Law: Income Tax Act, 1961

Section: 37

Income-tax---Business expenditure---Expenditure on advertisement---Constitutional validity of ceiling on deduction of expenditure on advertisement---Subsections (3A) and (3B) of S.37 do not violate Art. 14---They are not discriminatory and do not interfere with freedom of trade and business---Provision is valid---Indian Income Tax Act, 1961, S.37(3A), (3B)---Constitution of India, Arts. 14 & 19, Sched. VII, List I, entry 82. In substance, subsection (3A) of section 37 of the Income Tax Act, 1961, says that where the expenditure or the aggregate expenditure on any of the items specified in subsection (3B) exceeds Rs.l 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 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 deducting expenditure. The gross income is taxable subject to certain statutory deductions allowed by the Income Tax Act, 1961. Therefore, the deductions can be claimed only if they were 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. Parliament has not banned advertisement as such nor has Parliament put a ceiling on expenditure. What the subsection stipulates is that any expenditure over and above the limit prescribed would not qualify for deduction for the purpose of computing the income. It is now well-settled that though taxing laws are not outside Article 14, 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…

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