TMI Blog2002 (3) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... as not empowered to invoke the provisions of section 263 to rectify the mistake committed by the Income-tax Officer in not following the judgment of a Special Bench in deciding the matter of allowance of deduction under section 35B? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the materials which were not on record at the time of assessment and were made available afterwards cannot form part of the record of proceedings of the Income-tax Officer at the time he passed the order and thus cannot be taken into consideration by the Commissioner of Income-tax for the purpose of invoking the jurisdiction under section 263(1) of the Act?" The assessee is a firm which derived income from export of bamboos, imli and timber to Pakistan during the relevant assessment year 1978-79. Return for this assessment year was filed declaring a loss of Rs. 1,01,243. In the computation of income, the assessee had claimed deduction under section 35B of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), on various heads of expenditure as under: ------------------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sub-clause (i) of clause (b) of section 35B(1) ------------- Total 8,54,338 --------------------------------------------------------------------------------------- The assessment under section 143(3) of the Act was framed by the Income-tax Officer on January 28, 1978, and the assessee's claim for weighted deduction under section 35B was dealt with as under: "This weighted deduction has been claimed in respect of the following expenses incurred in connection with and for promotion of export sales: --------------------------------------------------------------------------------------- (i) Freight 7,12,031 (ii) Clearing charges 56,051 (iii) Inspection charges 2,650 ------------ 7,70,732 Weighted deduction has also been cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms: "(i) In order to qualify for a weighted deduction under section 35B the expenditure must necessarily be such as is incurred wholly and exclusively on an activity which clearly falls under any one of the sub-clauses of clause (b) of sub-section (1) of section 35B. The mere fact that an expenditure has been incurred in connection with and in the course of a business for the export of goods outside India does not in itself mean that the expenditure has been incurred wholly and exclusively on an activity mentioned in the various sub-clauses of clause (b) of sub-section (1) of section 35B and that, therefore, the expenditure qualifies for the weighted deduction under section 35B. None of the aforementioned expenses in respect of which weighted deduction under section 35B has been allowed by the Income-tax Officer can be said, having regarding to the details furnished by the assessee in respect of these expenses in the course of assessment proceedings, to have been incurred wholly and exclusively on any of the activities specified in clause (b) of sub-section (1) of section 35B. (ii) The weighted deduction under section 35B in respect of the expenses on freight charges, clearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 6 and 7 of the statement in para. 1 ante, the assessee had claimed them to qualify for the allowance of the weighted deduction under sub-clauses (i) to (ix) of clause (b) of section 35B(1) on the ground that the business of the assessee was exclusively of export of goods outside India and there were no sales made locally within India. The assessee did not specify any particular activity or activities mentioned in the various sub-clauses of clause (b) of sub-section (1) of section 35B on which each of the aforesaid expenses were incurred wholly and exclusively and did not explain how this was so. The Income-tax Officer accepted the claim of the assessee for the weighted deduction in respect of these expenses without examining and determining whether these expenses had been incurred wholly and exclusively on any of the activities mentioned in the various sub-clauses of clause (b) of sub-section (1) of section 35B. On scrutinising the details of these expenses as furnished in the course of the assessment proceedings before the Income-tax Officer it is noticed that none of these expenses can be said to have been incurred wholly and exclusively on any of the activities mentioned in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer do not show that these expenses have en incurred on advertisement or publicity outside India in respect of the export business of the assessee. Therefore, the Income-tax Officer has erroneously accepted the claim of the assessee that these expenses fall under the aforesaid sub-clause (i) and has erred in allowing the weighted deduction under section 35B in respect of this expenditure." The assessee filed a reply to the show-cause notice and after considering the same the Commissioner, vide order dated November 20, 1980, recorded a categorical finding for withdrawal of weighted deduction in respect of freight charges, clearing charges and inspection charges. As regards the remaining items, the Commissioner observed that the assessee's authorised representative had stated that they could not produce before him the requisite details and evidence for want of adequate time and had further stated that they would be in a position to produce all the requisite information if further time was allowed to them. Although the Commissioner did not agree with the contention that the assessee did not have adequate time to produce all the requisite details and evidence to prove its claim, he c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a decision of the larger Bench of the Tribunal had greater value as a precedent and it had to be preferred to the views expressed by the smaller Benches and that such a decision by precedent was binding on smaller Benches unless overruled by the High Court or the Supreme Court. In respect of items at serial Nos. 4 to 11 also, the finding of the Commissioner of Income-tax. that deduction had been allowed by the Income-tax Officer without making proper and necessary enquiries which amounted to an error prejudicial to the interests of the Revenue was also upheld. The Judicial Member, however, took the view that the decision of a Special Bench of the Tribunal cannot be looked upon as a decision of the authority superior to that of a Division Bench. He further held that the decision of a Special Bench was neither binding on the Division Benches nor enjoyed any precedence over the decision of a Division Bench. Accordingly, he opined that since the order of the Income-tax Officer was based on the decision of a Division Bench, the same could not be termed as erroneous by the Commissioner merely because a different view was taken by a larger Special Bench. Thus, according to him, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning of the word "record" used in section 263 and held that it referred to the record as it stood before the Income-tax Officer and not any subsequent material that came on surface. Thus, when the order of the Special Bench of the Tribunal was not on the record of the Income-tax Officer, the same did not form part of the "record" and, therefore, could not be a basis for exercise of jurisdiction by the Commissioner under section 263. Dealing with the controversy about the items at serial Nos. 4 to 11 as to whether the Income-tax Officer had made proper inquiry or not, he concluded that the Commissioner was not correct in saying that the assessee had not produced enough evidence to justify its claim and that the Income-tax Officer was in error when he accepted its claims. It was, therefore, held that the Commis sioner could not assume jurisdiction to unsettle the finality of that view of the Income-tax Officer in the hope that something would come out if a further inquiry was ordered. From the above noted factual position, it is apparent that the Tribunal has proceeded on the assumption that the Income-tax Officer, while allowing the deduction under section 35B, had followed some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motion 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 connection with, or incidental to, the execution of any contract for the supply outside of such goods, services or facilities; (ix) such other activities for the promotion of the sale outside India of such goods, services or facilities; as may be prescribed. Explanation.--In this section, 'domestic company' shall have the mean ing assigned to it in clause (2) of section 80B. (2) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to in sub-section (1), deduction shall not be allowed in respect of such expenditure under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the mere fact that an expenditure had been incurred in connection with and in the course of a business for the export of goods outside India, does not by itself mean that the expenditure had been incurred on the activities specified in the aforesaid provision. In the other grounds contained in paras. (ii) to (v), the Commissioner had gone into the merits of the admissibility of deduction under section 35B under various heads of expenditure. If the objection of the Commissioner raised in para. (i) is sustainable, the exercise of jurisdiction under section 263 has to be upheld on that ground alone and it is unnecessary to go into the other issues raised in the present case. A plain reading of section 35B shows that the weighted deduction on expenses under this provision can be allowed only if they are wholly and exclusively incurred for any of the purposes mentioned in the sub-clauses of section 35B(1)(b). The provision is quite dear and categorical. Since it is the assessee who claims the benefit of weighted deduction, it is for him to prove the facts which will bring the case within any of these sub-clauses. Unless that is done, the assessee will not be entitled to get thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(b). It has to be remembered that the onus is on the assessee to establish the facts to obtain the deduction claimed. The appeal is allowed with the above observations. There will be no order as to costs." The legal position in regard to the allowability of weighted deduction under section 35B of the Act has been reiterated by the Supreme Court in the case of Hero Cycles Pvt. Ltd. [1997] 228 ITR 463, in the following words: "The deduction is permissible if the expenditure is laid out wholly and exclusively for the purposes mentioned in clause (b) of section 35B(1). It is for the assessee to prove that the entire expenditure involved was exclusively for the purposes mentioned in clause (b) of section 35B(1). The Tribunal has also to give a finding as to the entitlement of the assessee with reference to the particulars of clause (b) of section 35B(1). The facts have to be found out and the law has to be applied to those facts." On a perusal of the facts of the case before it, the Supreme Court observed that the Tribunal was unmindful of the various sub-clauses of section 35B(1)(b) and had allowed the deduction without verifying or examining the sub-clauses under which the ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he action of the Commissioner under section 263 under exactly similar circumstances. In that case also, the Income-tax Officer had given relief under section 35B without any proper verification. The Commissioner exercising jurisdiction under section 263, held that the assessee was not entitled to deduction under section 35B and, accordingly, directed the Income-tax Officer to amend the original order withdrawing the said deduction. On appeal, the Tribunal upheld the invocation of jurisdiction by the Commissioner under section 263 but did not agree with the Commissioner that the assessee can be denied relief under section 35B straightaway without further inquiry in the matter. The order of the Commissioner was, accordingly, modified to that extent and the matter regarding admissibility of deduction under section 35B was remanded to the Income-tax Officer. On a reference the order of the Tribunal was sustained by the High Court. The facts of the present case are on all fours with the case of Indian Textiles [1986] 157 ITR 112 (Mad). Viewed from this angle, we find that the questions referred to us by the Tribunal for our opinion do not project the controversy in the right perspecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stribution, supply or provision outside India of such goods, services or facilities. No deduction under section 35B can be allowed to the assessee for expenditure incurred in India in connection with sale of goods. There is no dispute that the expenditure was wholly incurred in India." Even otherwise, the provisions of sub-clause (iii) of section 35B(1)(b) are totally unambiguous and leave no scope for more than one interpretation. This aspect of the matter has totally been lost sight of by the Tribunal. Even if the view that the decision of a larger Bench does not take precedence over the judgment of a Division Bench, were to be upheld, the Tribunal ought to have examined whether the provisions of sub-clause (iii) of section 35B(1)(b) were capable of two interpretations or not. This has not been done. Sub-clause (iii) of section 35B(1)(b) as originally enacted by the Finance Act, 1968, was as under: "(iii) distribution, supply or provision outside India of such goods, services or facilities." However, vide section 8 of the Finance Act, 1970, the following words and brackets were added at the end of this clause with retrospective effect from April 1, 1968: "not being expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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