Kushwaha Exports (P) Ltd. vs Commissioner Of Income Tax
2007 Latest Caselaw 1935 Del

JUDGMENT

Madan B. Lokur, J.

1. This reference under Section 256(1) of the Income Tax Act, 1961 has been made in respect of the assessment year 1981-82. Although as many as 8 questions have been referred for our opinion, we are of the view that only two of them really arise for our consideration. These two questions are:

1. Whether the finding of the Income-tax Appellate Tribunal that the assessed company was not entitled to deduction in respect of traveling expenses of Rs.1,17,525/- claimed by it, is based on a proper interpretation of the relevant provisions of law as contained in Section 37(1), 37(3) and 35B of the Income-tax Act, 1961?

2. Further, whether the Income-tax Appellate Tribunal was justified in law in holding that the assessed company was not entitled to weighted deduction u/s, 35B of the Act in respect of the aforesaid traveling expenses, simply because the same were allegedly not otherwise allowable as a deduction by virtue of Rule 6D of the Income-tax Rules, 1962

2. The assessed is a private limited company and one S.S. Kushwaha is one of its Directors. Mr. Kushwaha resides in Moscow and West Germany and visits India to procure business for the assessed company. Mr. S.S. Kushwaha also procures contracts for Indian parties desirous of making exports to Russia and other foreign countries and the assessed-company gets a commission on such export orders.

3. The assessed made a claim for deduction for the expenditure incurred on two items:

1. traveling and conveyance - Rs.2,71,188.90

2. Weighted deduction under Section 35B of the Income Tax Act on foreign tour expenses of Rs.1,34,430.00.

4. The Income Tax Officer allowed a sum of Rs.1,17,525/- out of the entire traveling and conveyance expenditure and a part of the weighted deduction.

5. The Commissioner of Income Tax was of the view that the order passed by the Income Tax Officer was erroneous and prejudicial to the interest of the Revenue and therefore, exercised his power under Section 263 of the Income Tax Act, 1961 (for short 'the Act'). After hearing the assessed, the Commissioner disallowed the entire expenditure claimed.

6. Feeling aggrieved, the assessed preferred an appeal before the Tribunal which came to be dismissed and that is how the aforesaid questions have been referred for our opinion.

7. In so far as the first item of traveling and conveyance expenditure is concerned, the relevant provision is Section 37(3) of the Act. At the relevant time, Section 37(3) of the Act read as follows:

(3) Notwithstanding anything contained in Sub-section (1), any expenditure incurred by an assessed after the 31st day of March, 1964, on advertisement or on maintenance of any residential accommodation including any accommodation in the nature of a guest-house or in connection with traveling by an employee or any other person (including hotel expenses or allowances paid in connection with such traveling) shall be allowed only to the extent, and subject to such conditions, if any, as may be prescribed.

8. The conditions are prescribed in Rule 6D(1)(i) of the Income Tax Rules, 1961 which reads as follows:

6D (1) (i) The allowance in respect of expenditure incurred by an assessed in connection with traveling by an employee or any other person outside India for the purposes of the business or profession of the assessed shall not exceed the amount which bears to the aggregate of the amount, if any, covered by foreign exchange granted, or permitted to be acquired, for the purpose of such travel under the law relating to foreign exchange for the time being in force and the amount expended on such travel in Indian currency the same proportion as is determined in the manner specified in Clause (ii).

9. The operative words in Rule 6D (1) (i) are that 'the expenditure incurred must be covered by foreign exchange granted, or permitted to be acquired, for the purpose of such travel'. In other words, to the extent of the foreign exchange granted or permitted to be acquired, the assessed would be entitled to the benefit of the deduction.

10. In so far as the present case is concerned, the facts clearly show that Mr. S.S. Kushwaha had travelled to India from Russia or West Germany and the expenditure incurred by him for the trip was incurred outside India and, therefore, in foreign currency. Later, Mr. S.S. Kushwaha was reimbursed by the assessed in Indian rupees in India. Therefore, the expenditure incurred by him for travel is not in foreign exchange. Moreover, there is nothing on the record to suggest that he acquired any foreign exchange or was granted any foreign exchange under any law in force in India relating to foreign exchange. Therefore, on a plain reading of Rule 6D(1)(i), the assessed was not entitled to claim the expenses incurred by Mr. S.S. Kushwaha on traveling and conveyance. It may be added that Mr. S.S. Kushwaha's travels were not to a place outside India but were to India.

11. Under these circumstances, the authorities below correctly declined to grant to the assessed, the benefit of the provisions of Section 37(3) of the Act read with Rule 6D(1)(i) of the Act.

12. As regards the second question, it is really consequential to the first question and must also be decided against the assessed. Additionally, it may be noted that Section 35B(b)(vii) provides for weighted deduction only if the expenditure is incurred for traveling from India to a place outside India for sales promotion outside India of goods, services or facilities.

13. The Tribunal has found, and this is not disputed, that the travel undertaken by Mr. S.S. Kushwaha was not from India to a place outside India but was from Russia to India. Therefore, the provisions of Rule 35B (b) (vii), ex facie do not assist the assessed. Moreover, it has been found that the sales promotion undertaken by Mr. S.S. Kushwaha was within India. As already noted above, he would encourage export by Indian parties to foreign countries, particularly Russia, and the assessed would earn commission on export orders obtained. In that sense, the sale promotion was actually in India and not abroad. Therefore, the assessed did not satisfy any of the conditions required by Section 35B of the Act and hence, it was not entitled to the deduction claimed.

14. Under the circumstances, both the questions are answered in the affirmative in favor of the Revenue and against the assessed.

15. The reference is disposed of accordingly.