1982 (3) TMI 10 - HC - Income Tax

Court denies relief under Section 35B but allows deduction under Section 37 for devaluation impact.

The court ruled against the assessee, denying relief under Section 35B of the Income-tax Act, 1961, due to the comprehensive provisions of Section 44 for ... Business Expenditure, Deduction, Insurance Business Issues Involved:1. Entitlement to relief under Section 35B of the Income-tax Act, 1961.2. Allowability of deduction for payment made to the provident fund due to devaluation of the Indian rupee under Section 37 of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Entitlement to Relief under Section 35B of the Income-tax Act, 1961The primary question was whether the assessee was entitled to the relief under Section 35B for the assessment years 1969-70, 1970-71, and 1971-72. The assessee claimed deductions under Section 35B, which provides an 'Export Markets Development Allowance' for domestic companies and residents who incur expenditure to promote sales outside India. The Income Tax Officer (ITO) disallowed the claim, and the Appellate Assistant Commissioner (AAC) upheld this decision. The Income-tax Appellate Tribunal also ruled against the assessee.The Revenue contended that the assessee was not entitled to the weighted deduction under Section 35B due to Section 44 of the Act, which deals with the computation of profits and gains of insurance companies. Section 44 states that the profits and gains of any business of insurance shall be computed in accordance with the rules contained in the First Schedule, overriding sections 28 to 43A of the Act.The court noted that Section 35B was introduced by the Finance Act, 1968, after the enactment of Section 44. The court rejected the argument that Section 35B should be specifically included in Section 44, stating that it was unnecessary because Section 35B falls between sections 28 to 43A. The court concluded that Section 44, along with Rule 5 of the First Schedule, provides a complete code for computing profits and gains of insurance businesses, and there is no provision for an additional allowance under Section 35B.Thus, the court held that the assessee was not entitled to claim any further allowance under the head 'weighted deduction' over and above the expenditure incurred in maintaining foreign branches, which was already accounted for in the profit and loss account. The first question was answered in the affirmative and against the assessee.Issue 2: Allowability of Deduction for Payment Made to Provident Fund Due to DevaluationThe second issue was whether the payment of Rs. 26,955 made by the assessee to the provident fund of its employees due to the devaluation of the Indian rupee was an allowable deduction under Section 37. The assessee claimed this deduction as a 'devaluation loss' for the assessment year 1969-70. The ITO disallowed the claim, and the AAC confirmed the disallowance. However, the Tribunal held that the expenditure was incurred wholly for the purpose of the business and should be allowed as a deduction under Section 37.The court referred to established principles that any payment made by an assessee in the character of a trader, even if voluntary, could be considered as having been made wholly for the purposes of the trade if it was dictated by commercial expediency. The court cited several precedents, including Atherton v. British Insulated and Helsby Cables Ltd. and CIT v. Ashok Leyland Ltd., to support this view.The court found that the payment was made to maintain cordial relationships with employees and as a matter of commercial expediency. The Tribunal's finding that the expenditure was dictated by commercial expediency was accepted. Therefore, the court held that the expenditure was a revenue expenditure and allowable as a deduction under Section 37. The second question was answered in the affirmative and against the Revenue.Conclusion:The court delivered mixed results: the first question was answered against the assessee, denying the relief under Section 35B, while the second question was answered in favor of the assessee, allowing the deduction under Section 37. Consequently, there was no order as to costs.