1. This is an appeal filed by Vazir Sultan Tobacco Co. Ltd. of Hyderabad against the order of the Commissioner (Appeals) for the assessment year 1979-80.
3. The next ground relates to the claim of the assessee under Section 35CC of the Income-tax Act, 1961 on a programme approved by the prescribed authority. The total amount expended was Rs. 4,56,898. Tee ITO disallowed Rs. 99,225 out of the same on the ground that this part of the expenditure was incurred before 21-2-1978, the date with effect from which the approval was granted by the prescribed authority. It is the assessee's case that once the programme is approved, there is no point in disallowing any part of the same as the expenditure for the programme as a whole has to be considered. The authorities, however, have pointed out that the proviso to Sub-section (1) of Section 35CC lays down that the approval should have been obtained before incurring expenditure. The first appellate authority confirmed the disallowance for the same reason. The assessee is, therefore, in second appeal. It is claimed that the provision relating to the date of approval for incurring the expenditure is only directory and not mandatory. Reliance was placed on the rationale of the decision of the Calcutta High Court in the case of CIT v. Birla Bros. (P.) Ltd.  133 ITR 373. The learned counsel for the assessee took us over the facts. It was claimed that the programme was a rural development programme, taken up with effect from 1-10-1977, the beginning of the accounting year at the Instance of the Chief Minister of Andhra Pradesh and Secretary to the Government for Rural Development. The work was taken up in the village Nadlapur situated in Telengana region which required special development programmes being a backward region. The assessee had no reason to believe that such a programme sponsored at the instance of the State Government would not qualify for the deduction under the scheme under Section 35CC. In fact, its anticipation was also proved to be correct. The assessee's initiative had been approved and appreciated from a letter dated 7-1-1977 issued by the Chief Minister of Andhra Pradesh. It was claimed that what was required was the approval of the programme. Substantial part of the expenditure was made after the approval. It does not mean, according to the learned counsel, that the initial outlay should be disregarded. He claimed that the learned first appellate authority misled himself into thinking that the expenditure was subject to approval and not the programme. No doubt, the assessee ran the risk of disallowance if the programme ultimately is turned down but that is no reason why there should be a disallowance when the programme is approved. He also claimed that there was no rhyme in fixing 21-2-1978 as the date with which the approval was considered effective while the assessee has made an application on 12-12-1977. The assessee also pointed out that the expenditure between 1-12-1977 and 12-12-1977 was only Rs. 18,833 and he alternatively claimed that at best this amount could have been disallowed and nothing more. As for the other objection that the audit certificate covered the expenditure only the amount allowed by the ITO, he claimed that what was required was only an audit certificate. At any rate, he claimed that if the ITO wanted an amended audit certificate, the assessee should have been given an opportunity to furnish the same. The learned departmental representative, on the other hand, relied upon the orders of the authorities below. He stressed the words in the proviso that the assessee should have obtained the approval 'before incurring the expenditure'. The expenditure incurred after the date of approval alone, in his opinion, would qualify for weighted deduction.
4. We have carefully considered the records as well as the arguments.
The relevant portion of Section 35CC reads as under: (1) Where the assessee, being a company or a co-operative society, incurs any expenditure on any programme of rural development, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of the amount of such expenditure incurred during the previous year: Provided that the approval of the prescribed authority has been obtained by the assessee in respect of such programme before incurring the expenditure: (3) No deduction shall be allowed in respect of the expenditure referred to in Sub-section (1) unless the assessee furnishes, along with the return of income for the assessment year for which the deduction is claimed, a statement of such expenditure in the prescribed form duly signed and verified by an accountant as defined in the Explanation below Sub-section 2 of Section 288 and setting forth such particulars as may be prescribed.
The assessee applied for the approval on 12-12-1977. It had incurred an expenditure to the extent of Rs. 18,833 till this date, while the total expenditure up to 21-2-1978 was Rs. 99,225. The entire expenniture during the accounting year for which the claim is made is Rs. 4,56,898, while the amount allowed by the ITO is Rs. 3,57,673. The programme as planned by the assessee is approved by the Ministry of Finance as prescribed authority vide its letter dated 10-3-1978. The clause in the letter relied upon by the authorities for restricting the assessee's claim reads as under: (2) The approval of the prescribed authority is subject to the following conditions: (b) The programme has been approved for the period beginning 21st February, 1978 up to the end of the previous year commencing after the 21st February, 1978." The assessee's accounting year is from 1-10-1977 to 30-9-1978. The first appellate authority sought to distinguish the Calcutta High Court decision in the case of Birla Bros. P. Ltd. (supra) on the ground that the decision in that case was rendered in the context of relief under Section 80-O of the Act where the relief was with reference to the income during the year while the relief under Section 35CC is with reference to the expenditure incurred after a particular date. We do not find any justification for this distinction. The main part of Sub-section (1) of Section 35CC reads: ... be allowed a deduction of the amount of such expenditure incurred during the previous year" Instruction in Circular No. 229 [F. No. 131/9/77-TPL], dated 9-8-1977--See Taxrnann's Direct Taxes Circulars Vol. 1, 1980 edn., p.
189--by rthe Finance (No. 2) Act, 1977, which introduced the relief, explains the scope of this relief in para 14(1) of such instructions: 14.1 The Finance (No. 2) Act, 1977 has introduced a new Section 35CC under which companies and co-operative societies will be entitled to a deduction in the computation of their taxable profits of the expenditure incurred by them during the previous year on any programme of rural development [vide Sub-section (1) of new Section 35CCJ. The deduction will be allowed only where the company or co-operative society has obtained the prior approval of the prescribed authority in respect of the programme of rural development before incurring such expenditure ...
Guidelines for approval of the programme under Section 35CC issued by Circular No. 231 [F. No. 203/201/77-IT (A-II)], dated 14-11-1977--See Taxmann's Direct Taxes Circulars Vol. 1, 1980 edn. p. 192--also refer to the 'expenditure incurred by them during the previous year on any programme of rural development'. Annexure III to the said Circular gives the important points to be kept in view in formulating programmes of rural development, item 4 of which reads as under: Ordinarily the programme will be approved for an initial period of one accounting year. In case the programme extends beyond one accounting year. it may be informally approved for the successive years but a formal approval order will, however, be passed for each year separately if the prescribed authority is satisfied that the programme has been implemented properly. For this purpose, the prescribed authority may monitor the implementation of the programme." Hence, the approval that is contemplated is approval of a programme in the accounting year and not the expenditure incurred from any particular day in the accounting year. At the same time, we cannot ignore the argument on behalf of the authorities that the assessee should have obtained the approval 'before incurring the expenditure'.
Having noticed that the expenditure incurred for a programme in the whole year has to be treated as allowable or to be disallowed on the basis of the approval or disapproval, we consider that since the substantial part of the expenditure had been incurred after the approval date, the authorities took too narrow view in splitting up the expenditure. We further find that the approval letter sets the date from 21-2-1978. We do not understand how this date was fixed. Probably it is the date on which the prescribed authority decided to approve this programme though such a decision was communicated in the letter dated 10-3-1978. Since the statute does not contemplate the approval with effect from any particular date, we have to assume that the prescribed authority is entrusted only with the power either of approval or disapproval of the programme. Neither the statute nor the guidelines enable the fixation of a particular date from which the approval has to be reckoned. We should imagine that once the programme has been approved, such approval is available for the accounting year.
If the assessee had expended any amount prior to such approval and such approval is not forthcoming, the amount has to be disallowed. But there is no reason why a small part of the total expenditure, admittedly on the programme, should be disallowed though it falls within the scope of Section 35CC(1). The assessee's alternative argument is that there is at least no case for disallowance of the expenditure after 12-12-1977, the date of the application. Even if a strict interpretation is given to Section 35CC(1) proviso, we find it difficult to accept that the rationale of the decision of the Calcutta High Court in Birla Bros.
(P.) Ltd. case (supra) does not help the assessee at least as regards expenditure incurred after 12-12-1977. Ordinarily when a programme is approved, it stands to reason that such approval has the effect of authorising the expenditure from the date of the application. The assessee, no doubt, takes the risk of non-approval where it spends moneys on such programmes merely on application. But that does not mean that the expenditure incurred between the date of application and the date fixed in the order of approval ceases to be expenditure on the programme. If the approval under Section 80-O was considered directly by the Calcutta High Court, we do not see any reason why a similar approval under Section 35CC should be given a different interpretation.
The Calcutta High Court found that in case of directory requirements of the statute, 'it is sufficient if such directory enactment is obeyed or fulfilled sufficiently' following Maxwell, Craiece and certain English decisions and earlier decisions in other cases. There is no doubt that in the assessee's case there has been substantial compliance on the part of the assessee as most part of the expenditure was incurred after 21-2-1978, a date fixed by the letter of approval. As pointed out by us, we do not find any authority for prescribing a particular date in the statute. In fact, the statute, the instructions and the guidelines clearly expect that the approval is for the expenditure incurred in a particular accounting year. If it were so, there is no reason why any part of the expenditure incurred during the year on a programme which has met with the approval of the Government should be disallowed.
However, the assessee has to pass a further hurdle inasmuch as the accountancy certificate does not cover the entire expenditure. In our opinion, this point is well taken but the assessee should have been given an opportunity to amend its certificate. The assessee's accountant took the safer course of certifying that expenditure after the date of approval. If a revised certificate in the prescribed pro-forma satisfying the requirements of the balance of expenditure prior to 21-2-1978 is furnished, there is no reason why such certified expenditure should not be allowed. The ITO should have given an opportunity to the assessee in this regard. We, therefore, remit the claim back to the ITO to give the assessee an opportunity to furnish a certificate in respect of the balance of expenditure admissible out of the further claim of the assessee of Rs. 99,225. We, therefore, find that the expenditure to the extent to be certified out of the further claim of Rs. 99,225 is admissible because as held by the Calcutta High Court and other Courts consistently: 'it is well settled that fiscal laws should be strictly construed but it is also fundamental that all provisions should be so construed as to fulfil the purpose of the provisions'. The Court further observed that it is necessary that the real intention of the Legislature should be carefully construed and the whole scope of the relief considered before considering whether a particular provision is mandatory or directory. We have found that the statute required an approval of the programme and such approval is forthcoming. We have further found that a substantial part of the expenditure was incurred after obtaining the approval as provided under the Act. We therefore, find that in such circumstances, the entire expenditure on the programme during the year has to be allowed subject to a proper audit certificate to be funsished before the ITO. We consider it expedient to further record that even if we were to agree with the authorities that the proviso has to be construed very strictly, we would have still found it difficult to disallow any part of the expenditure incurred between 12-12-1977 and 21-2-1978. We do not think that a mere delay on the part of the Government machinery should defeat the intent and purpose of the relief specifically granted by the Parliament to ensure rural development. Both the spirit and letter of the law would expect that once an application is accepted, such acceptance should date back to the date of application unless, of course, the statute itself prescribed a time limit for disposal of such application and the statute provides specifically that the date of approval or any other date fixed by the order of approval should be reckoned as the date from which the relief is to be granted. Hence, in any event, only an amount of Rs. 18,833 incurred prior to such application would, on the facts and in the circumstances of the case be disqualified even if a very strict interpretation were to be put on the proviso as urged by the learned departmental representative. We hasten to add that we are merely disposing of the alternative ground urged on behalf of the asscssee but we hold that the expenditure on the programme incurred during the accounting year will have to be allowed only subject to the extent certified by the accountant as required by Sub-section (3) of Section 35CC. In the result, the appeal on this ground is treated as allowed.
5. In the result, the appeal is partly allowed in the manner indicated in the preceding paragraph.