1997 (8) TMI 5 - SC - Income Tax

Export commission and overseas promotion expenses u/s35B weighted deduction-claim rejected; remand ordered to verify each expense item.

Weighted deduction under s. 35B(1)(b) for commission and other export-related expenditure was in issue. The SC held that expenditure does not qualify ... Development Allowance - weighted deduction u/s 35B in respect of commission payment - Whether, the Income-tax Appellate Tribunal was correct in law in holding that the assessee was entitled to weighted deduction under section 35B of the Income-tax Act, 1961, in respect of commission payment ? - HELD THAT:- Merely because some activities took place outside India that will not qualify the expenditure for the deductions mentioned in section 35B. If the State Trading Corporation incurs expenditure for an advertisement or publicity outside India, the assessee will not be entitled to any deduction unless the assessee can establish that the advertisement or publicity was being done outside India for and on behalf of the assessee and in respect of goods the assessee deals in or provides in the course of his business. Likewise, if the State Trading Corporation maintains a branch office or agency for the promotion of sale outside India, the assessee cannot claim any deduction on account of maintenance of such branch office or agency but if such branch office or agency is maintained by the assessee himself for the promotion of sale outside India of his goods, services or facilities, then the assessee will be entitled to a deduction under section 35B. We are of the view that the High Court should have called for a reference of this question. However, at this stage, there is no point in sending the case back to the High Court. We treat the reference as having been made to this court and answer the question in the negative and in favour of the Revenue. There will be no order as to costs. The appeal is allowed. Entitlement to weighted deduction under section 35B(1)(b) - There cannot be any blanket allowance of the expenditure nor can there be any blanket disallowance. Every case has to be discussed specifically and the expenditure must be found to be of the nature mentioned in any one of the sub-clauses. If the expenditure does not fall in any of these categories, it cannot be allowed as a deduction. Some of the sub-clauses provide that if the expenditure is incurred in India, it cannot be allowed but in some of the sub-clauses this requirement is not there. In such cases, the expenditure may or may not be incurred in India. Every case will have to be examined in the light of the provisions of the sub-clauses and the facts proved by the assessee. We allow this appeal, set aside the order of the High Court as also the appellate order of the Tribunal. The case is remanded back to the Tribunal. The assessee will have an opportunity to establish his case before the Tribunal to claim deduction. The appeal is disposed of. Issues Involved:1. Entitlement to weighted deduction under section 35B of the Income-tax Act, 1961.2. Onus of proof for claiming deductions.3. Specific nature of expenditures qualifying for deductions under section 35B.4. Examination of claims by the Tribunal and the High Court.5. Remanding cases for re-examination by the Tribunal.Issue-Wise Detailed Analysis:1. Entitlement to Weighted Deduction Under Section 35B:The primary issue across the cases was whether the assessee was entitled to weighted deduction under section 35B of the Income-tax Act, 1961. The court consistently emphasized that for an expenditure to qualify for deduction under section 35B, it must be incurred wholly and exclusively for the purposes set out in sub-clauses (i) to (ix) of clause (b) of section 35B(1). The court clarified that merely because some activities took place outside India, it does not automatically qualify the expenditure for deductions under section 35B. The assessee must establish that the expenditure was incurred for purposes such as advertisement or publicity outside India on behalf of the assessee, or for maintaining a branch office or agency for promoting sales outside India.2. Onus of Proof for Claiming Deductions:The court underscored that the onus lies heavily on the assessee to prove that the expenditure falls within any of the purposes set out in the various sub-clauses of clause (b) of section 35B(1). The assessee must provide sufficient evidence to satisfy the Income-tax Officer that the expenditure was incurred wholly and exclusively for the specified purposes. The court noted that there cannot be any blanket allowance or disallowance of the expenditure; each case must be examined individually based on the specific facts and the provisions of the sub-clauses.3. Specific Nature of Expenditures Qualifying for Deductions:The court examined various types of expenditures claimed by the assessees, such as commission payments, advertisement expenses, registration charges, director's salary, postage, and telegrams. The court ruled that expenditures incurred in India in connection with the sale of goods do not qualify for deduction under section 35B. For instance, payments made to middlemen for sales commission were not considered as obtaining information regarding markets outside India. Similarly, expenditures such as customs duty paid for sending goods to foreign branches were deemed internal transactions and not qualifying for deductions.4. Examination of Claims by the Tribunal and the High Court:The court found that in several cases, the Tribunal and the High Court had not thoroughly examined the claims of the assessees by reference to the specific sub-clauses of section 35B(1)(b). The court emphasized that no expenditure can be allowed under section 35B generally; the assessee must establish that the expenditure falls within the ambit of the specified sub-clauses. The court set aside the orders of the High Court and the Tribunal in multiple cases, remanding them back to the Tribunal for re-examination with proper scrutiny of the facts and applicable law.5. Remanding Cases for Re-examination by the Tribunal:In numerous appeals, the court remanded the cases back to the Tribunal for fresh examination. The court directed the Tribunal to give the assessees an opportunity to prove that their claims for weighted deduction were for activities falling within the sub-clauses of clause (b) of section 35B(1). The court reiterated that the onus is on the assessee to establish the facts to obtain the claimed deductions. The appeals were allowed with the above observations, and no order as to costs was made in most cases.Conclusion:The judgment consistently highlighted the stringent requirements for claiming weighted deductions under section 35B of the Income-tax Act, 1961. The onus of proof rests on the assessee to demonstrate that the expenditure was incurred wholly and exclusively for the specified purposes. The Tribunal and the High Court must thoroughly examine each claim based on the specific facts and the provisions of the sub-clauses of section 35B(1)(b). The court's decision to remand multiple cases back to the Tribunal underscores the necessity for meticulous scrutiny and adherence to legal standards in determining the eligibility for deductions.