Bijli Cotton Mills [1964] 15 STC 656 has concluded that "when the law has been amended with retrospective operation, it should be the duty of the High Court to apply the law so amended if it applies". In our view, the law declared by the apex court in Bijli Cotton Mills' case [1964] 15 STC 656 and the law declared by this court in Sterling Foods' case [1991] 190 ITR 275 following the view expressed by the apex court in the aforesaid decision requires to be noticed. Therefore, they are extracted and they are as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be brought to its notice.' Therefore, following this judgment, we must hold that Mr. Sastri is entitled to rely on the 1962 order and it is our duty to answer the reference in accordance with the amendment made by the order, unless the question referred is not couched in terms of sufficient amplitude to cover an enquiry into the question in the light of the amended law." In Sterling Foods' case [1991] 190 ITR 275, this court has stated as under: "When a question has been referred to the High Court and, in the meanwhile, the law has been amended with retrospective operation, it would be the duty of the High Court to apply the law so amended if it applies. Application of the relevant law to a problem raised by reference before the High Court is not normally excluded merely because at the date when the Tribunal decided the question, the relevant law was not or could not be brought to its notice." Sri Parthasarathy, learned counsel for the assessee, would submit that the scheme floated by the assessee was for her business purpose and that by no stretch of imagination, it could be characterised as a scheme which is prohibited by law, and therefore, the expenditure incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion"? This question of law now requires to be decided in view of the Explanation inserted retrospectively by the Finance (No. 2) Act, 1998, with effect from April 1, 1962. Whether this can be done by this court without remanding the matter to the Tribunal is now well settled by the decision of the apex court in Bijli Cotton Mills' case [1964] 15 STC 656, which view is adopted by this court in the case of Sterling Foods' case [1991] 190 ITR 275. Therefore, we are of the opinion that these reference cases need not be remanded to the Income-tax Appellate Tribunal for determination of the legal issue canvassed by learned counsel for the Revenue. The next question that falls for our consideration is whether the amounts collected by the assessee from the depositors under the "deposit linked incentive scheme" are allowable expenditure in computing the income chargeable under the head "Profits and gains of business or profession"? Learned counsel for the Revenue placing heavy reliance on the observations made by the apex court in the case of Secured Investment Co. [1988] 63 Comp Cas 383; AIR 1988 SC 492, contends that the scheme evolved by the assessee is nothing but a "money circulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the first place, it must be proved that he is promoting or conducting a scheme for the making of quick or easy money and, secondly, the chance or opportunity of making quick or easy money must be shown to depend upon an event or contingency relative or applicable to the enrolment of members into that scheme. The legislative draftsman could have thoughtfully foreseen and avoided all reasonable controversy over the meaning of the expression 'money circulation scheme' by shaping its definition in this form: '"money circulation scheme" means any scheme, by whatever name called, (i) for the making of quick or easy money, or (ii) for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.' I have reshaped the definition, in order to bring out its meaning clearly, without adding or deleting a single word or comma from the original text of section 2(c). The substance of the matter is really not in doubt: only the for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 2(c) of the Act." Now coming to the scheme floated by the assessee in these proceedings, we had the advantage of seeing the application form issued by the assessee that requires to be filled and filed by any person interested in becoming a member under the scheme. We are told by Sri Parthasarathy, learned counsel, who appears for all the assessees in these reference cases, that similar application forms had been issued by all the assessees while floating the "deposit linked incentive scheme". The nomenclature that the assessee has given to her scheme is "Guru credit card goods linked incentive scheme". According to the promoters of the scheme, it is a double benefit scheme and to avail of the benefit of a free present item as an incentive, a person must become a regular credit card member by paying the prescribed security deposit amount and once he becomes a member under the scheme, he can terminate his membership only after five years and the security deposit would be refunded to him without interest after adjusting any dues from the member. The security deposit can also be paid in monthly instalments and in such cases, member is required to provide two guarantors pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a subscriber, who enrols himself as a member, makes a deposit of Rs. 525, he is given a free present item/gift of the value of Rs. 400 and thereby a sum of Rs. 125 of such deposit would be retained by the promoter for a period of five years, but it would not earn any interest to the member and after the expiry of the period of five years, the deposit of Rs. 525 is refunded to the depositor. The assessee as promoter of the scheme has promoted a scheme where she can make quick and easy money. The scheme so promoted by the assessee would induce a person, to invest his/her money by way of deposit to get an incentive or gift worth 75 per cent, of the amount deposited. The remaining 25 per cent, of the amount is retained by the assessee not for a short-term but for a period of five years and sometimes more and after the expiry of the stipulated period what the member gets is what is deposited by him/ her without interest. This scheme, in our view, answers the requirements of definition of "money circulation scheme", which is banned under the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. Now coming back to the facts of this case, in the previous year r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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