1978 (12) TMI 56 - AT - Income Tax

Tribunal rules on assorted expenses, deductions under Section 35B, 80G, and more

The Tribunal ruled in favor of the assessee for entertainment expenses, Madras office expenses, and presentation expenses under Section 35B. The Tribunal ... Export market development allowance - weighted deduction under s. 35B - entertainment expenditure and eligibility for weighted deduction - presentation of articles to foreign buyers as market development expenditure - apportionment of office expenses for export market development - travelling expenses within India and non-eligibility under s. 35B - payments to related/sister concern for export market services - relief under s. 80G to be allowed before setting off carry-forward lossesEntertainment expenditure and eligibility for weighted deduction - weighted deduction under s. 35B - Entertainment expenses incurred in entertaining foreign buyers qualify for weighted deduction under s. 35B. - HELD THAT: - The Tribunal followed earlier decisions of the Bombay Benches which recognised that expenditure on receiving and treating foreign buyers forms part of export market development activities and thus falls within the ambit of s. 35B(1)(b). Since such expenditure is directed to obtaining information regarding markets outside India and promoting export, it is not governed by the residuary provisions of s. 37(1) or the disallowance in s. 37(2A). Applying those principles, the Tribunal held that the entertainment expenditure incurred for foreign customers is entitled to the weighted deduction under s. 35B. [Paras 4]Entertainment expenses of Rs. 5,916 incurred in respect of foreign customers are allowable for weighted deduction under s. 35B.Presentation of articles to foreign buyers as market development expenditure - weighted deduction under s. 35B - Expenditure on presentation of articles to foreign buyers qualifies for weighted deduction under s. 35B. - HELD THAT: - The Tribunal observed that presentation of articles to foreign buyers is undertaken to solicit export business and to obtain information about overseas markets; it thus falls within expenditure incurred for export market development. The AAC's inconsistent approach (allowing under one paragraph and disallowing under another) was resolved in favour of allowance, applying the same reasoning used for entertainment expenses. [Paras 7]Expenditure on presentations to foreign buyers is eligible for weighted deduction under s. 35B.Apportionment of office expenses for export market development - weighted deduction under s. 35B - One-third of the Madras office expenses (rent and staff) is attributable to obtaining information regarding markets outside India and is eligible for weighted deduction under s. 35B. - HELD THAT: - Although the Madras office primarily attended to inspection of shipments and purchase-related functions, the Tribunal accepted that foreign buyers visiting Madras (including quarry inspections) involved market-development activity. Given the mixed functions, the Tribunal directed an apportionment and allowed one-third of the Madras office expenses to be treated as qualifying expenditure under s. 35B. [Paras 5]One-third of the Madras office expenses qualifies for weighted deduction under s. 35B.Travelling expenses within India and non-eligibility under s. 35B - weighted deduction under s. 35B - Travelling expenses of the director incurred within India are not eligible for weighted deduction under s. 35B; the ITO's allowance of one-third is restored. - HELD THAT: - Relying on the Special Bench's view, the Tribunal held that sub-clause (vii) of s. 35B contemplates expenditure on travelling outside India and that travelling within India cannot be treated as qualifying export-market development expenditure under s. 35B. Consequently, the AAC's enhancement (50 per cent) was set aside and the ITO's approach restored. [Paras 6]No weighted deduction under s. 35B for travelling expenses of the director within India; the ITO's order (allowing one-third) is restored in part as to the departmental appeal outcome.Payments to related/sister concern for export market services - weighted deduction under s. 35B - Full amount of payments made to the sister concern (M/s Jay Prestressed Products Ltd., Delhi) for services in connection with export market development is allowable as weighted deduction under s. 35B. - HELD THAT: - The ITO had restricted the weighted deduction to 50% because some services included entertaining foreign buyers; the Tribunal rejected that basis, holding that entertaining foreign buyers is itself an activity qualifying for weighted deduction. The AAC's finding that the Delhi concern's activities were solely for export-market development was accepted and the entire payments were held to be eligible for s. 35B relief. [Paras 8]Entire payments to the sister concern for Delhi office services are entitled to weighted deduction under s. 35B.Relief under s. 80G to be allowed before setting off carry-forward losses - Relief under s. 80G is to be computed and allowed before setting off carry-forward losses from earlier years. - HELD THAT: - Following earlier orders of the Bench and High Court precedents applied in analogous contexts, the Tribunal held that deductions under s. 80G should be allowed against gross income prior to adjustment by carry-forward losses and other set-offs. The AAC's approach in granting s. 80G relief before setting off earlier years' losses was upheld. [Paras 9]Relief under s. 80G shall be allowed before setting off carry-forward losses of earlier years.Final Conclusion: The assessment for asst. yr. 1976-77 is partly modified: entertainment expenditure and presentations to foreign buyers qualify for weighted deduction under s. 35B; one-third of Madras office expenses is allowable under s. 35B; travelling expenses of the director within India are not eligible (the ITO's position stands as to the departmental relief outcome); payments to the Delhi sister concern are fully allowable under s. 35B; and relief under s. 80G is to be allowed before setting off earlier years' losses. Issues Involved:1. Disallowance of export market development allowance under Section 35B for entertainment expenses.2. Eligibility of Madras office expenses for weighted deduction under Section 35B.3. Eligibility of travelling expenses of the director for weighted deduction under Section 35B.4. Eligibility of presentation expenses to foreign buyers for weighted deduction under Section 35B.5. Eligibility of payments made to M/s. Jay Prestressed Products Ltd. for weighted deduction under Section 35B.6. Relief under Section 80G before setting off earlier years' losses.Detailed Analysis:1. Disallowance of Export Market Development Allowance under Section 35B for Entertainment Expenses:The assessee argued that entertainment expenses incurred for foreign buyers should qualify for weighted deduction under Section 35B. The Tribunal referenced the Bombay Bench decision in ITO vs. M/s. B. Bombay, which held that entertainment expenditure for overseas visitors qualifies for weighted deduction under Section 35B, as Sections 37 and 37(2A) do not apply to such expenses. The Tribunal concluded that the entertainment expenses of Rs. 5,916 incurred by foreign customers qualify for weighted deduction under Section 35B.2. Eligibility of Madras Office Expenses for Weighted Deduction under Section 35B:The assessee claimed that the Madras office expenses were not only for the inspection of shipments but also for obtaining information regarding markets outside India. The Tribunal referenced the Bombay Bench decision in M/s L.M.N. Bombay, which allowed 50% of the rent for maintaining an office for obtaining market information outside India. The Tribunal decided that 1/3rd of the Madras office expenses, both for rent and staff, pertained to obtaining information regarding markets outside India and thus qualified for weighted deduction under Section 35B.3. Eligibility of Travelling Expenses of the Director for Weighted Deduction under Section 35B:The ITO allowed weighted deduction for 1/3rd of the director's travelling expenses, while the AAC allowed 50%. The Special Bench of the Tribunal ruled that only expenditure on travelling outside India qualifies under sub-clause (vii) of Section 35B. Consequently, the Tribunal concluded that the assessee was not entitled to any weighted deduction for the director's travelling expenses within India, setting aside the AAC's enhancement and restoring the ITO's order.4. Eligibility of Presentation Expenses to Foreign Buyers for Weighted Deduction under Section 35B:The AAC initially allowed weighted deduction for presentation expenses but later upheld disallowance under Rule 6-B. The Tribunal referenced the Special Bench's decision, which equated presentation expenses with entertainment expenses for foreign buyers. The Tribunal concluded that presentation expenses aimed at soliciting business from foreign customers qualify for weighted deduction under Section 35B, aligning with the AAC's initial view.5. Eligibility of Payments Made to M/s. Jay Prestressed Products Ltd. for Weighted Deduction under Section 35B:The ITO allowed weighted deduction for 50% of the expenses paid to M/s. Jay Prestressed Products Ltd., while the AAC allowed the full amount. The Tribunal held that entertaining foreign buyers is as much entitled to weighted relief as negotiating sales. Since the AAC found that the assessee's Delhi office was solely engaged in export market development, the Tribunal upheld the AAC's decision to allow the entire expenses for weighted deduction under Section 35B.6. Relief under Section 80G Before Setting Off Earlier Years' Losses:The AAC followed a previous Tribunal order in M/s. K.L. Poddar & Sons (P) Ltd., Bangalore, which allowed relief under Section 80E before setting off earlier years' losses. The Tribunal upheld the AAC's decision, noting that the same principle applies to Section 80G. Therefore, the relief under Section 80G should be allowed before setting off earlier years' losses.Conclusion:Both the assessee's and the Department's appeals were partly allowed. The Tribunal ruled in favor of the assessee for entertainment expenses, Madras office expenses, and presentation expenses, while restoring the ITO's order regarding the director's travelling expenses. The Tribunal also upheld the AAC's decision for full weighted deduction on payments to M/s. Jay Prestressed Products Ltd. and relief under Section 80G before setting off earlier years' losses.