Commissioner Of Income Tax vs Walchandnagar Industries Ltd.
2003 Latest Caselaw 159 Bom

JUDGMENT

S.H. Kapadia, J.

1. The following questions of law have been referred to us for our opinion under Section 256(1) by the Tribunal at the behest of the Department. The reference pertains to asst. yr. 1978-79.

(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to deduction under Section 35B of the IT Act on the guarantee commission charges of Rs. 5,91,015 paid to ECGC. on commission of Rs 8,37,862 paid to M/s Tata Exports and on 75 per cent of the proportionate administrative expenses of Rs. 2,54,356 ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs. 29,983 made under Section 37(2A) of the IT Act on account of entertainment expenditure incurred by the assessee.?

(iii) Whether, on the facts and in the circumstances of the case the Tribunal was right in law in holding that the excess price of sugar collected over and above the control price fixed by the Government for the asst. yr. 1978-79, was not taxable as income of the assessee for said assessment year ?"

Facts

2. The assessee is a public limited company engaged in the business of manufacture of industrial machinery required for manufacture of sugar. The assessee claimed weighted deduction under Section 35B on three items viz., guarantee commission paid to ECGC amounting to Rs. 5,91,015; Rs. 8,37,862 paid as commission to Tata Exports for monitoring and doing liaisoning work outside India; and the assessee has claimed weighted deduction on account of proportionate administrative expenses. These three items concerning weighted deduction under Section 35B are covered by question No. 1 quoted above. The weighted deduction on the above three items was disallowed. The assessee went in appeal to the first appellate authority, where the claim of the assessee stood allowed. This decision was affirmed by the Tribunal. Therefore, the Department has come by way of a reference under Section 256(1) of the IT Act as it stood at the relevant time.

As regards question No. 2 is concerned, it may be stated that the ITO came to the conclusion that the assessee was entitled to claim entertainment expenditure under Section 35B. However, the ITO found that the entertainment expenditure was very lavish and, therefore, he curtailed that expenditure by invoking Section 37(2A) of the Act and consequently, he added back Rs. 29,983 as income. Being aggrieved, the assessee went in appeal to the first appellate authority who deleted the addition on the ground that Section 37(2A) had no application as Section 37(2A) would apply only if Section 37(1) is applicable. At this stage it may be pointed out that since the ITO had concluded that Section 35B of the Act stood attracted, the assessee did not prefer any appeal against that finding of the ITO. Moreover, the Department did not go in appeal against that finding of the ITO. What was challenged in the appeal by the assessee was only disallowance of a sum of Rs. 29,983 under Section 37(2A). Therefore, the finding of the ITO that Section 35B was applicable to this case became final. On this point, the Tribunal concurred with the findings given by the first appellate authority. Therefore, the Department has come by way of reference seeking our opinion on question No. 2, which only states as to whether the Tribunal was right in law in deleting the addition of Rs. 29,983 under Section 37(2A) on account of entertainment expenditure.

As far as question No. 3 quoted above is concerned, the facts are as follows. In the appeal before the first appellate authority, an additional ground was taken by the assessee as the ITO had brought to tax the difference between the levy price of the sugar and the amount allowed to be collected by the assessee as per Court's order. In this connection it may be mentioned that the levy price fixed by the Government was challenged by the assessee by filing a writ petition in the Bombay High Court. According to the assessee the levy price was understated. By an interim order passed by the Bombay High Court at the stage of admission, the assessee was permitted to charge and collect the excess sale price pending hearing and final disposal of the writ petition and subject to the assessee furnishing bank guarantee. The AO taxed this excess sale price. In appeal the first appellate authority allowed the assessee to raise an additional ground and in the final hearing, the first appellate authority came to the conclusion that excess sale price collected by the assessee over and above the levy price fixed by the Government, cannot be subjected to tax since the assessee did not get an unconditional and undisputed right to receive and appropriate the said excess. This order was confirmed by the Tribunal. Hence this reference.

Scope of Section 35B

3. Before coming to the findings, we would like to refer to Section 35B of the IT Act as it stood at the relevant time. The said section concerns export market development allowance. Under Section 35B(1)(a) it is, inter aha, provided that where an assessee has incurred any expenditure referred to in Clause (b), not being in the nature of capital expenditure/personal expenses, such assessee shall be allowed a weighted deduction. Therefore, in this case, we are required to examine Sub-clause (b) of Section 35B(1). Sub-clause (b) contains items (i) to (ix). We are concerned with items (i), (ii) and (iii). Accordingly, Sub-clauses (b)(i) to (iii) is reproduced hereinbelow:

"Section 35B

(1)..........

(a)..........

(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;"

On reading items (i), (ii) and (iii) of Sub-clause (b), it is clear that weighted deduction was admissible on certain types of expenditure incurred on specified activities. Under Sub-clause (b)(i), weighted deduction was admissible on advertisement or publicity outside India in respect of goods, services or facilities provided by the assessee in the course of its business. Similarly, under Sub-clause (b)(ii), weighted deduction was admissible qua expenditure on obtaining information regarding markets outside India for goods, services or facilities mentioned in Sub-clause (b)(i). If one reads item (i) with item (ii), the only requirement contemplated by the legislature for admissibility of weighted deduction was that the activity stood carried out outside India. If one contrasts items (i) and (ii) on one hand with item (iii) of Sub-clause (b) then one finds that item (iii) deals with distribution, supply or provision of goods, services or facilities outside India and further that such expenditure should also be incurred outside India. Item (iii) of Sub-clause (b) states that expenditure on distribution, supply or provisions of goods, services or facilities should be out of India and further that expenditure incurred by the assessee should not be in India. Therefore, under item (iii) of Sub-clause (b), there are two requirements viz., that the activity of distribution, supply or provision should have taken place outside India, which is also the requirement in items (i) and (ii) of Sub-clause (b). However, item (iii) imposes one more additional requirement viz., that the assessee should have incurred the expenditure outside India. This second requirement is not there in items (i) and (ii) of Sub-clause (b). It is for this reason that in every matter, one has to examine the activity in the context of each of the items in Sub-clause (b). This is precisely what has been held in the case of CIT v. Stepwell Industries Ltd. and Ors. . In the said judgment, the Supreme Court has examined all the items (i) to (ix) of Sub-clause (b) and after examining those items, it has held that some of the sub-clauses provide that the expenditure incurred in India shall not be allowed, whereas some of the sub-clauses do not insist on such requirement and, therefore, each of the sub-clauses should be applied after examining the nature of expenditure and the activity carried out by the assessee depending on the facts of each case. In our case, item (iii) of Sub-clause (b) is not applicable. What is applicable is items (i) and (ii) because Tata Exports did the work of liaisoning and monitoring the turnkey project outside India. This is the finding given by the Tribunal. Out of the above three sub-clauses, it is only item (iii) of Sub-clause (b) which insists on the aforestated dual requirement of activity being outside India and the expenditure not being incurred in India. The view which we have taken on items (i), (ii) and (iii) of Sub-clause (b) is supported by the judgment of the Bombay High Court in the case of CIT v. Sahney Steel & Press Works (P) Ltd. (1989) 177 ITR 354 (Bom).

Findings

4(i) As stated above, the assessee has claimed weighted deduction under Section 35B on the guarantee commission charges paid by it to ECGC amounting to Rs. 5,91,015. In the case of CIT v. Jaipur Metals & Electricals Ltd. (1995) 215 ITR 413 (Bom), it has been held that the guarantee charges were payable by the assessee to ECGC of India, a Government of India undertaking, for getting information regarding credit worthiness and reputation of its foreign constituents and in the circumstances, the assessee was entitled to weighted deduction under Section 35B(1)(b)(ii). This judgment squarely applies to the facts of our case. Accordingly, this sub-question is answered in favour of the assessee and against the Department.

(ii) As regards the next sub-question which relates to commission paid to Tata Exports, the Tribunal has given a categorical finding of fact to the effect that the business deal was brought about through negotiations of Tata Exports. That, the contract concerned was a turnkey contract and Tata Exports had monitored the work outside India and it is for that job that commission was paid at 5 per cent on FOB rate. The sale of plant and machinery was to take place outside India. In the case of CIT v. Stepwell Industries Ltd. (supra), it has been held that when a claim for weighted deduction is made, it is for the assessee to satisfy the ITO that the expenditure falls under any of the sub-clauses of Clause (b) of Section 35B(1) of the IT Act. That, in order to get the deduction, the assessee has to prove that the expenditure was incurred during the previous year wholly and exclusively for the purposes set out in Clause (b) of Section 35B(1). That, there cannot be any blanket allowance of the expenditure nor can there be any blanket disallowance and every case has to be discussed specifically and the expenditure must be found to be of a nature mentioned in one of the sub-clauses. That, if the expenditure does not fall in any of the sub-clauses then it cannot be allowed as deduction. At this stage, it may be pointed that Mr. R.V. Desai, learned senior counsel for the Department, argued before us that all the sub-clauses pertain to activities outside India and further that even the expenditure should be incurred outside India. He contended that both the tests must be fulfilled. He contended that in the present matter, Tata Exports was in India and payment was made by the assessee to Tata Exports by way of commission in India. He submitted that Tata Exports was only a middleman and, therefore, the commission paid to Tata Exports did not come within the ambit of any of the above sub-clauses. In this connection he also placed reliance on the judgment of the Supreme Court in Stepwell Industries case (supra) in which it has been held that payment of commission to the middleman will not fall under Section 35B(1)(b)(ii). In this connection, he also relied upon Section 35B(1)(b)(iii) which states that expenditure which qualifies for deduction in connection with distribution, supply or provision outside India of such goods, services or facilities. In view of Section 35B(1)(b)(iii), it was argued, that not only should the expenditure be incurred on an activity outside India, but even the actual expenditure should be incurred outside India and in the absence of any one of the two tests, weighted deduction under Section 35B(1)(b) cannot be granted. We do not find any merit in this argument. In the case of Stepwell Industries Ltd. (supra), a middleman approached the assessee in India for purchase of its goods for and on behalf of the foreign buyer, the assessee agreed to sell his goods to the middleman who obtained commission. In the circumstances, the Supreme Court concluded that Section 35B(1)(b)(ii) was not attracted. In the present case, as found by the Tribunal, commission was paid to Tata Exports for monitoring and doing liaisoning work outside India. The activity was carried out in the foreign country and not in India. Secondly, in the case of Stepwell Industries Ltd. (supra) the Supreme Court has categorically laid down that the various sub-clauses of Clause (b) deal with different situations. That some of the sub-clauses provide that if the expenditure is incurred in India, it cannot be allowed. But, in some of the sub-clauses, this requirement is not there. In the present case, we are concerned with Section 35B(1)(b)(i) and (ii), which only stipulates one condition viz., that the expenditure should have been incurred on an activity of obtaining information regarding markets outside India and also advertisement/publicity outside India for goods, services and facilities, which the assessee provides in the course of its business. In the circumstances, the judgment of the Supreme Court in Stepwell Industries case (supra) has no application. Thirdly, one has to keep in mind Sub-clause (iii) in contradistinction to Sub-clauses (i) and (ii). Sub-clause (iii) specifically states that expenditure incurred on distribution supply or provision outside India of goods, services or facilities, not being expenditure incurred in India, shall be entitled to weighted deduction. Such a condition is not contemplated by Sub-clause (i) or (ii). It is for this reason that the Supreme Court has held in Stepwell. Industries' case that some of the sub-clauses provide that if expenditure is incurred in India, it cannot be allowed, but in some of the sub-clauses, this requirement is not there. We accordingly hold that as far as Sub-clauses (i) & (ii) are concerned, there is no requirement for expenditure to have been incurred outside India. Lastly, it may be pointed out that the word "middleman" is of a very wide import. In the case of Stepwell Industries, the assessee was approached by the middleman in India. The middleman approached the assessee in India for purchase of goods on behalf of the foreign buyer. Therefore, the judgment of the Supreme Court, on facts, in Stepwell Industries' case will not apply. We may also mention that in this case, Tata Exports had monitored the work outside India; that they did the work of liaisoning. Therefore, on facts, the judgment in Stepwell Industries case (supra) will not apply. Accordingly, this sub-question is answered in favour of the assessee and against the Department.

(iii) Now coming to the next sub-question of question No. 1, it may be pointed out that the assessee claimed administrative expenses based on proportionate export sales. Out of the total sales, the percentage of export sales in each case was worked out and the percentage was calculated out of HO administrative expenditure, IMDA administrative expenses and supervision expenses amounting in all to Rs. 2,54,356. The Tribunal granted 75 per cent of Rs. 2,54,356 as weighted deduction under Section 35B(1)(b)(i) to (viii). In the case of Stepwell Industries Ltd., the Supreme Court has held that the assessee was not entitled to this deduction. It was held that such administrative expenses do not come under any of the sub-clauses. To the same effect is the judgment of the Supreme Court in the case of CIT v. Hero Cycles (P) Ltd. . In the circumstances, on this sub-question we hold that the assessee was not entitled to weighted deduction of 75 per cent of Rs. 2,54,356.00 as such administrative expenses does not fall within any of the sub-clauses of Clause (b) of Section 35B(1). Therefore, this sub-question is answered in the negative i.e., in favour of the Department and against the assessee.

This completes our findings on the main question No. 1

5. Question No.2 has been quoted hereinabove. As per the question referred to us, the opinion sought is on a very limited point viz., whether the Tribunal was right in ordering deletion of Rs. 29,983 under Section 37(2A) of the IT Act on account of entertainment expenditure incurred by the assessee. The ITO found that the assessee was entitled to deduction under Section 35B for entertainment expenditure. However, the ITO invoked Section 37(2A) to limit that expenditure and consequently, he added Rs. 29,983 to the income of the assessee. The assessee was not aggrieved by the order of the ITO to the effect that the assessee was entitled to deduction under Section 35B. The assessee was only aggrieved by the second part of the order of the ITO limiting the entertainment expenditure under Section 37(2A) of the Act. Therefore, the assessee went in appeal to CIT(A) only on a limited ground of the addition made by the ITO under Section 37(2A) of the Act. The Department did not go in appeal against granting of weighted deduction by the ITO under Section 35B and, therefore, to that extent, the finding of ITO became final. Before us, it was argued by the learned counsel appearing on behalf of the Department that entertainment expenditure can never come under Section 35B of the Act and, therefore, the Tribunal erred in deleting the addition under Section 37(2A) of the Act. We would have examined this question raised by the Department if the Department had carried the matter in appeal to the CIT(A). However, the Department did not prefer the appeal to CIT(A). Further, no such question has been referred to us. In the circumstances, we cannot now permit the Department to raise a new ground for the first time before us on the scope of Section 35B vis-a-vis entertainment expenditure. However, it is clear that Section 37(2A) can only apply if Section 37(1) is applicable. In the circumstances, question No. 2 is answered in the affirmative i.e. in favour of the assessee and against the Department.

6. Now, coming to question No. 3, we may point out that the assessee had filed a writ petition in the Bombay High Court challenging the decision of the Government fixing the levy price of sugar on the ground that the levy price was fixed arbitrarily and that it has been understated. Pending the hearing and final disposal of the writ petition the assessee was allowed to collect the excess price of sugar over and above the levy price fixed by the Government during the asst. yr. 1978-79, subject to the assessee giving bank guarantee, which was enforceable in the event of the writ petition being dismissed. In the case of CIT v. Sharda Sugar Industries Ltd. (1999) 239 ITR 393 (Bom), the facts were as follows. The assessee was engaged in the business of manufacture and sale of sugar. The Government of India fixed the price of levy sugar at Rs. 153.39 per quintal, inclusive of excise duty. By another Notification dt. 14th Dec., 1973, the Government revised the price and fixed the same at Rs. 155.30 per quintal. Aggrieved by these two notifications, the assessee filed a writ petition in the Allahabad High Court, challenging the notifications. The High Court passed an interim order, pursuant to which the assessee was allowed to realize Rs. 18.38 per quintal of levy sugar in excess of the price fixed by the notification. The High Court directed the assessee to retain the amounts as deposits, pending final decision in the writ petition and subject to the assessee furnishing a bank guarantee. The ITO treated the amount of excess collection made by the assessee as "income". It was held by the High Court, under the above circumstances, that the assesee's right to receive payment was in dispute and, therefore, no income accrued to the assessee. Consequently, the right to receive the amount was contingent or inchoate. In our view, the judgment of the Bombay High Court in Sharda Sugar Industries Ltd. (supra) squarely applies to the facts of this case. However, Mr. Desai learned counsel appearing on behalf of the Department contended that in view of the judgment of the Supreme Court in the case of K.C.P. Ltd. v. CTT , the judgment of the Bombay High Court in the case of Sharda Sugar Industries Ltd. (supra) stood impliedly overruled. We do not find any merit in this argument. In that matter, the assessee manufactured sugar. The levy price of the sugar was fixed at Rs 120.30 per quintal by the Government. The assessee had challenged the order by filing a writ petition in the Andhra Pradesh High Court. On 31st March, 1970, the High Court passed an interim order permitting the assessee to sell sugar at the rate of Rs. 131.01 per quintal plus excise duty. The writ petition was dismissed on 18th Feb., 1971. With the dismissal of the writ petition, the interim order passed by the Andhra Pradesh High Court stood vacated. However, the Supreme Court found that under the interim orders of the High Court, no liability was casted on the assessee to refund the amount to the purchasers of sugar from whom excess amount was realised and that the only effect of the interim order was that in future, the assessee could no longer charge the price of Rs. 131 plus excise duty and consequently, the Supreme Court found that the excess amount continued to remain with the assessee for all times. Therefore, on facts of that case, the Supreme Court ruled that if a receipt is a trading receipt, it would be taxable as income. In fact, the Supreme Court itself has distinguished the case before it from judgments of various Courts including the judgment of the Bombay High Court in the case of CIT v. Seksaria Biswan Sugar factory (P) Ltd. (1992) 195 ITR 778 (Bom) in which it has been held that the assessee was permitted to collect excess amount pursuant to an interim order, which was subject to several conditions and, therefore, the collection made by the assessee at increased rate was pursuant to an inchoate right of the assessee and, therefore, the amount collected at a higher rate did not constitute income as the right to receive payment was itself in dispute and, therefore, no income arose. In the circumstances, the judgment of the Supreme Court in K.C.P. Ltd. (supra) has no application to the facts of this case. Consequently, we answer question No. 3 in the affirmative i.e., in favour of the assessee and against the Department.

Conclusion:

7. Accordingly, the reference is partly allowed. No order as to costs.