The main legal point established in the judgment is that the limit of expenditure on advertisement, publicity, and sales promotion should be proportionately increased when the previous year exceeds 12 months, in accordance with the object and purpose of the law.

S.C. GUPTE, J.

1. By this Reference under Section 256(1) of the Income Tax Act, 1961 (“Act”), the Income Tax Appellate Tribunal (“Tribunal”) has referred the following questions of law for our opinion:

“(a) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the limit of Rs.40,000/- laid down in Section 37(3A) of the Income Tax Act, 1961, could not be proportionately increased because the previous year relevant for the assessment year was seventeen months instead of twelve months?

(b) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the amount of Rs.28,983/- transferred out of Profit & Loss Account to Storage Fund for Molasses and Alcohol account to meet with the statutory requirements of Ethyl Alcohol (Price Control) Amendment Order, 1971, was not an admissible deduction in working out the business income?

(c) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the provisions of Section 40A(8) of the Income Tax Act, 1961 also applied to the accounts of S.K. Somaiya (IND) which were claimed to be current accounts paid in these accounts, the disallowance as laid down in section 40A(B) of the Act was justified?

(d) Whether on the facts and in the circumstances of the case, the Appellant Tribunal was justified in holding that the insurance claim of Rs.4,17,472/- received from the insurance company on account of loss of stocks-in-trade and other goods due to fire was the assessee's business income liable to tax?”

2. This Reference relates to Assessment Year 1980-81.

Re: Question (a):

3. Question (a) relates to disallowance of certain advertisement expenses under Section 37 (3A) of the Act. The short controversy may be stated thus:

(i) Section 37 of the Act generally deals with expenditure laid out or incurred wholly and exclusively for the purpose of business or profession which is allowed as a deduction while computing income chargeable to tax under the head 'profit and gains of business or profession'. Expenses incurred by an assessee on advertisement, publicity and sales promotion would accordingly be allowed as deduction whilst computing income under this Section.

(ii) Section 37 was amended in the previous year relevant to A.Y. 1980-81 inter-alia by introduction of Sub-section (3A) therein, which provided for a limit of expenditure on advertisement etc. beyond which portions of such expenditure, were to be disallowed as provided therein.

Sub-section 3A reads as under:

“Sub-section 3A: Notwithstanding anything contained in sub-section (1), but without prejudice to the provisions of sub-section (2B) or sub-section (3), where the aggregate expenditure incurred by an assessee on advertisement, publicity and sales promotion in India exceeds forty thousand rupees, so much of such aggregate expenditure as is equal to an amount calculated as provided hereunder shall not be allowed as a deduction, namely:

(i)	Where such aggregate expenditure does not exceed 4 per cent of the turnover, or as the case may be, gross receipts of the business or profession	10 per cent of the adjusted expenditure;
(ii)	Where such aggregate expenditure exceeds ¼ per cent but does not exceed ½ per cent of the turnover or, as the case may be, gross receipts of the business or profession	12½ per cent of the adjusted expenditure;
(iii)	Where such aggregate expenditure exceeds ½ per cent of the turnover or, as the case may be, gross receipts of the business or profession	15 per cent of the adjusted expenditure.

(iii) The Assessee is a limited company. For Assessment Year 1980-81, it applied to the Income Tax Officer (“ITO”) for change of its previous year. The ITO allowed the application with the result that the previous