TaxTMI 
TaxTMI 
1981 (12) TMI 25
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....ia (hereinafter referred to as " the STC "). The assessee is carrying on business in the export of handlooms, handicrafts and antiques and this export business is its only business activity. We are concerned in this reference with the assessment year 1970-71 for which the relevant previous year was the financial year 1969-70. The Tribunal has referred to us four questions of law which read as follows : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that cash assistance of Rs. 11,70,000 rendered by the STC was not a trading receipt in the hands of the assessee and thereby deleting the addition of Rs. 11,70,000 made by the Incometax Officer to the income of the assessee-company for the assessment year 1970-71 ? (2) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 6,64,387 being general administration expenditure in India qualified for weighted deduction under section 35B of the Incometax Act, 1961 ? (3) Whether, on the facts and in the circumstances of the case, the weighted deduction under section 35B of the Income-tax Act, 1961, is allowable in respect of the assessee's claim of Rs. 6....
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....could not be allowed as a deduction in the computation of the taxable profits in the year under consideration. Thus, in all, the AAC gave a relief of Rs. 2,81,723 out of Rs. 5,96,128. He does not discuss the rest of the items while dealing with the objection against the disallowance of Rs. 5,96,128 raised by the assessee in its grounds of appeal. Mr. Bishamber Lal, learned counsel for the assessee, placed before us a comparative statement showing the various items that were included in the claim of Rs. 5,96,128, the various items allowed by the AAC and the balance of the amount that was in dispute before the Tribunal. We have taken this typed statement on record. But it is unnecessary to discuss the details here because we find that the Tribunal has not dealt with the assessee's claim at all in regard to this subject-matter. The assessee in its grounds of appeal had stated that the AAC should have allowed the entire claim of Rs. 5,96,128 and the Tribunal proceeded to dispose of the assessee's appeal under the impression that this entire amount was in dispute before it. However, it proceeded to say as follows : " It was contended that the items comprised in the aforesaid amount h....
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.... the Tribunal in relation to this ground will stand revived and it will be for the Tribunal, when disposing of the appeal conformably to this judgment, to deal with this ground of appeal de novo and in accordance with the law. This disposes of question No. 4 which has been referred to us. It may now be convenient to take up question No. 1 in relation to the sum of Rs. 11,70,000. We do not propose to set out the facts relating to this question at length because a similar question had arisen in connection with the assessments of the same assessee for the assessment years 1965-66 and 1966-67 and the relevant facts have been set out in our judgment dated 14th July, 1981, in I.T.Rs. Nos. 17 & 94/74 (Addl. CIT v. Handicrafts and Handloom Export Corpn. [1982] 133 ITR 590). We shall, therefore, state only a few facts which will be necessary to take up the issue from the point where it was left in our previous judgment. It has been mentioned that the assessee is a cent. per cent. subsidiary of the STC. Its business activity of export is wholly financed by the STC of India. In this export business the assessee suffered losses year after year. In the previous year relevant to the assess....
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....here were two points of difference which placed the sum of Rs. 11,70,000 on a different footing from the amounts which it had received from the STC in the earlier years which had been held to be not taxable. The first was that the amount had been paid in pursuance of an arrangement entered into during the previous year and effective for the financial year 1969-70. The second was that in the earlier years, the STC had given amounts to the assessee to reimburse it in respect of the actual losses incurred by it ; but the payment this year was by way of a percentage of its export earnings and not by way of recoupment of losses. The Tribunal did not accept this contention and hence question No. 1 in the present reference. Before dealing with the objections raised by, the assessee we may mention that even for the assessment year 1970-71, the assessee-company had received a sum of Rs. 2,04,640 from the STC. This was the balance amount which had been received by the assessee towards the reimbursement of its losses in earlier years. As already pointed out, a portion of the losses had been recouped by the amounts given in earlier years and the sum of Rs. 2,04,640 was given with a view to ....
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...., what we have said in our earlier judgment in ITR Nos. 17 and 94/74 (Addl. CIT v. Handicrafts & Handloom Export Corpn. [1982] 133 ITR 590) will equally apply in regard to the assistance received by the, assessee from the STC during the current year. On behalf of the Department reliance was placed on two judgments, one of the Allahabad High Court in the case of Ratna Sugar Mills Co. Ltd. v. CIT [1958] 33 ITR 644 and the other one of the Madras High Court in the case of Meenakshi Achi v. CIT[1963] 50 ITR 206, which has been subsequently confirmed by the Supreme Court in Meenakshi Achi's case [1966] 60 ITR 253. We are, however, in agreement with the Appellate Tribunal that these decisions do not help the Department. Both were cases in which grants-in-aid were received by an assessee from the Government. In the case of Meenakshi Achi v. CIT [1966] 60 ITR 253 (SC), the amounts were paid out of a fund on the basis of the rubber produced by the assessee and against the expenditure incurred by it. In the Allahabad case, the subsidy was paid by the U. P. Government to sugar mills to compensate them for the loss of profits resulting from the Government orders to pay wages at an enhanced ....
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....is permitted to deduct not merely the whole of the expenditure of the nature described in cl. (b) of the section but also an additional 33-1/3% of that expenditure. In fact by a proviso to sub-s. (1)(a) inserted by the Direct Taxes (Amendment) Act, 1974, with effect from April 1, 1973, the deduction under this section in the case of a domestic company in which the public are substantially interested has been raised to 150% in respect of the expenditure incurred after February 28,1973. The idea of weighted deduction is to offer special incentives for the export of goods, services and facilities by domestic companies and other persons who are resident in India. This section was inserted by the Finance Act, 1968, with effect from April 1, 1968. There were subsequent amendments (other than the insertion of the proviso earlier referred to by the Finance Acts of 1970 and 1973, which were made retrospective with effect from April 1, 1968. It is necessary for the purpose of considering the questions referred to us to set out the section (except the proviso to sub-s. (1)(a) referred to above and sub-s. (2), which are not applicable here) in extenso: " 35B. (1)(a) Where an assessee, being....
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....ss of (i) operation of any ship or other vessel, aircraft or vehicle, or (ii) carriage of, or making arrangements for carriage of, passengers, livestock, mail or goods, on or in relation to such operation or carriage or arrangements for carriage (including in each case expenditure incurred on the provision of any benefit, amenity or facility to the crew, passengers or livestock) shall not be regarded as expenditure incurred by the assessee on the supply outside India of services or facilities. " The interpretation of the above section is called for in this case in regard to two amounts of Rs. 6,64,387 (question No. 2) and Rs. 6,05,935 (question No. 3). It will be convenient to take up the third question first. The assessee claimed that it was entitled to weighted deduction under s. 35B in respect of the following expenses : Rs. (a) Customs duty pai....
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.... the assessee could not be said to be expenditure incurred by it on distribution, supply or provision outside India of its goods, services or facilities. We do not agree.. In order to supply its goods in U.S.A. the assessee had to export these goods out of India and had also to incur expenditure in New York by way of duty for importing them into U.S.A. The payment of customs duty was, therefore, an item of expenditure which the assessee incurred in the process of supplying or providing outside India its goods, services and facilities. The Bombay High Court in CIT v. Eldee Wire Ropes Ltd. [1978] 114 ITR 485 was dismissing an application under s. 256(2). In the course of the discussion, it pointed out that " export duty " could, if at all, fall for consideration as expenditure on the supply, etc., of goods outside India. The Tribunal, it would seem, is of the same view on this aspect, for it has disallowed the expenditure not on the ground that it does not fulfil the above description but only because it has not been incurred in India. It is difficult to understand this, for what sub-cl. (iii) excludes from allowance is expenditure incurred in India in connection with the supply, etc....
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.... such goods while in transit " have nothing whatever to do with the earlier part of the clause which we have just referred to. According to counsel, these words are not qualified by the words "not being " which occur earlier in the clause and are intended to describe another type of expenditure-viz., expenditure on carriage and insurance which (wherever incurred) would be allowable under sub-cl. (iii). We find that a Special Bench of the Income-tax Appellate Tribunal has rejected this contention (by its order dated June 17, 1978, in I.T. As. Nos. 3255 and 3330 (Bom.)76-77 placed before us), we think, rightly. The arrangement of the section is quite clear. Expenditure on various kinds of activities which are to be given the benefit of weighted deduction are enumerated in the several sub-clauses of cl. (b). The presence of the "comma " after the word " facilities " in sub-cl. (iii) indicates that the exclusion is in respect of all that follows. The word " expenditure " is repeated in the second part of the saving clause not to mark it from the earlier part but to mark out the distinction that whereas the first part refers to " expenditure incurred in India ", the exclusion by the sec....
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....ucity of material. The result will be that the matter will have to be adjudicated upon by the Tribunal afresh when the matter goes back to it and dispose of the issue after a consideration of the relevant facts and details. (d) The same direction has to be given even in respect of the differences in exchange. Here again it was explained on behalf of the assessee that these expenses were incidental to the supply, distribution, etc., of goods abroad and the maintenance of offices abroad. It is explained that differences in exchange rates arise in two ways (i) the accounts of foreign branches had to be maintained in foreign currency and then converted at the end of the year at the bank rate on 31st March. (ii) Remittances from India to foreign offices for expenses and also remittances from abroad by way of payments for goods were entered in the two sets of accounts in the respective currencies and needed conversion at the end of the year at the prevalent exchange rate. According to the assessee, the differences would constitute expenditure deductible under sub-cls. (iii) or (iv). Here again, the Appellate Tribunal has not considered the relevant facts and in the absence of....
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....ed under this head. So far as item (c) is concerned he agreed that the expenditure might fall under cl. (vi) of cl. (b) but observed that the appellant's representative was unable to tell him what part of expenses of general administration could be attributable to this and in the absence of precise data he attributed Rs. 15,000 (slightly more than 2 1/2% of the total expenses of general administration) as falling under this head. The Appellate Tribunal disposed of the matter very briefly because it agreed to the observations of the AAC that expenditure falling under items (a) and (d) would not qualify for deduction under s. 35B. So far as the expenditure claimed under items (b) and (c) were concerned, the Tribunal was of opinion that the estimate made by the AAC was somewhat low and increased it to Rs. 30,000 as falling under s. 35B, otherwise the assessee's claim was rejected. Mr. Bishamber Lal, learned counsel for the assessee, submitted that the assessee had actually claimed only 25% of the total administration expenses as falling under s. 35B. He pointed out that the total expenditure incurred in India on personnel (i.e., by way of payment of salary and other benefits to sta....
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....on, supply and provision of the assessee's goods, etc., outside India and having been incurred in India excluded under sub cl. (iii). In a like manner, it was suggested on behalf of the assessee that since the only business activity of the assessee is of export, all its expenditure must be allowed the weighted deduction, except only to the extent specifically correlated to the two exceptions outlined in sub-cl. (iii). We think that these contentions represent two extreme stands neither of which can be accepted. The correct interpretation lies in between these two extremes. In our view, one should eschew a purely literal interpretation of the section and adopt a practical and workable interpretation which will on the one hand help to implement the true spirit and objective of the allowance provided for by statute and at the same time ensure that expenditure otherwise than in relation to the specified activities is not given the benefit of this special provision. Adopting this approach, we broadly agree with the AAC and the Appellate Tribunal that the administrative expenditure incurred by the company in India would qualify for weighted deduction to the extent it can be correlated, o....
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.... general category (a) mentioned by the assessee cannot imply an automatic disqualification from allowance of all items falling under that head including the various items of expenditure attributable to the activities above-mentioned. Similarly, the classification under head (d) is very wide and may include expenditure-relatable to activities falling under sub-cls. (v) and (viii) of cl. (b). From this point of view, we are of opinion that a thorough reconsideration of the various heads of the administrative expenditure to see if some correlation exists between the nature of the expense and the various types of activities envisaged in s. 35B(1)(b) is necessary before a logical apportionment of the expenditure which can be attributed to such activities can be made. Such a correlation appears to have been attempted by the assessee in subsequent years and accepted by the Department to some extent. This would indicate that a further analysis is possible than has been attempted by the AAC and the Tribunal. We think it should be done if a fair determination of the expenditure qualifying for deduction under s. 35B is to be made. Again, it appears to us that the AAC and the Tribunal have fal....
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.... extent the administration expenditure is attributable to the supply, distribution or provision of the assessee's goods outside India such administration expenditure cannot be allowed under s. 35B because it represents expenditure incurred in India and falls within the prohibition of sub-cl. (iii). We also agree with the view of the Tribunal that so far as items falling under items (b) and (c) discussed above are concerned, an apportionment should be made of the administration expenses attributable to these items. We are, however, of opinion that the Tribunal's approach, though broadly correct, is for the reasons already discussed, vitiated by a failure to consider the heads under which administration expenditure was claimed and to attempt to correlate an estimated percentage thereof to the activities qualifying under cl. (b). In these circumstances, it appears to us that we have no option but to leave the question referred to us on this issue unanswered. The result will be that when the matter goes back to the Tribunal it will be necessary for the Tribunal to examine the facts and attempt a more detailed classification and analysis of the administration expenditure and to arriv....