Punjab-Haryana High Court
Commissioner Of Income-Tax vs Hansa Agency (P.) Ltd. on 7 July, 1997
Equivalent citations: [1998]230ITR272(P&H)
Author: Ashok Bhan
Bench: Ashok Bhan
JUDGMENT N.K. Agrawal, J.
1. By a common statement of the case, the following two questions of law have been referred by the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar (for short "the Tribunal"), in two reference applications to this court for opinion :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing weighted deduction under Section 35B to the assessee on a part of the salary and other establishment expenses ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing weighted deduction to the assessee on the expenditure incurred on receiving and treating the foreign buyers in India ?"
2. The assessee derived income from export of handicrafts, brassware, readymade garments, etc. During the course of the assessment for the assessment year 1976-77, the Assessing Officer allowed weighted deduction under Section 35B of the Income-tax Act, 1961 (for short "the Act"), on the expenditure amounting to Rs. 1,64,577 only. The assessee had, however, claimed such deduction on a total expenditure, under different heads, of Rs. 12,04,147. The assessee, therefore, went in appeal and the Commissioner of Income-tax (Appeals) examined each item of expenditure on which weighted deduction had been claimed by the assessee and thereafter allowed expenditure amounting to Rs. 3,41,740, holding that such expenditure qualified for deduction under Section 35B of the Act. While doing so, the Commissioner also took the view that certain other expenditure qualified for deduction to the extent of 50 per cent. of the total amount spent. Under the head "Establishment expenses", weighted deduction was allowed by the Commissioner at 60 per cent. of the total amount of Rs. 4,46,010. Under the head "Export promotion expenses", deduction of the entire expenditure amounting to Rs. 4,839 was allowed.
3. Both the assessee and the Revenue carried appeals before the Tribunal. The assessee wanted full deduction of the expenditure under the head "Establishment expenses" amounting to Rs. 4,46,010 whereas the Revenue felt aggrieved by the full deduction allowed by the Commissioner in respect of export promotion expenses amounting to Rs. 4,839. The Tribunal raised deduction from 60 per cent. to 65 per cent. with regard to "Establishment expenses" and upheld the full deduction allowed for export promotion expenses at Rs. 4,839.
Question No. 1 :
4. Section 35B permits export markets development allowance in the form of and called in tax parlance as a weighted deduction. The basic object for the grant of a weighted deduction in respect of expenditure on the development of export markets was primarily to provide an incentive for promotion of exports. The benefit of weighted deduction was, however, limited to certain specified categories of expenditure only. Any expenditure, other than capital expenditure or personal expenses of the assessee, specified in Clause (b) of Sub-section (1) of Section 35B of the Act and incurred wholly and exclusively on export promotion is to be allowed as deduction. Having regard to the object of this provision, it is necessary to give a liberal interpretation, so that the purpose behind it could be properly achieved. Expenditure is, therefore, to be first localised with reference to the sub-clauses of Clause (b) of Sub-section (1) of Section 35B of the Act and then it has to be determined whether the expenditure had been fully and exclusively incurred for any of the purposes listed therein. Each sub-clause is to be read independently. The condition specified in each sub-clause, whereunder deduction is claimed, has to be satisfied. A direct nexus between the expenditure and promotion of exports is necessary.
5. Clause (b) of Sub-section (1) of Section 35B of the Act specifies the conditions in each sub-clause as under :
"35B. Export markets development allowance.--. . .
(b) The expenditure referred to in Clause (a) is that incurred wholly and exclusively on--
(i) advertisement or publicity outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business ;
(ii) obtaining information regarding markets outside India for such goods, services or facilities ;
(iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit.
(iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities ;
(v) preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto ;
(vi) furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities ;
(vii) travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from, and return to, India ;
(viii) performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities ; and
(ix) such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed."
6. Sub-clause (ix) is in the nature of a residuary sub-clause, permitting deduction of expenditure on other activities related to the promotion of sale of goods outside India. Salary, etc., paid by the assessee-company to its directors and other employees have been claimed by the assessee to be primarily connected with the activities for the promotion of the export business.
7. The assessee had incurred expenditure amounting to Rs. 4,46,010 on payment of salary, bonus, provident fund and gratuity to the directors and other employees. It was pleaded by the assessee before the Revenue authorities that the directors and the employees looked after the export business of the assessee-company, though the company was also engaged in some local business. Total sales during the year under reference amounted to Rs. 92,61,902. The exports accounted for Rs. 72,58,000. If the expenditure on payment of salary, bonus, etc., was incurred for the purposes of business in export and for the promotion and development thereof, it would then qualify for weighted deduction.
8. A question about the eligibility of expenditure incurred on salary to the staff came to be examined by the Kerala High Court in CIT v. Bakul Cashew Co. [1992] 197 ITR 135. In that case, the assessee had claimed salary and allowances to the staff engaged in export sales in the sum of Rs. 43,000. Weighted deduction under Section 35B of the Act in respect of the said amount was denied by the Income-tax Officer. In appeal, the Commissioner of Income-tax (Appeals) held that the assessee was entitled to deduction of 75 per cent. of the salary paid to the clerical staff. In further appeal before the Tribunal by the Revenue, the Tribunal held that there was no reason to interfere with the order passed by the Commissioner. The High Court agreed with the deductibility of the expenditure, though on the question of proportionate allowance, the matter was referred back to the Tribunal for reconsideration.
9. A similar question was again examined by the same High Court in CIT v. Aspinwall and Co. Ltd. [1993] 204 ITR 225 (Ker). There also, the assessee had claimed weighted deduction of Rs. 58,408 in respect of salary, bonus, overtime, etc., paid to the employees. The Income-tax Officer disallowed the claim. The Tribunal, however, held that weighted deduction is allowable, though not in its entirety, in terms of the decision of the Special Bench of the Tribunal in ITA No. 3255 of 1976-77 in the case of J. Hemchand and Co. v. Second ITO, B-11 Ward, Bombay. The claim was thus restricted to Rs. 36,488. The High Court found no error in the finding of the Tribunal, allowing Rs. 36,488 as weighted deduction under Section 35B of the Act.
10. The Calcutta High Court had also an occasion to examine a question of weighted deduction in respect of the head office expenses pertaining to export in Jayshree Tea and Industries Ltd. v. CIT [1993] 202 ITR 695. The assessee had incurred an expenditure of Rs. 1,79,760 being the head office expenses. The assessee had claimed weighted deduction in respect of that expenditure on the ground that it pertained to exports. The Income-tax Officer negatived that claim of the assessee by observing that the head office expenses were incurred in India and as such nothing can be allowed. In appeal, the Commissioner of Income-tax (Appeals) accepted the assessee's plea and directed the Income-tax Officer to allow weighted deduction to the assessee in respect of an amount of Rs. 71,210 out of the said claim of Rs. 1,79,760. The Tribunal upheld the deduction of the proportionate expenditure, as allowed by the Commissioner. The High Court noticed that the Commissioner as well as the Tribunal had allowed proportionate head office expenses pertaining to export. It was seen that the Special Bench of the Bombay Tribunal had fixed a formula for allowing such expenditure. Since the Commissioner (Appeals) as well as the Tribunal had followed the formula evolved by the Special Bench and the reasonableness of that formula had not been questioned, the High Court found no ground to interfere. It was further seen that the Department had issued a circular, accepting the Special Bench's formula and allowing proportionate deduction of expenditure. The circular dated December 28, 1981, intended to accept the said decision of the Special Bench in so far as the question of allowability of the weighted deduction under Section 35B of the Act was concerned. The Board had, however, not accepted the apportionment of the claim at 75 per cent.
11. The Gujarat High Court in Testeels Ltd. v. CIT [1994] 205 ITR 230 has also upheld the deductibility of the salary to the employee in-charge of the export department to the extent of 50 per cent. It was found that an employee, Mr. T.S.K. Chari, had been paid salary amounting to Rs. 50,000. The assessee claimed weighted deduction in respect of the entire salary. The Income-tax Officer allowed the assessee's claim only to the extent of 20 per cent. of the salary. In appeal, the Commissioner directed the Income-tax Officer to allow weighted deduction in respect of half of the salary. The Tribunal confirmed the view taken by the Commissioner. The High Court noticed that Mr. Chari was looking after business other than export also. Proportionate expenditure was, therefore, held to be appropriate for the purposes of deduction under Section 35B of the Act.
12. This court has in CIT v. Indo Asian Switch-Gears (P.) Ltd. [1996] 222 ITR 772, taken a similar view in regard to the miscellaneous expenses (establishment expenses and salary). It was held that the proportionate expenditure allowed as weighted deduction had to be upheld keeping in view the percentage of export business of the assessee.
13. Keeping in view the above discussion, it is manifest that weighted deduction has to be allowed on expenditure incurred on salary, bonus, etc., to the employees engaged in the export business of the assessee. The question of proportionate deduction arises where the assessee carried on some other business or activity also. As has been seen, the assessee had made exports of goods worth Rs. 72,58,000 against the total sales amounting to Rs. 92,61,902. In such a situation, deduction of 65 per cent. of the total expenditure appears to be appropriate.
14. Question No, 1 is, therefore, answered in the affirmative in favour of the assessee and against the Revenue.
Question No. 2 :
15. A total amount of Rs. 4,839 was incurred by the assessee while receiving and treating foreign buyers. This expenditure has been shown under the head "Export promotion expenses". The Assessing Officer had disallowed deduction to the extent of Rs. 2,000, treating it to be an expenditure in the nature of entertainment and inadmissible expenses. The Commissioner did not find any justification in the disallowance and, therefore, permitted weighted deduction for the whole amount of Rs. 4,839 under Section 35B of the Act.
16. A question regarding "expenditure incurred by an assessee, holding a conference in India for promotion of export, was examined by the Calcutta High Court in CIT v. Bata India Ltd. [1989] 178 ITR 669. It was noticed that expenditure had been incurred for personnel from foreign countries in connection with a conference in India for promotion of exports. The Income-tax Officer disallowed the claim on the ground that the conference was in the nature of a routine programme and was not held for the promotion of exports. The Appellate Assistant Commissioner affirmed the order. On further appeal, the Tribunal remanded the matter to the Appellate Assistant Commissioner for deciding whether the expenses claimed by the assessee were incurred for the purpose of export promotion. The High Court took the view that the expenditure related to the other activities for promotion of sale outside India under Sub-clause (ix) of Section 35B(1)(b) of the Act.
17. The Karnataka High Court in Chief CIT v. H. M. T (International) Ltd. [1993] 203 ITR 573 has also examined a similar question relating to the expenditure incurred in India on foreign delegates. The assessee had claimed weighted deduction under Section 35B of the Act in respect of the expenditure incurred towards the complimentaries to foreign delegates, and similarly other expenses on the said foreign delegates as export promotion activities. The High Court noticed that the delegates from foreign countries had been received and entertained, so that the assessee could obtain proper information regarding the markets outside India for the goods marketed by the assessee. It was, therefore, held that there was a direct nexus between the expenditure incurred and the promotion of exports and, therefore, the assessee will be entitled to weighted deduction under Section 35B of the Act.
18. In the case in hand, it is clear that the main business of the assessee was that of export of different items. The assessee had incurred expenditure on foreign buyers. Such an expenditure was aimed at encouraging promoting and developing the export market. An expenditure for the purposes of Section 35B of the Act is that expenditure which is incurred for sales promotion or development. In these circumstances, expenditure incurred on receiving and treating foreign buyers would also qualify for deduction under Sub-clause (ix) of Section 35B(1)(b) of the Act.
19. Question No. 2 is also answered in the affirmative, in favour of the assessee and against the Revenue.