1981 (10) TMI 56 - AT - Income Tax

Assessee denied deduction for salary & travelling expenses under section 35B. Majority view akin to cost of services.

The Tribunal held that the assessee was not entitled to the weighted deduction under section 35B for salary and travelling expenses. The majority view ... Export Market Development Allowance, Appellate Tribunal, Orders Of Issues Involved:1. Entitlement to weighted deduction under section 35B of the Income-tax Act, 1961, for salary and travelling expenses.2. Applicability of earlier Tribunal decisions and High Court rulings.3. Interpretation of section 35B(1)(b)(viii) concerning the supply of services outside India.4. Relevance of the Special Bench decision in J. Hemchand & Co. case.5. Binding nature of CBDT circular dated 4-9-1975.Issue-Wise Detailed Analysis:1. Entitlement to Weighted Deduction under Section 35B:The primary issue was whether the assessee was entitled to a weighted deduction under section 35B for the salary and travelling expenses paid to employees stationed abroad. The Income Tax Officer (ITO) disallowed the claim, but the Commissioner (Appeals) allowed it, leading to the revenue's appeal.2. Applicability of Earlier Tribunal Decisions and High Court Rulings:The Commissioner (Appeals) relied on earlier Tribunal decisions, particularly for the assessment years 1972-73 and 1973-74, where similar claims were allowed. The assessee argued that the Tribunal was bound to follow its previous decisions under identical facts, citing the Madras High Court decision in CIT v. L.G. Ramamurthi and the Bombay High Court decision in H.A. Shah & Co. v. CIT.3. Interpretation of Section 35B(1)(b)(viii):The Tribunal had to interpret whether the expenditure on salaries and travelling expenses fell under section 35B(1)(b)(viii), which pertains to the 'performance of services outside India in connection with or incidental to the execution of any contract for the supply outside India of such services.' The learned judicial member argued that the expenses were for acquiring services (labour), which should not qualify for weighted deduction, as the cost of acquiring goods or services is not covered under section 35B.4. Relevance of the Special Bench Decision in J. Hemchand & Co. Case:The revenue's representative argued that the Special Bench decision in J. Hemchand & Co. laid down specific criteria for granting relief under section 35B, which were not met in this case. The learned judicial member emphasized that this decision should take precedence over earlier Tribunal decisions, as it provided a detailed examination of the conditions under which relief could be granted.5. Binding Nature of CBDT Circular Dated 4-9-1975:The assessee's counsel referred to a CBDT circular dated 4-9-1975, which supposedly supported the claim for weighted deduction. However, the learned judicial member and the President concluded that the circular did not apply to a pure labour supply contract. The circular was intended for contracts involving both material and labour supply, and thus, did not support the assessee's claim.Conclusion:The Tribunal, by majority view, decided that the assessee was not entitled to the weighted deduction under section 35B for the salary and travelling expenses. The President, agreeing with the judicial member, emphasized that the expenses were akin to the cost of goods or services, which are not eligible for weighted deduction, and that the Special Bench decision in J. Hemchand & Co. should be followed. The appeals were thus allowed, setting aside the Commissioner (Appeals)'s order and restoring the ITO's decision.