TaxTMI 
TaxTMI 
2003 (2) TMI 37
X X X X Extracts X X X X
X X X X Extracts X X X X
....iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the excess price of sugar collected over and above the control price fixed by the Government for the assessment year 1978-79, was not taxable as income of the assessee for said assessment year ? Facts: The assessee is a public limited company engaged in the business of manufacture of industrial machinery required for manufacture of sugar. The assessee claimed weighted deduction under section 35B on three items, viz., guarantee commission paid to the Export Credit Guarantee Corporation amounting to Rs. 5,91,015; Rs. 8,37,862 paid as commission to Tata Exports for monitoring and doing liaisoning work outside India; and the assessee has claimed weighted deduction on account of proportionate administrative expense. These three items concerning weighted deduction under section 35B are covered by question No. 1 quoted above. The weighted deduction on the above three items was disallowed. The assessee went in appeal to the first appellate authority, where the claim of the assessee stood allowed. This decision was affirmed by the Tribunal. Therefore, the Department has come by w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e writ petition and subject to the assessee furnishing bank guarantee. The Assessing Officer taxed this excess sale price. In appeal the first appellate authority allowed the assessee to raise an additional ground and in the final hearing the first appellate authority came to the conclusion that the excess sale price collected by the assessee over and above the levy price fixed by the Government, cannot be subjected to tax since the assessee did not get an unconditional and undisputed right to receive and appropriate the said excess. This order was confirmed by the Tribunal. Hence, this reference. Scope of section 35B: Before coming to the findings, we would like to refer to section 35B of the Income-tax Act as it stood at the relevant time. The said section concerns export markets development allowance. Under section 35B(1)(a) it is, inter alia, provided that where an assessee has incurred any expenditure referred to in clause (b), not being in the nature of capital expenditure/personal expenses, such assessee shall be allowed a weighted deduction. Therefore, in this case, we are required to examine clause (b) of section 35B(1). Clause (b) contains items (i) to (ix). We are conc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ture outside India. This second requirement is not there in items (i) and (ii) of clause (b). It is for this reason that in every matter, one has to examine the activity in the context of each of the items in clause (b). This is precisely what has been held in the case of CIT v. Stepwell Industries Limited [1997] 228 ITR 171. In the said judgment, the Supreme Court has examined all the items (i) to (ix) of clause (b) and after examining those items, it has held that some of the sub-clauses provide that the expenditure incurred in India shall not be allowed, whereas some of the sub-clauses do not insist on such requirement and, therefore, each of the sub-clauses should be applied after examining the nature of expenditure and the activity carried out by the assessee depending on the facts of each case. In our case, item (iii) of clause (b) is not applicable. What is applicable is items (i) and (ii) because Tata Exports did the work of liaisoning and monitoring the turnkey project outside India. This is the finding given by the Tribunal. Out of the above three sub-clauses, it is only item (iii) of clause (b) which insists on the aforestated dual requirement of activity being outside I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cannot be allowed as deduction. At this stage, it may be pointed out that Mr. R.V. Desai, learned senior counsel for the Department, argued before us that all the sub-clauses pertain to activities outside India and further that even the expenditure should be incurred outside India. He contended that both the tests must be fulfilled. He contended that in the present matter, Tata Exports was in India and payment was made by the assessee to Tata Exports by way of commission in India. He submitted that Tata Exports was only a middleman and, therefore, the commission paid to Tata Exports did not come within the ambit of any of the above sub-clauses. In this connection, he also placed reliance on the judgment of the Supreme Court in Stepwell Industries' case [1997] 228 ITR 171, in which it has been held that payment of commission to the middleman will not fall under section 35B(1)(b)(ii). In this connection, he also relied upon section 35B(1)(b)(iii) which states that expenditure which qualifies for deduction in connection with distribution, supply or provision outside India of such goods, services or facilities. In view of section 35B(1)(b)(iii) it was argued that not only should the ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that as far as sub-clauses (i) and (ii) are concerned, there is no requirement for the expenditure to have been incurred outside India. Lastly, it may be pointed out that the word "middleman" is of a very wide import. In the case of Stepwell Industries Limited [1997] 228 ITR 171 (SC), the assessee was approached by the middleman in India. The middleman approached the assessee in India for purchase of goods on behalf of the foreign buyer. Therefore, the judgment of the Supreme Court, on the facts, in Stepwell Industries Limited's case [1997] 228 ITR 171 will not apply. We may also mention that in this case, Tata Exports had monitored the work outside India; that they did the work of liaisoning. Therefore, on the facts, the judgment in Stepwell Industries Limited's case [1997] 228 ITR 171 (SC) will not apply. Accordingly, this sub-question is answered in favour of the assessee and against the Department. Now coming to the next sub-question of question No. 1, it may be pointed out that the assessee claimed administrative expenses based on proportionate export sales. Out of the total sales, the percentage of export sales in each case was worked out and the percentage was calculated o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Department that entertainment expenditure can never come under section 35B of the Act and, therefore, the Tribunal erred in deleting the addition under section 37(2A) of the Act. We would have examined this question raised by the Department if the Department had carried the matter in appeal to the Commissioner of Income-tax (Appeals). However, the Department did not prefer the appeal to the Commissioner of Income-tax (Appeals). Further, no such question has been referred to us. In the circumstances, we cannot now permit the Department to raise a new ground for the first time before us on the scope of section 35B vis-a-vis entertainment expenditure. However, it is clear that section 37(2A) can only apply if section 37(1) is applicable. In the circumstances, question No. 2 is answered in the affirmative, i.e., in favour of the assessee and against the department. (c) On question No. 3: Now, coming to question No. 3, we may point out that the assessee had filed a writ petition in the Bombay High Court challenging the decision of the Government fixing the levy price of sugar on the ground that the levy price was fixed arbitrarily and that it has been understated. Pending the hearing ....