Madras High Court
Commissioner Of Income-Tax vs Southern Sea Foods Ltd. on 31 October, 1994
Equivalent citations: [1995]215ITR176(MAD)
JUDGMENT A.S. Venkatachalamoorthy, J.
1. Four questions of law have been referred to this court to be answered.
2. The first one reads as follows :
"Whether, on the facts and in the circumstances of the case, and having regard to the provisions of rule 19A(3) of the Income-tax Rules, 1962, the Appellate Tribunal was right in holding that the entire liability consisting of secured loans, unsecured loans, current liabilities and provision for taxation should not be deducted and the entire gross value of the assets should be taken as capital for the purpose of grant of relief under section 80J of the Income-tax, Act 1961 ?"
3. As far as this is concerned it is brought to the notice of this court that an identical question has been answered in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 (SC). We hold that the decision rendered in the said reference would apply to this case on all fours.
4. Similarly, the fourth question of law has been set out as follows :
"Whether, on the facts and in the circumstance of the case, the Appellate Tribunal was right in holding that the payment of Rs. 6 lakhs made on March 19, 1973, should be treated as advance tax payment ?"
5. Here again, now it is brought to the notice of this court that in CIT v. T. T. Investments and Trades Pvt. Ltd. [1984] 148 ITR 347, an identical question was considered and decided. We are in complete agreement with the decision rendered in the said reference and we hold that the decision in that case would squarely apply to this case and will be followed in this case as well. We answer this question of law in favour of the assessee.
6. The second question of law referred to this court reads as follows :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was entitled to deduction under section 35B on expenses like salary, telex, stationery, etc., much less on a sum of Rs. 30,000 estimated by the Appellate Tribunal ?"
7. Before the Income-tax Officer the assessee claimed under section 35B relief in respect of certain items such as export subsidy, commission to overseas agency, export sample and export promotion expenses, foreign travel expenses totally to the turn of Rs. 1,81,916. The Income-tax Officer allowed the claim except the relief on export subsidy. At the appellate stage, the assessee claimed under section 35B, relief in respect of more items of expenditure like salary, stationery, telex, telegram, printing, postage, etc. The assessee contended before the Appellate Assistant Commissioner that 98.5 per cent. of that cadre of expenditure would relate to export and that therefore under section 35B, relief should be allowed in respect of 98.5 per cent. of that expenditure. However, the Appellate Assistant Commissioner did not accept the claim of the assessee and rejected it. Before the Tribunal the assessee claimed that the items claimed are relatable to section 35B(1)(b)(i), (ii) and (v). However, the Revenue contended before the Tribunal that if the assessee had incurred any such expenditure under section (i), (ii) or (v), it is capable of direct proof and the quantum of expenditure also be proved without resort to estimate and that there being no separate allocate of staff or expenditure or of funds for these categories of expenditure, it will not be possible to say there is evidence of any expenditure having been wholly and exclusively incurred on these items specified in section 35B. The Tribunal accepted the case of the assessee holding that it might be capable of direct proof with definite materials, advertisements, correspondence or tender copies, etc. If further held that in the absence of such proof, it would not lead to the inference that the assessee did not incur any such expenditure. The Tribunal further held that the assessee did incur the expenditure on advertisements, etc., and that these items of expenditure are essential things in an export trade and that just because there is no separate staff or separate allocation of expenditure or funds for such expenditure, it would not be said that there is no material to show that the expenditure was wholly or exclusively incurred for these. The Tribunal restored to estimate and estimated such quantum of expenditure at Rs. 30,000 as wholly and exclusively spent on advertisements., etc., and, consequently, the Tribunal directed that one-third of it should be further allowed as a deduction under section 35B.
8. With regard to this issue, we are concerned with section 35B(1)(b)(1), (ii) and (v) of the Income-tax Act, 1961, which reads as follows :
"35B. Export markets development allowance. - (1)(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;. . .
(v) preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto;"
9. According to the said provisions, the expenses incurred on advertisement, publicity, etc., obtaining information regarding markets and preparation and submission of tenders, etc., are allowed. It is needless to mention that in an export trade, expenditure on advertisement, publicity, etc., obtaining information regarding markets and preparation and submission of tenders, etc., are inevitable, inescapable and unavoidable. To hold that the assessee would not have incurred any expenditure would be contrary to the realities in trade. The contention of the Revenue that only if such expenses have been incurred outside India, the assessee would be entitled for relief cannot be accepted and that would be contrary to the provisions of the Act. All the Purposes mentioned in sub-clauses (i), (ii) and (v) are activities for the promotion of sale outside India. The language employed in sub-clauses (ix). - "such other activities for the promotion of the sale outside India ...", clearly implies that the activities mentioned in sub-clauses (i), (ii) and (v) are also activities for the purpose of promotion of sale outside India. In other words, apart from the activities which may be prescribed under sub-clause (ix), the other activities specifically mentioned in sub-clauses (i), (ii) and (v) do not cease to be activities for promotion of sale outside India or such rules, services or facilities because the expression "activities for the promotion of the sale outside India" has not been specifically used in any of the sub-clauses.
10. However, the Tribunal, after stating the law that the factum of expenditure being incurred by the assessee for promotion of sales under sub-clause (i), (ii) and (v) under section 35B can be proved in the absence of direct evidence by circumstantial evidence, should have remitted the case to the assessing authority, viz., the Income- tax Officer or the Appellate Assistant Commissioner, and if it thought proper to go into the evidence, at least stated about the circumstances. We have serious reservations, however, to the Tribunal's approach of proceeding, in the absence of direct evidence, to observe :
"Now, We will proceed to make an estimate; the claim of the assessee as shown above is certainly exaggerated and excessive. Of course the main and only business is export trade; we looked into the fifth annual report relevant for this assessment year. The total receipts of the assessee amounted to Rs. 15 lakhs and more out of which the gross profit from the export trade which required advertisements, obtaining information and preparation and submission of tenders, etc., is only about Rs. 2.75 lakhs. The other receipts are of course incidental to export trade by way of import licences and sale of commodities sought to be imported. The turnover of the export trade is about Rs. 126 lakhs. The assessee is also a partner in a hotel called 'Queens Hotel'. Under such facts and circumstances, it cannot be said that all the office staff and equipment is mainly used for advertisements, obtaining information and preparation and submission of tenders. The office and administrative staff would have been more interested in getting the import licences automatically issued to the assessee for export performance sold and transferred to others. Such activities fetch the highest profit for the assessee, say about Rs. 12 to 13 lakhs. So the concentration of the assessee would have been on getting the maximum profit from the sale of import entitlements, etc. The Advertisements, obtaining information, preparation and submission of tenders etc., would have been only subsidiary activity so far as the office of the assessee is concerned. Of course, it is vital work for export trade, but in the facts of this case the stress and concentration would have been more on the other activities like sale of import entitlements. Considering all these facts and circumstances we think that the assessee would have spent only about Rs. 30,000 (rupees thirty thousand only) wholly and exclusively on advertisements, etc., obtaining information, etc., and preparation and submission of tenders, etc., So the section 35B deduction will be Rs. 40,000 (rupees forty thousand only). Now Rs. 30,000 has been already deducted under section 37. So the further deduction that can be allowed is only Rs. 10,000 (Rupees ten thousand only). The Income-tax Officer has allowed in assessment under section 35B relief to the extent of Rs. 23,862. By our decision in this appeal it will get enhanced to Rs. 33,862 (rupees thirty-three thousand eight hundred and sixty-two only)."
11. The Tribunal recorded the above finding after stating as follows :
"In such cases, report to estimate is a well known method in income- tax assessment. So we can resort to such an estimate to find out the quantum which has wholly and exclusively incurred for such category of expenditure."
12. The Income-tax Act is the law under which tax is levied, assessed and collected for any assessment year at any given rate or rates in respect of the total income of the previous years, as the case may be, on every person. "Person" is defined as an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals whether incorporated or not, a local authority, and every artificial juridical person, as well as a person who is the beneficial owner of shares in a company, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than twenty per cent. of the voting power. Such a person who is chargeable under the Act can claim the deduction, contribution or depreciation on various accounts including deduction on account of "export markets development allowance". Expenditure on 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, obtaining information regarding markets inside India for such goods, services or facilities, distribution supply or provision outside India of such goods, services or facilities, maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities, preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto, furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities; for 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; 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 such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed, are allowable as deduction, a sum equal to one and one-third times the amount of such expenditure incurred during the previous year. In respect of items such as advertisements or publicity outside India, obtaining information regarding markets outside India, maintenance outside India of a branch, office or agency, preparation or submission of tenders for the supply, and such other activities for the promotion of sale outside India, are couched in such words that one can take notice of the expenditure of the assessee on advertisements or publicity and such other functions, which being in India, get their effect outside India except distribution, supply or provision outside India of such goods, services or facilities, which is found in section 35B(1)(b)(iii) and which is qualified by the words "not being expenditure incurred in India in connection with or expenditure incurred on carriage of such goods to destinations outside India or on the insurance of such goods while in transit". These qualifying words in respect of expenditure on distribution, supply or provision outside India of goods, services or facilities are not available in the other clauses of sub-section (1)(b) of section 35B, and thus it is irresistible that while assessing any claim to expenditure on advertisement or publicity can be allowed to be deducted it is necessary to find that such expenses are closely connected with the activities of the assessee outside India.
13. An assessee who would be claiming deduction is expected to have some evidence of such expenditure incurred by it, as no one is expected to expend by any payment to another without there being any proof of it. No fact is proved without evidence. A fact is proved by evidence, and evidence means and includes all statements made by the witnesses in relation to matters of fact under enquiry, and all documents produced for the exhibition in course of the enquiry. Statements made by the witnesses in relation to matters of fact under enquiry are called oral evidence, documents produced for the exhibition in course of the enquiry are called documentary evidence. Any thing, state of things, or relation of things, capable of being perceived by any mental condition of which any person is conscious are taken in the fold of facts. Some facts can be proved by the admission, some by the preponderance of probabilities, and by oral or documentary proof and their association with other relevant facts. In the latter case, circumstances play a very important role and establish a fact as proved by inference. Courts, however, have always pointed out that no fact can be surmised or conjectured, though it can be inferred from proved facts. Presumptions as to genuineness and proof play a very important role but the court, Tribunal or any authority cannot presume something which is not envisaged in the Evidence Act, and which does not fall in the discretion as to the existence of any fact. The court, Tribunal authority may presume the existence of any fact which is thinks is likely to have happened, regard being had to the common course of natural events, human conduct and public and private business in their relation to the facts of public importance. Circumstantial evidence may take the character of proof only when it is conclusive in the sense that no other possibility is conceivable in a given case, and the only probable conclusion is the one indicated by the circumstances.
14. In the right of the above, we think it proper to state the law as follows :
(i) A person who claims that he has made certain expenditure is expected to have some documentary evidence;
(ii) In the absence of the above, he is expected to say how he incurred the expenditure and why there is no documentary proof for such expenditure, and if he has any satisfactory evidence to show that documentary evidence has been lost or destroyed, he may take recourse to secondary evidence, viz., certified copies or attested copies of such documents, or copies made from the original by the mechanical processes which in themselves ensure the accuracy of the copy, and copies compared with such copies, copies made from or compared with the original; counterparts of documents as against the parties who did not execute them; and oral accounts of the contents of a document given by some person who has himself seen it;
(iii) Circumstantial evidence in such cases as proof of expenditure by the assessee shall be rare and exceptional, and if at all, in the aid of the assessee, it shall so come to remove doubts as to the expenditure and to established genuineness of the claim which is otherwise sought to be proved by direct evidence or secondary evidence ; and
(iv) It will be difficult to assume that such expenditure has been incurred on the basis of a presumption that such expenditure must have been incurred because the assessee is engaged in the trade of export and he is expected to incur expenses to promote the sale of his goods abroad.
15. We are inclined, for the above reasons, to discharge with the view taken by the Tribunal and hold that the Tribunal has not acted legally in proceeding to make some sort of best judgment assessment itself without following the proper procedure in this regard.
16. With regard to the question of law, viz., question No. 2, we hold as follows :
The expenses are incurred for any of the purposes set out in section 35B(1)(b)(i), (ii) and (v) for the purpose of promotion of exports, such expenses would qualify for deduction as per section 35B of the Act. For the purpose of arriving at a figure, the Appellant Assistant Commissioner has to decide on the proof with materials produced by the assessee before it.
17. The third question of law read as follows :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the disallowance based on the method of 24 hours a day of Rs. 7,557 made under rule 6D of the Income-tax Rules, 1962 ?"
18. To put it simply, the question that arises for consideration is, suppose an employee had spend two days in full and part of the third day in travelling, for the purpose of calculating expenditure in connection with travelling in terms of rule 6D of the Income-tax Rules, how has the same to be calculated ?
19. Is it only two days that should be taken onto consideration, or is to be counted as three days ? In other words, for the purpose of calculating allowance for a day, is it to be on the basis of 24 hours and is it that rule 6D prescribes or contemplates.
20. The Income-tax Officer had disallowed a sum of Rs. 7,557 probably on the basis, calculating a day as 24 hours. Before the Appellate Assistant Commissioner, the assessee contended that the Income-tax Officer has disallowed certain expenses on the basis of rule 6D incorrectly and further pointed out that the rule does not specify a 24 hour period as comprising a day for the purpose of calculating allowance. We find that the Appellate Assistant Commissioner has not considered that point but would simply say, "I am, however, unable to agree. After going through the particulars furnished by the appellant in the Income-tax records and schedule "A" annexed to the assessment order, I find that the excess disallowance has been correctly worked out and in view of this, the disallowance is confirmed".
21. The Appellate Tribunal, while considering this issue, has pointed out that reading of schedule 'A' to the assessment order would go to show that the Income-tax Officer had followed the principle indicated by the assessee and that this method of computing a day on the basis of 24 hours is not warranted by rule 6D of the Rules. On that basis, the Tribunal held that disallowance based on the method of 24 hours a day is not at all sustainable and consequently held that the entire disallowance is to be deleted and the disallowance of Rs. 7,557 under rule 6D as per annexure "A" to the assessment order is to be deleted. We find that the reasoning given by the Tribunal and the conclusion arrived at are correct and in conformity with rule 6D of the Income- tax Rules, 1962. A reading of rule 6D would show that it does not specify a 24 hour period as comprising a day for the purpose of calculating allowance. It is not as if for an employee to claim allowance for a day, he must be travelling all the 24 hours. Suppose, the employee had spent three days, then the rate permissible is (calculating at Rs. 120 per day) Rs. 360. Similarly, if the employee had spent two days and a part of the third day, even then the assessee could claim Rs. 360. We hold that the claim made by the assessee is totally in conformity with rule 6D of the Income-tax Rules. The findings arrived at on this issue by the Tribunal are correct. Hence, we answer this question of law in favour of the assessee.
22. In the result, the questions referred to us in this tax case are answered as above.