Kerala High Court
Commissioner Of Income-Tax vs C.W.S. (India) Ltd. on 20 August, 1999
Equivalent citations: [2000]242ITR429(KER)
JUDGMENT K.K. Usha, J.
1. These tax references at the instance of the Revenue arise out of the orders passed by the Income-tax Appellate Tribunal, Cochin Bench, in I. T. A. No. 533/Coch. of 1989, dated June 7, 1994 and I.T.A. No. 679/Coch. of 1989, dated June 10, 1994. The relevant assessment years are 1983-84 and 1984-85. The question referred for opinion of this court in I. T. R. No. 8 of 1996 is as follows :
"Whether, on the facts and in the circumstances of the case, the asses-see is entitled to claim weighted deduction in a sum of Rs. 4,27,256 spent for the promotion of sales outside India ?"
2. The questions referred in I. T. R. No. 9 of 1996 for opinion of this court are as follows :
"(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of Rs. 9,365 relating to the issue of rights shares ?
(2) Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim weighted deduction under Section 35B, amounting to Rs. 2,02,456 in respect of brokerage and warehouse charges ?
(3) Whether, on the facts and in the circumstances of the case and the claim in the case being both for brokerage and warehousing, the Tribunal is right in holding that the facts in Poopally Foods : 'being similar' ?"
3. The relevant facts are as follows : The assessee is engaged in cultivating, processing and selling tea. It claimed a sum of Rs. 4,27,256 as a deduction under Section 35B of the Income-tax Act, 1961, for the assessment year 1983-84. The contention raised by the assessee was that it is entitled to deduction under Section 35B on selling commission, warehousing charges, sales charges, etc., paid to foreign agents. The assessing authority took the view that the assessee has not maintained a branch or an office abroad and that there was no agent who can bind the principal by acts done on behalf of the principal. Therefore, the abovementioned expenses would not fall under the purview of Section 35B. The claim for weighted deduc tion was thus rejected. On appeal, the Commissioner of Income-tax (Appeals) took the view that selling commission and brokerage paid to foreign agents was for maintaining an agency for promotion of the sale outside India. Accordingly, it was held that the assessee is eligible for deduction under Section 35B. The matter was taken in appeal by the Revenue before the Tribunal, which, following the decision of this court in Sri-vilas Cashew Co. v. CIT [1992] 196 ITR 887, held that the assessee is entitled to weighted deduction.
4. For the assessment year 1984-85, the assessee claimed a sum of Rs. 9,365 as a deduction being the expenditure incurred in raising rights shares. This claim was disallowed by the officer holding that it is capital expenditure in nature. The assessee's claim for weighted deduction under Section 35B in respect of brokerage and warehousing charges amounting to Rs. 2,02,456 was also rejected by the Assessing Officer for the reason that it would not come within the purview of Section 35B. On appeal, the Commissioner of Income-tax (Appeals) confirmed the assessment order. Aggrieved by the above, the assessee filed second appeal before the Tribunal. The assessee's claim for deduction of Rs. 9,365 relating to issue of right shares was allowed following a decision of this court in Federal Bank Ltd. v. CIT [1989] 180 ITR 241. The assessee's claim for weighted deduction under Section 35B amounting to Rs. 2,02,456 in respect of brokerage and warehousing charges incurred up to March 1, 1983, was also allowed by the Tribunal following a decision of this court in CIT v. Pooppally Foods [1986] 161 ITR 729.
5. It was pointed out by learned senior standing counsel for the Revenue that the decision of this court in Federal Bank Ltd. v, CIT [1989] 180 ITR 241, has been overruled by the Supreme Court in Punjab State Industrial Development Corporation Ltd. v. CIT[1997] 225 ITR 792 and Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798 (SC). In the above decisions it was held that the fees paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company. Although incidentally that would help in the business of the company and may also help in profit-making, it still retains the character of capital expenditure, since the expenditure was directly related to the expansion of the capital base of the company. In the light of the above decisions of the Supreme Court, the contention raised by the Revenue has to be accepted on this issue.
6. Learned senior standing counsel for the Revenue further pointed out that the decision of this court in CIT v. Pooppally Foods [1986] 161 ITR 729, is no longer good law, in the light of the view expressed by the Supreme Court in Aravinda Paramila Works v. CIT[1999] 237 ITR 284. The question that arose for consideration in the above case before the Supreme Court was whether the assessee was entitled to weighted deduction under section 35B(1)(b)(iv) of the Income tax Act, 1961, in respect of commission payments made to agents outside India. On analysing the provisions of Section 35B(1)(b)(iv), the Supreme Court observed as follows (page 287) : "The expenditure that is referred to therein has to be incurred on the maintenance outside India of a branch, office or agency for the promotion of sales outside India of the assessee's goods, services or facilities. Therefore, what is requisite is that the assessee should have maintained the branch, office or agency outside India. It is also requisite that such branch, office or agency should be for the promotion of sales outside India of the assessee's goods, services or facilities. When payment is made, as here, by an assessee of commission to agents outside India who had procured orders, the requirements of Clause (iv) are far from satisfied. There is, in the first place, no maintenance by the assessee of the agency. Secondly, the expenditure has to be incurred on the promotion of sales of the assessee's goods outside India. When expenditure is incurred by way of payment of commission on particular sales, that is not expenditure on the promotion of the assessee's sales in general.
7. While we think that there is some merit in the observation of the Karnataka High Court that the words 'branch, office or agency' in the Clause draw colour from each other and that the word 'agency' should, therefore, be interpreted in the light of the words 'branch' and 'office', it is, in any event, very clear that even if the agency is an agency established not by the assessee but by a third party, the agency must be maintained by the assessee."
8. Learned senior standing counsel for the Revenue submits that in the light of the above observation, it has to be taken that CIT v. Pooppally Foods [1986] 161 ITR 729 (Ker) is impliedly overruled.
9. Learned counsel for the assessee contended before us that even going by the decision of the Supreme Court it is not essential that the assessee should maintain an agency exclusively for itself. In the appeal for the year 1983-84, the Tribunal after referring to the contention raised by the Revenue that the assessee had not spent the amount of Rs. 4,27,256 for the purpose of maintaining an agency for the promotion of sales outside India proceeded to refer to the decision of this court in CIT v. Pooppally Foods [1986] 161 ITR 729. Thereafter referring to the conclusion in CIT v. Poop-pally Foods [1986] 161 ITR 729 (Ker), that for being entitled to weighted deduction the foreign agency need not work as a servant exclusively for the assessee the Tribunal proceeded to uphold the finding of the Commis-sioner (Appeals).
10. For the year 1984-85, the Tribunal by observing that the facts of the case are similar to CIT v. Pooppally Foods [1986] 161 ITR 729 (Ker), just followed the decision and allowed the claim of the assessee. Learned counsel points out that there was no consideration by the Tribunal as to whether the agent to whom commission was being paid by the assessee was an agency maintained by the assessee as contemplated in the decision in Aravinda Paramila Works v. CIT[1999] 237 ITR 284 (SC). He also contends that the claim put forward by the assessee regarding warehousing charges should have been considered by the Tribunal under Section 35B(1)(b)(ix) read with rule 6AA(b) of the Income-tax Rules, 1962. In view of the provisions contained under sub Clause (ix) expenditure incurred wholly and exclusively on such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed would be entitled to weighted deduction under Section 35B. The activities as referred to in Sub-clause (ix) are prescribed under rule 6AA, which takes in, among other matters, maintenance outside India of a warehouse for the promotion of the sale outside India of such goods. The assessment order for the year 1983-84 would show that the assessee had claimed weighted deduction under Section 35B in respect of warehousing charges. The first appellate order for the year 1984-85 would also show that the total amount of Rs. 2,02,456 was constituted of brokerage and warehousing charges. Learned counsel for the assessee referred to two decisions of the Calcutta High Court in CIT v. Moran Tea Co. (India) Ltd. [1992] 194 ITR 429, and CIT v. Bishnauth Tea Co. Ltd. [1992] 197 ITR 150, where weighted deduction had been granted under Section 35B on expenditure incurred on the maintenance outside India of a warehouse for the promotion of the sale outside India of goods, relying on rule 6AA of the Income-tax Rules, 1962. The assessee prays that the Tribunal may be directed to consider the question whether the assessee had been maintaining an agency in the nature of the one considered by the Supreme Court in Aravinda Paramila Works v. CIT [1999] 237 ITR 284, outside India and also the question whether the assessee is not entitled to weighted deduction in respect of warehousing charges by applying the provisions contained under rule 6AA(b) of the Income-tax Rules, 1962.
11. We find merit in the contention raised by the assessee. On going through the orders passed by the Tribunal, we find that since the Tribunal was following the decision of this court it did not go into a discussion regarding the facts of the assessee's case nor it entered a finding on the question, whether the assessee is maintaining an agency outside India. There was also no consideration of the claim for weighted deduction in respect of warehousing charges under rule 6AA of the Income-tax Rules, 1962.
12. According to us, without factual findings on these aspects, it may not be proper for this court to give its opinion on the question raised. We, therefore, answer question No. (1) in I. T. R. No. 9 of 1996 in the negative against the assessee and in favour of the Revenue. We decline to answer the only question referred in I. T. R. No. 8 of 1996 and questions Nos. (2) and (3) in I. T. R. No. 9 of 1996. To the above extent the matter is remitted back to the Tribunal for fresh consideration.
13. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.