Calcutta High Court
Commissioner Of Income-Tax vs G.E.C. Of India Ltd. on 7 November, 1990
Equivalent citations: [1991]192ITR559(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court for the assessment year 1977-78 :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in holding that, in order to be entitled to weighted deduction under Section 35B(1) of the Income-tax Act, 1961, it is not necessary that the assessee must export the goods or be an exporter and, in that view, remitting the matter to the Income-tax Officer for further enquiry ?"
2. Shortly stated, the facts are that Messrs. Project and Equipment Corporation of India Ltd. (hereinafter referred to as "PEC") obtained a contract from a Dubai party for supply of distribution materials in kind of electrical equipment and, on its part, entered into a contract with the assessee-company for supply of these distribution materials to it. Under this contract, PEC was entitled to certain commission. For the assessment year under consideration, the assessee claimed weighted deduction under Section 35B of the Act on the commission of Rs. 6,87,575 paid to PEC. The Income-tax Officer, however, disallowed the deduction because "it is PEC which is making the export but not GEC. So, the commission paid to PEC in this connection will not qualify for deduction under Section 35B". On appeal, the Commissioner of Income-tax (Appeals) allowed the claim of weighted deduction allegedly on the basis of this Tribunal's Special Bench decision in the case of J. H. and Co. v. ITO (1 SCT 150).
3. Being aggrieved, the Department preferred an appeal to the Tribunal. During the hearing of the appeal, the departmental representative contended that the assessee-company was not the exporter but PEC was the exporter and as such the assessee-company is not entitled to weighted deduction. Opposing this contention, the authorised representatives for the assessee contended that, in order to be entitled to weighted deduction, it is not necessary for the assessee to be the actual exporter and submitted that the assessee claimed the deduction under Sub-clause (i) or (ii) of Section 35B(1)(b) of the Act, on the strength of the decision of the Delhi Bench of this Tribunal in the case of Ferro Alloys Corporation Ltd. v. ITO [1983] 6 ITD 521. The Tribunal held therein that it was not necessary that "a person to be entitled to the weighted deduction must export the goods or be an exporter. The only criterion fixed is that the assessee must incur the particular types of expenditure mentioned in Clause (b) of Sub-section (1) of Section 35B in respect of the goods etc., which he deals in". As neither the Income-tax Officer made such enquiry nor the "assessee produced any evidence in support of his claim under Sub-clauses (i) and (ii) thereof during the assessment proceedings," the Tribunal remitted the matter to the Income-tax Officer for such enquiry during which the assessee was to lead evidence to show that the conditions enumerated in Sub-clauses (i) and (ii) of Section 35B(1)(b) of the Act had been fulfilled by it.
4. Before us, the contentions raised before the Tribunal have been reiterated.
5. The short question which calls for determination is whether weighted deduction under Section 35B is available with reference not only to the qualifying expenditure incurred directly by the assessee but also with reference to such expenditure incurred indirectly by him. Section 35B, as it stood at the material time, provided that, where the assessee, being a domestic company who is resident in India, has incurred, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee), the assessee shall, subject to the provisions of Section 35B, be allowed a deduction of a sum equal to one and one half times the amount of the qualifying expenditure in the computation of his business profits. Section 35B, which deals with export markets development allowance, provides that weighted deduction is available even if the expenditure incurred by the assessee is in association with any other person.
6. Our attention has been drawn to a Circular of the Central Board of Direct Taxes being Circular No. 27 dated August 16, 1969. The said circular, inter alia, provides as follows :
"A question has been raised as to the circumstances in which, and the conditions, if any, subject to which, expenditure incurred by an assessee indirectly as stated above, will count for the weighted deduction contemplated under Sections 35B and 35C. This is particularly important in the case of expenditure incurred by export houses for development of export markets on behalf of their constituents, or by associations, such as IJMA, providing agricultural inputs and extension services to jute growers with a view to improving the productivity and quality of jute. While it is not possible to lay down any general rule in this regard which would be applicable in all situations, it may be stated that individual members or constituents of an association or body, which undertakes export markets development or agricultural development on behalf of or for the benefit of its members, will qualify for the weighted deduction under Section 35B or 35C with reference to their share in the expenditure incurred by the association or body, provided :
(a) the expenditure falls under one or more of the several qualifying categories specified in the respective sections and the rules, if any, framed thereunder ;
(b) where the expenditure incurred by the association or body includes any expenditure on activities other than those which fall under the specified heads, such expenditure is isolated ; and
(c) the net amount of expenditure incurred by the association or body under the specified heads (i.e., after excluding the expenditure referred to in (b) above, and after taking credit for any grant or subsidy received by it from the Government or any other source for carrying on the said activities) is apportioned among the members of the association or body on a rational basis and recovered from them."
7. It is, therefore, clear that a person may export goods in association with others. He may do it directly or indirectly. There is nothing in Section 35B to indicate that a person to be entitled to weighted deduction must export the goods himself or he must be an exporter, Section 35B was inserted with a view to help export promotion. The expenditure must be incurred under the specified heads by the assessee to promote sales outside India of any goods, services or facilities dealt in or provided by it in the course of its business. The assessee in this case is the manufacturer of the products and goods which were exported through Project and Equipment Corporation of India Ltd. The Project and Equipment Corporation Limited obtained orders for the export of the products and goods manufactured by the assessee. These goods were sold by the assessee on "High Seas Sales" basis. Thus, the goods remained the absolute property of the assessee-company till they crossed the customs frontiers of India. In other words, the sales took place beyond the territorial jurisdiction of this country. Therefore, in such a case, the real exporter is the assessee-company who, through the Project and Equipment Corporation of India Limited, exported the goods. We are, therefore, of the opinion that if the assessee fulfils the other requirements of the provisions of Section 35B, it will be certainly entitled to claim weighted deduction under Section 35B in respect of the goods and products manufactured and exported by the assessee on which the assessee claimed to have incurred certain expenditure. In our view, therefore, the Tribunal was justified in holding that the weighted deduction cannot be denied to the assessee simply on the ground that the assessee has not exported the goods directly.
8. For the reasons aforesaid, the question in this reference is answered in the affirmative and in favour of the assessee.
9. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
10. I agree.