TMI Blog2003 (2) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 256(1) by the Tribunal at the behest of the Department. The reference pertains to the assessment year 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 Income-tax Act, 1961, on the guarantee commission of charges of Rs. 5,91,015 paid to E.C.G.C. on commission of Rs. 8,37,862 paid to 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 Income-tax Act on account of entertainment expenditure incur red 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 assessment year 1978-79, was not taxable as income of the assessee for said assessment year ? Facts: The assessee is a public limited company engaged in the business of manufacture of industrial machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure. 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 Income-tax Officer 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 the 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 Assessing Officer 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 the excess sale price collected by the assessee over and above the levy price fixed by the Government, cannot be subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) of 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 clause (b) states that expenditure on distribution, supply or provision 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 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 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 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 clause (b). This is precisely what has been held in the case of CIT v. Stepwell Industries Limited [1997] 228 ITR 171. In the said judgment, the Supreme Court has examined all the items (i) to (ix) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustries Limited [1997] 228 ITR 171 (SC), it has been held that when a claim for weighted deduction is made, it is for the assessee to satisfy the Income-tax Officer that the expenditure falls under any of the sub-clauses of clause (b) of section 35B(1) of the Income-tax 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 out 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment of the Supreme Court in Stepwell Industries Limited's case [1997] 228 ITR 171 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 Limited's case [1997] 228 ITR 171 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. We accordingly hold that as far as sub-clauses (i) and (ii) are concerned, there is no requirement for the 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 Limited [1997] 228 ITR 171 (SC), the assessee was approached by the middleman in India. The middleman approached the assessee in India for purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income of the assessee. The assessee was not aggrieved by the order of the Income-tax Officer 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 Income-tax Officer limiting the entertainment expenditure under section 37(2A) of the Act. Therefore, the assessee went in appeal to the Commissioner of Income-tax (Appeals) only on a limited ground of the addition made by the Income-tax Officer under section 37(2A) of the Act. The Department did not go in appeal against granting of weighted deduction by the Income-tax Officer under section 35B and, therefore, to that extent, the finding of the Income-tax Officer became final. Before us, it was argued by 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 Commissioner of Income-tax (Appeals). However, the Department did not prefer the appeal to the Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay High Court in Sharda Sugar Industries Limited [1999] 239 ITR 393 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. Limited v. CIT [2000] 245 ITR 421, the judgment of the Bombay High Court in the case of Sharda Sugar Industries Limited [1999] 239 ITR 393 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 March 31, 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 February 18, 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 cast on the assessee to refund the amount to the purchasers of sugar fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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