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Dollar Co. Private Ltd. v. Union Of India And Others.
Structured Summary of the Opinion Delivered by Kanakaraj, J.
Factual and Procedural Background
The petitioner is a company engaged in the manufacture and sale of specified medicinal products, whose principal products are "Hedensa" and "Eichensa". The petitioner contends that these products cannot be sold without consumer awareness created through advertisement and publicity, and states that on average it spends 20% of net annual sales value on advertisement. The petition challenges the validity of sub-sections (3A) to (3D) of section 37 of the Income-tax Act, 1961 (introduced with effect from April 1, 1984 in a modified form), which provide for the disallowance, in part, of expenditure on specified items (including advertisement, publicity and sales promotion) for the purpose of computing income under the head "Profits and gains of business or profession". The text of sub-sections (3A) to (3D) is set out in the opinion and forms the statutory provision under challenge. The writ petition attacking the constitutional and other validity of those sub-sections was heard and is disposed of by this judgment.
Legal Issues Presented
- Whether sub-section (3A) of section 37 of the Income-tax Act, 1961 (and related sub-sections (3B)-(3D)) violates the principle of reasonable classification under Article 14 of the Constitution by grouping all advertisement/publicity/sales promotion expenditure together and disallowing 20% of the excess over Rs. 1 lakh.
- Whether the impugned sub-sections arbitrarily or unreasonably discriminate between different industries or classes of assessees (for example, between industries that require advertisement and those that do not), thereby infringing Article 14 and/or Article 19(1)(g) of the Constitution.
Arguments of the Parties
Petitioner's Arguments (as advanced by Mr. T. Srinivasamoorthy)
- The sub-sections treat large established industries (e.g., steel, cement, sugar) the same as small industries that require advertising (such as the petitioner's medicinal products industry), thereby failing to reflect a rational classification.
- The disallowance of expenditure on advertisements irrespective of the product or industry is arbitrary.
- Assessees with markets covering wide areas are placed on the same footing as assessees whose market is local, despite different commercial needs for advertisement.
- The fixation of the Rs. 1 lakh threshold in sub-section (3A) is arbitrary and bears no nexus to the objects of the Act; Parliament did not distinguish between assessees who manufacture some products that require advertisement and others that do not.
Respondents' Arguments
- The scope of taxation under the Income-tax Act is such that income to be assessed is not measured by the expenditure; deductions are available only if the statute permits them.
- It is not appropriate for Parliament to tailor tax deductions by reference to the specific products manufactured by an assessee; Parliament may uniformly group all advertisement expenditure under a single head and provide a uniform allowance or disallowance.
- The existence of a ceiling (Rs. 1 lakh) and a 20% disallowance on the excess does not render the provision unconstitutional; the provision does not prohibit advertisement nor place a cap on actual advertising expenditure, it only prescribes tax treatment (disallowance of part of the deduction for excess expenditure).
- Respondents relied on judicial decisions (discussed by the court) that support a wide legislative latitude in fiscal classification and uphold the challenged provision.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| British Electrical & Pumps (P.) Ltd. v. Commissioner Of Income-Tax, [1977] 106 ITR 620 (Cal) | Scope of section 37(1) deductions — whether payments were wholly and exclusively for business. | The court observed that the decision did not advance the petitioner's case. The referenced case dealt with payments to welfare/charitable funds where the Calcutta High Court held the expenditure to be wholly and exclusively for trade; that outcome did not assist the petitioner here. |
| Mysore Kirloskar Ltd. v. Union of India, [1986] 160 ITR 50 (Karnataka HC) | Validity of sub-section (3A) of section 37 — Article 14, Article 19(1)(g) and Article 19(6), and legislative competence (Entry 82, List I). | The Karnataka High Court upheld the validity of sub-section (3A), holding it not violative of Article 14 or Article 19(1)(g), saved by Article 19(6), and within Parliament's legislative competence. The present court agreed with this view and noted that special leave against that judgment had been dismissed. |
| Federation of Hotel and Restaurant Association of India v. Union of India, [1989] 178 ITR 97 (Supreme Court) | Scope of taxation power of Parliament; testing discrimination in taxing laws; legislative latitude in fiscal classification. | The court relied on the Supreme Court's guidance that taxing laws fall within Article 14 but permit a wide latitude for legislative classification; the tests for discrimination in fiscal laws are less rigorous. This principle supported the court's conclusion that the challenged provision was not discriminatory in a constitutional sense. |
| Hoechst Pharmaceuticals Ltd. v. State of Bihar, [1985] 154 ITR 64 (Supreme Court) | Economic wisdom of tax is within the exclusive province of the Legislature; proportional taxation by reference to capacity to pay. | The court applied the principle that the economic policy and proportionality of taxation are legislative functions, and that heavier tax on larger dealers may be a legitimate attempt to relate payment to capacity. This supported rejecting the petitioner's complaints about arbitrariness. |
Court's Reasoning and Analysis
The court began by extracting and summarising sub-sections (3A) to (3D) of section 37, noting in substance that where aggregate expenditure on specified items (including advertisement, publicity and sales promotion) exceeds Rs. 1 lakh, 20% of the excess shall not be allowed as a deduction for computing income under the relevant head.
It framed the petitioner's challenge as alleging lack of rational classification and arbitrariness — principally that the provision treats assessees whose products require advertisement and those whose products do not require advertisement in the same manner, and that the Rs. 1 lakh threshold is arbitrary.
On analysis, the court addressed several strands of reasoning:
- The court considered the British Electrical & Pumps decision and found that it did not advance the petitioner's case.
- The respondents' explanation of the proper scope of taxation under the Income-tax Act was accepted in principle: tax liability is assessed with reference to statutory provisions for deductions; the statute (Parliament) determines which expenditures are deductible. The court emphasised that income to be assessed is not measured by expenditure and that deductions are available only when provided by statute.
- The court agreed with respondents that Parliament may group all advertisement expenditure under a single head and provide a uniform rule for allowance/disallowance; the existence of a monetary ceiling for tax-deduction purposes does not in itself render the provision unconstitutional. The provision does not ban advertisement or limit actual advertising spend; it only prescribes tax treatment by disallowing part of the deduction over a threshold.
- The court reviewed and relied upon judicial authorities (Mysore Kirloskar, Federation of Hotel and Restaurant Association, and Hoechst), which collectively establish that: (a) taxing laws are subject to Article 14 but legislative classification in fiscal matters enjoys wide latitude; (b) the tests for discrimination in taxation are less rigorous; and (c) economic policy choices (including differential treatment to reflect capacity to pay) are generally within the legislature's domain.
- Applying these principles, the court found that the impugned sub-sections reflect a reasonable classification for fiscal purposes — grouping advertisement expenditure uniformly and prescribing a uniform tax consequence for excess expenditure — and that the petitioner's complaints about product-specific advertising needs and the Rs. 1 lakh threshold did not demonstrate constitutional invalidity.
Holding and Implications
DISMISSED — The writ petition challenging the validity of sub-sections (3A) to (3D) of section 37 of the Income-tax Act, 1961 was dismissed.
Implications:
- Direct effect: The impugned sub-sections remain valid and enforceable as against the petitioner; the petitioner’s challenge to their constitutional validity failed. The court ordered that there will be no order as to costs.
- Broader implications: The opinion applies and follows existing authority that grants Parliament wide latitude in tax classification and treats economic policy in taxation as within the legislative domain. The judgment expressly aligns with the Karnataka High Court decision in Mysore Kirloskar Ltd. and cites Supreme Court guidance on the permissive standard of review in fiscal classification. The opinion itself does not purport to lay down a novel precedent beyond these applications.
The Judgment of the Court was delivered by
Kanakaraj, J.:— The petitioner is a company carrying on the business of manufacture and sale of certain specified medicinal products. The main products of the petitioner-company are “Hedensa” and “Eichensa”. According to the petitioner, these products cannot be sold unless consumer awareness is created through advertisements and publicity. On an average, the petitioner-company is said to be spending 20 per cent, of the value of the net sales in a year towards the advertisement. Section 37(3) of the Income-tax Act, 1961, and rule 6B of the Income-tax Rules, prescribe conditions as to the extent to which the expenditure on advertisements shall be allowed while computing the income chargeable under the head “Profits and gains of business or profession”. With effect from April 1, 1979, sub-sections (3A), (3B), (3C) and (3D) were introduced in section 37 of the Act and they provided for disallowance of part of the expenditure on advertisements. However, with effect from April 1, 1981, those subsections were withdrawn. Again, with effect from April 1, 1984, the very same sub-sections have been introduced in a modified manner. Since the validity of these sub-sections is challenged in this writ petition, it would be convenient to extract those sub-sections:
“(3A) Notwithstanding anything contained in sub-section (1), where the expenditure or, as the case may be, the aggregate expenditure incurred by an assessee on any one or more of the items specified in sub-section (3B) exceeds one hundred thousand rupees, twenty per cent, of such excess shall not be allowed as deduction in computing the income chargeable under the head ‘Profits and gains of business or profession’.
(3B) The expenditure referred to in sub-section (3A) is that incurred on—
(i) advertisement, publicity and sales promotion; or
(ii) running and maintenance of aircraft and motor cars; or
(iii) payments made to hotels.
Explanation.—For the purposes of sub-sections (3A) and (3B),—
(a) the expenditure specified in clause (i) to clause (iii) of subsection (3B) shall be the aggregate amount of expenditure incurred by the assessee as reduced by so much of such expenditure as is not allowed under any other provision of this Act;
(b) expenditure on advertisement, publicity and sales promotion shall not include remuneration paid to employees of the assessee engaged in one or more of the said activities;
(c) expenditure on running and maintenance of aircraft and motor cars shall include,—
(i) expenditure incurred on chartering any aircraft and expenditure on hire charges for engaging cars plied for hire;
(ii) conveyance allowance paid to employees and, where the assessee is a company, conveyance allowance paid to its directors also.
(3C) Nothing contained in sub-section (3A) shall apply in respect of expenditure incurred by an assessee, being a domestic company as defined in clause (2) of section 80B, or a person (other than a company), who is resident in India in respect of expenditure incurred wholly and exclusively on:—
(i) advertisement, publicity and sales promotion outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business;
(ii) running and maintenance of motor cars in any branch, office or agency maintained outside India for the promotion of the sale outside India of such goods, services or facilities.
(3D) No disallowance under sub-section (3A) shall be made:—
(i) in the case of an assessee engaged in the business of operation of aircraft, in respect of expenditure incurred on running and maintenance of such aircraft;
(ii) in the case of an assessee engaged in the business of running motor cars on hire, in respect of expenditure incurred in running and maintenance of such motor cars.”
2. In substance, sub-section (3A) of section 37 of the Act says that where the expenditure or the aggregate expenditure on any of the items specified in sub-section (3B) exceeds Rs. 1 lakh, 20 per cent, of the said excess shall not be allowed as a deduction in computing the income chargeable under the head “Profits and gains of business or profession”. The sub-sections are challenged on the ground that they do not reflect a rational classification in relation to the objects of the Act.
3. The arguments of Mr. T. Srinivasamoorthy are as follows:
1. By the application of the sub-sections, large established industries had been treated on par with small industries. Elaborating the arguments it is contended that industries producing steel, cement, sugar, etc., which really do not require any advertisement are entitled to the same benefits as small industries like that of the petitioner;
2. The disallowance of expenditure on advertisements, irrespective of the products manufactured by a particular industry is said to be arbitrary;
3. Assessees who have to cater to a market covering wide areas have been treated as equal to assessees whose market is restricted to a particular local area;
4. The fixation of Rs. 1 lakh in sub-section (3A) is arbitrary and has no nexus to the objects sought to be achieved by the Act. The Government had not kept in mind the distinction between the assessees who manufacture several products some of which require advertisements and some do not on the one hand and between the assessees who manufacture products which either require advertisement or do not require advertisement at all.
4. In respect of his arguments, Mr. British Electrical & Pumps (P.) Ltd. v. Commissioner Of Income-Tax., [1977] 106 ITR 620 (Cal). On going through the said decision, I am afraid that the same does not advance the case of the petitioner. In that case, the Tribunal had disallowed the claim of the assessee, under section 37(1) of the Act, deduction of certain sums of money paid to the American Women's Club Welfare Fund and certain other such associations. The Tribunal had observed that the predominant motive for the payments was charity and the payments were not out of considerations of business. On a reference, the Calcutta High Court held that the expenditure was incurred or laid out by the assessee wholly and exclusively for the purpose of its trade.
5. The respondents have filed a detailed counter-affidavit where, in my opinion, the correct scope of the levy under the Income-tax Act, 1961, is explained. The income that is assessed to tax should not be measured by the expenditure. The income sought to be assessed is not the residual income that is available after expenditure, the gross income is taxable subject to certain statutory deductions allowed by the Income-tax Act. Therefore, the deductions can be claimed only if they are provided by the statute. It would not be proper for Parliament to take note of the products manufactured by the assessee and make a distinction between those who require advertisement and those who do not require advertisement. On the other hand, Parliament has rightly grouped all advertisements under one head and has given a uniform allowance or disallowance. The fact that a ceiling has been fixed on the expenditure cannot make the subsection unconstitutional. The fact that Parliament has fixed a limit of Rs. 1 lakh without reference to the type of the product which is being advertised, is proof of the fact that a reasonable classification had been adopted. I am also in agreement with the arguments of learned counsel for the respondents that Parliament has not banned advertisement as such nor has Parliament put a ceiling on expenditure. What the sub-section stipulates is that any expenditure over and above the limit prescribed would not qualify for deduction for the purpose of computing the income.
6. Learned counsel for the respondents has also cited the following decisions in opposition to the claim of the petitioner.
7. In Mysore Kirloskar Ltd. v. Union of India, [1986] 160 ITR 50, the Karnataka High Court had occasion to test the validity of the very, same sub-section (3A) of section 37 of the Income-tax Act, 1961. They held that the sub-section uniformly provides for disallowance of 20 per cent, of the expenditure over and above a sum of Rs. 1 lakh incurred on advertisements, publicity and sales promotion, or running and maintenance of aircraft and motor cars, or payments made to hotels. They held that the provision is not violative of article 14 of the Constitution. They also held that the provision does not in any way interfere with the freedom of trade and business guaranteed under article 19(1)(g) of the Constitution of India. In any event, they held that the provision is for the general public interest and is saved by article 19(6) of the Constitution. They also held that the provision is within the purview of entry 82 of List I of the Seventh Schedule to the Constitution and, therefore, they are within the legislative competence of Parliament. It is brought to my notice that the special leave petition preferred against this judgment had been dismissed on October 4, 1989.
8. In Federation of Hotel and Restaurant Association of India v. Union of India, [1989] 178 ITR 97, the Supreme Court has pointed out the scope of the taxation power of Parliament. It observed (at page 121):
“It is now well-settled that though taxing laws are not outside article 14, however, having regard to the wide variety of diverse economic criteria that go into the formulation of a fiscal policy, the Legislature enjoys a wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are, accordingly, less rigorous. In examining the allegations of a hostile, discriminatory treatment, what is looked into is not its phraseology, but the real effect of its provisions. A Legislature does not, as an old saying goes, have to tax everything in order to be able to tax something. If there is equality and uniformity within each group, the law would not be discriminatory. Decisions of this court on the matter have permitted the Legislatures to exercise an extremely wide discretion in classifying items for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes.”
9. In Hoechst Pharmaceuticals Ltd. v. State of Bihar, [1985] 154 ITR 64, the Supreme Court points out that the economic wisdom of a tax is within the exclusive province of the Legislature. To make the tax heavier on a large dealer who occupies a position of economic superiority, by reason of his greater volume of business, both absolutely and relatively is not arbitrary discrimination, but an attempt to proportion the payment to capacity to pay and thus to arrive in the end at a more genuine equality.
10. Having regard to the guidelines prescribed by the apex court, I do not think that any of the complaints raised by the petitioner can be upheld. It appears to me that the impugned sub-sections only purport to group all advertisements under one head and have prescribed a uniform allowance or disallowance. The petitioner cannot attack the validity only from the angle of the products manufactured by him and on the ground that the sub-section benefits certain other manufacturers while it does not benefit him. It would not be proper to invalidate a provision of law in the manner sought to be urged by the petitioner. Further, the Karnataka High Court has upheld the validity of the very same sub-section and I am in agreement with the views expressed by the Karnataka High Court. Consequently, the writ petition fails and it is dismissed. There will, however, be no order as to costs.
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