1997 (8) TMI 6 - SC - Income Tax

Weighted deduction under s.35B(1)(b) allowed only for expenses proved wholly and exclusively incurred for specified sub-clauses

SC set aside the HC and Tribunal orders and remanded the matter to the Tribunal, holding that weighted deduction under s.35B(1)(b) is allowable only for ... Interpretation of Section 35B - Weighted deduction - Burden Of Proof - dispute relates to various expenditure including commissions paid to STC, HHEC and ECGC - Whether, on a proper interpretation of section 35B of the Income-tax Act, 1961, the Appellate Tribunal was right in law in allowing the assessee's claim for weighted deduction in respect of 'export sales commission' 'E. C. G. C. charges' and 'foreign dealers visiting expenses' ? HELD THAT:- It appears that the Tribunal was totally unmindful of the various sub-clauses of section 35B(1)(b). Expenses can only be allowed if they are wholly and exclusively incurred for any of the purposes mentioned in these sub-clauses. The section is quite clear and categorical. There is no way that any other expenditure can be given weighted deduction. Under section 35B, it is the assessee's duty to prove facts which will bring the case within any of these sub-clauses. Unless that is done the assessee will not be entitled to get this deduction. The Tribunal has allowed the deduction without verifying or examining the sub-clauses under which this could be allowed. We have passed similar orders in a large number of cases but in this case on behalf of the assessee it has been contended that there is a circular issued by the Central Board of Direct Taxes, New Delhi, which should conclude the matter. A copy of the so-called circular dated April 9, 1981/April 13, 1981, has been handed over in court. It does not appear that the document handed over in court is a copy of the circular at all. It is a letter written to one Shri D'Souza with a reference to a letter written by his predecessor. It is well-settled that circulars can bind the Income-tax Officer but will not bind the appellate authority or the Tribunal or the court or even the assessee. There is nothing in the alleged circular which supports the contention of the assessee. It merely says that each case has to be examined and the issue would be basically a finding of fact. The assessee had not made his claim before the Income-tax Officer by relying on this circular. We set aside the order of the High Court. We also set aside the appellate order of the Tribunal. The Tribunal must examine the question of section 35B(1) with reference to the various sub-clauses of clause (b) of that section. The Tribunal will examine the facts of each claim made by the assessee and find out whether the claim can be allowed having regard to the facts and also the sub-clauses of section 35B(1)(b). Issues Involved:1. Interpretation of Section 35B of the Income-tax Act, 19612. Allowability of weighted deduction under Section 35B for various expenses3. Scope of Section 44 of the Income-tax Act, 1961Issue-wise Detailed Analysis:1. Interpretation of Section 35B of the Income-tax Act, 1961:The primary question addressed was whether the Appellate Tribunal correctly allowed the assessee's claim for weighted deduction under Section 35B for expenses like 'export sales commission,' 'E.C.G.C. charges,' and 'foreign dealers visiting expenses.' The Tribunal's decision was challenged on the grounds that rectification under Section 154 is only permissible when a glaring mistake of fact or law is apparent from the record, not when the question is debatable. The Tribunal was found to be in error in upholding the assessee's claim for weighted deductions without proper examination of the facts and law. The Supreme Court treated the question as referred to it and answered in the negative, in favor of the Revenue, allowing the appeal.2. Allowability of weighted deduction under Section 35B for various expenses:Several appeals dealt with the allowability of weighted deductions under Section 35B for different expenses. The Supreme Court consistently emphasized that deductions under Section 35B are permissible only if the expenditure is laid out wholly and exclusively for the purposes mentioned in clause (b) of Section 35B(1). It was for the assessee to prove that the entire expenditure involved was exclusively for the purposes mentioned in clause (b). The Tribunal was directed to re-examine the facts and apply the law accordingly. Specific cases included:- Civil Appeal Nos. 7666-7667 of 1996: Tribunal's order was set aside, and the matter was remanded for fresh examination of facts and application of law under Section 35B.- S.L.P. (C) No. 10982 of 1997: Tribunal's order was set aside for failing to consider sub-clauses of Section 35B(1)(b). The Tribunal was directed to re-examine the claims.- S.L.P. (C) Nos. 4663-65 of 1989: Tribunal's order was set aside, and the matter was remanded for the assessee to prove the facts supporting the claim under Section 35B.- S.L.P. (C) No. 8620 of 1995: Tribunal was directed to re-examine the claim for weighted deduction under Section 35B.- S.L.P. (C) No. 10949 of 1995: Tribunal's order was set aside, and the matter was remanded for re-examination of the claim under Section 35B.- C.A. Nos. 5620-21 of 1995: Tribunal's order was set aside, and the matter was remanded for examination under Section 35B(1)(b).- C.A. No. 6942 of 1995: Tribunal was directed to re-examine the claim for weighted deduction for payments to HHEC and ECGC.- C.A. No. 3120 of 1995: Tribunal's order was set aside, and the matter was remanded for re-examination of commission payments to STC, HHEC, and ECGC.3. Scope of Section 44 of the Income-tax Act, 1961:In cases involving insurance companies, the Supreme Court clarified the scope of Section 44, which states that profits and gains of any business of insurance must be computed in accordance with the rules contained in the First Schedule, notwithstanding other provisions of the Act. The contention that Section 35B benefits should also apply to insurance companies was rejected. The Court held that Section 44's non obstante clause means that insurance business profits must be computed as per the First Schedule rules, excluding benefits under Section 35B. Specific cases included:- S.L.P. (C) No. 9065 of 1994 and C.A. Nos. 1494-96 of 1988 and 5567 of 1990: The Court upheld the High Court's order, dismissing the appeals and rejecting the application of Section 35B to insurance companies.In conclusion, the Supreme Court's judgment clarified the interpretation and application of Section 35B, emphasizing the need for specific and exclusive expenditure for the purposes mentioned in the section. The Tribunal was directed to re-examine the claims in light of these principles, ensuring proper application of the law and verification of facts. The scope of Section 44 was also clarified, excluding insurance companies from the benefits of Section 35B.