JUDGMENT
Ajit K. Sengupta, J.
1. The following question of law has been referred to this court by the Tribunal under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1984-85 :
R. A. No. 279 (Cat) of 1990 :
“Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the assessee’s expenditure on commission paid to sales agents amounting to Rs. 1,57,65,878 and that paid to advertisement agents amounting to Rs. 1,53,88,321 are not covered by the provisions of Section 37(3A) read with Section 37(3B) of the Income-tax Act, 1961, in vacating the order of the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961 ?”
2. Shortly stated, the facts are that the assessee-company is the owner of a well-known newspaper “The Statesman”. In its return for the assessment year 1984-85, it claimed deductions of Rs. 1,57,65,878 and Rs. 1,53,88,321 as commission paid to sales agents and advertisement agents, respectively. The above deductions were allowed to the assessee by the Assessing Officer in the assessment made by order dated January 28, 1986. The Commissioner, on examination of the record of the proceeding, was of the view that the above claims were hit by the provisions of Section 37(3A) of the Act and twenty per cent. thereof should have been disallowed. He, accordingly, issued a show-cause notice asking the assessee-company to explain as to why the assessment made should not be revised as the same was erroneous in so far as it was prejudicial to the interests of the Revenue.
3. The assessee, in its detailed reply dated February 25, 1988, objected to the revision of assessment. It was explained that the sum of Rs. 1,57,85,876 was paid to selling agents on sale of publication. The newspaper was sold almost entirely through selling agents outside the publishing centres of Calcutta and New Delhi and through hawkers in Calcutta and Delhi. The selling agents outside Calcutta and Delhi have to make arrangement for expeditious and efficient distribution of the newspaper through hawkers. The commission is paid at a uniform rate to all selling agents to compensate them for the service of distribution and hawking. The selling agents apart from the above service of distribution are required to pay for the newspapers supplied to them during a month within 25 days of the following month irrespective of whether or not they have been able to collect the relevant amounts from their clients or hawkers. The newspaper thus saved the expenditure of maintaining a debt collection cell for recovering debts from individual readers whose numbers are legion. The prompt payment also ensures regular flow of working capital. Likewise, hawkers in Calcutta and New Delhi are paid commission for distribution of copies of the newspaper in the houses of the readers and interests.
4. In respect of advertising commission of Rs. 1,53,88,321 claimed as payment to advertising agents, the assessee explained that it was paid to agents on the business secured by them. The commission was paid monthly to advertising agents who were accredited to the Indian and Eastern Newspaper Society, which is the principal body officially representing the newspaper industry in India having over 500 newspaper establishments as its members of which the Statesman is one. The commission was paid at a uniform rate for the professional services which these agents rendered directly to newspapers or to the advertisers thus indirectly to newspapers since such services would, otherwise, have been rendered by the newspaper. These services help to facilitate the day-to-day operations of advertising business. The assessee also gave details of various jobs/services which the sales agents carry out for the newspaper. It further emphasised that in return for commission, the advertising agencies undertook to pay bills drawn by the newspaper within 60 days from the date of such bills irrespective of whether or not they have been able to collect the relevant amount from the advertiser.
5. The assessee, thus, in respect of the above two items of expenditure, pointed out that these were incurred for specific service rendered to the newspaper and do not fall within the expression “advertisement, publicity or sales promotion” employed in Section 37(3A) of the Act.
6. The Commissioner considered the above contention of the assessee but found the same to be unacceptable. He was of the view that the action of the Assessing Officer in not disallowing twenty per cent. of the expenditure on commission paid to sales agents and commission paid to advertising agents was prima facie erroneous in so far as it was prejudicial to the interests of the Revenue. Accordingly, the Assessing Officer was directed to recompute the disallowance under Section 37(3A) of the Act.
7. Being aggrieved, the assessee challenged the order of the Commissioner of Income-tax in appeal before the Tribunal. Before the Tribunal, the assessee’s counsel assailed the order of the Commissioner on several grounds. It was submitted that payments made for services rendered did not fall within the mischief of Section 37(3A) of the Act. Counsel reiterated all the submissions advanced before the Commissioner.
8. The Departmental Representative, on the other hand, strongly supported the order of the Commissioner. Further, he submitted that the Assessing Officer failed to look into the details and nature of the expenditure claimed before allowing them. As there was failure to examine the case with reference to the provisions of Section 37(3A), the assessment order was erroneous and prejudicial to the interests of the Revenue. He further submitted that the assessment order being a quasi-judicial order should have been a speaking one. In other words, the Assessing Officer, while accepting the claim of the assessee, did not give any reason as he should have, and, therefore, the assessment was erroneous in so far as it was prejudicial to the interests of the Revenue under Section 263 of the Act and was rightly revised by the Commissioner. The Tribunal, after considering the provisions of Sub-sections (3A) and (3B) of Section 37 as also the speech of the Finance Minister at the time of introduction of the provision and the departmental Circular No. 240, dated May 17, 1978 (see [1979] 117 ITR (St.) 17), held that the provisions of Section 37(3A) were not attracted in the assessee’s case. The Tribunal, accordingly, vacated the order of the Commissioner and allowed the assessee’s appeal.
9. At the hearing before us, the contentions raised before the Tribunal have been reiterated. The provisions of Sub-sections (3A) and (3B) of Section 37 were not there in the Income-tax Act, 1961, at the time of its commencement but the same were first grafted in the Act by the Finance Act, 1978, with effect from April 1, 1979. These provisions were, however, subsequently withdrawn with effect from April 1, 1981.
10. The object of inserting such a provision in the statute was explained by the Central Board of Direct Taxes through its Circular No. 240, dated May 17, 1978 (see [1979] 117 ITR (St.) 17, 22), which is as under :
“In order to place a curb on extravagant and socially wasteful expenditure on advertisement, publicity and sales promotion at the cost of the Exchequer, the Finance Act has inserted new Sub-section (3A) in Section 37 of the Income-tax Act for the disallowance of a part of such expenditure in the computation of taxable profits.”
11. In a slightly changed form, the aforesaid provisions of Sub-sections (3A) and (3B), etc., were re-enacted in the Income tax Act through the Finance Act, 1983, with effect from April 1, 1984. The relevant provisions run as under :
“(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.”
12. The object of rehabilitating the provisions in the Income-tax Act was explained by the Central Board of Direct Taxes through its Circular No. 372, dated December 8, 1983 (see [1984] 146 ITR (St.) 9, 31).
Clause 30 of the said circular runs as under :
“Section 37 of the Income-tax Act provides for deduction in the computation of taxable profits of any expenditure, other than expenditure of the nature described in Sections 30 to 36 and Section 80VV, or expenditure in the nature of capital expenditure or personal expenses of the assessee, laid out or, expended wholly and exclusively for the purposes of the business or profession carried on by the taxpayer. With a view to curbing certain categories of avoidable or ostentatious expenditure by assessees carrying on business or profession, the Finance Act has made certain amendments to Section 37 of the Income-tax Act.”
13. It is, therefore, evident that the provisions of Sub-sections (3A) and (3B) of Section 37 were initially introduced by the Finance Act, 1978, with an object to place a curb on “extravagant and socially wasteful expenditure … at the cost of the exchequer”. The provisions were subsequently withdrawn after two years and reintroduced by the Finance Act, 1983, which also lasted for two years, i.e., assessment years 1984-85 and 1985-86. The object of revival of the provisions was “with a view to curbing certain categories of avoidable or ostentatious expenditure by assessees carrying on business or profession”.
14. We are concerned with the implication of the reintroduced provisions in the instant case. No construction which is manifestly irrational and against the realities should be adopted. One has to look at the nature of the business of the assessee and the nature of the expenditure to ascertain, whether such expenditure relates to sales promotion.
15. The assessee has not confined itself merely to newspaper production. It is also a newspaper publishing concern and has to have a circulation organisation as an integral part of its business. For the circulation, it has to maintain necessarily a distribution system on a wide range. It is common knowledge that the circulation, i.e., effecting sales, is accomplished by a newspaper publisher through its agents. It is the hawkers and the sales agents who form a country-wide network for distribution of the newspapers that sustain its circulation. The advertisement agents are also an indispensible part of the business of newspaper publication. It is through them that the newspaper can sell advertisement space to the intending advertisers. Therefore, these news agents and the advertisement agents effect sales in the ordinary course of the business of newspaper publishing. If we are to say that the remuneration paid as and by way of commission to these agents is not the ordinary selling cost which a trader has to incur even in a perfectly competitive market, we are to go against the fundamentals of the economics of trading. If the contention of the Revenue is accepted, even the cost incurred by the assessee in maintaining its circulation department has to be disallowed. That would be something ridiculous. The commission paid to the agents, in our view, is the basic selling cost of a trade which a newspaper has to incur to reach out to the market.
16. As a matter of fact, the expression “sales promotion” though one of wide amplitude is not defined. It has, therefore, to be understood in its meaning in the setting in which it occurs. “Sales promotion” necessarily involves an element of advertisement and publicity. A manufacturer of a product may intend to further the popularity or sales by publishing and advertising or by several other modes, but the cost incurred to sell the product will not come within the purview of the “sales promotion “.
17. The expression “sales promotion” is preceded by the words “advertisement” and “publicity” in Clause (i) of Sub-section (3B) of Section 37. Here, the legal maxim ejusdem generis is of aid. The maxim serves to restrict the meaning of a general word to things or matters of the same genus as the preceding particular words. In this connection, the following passage from Salmond on Jurisprudence (12th Edition), page 135, is worth quoting :
“This, however, is only the application of a commonsense rule of language ; if a man tells his wife to go out and buy butter, milk, eggs and anything else she needs, he will not normally be understood to include in the term ‘ anything else she needs’ a new hat or an item of furniture.”
18. This lucid illustration explains the said maxim. Thus, where the statute imposes restriction on advertisement, publicity and sales promotion, the expression “sales promotion” cannot include the selling expenses incurred in the ordinary course of the business. It only restricts such expenses as are of like nature as advertisement and publicity. The payment of commission to the newsagents who constitute the distribution net sustaining the circulation of the newspaper is the ordinary selling cost. They can be said to be the very infrastructure of the business of newspaper publication. Such expenses, by no means, can pertain to activities partaking of the nature of sales promotion. The import of the expression “sales promotion” has to be understood as such activities as take their colour from the preceding words advertisement or publicity. The payment of commission can, by no means, be said to be either advertisement or publicity. It is the expenses of a sales network. Without a selling network, the running of the business in newspaper publication is unthinkable. This system is as old as the newspaper business itself. Likewise, the sale of advertisement space is the life-line for a newspaper business. The advertisement tariff is the mainstay of the business. It is a notorious fact of which judicial notice need be taken. In our view, therefore, the expenditure incurred by way of commission to sales agents and advertisement agents are not the expenditure sought to be curtailed by the non obstante provisions of Section 37(3B), there being no ingredient of advertisement or publicity in remunerating the agents.
19. The view we have taken accords with the approach taken by the Board towards the scope of operation of the said provision. According to the Explanatory Notes issued by the Board, the expenditure which is avoidable or ostentatious in nature alone is sought to be curbed under the provisions. In these days of monopolistic competition, advertisements and publicity drives are carried by producing or manufacturing concerns to such an excess as warrants restraint by reason of the socially wasteful nature of such expenses. That is why the Board has explained that the provisions of Sections 37(3A) and 37(3B) have been brought in to eliminate avoidable and ostentatious expenses on advertisement, publicity and other sales drives of like nature.
20. This restriction cannot, therefore, operate to selling cost which is the ordinary and normal incident of the business. The provision cannot be construed as restricting anything and everything connected with sale, such as transportation of goods for sale, collection of sale proceeds and so on. It is difficult to perceive how a newspaper publisher can run his business without the commission agency system. In its absence, the assessee would have been forced to replace the traditional distribution network by its own distribution system covering street distribution and house-to-house distribution. The diseconomies and the managerial complexities of such a self-managed system would have entailed by far higher cost and the proposition would have been commercially uneconomic. That is precisely the reason why no newspaper publisher did ever venture to adopt his own household system of total distribution. A prudent businessman will naturally arrange his affairs in a manner that yields the maximum profits by minimising the cost and also maintains an even flow of the working capital of the trade by instant realisation of the proceeds, the news agents having to take delivery on prepayment. This causes the process of quick return and rotation of the working capital. The assessee, here, has to churn out lakhs and lakhs of news sheets overnight and reach them to as many door-steps and bed-sides by the break of day. The whole distribution system on which the circulation depends would break down without them. Therefore, from no point of view, the commission paid to hawkers and sales agents could be comprehended by the expression sales promotion.
21. The element of ostentation cannot also be imputed to such a system which has provided by tradition an indispensable and vital organ of the business, rather the infrastructure of the business.
22. For the reasons aforesaid, it must be held that the expenditure here for maintaining circulation is the ordinary soiling cost and cannot be said to be of the nature prohibited in Section 37(3A) and (3B). The expenditure of Rs. 1,57,65,878 and Rs. 1,53,88,521 incurred as and by way of commission paid to sales agents and advertisement agents, respectively, do not attract the disallowance under Sub-section (3A) and Sub-section (3B) of Section 37.
23. Accordingly, we answer the question in the affirmative and in favour of the assessee.
24. There will be no order as to costs.
Shyamal Kumar Sen, J.
25. I agree.