TMI Blog1999 (1) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... er, on the facts and the circumstances of the case, the Explanation 2 has been properly interpreted/construed by the Appellate Tribunal in withholding legitimate weighted deduction under section 35B(1)(b)(i) on sample designing, which has otherwise been allowed as a business expense in computing the total income of the assessee-company by the assessing authority ?" (b) Questions at the instance of the Revenue "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing weighted deduction under section 35B in respect of the expenses, incurred by the assessee on quality control, advertisement, subscription, free samples, export promotion, MFHC commission and WEEP commission under sub-clause (ix) of clause (b) of sub-section (1) of section 35B added by the Finance (No. 2) Act, 1980, with effect from April 1, 1981, read with rule 6AA inserted by the Income-tax (Eighth Amendment) Rules, 1981, with effect from August 1, 1981 ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing depreciation on generator at 30 per cent. instead of 10 per cent. as allowed by the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged the order of the Commissioner whereby deductions under section 35B were allowed in respect of the expenditure on quality control, advertisement, subscription, free samples and export promotion, etc. The plea taken was that the Commissioner had wrongly allowed deduction under rule 6AA of the Rules. Expenditure had been incurred during the accounting year ending on March 31, 1981 and, therefore, the same did not qualify for deduction under the said rule, which was introduced with effect from August 1, 1981. The Tribunal, however, took the view that the assessment year under appeal was 1981-82 which commenced from April 1, 1981. Since the new rule 6AA had come into force from August 1, 1981, it covered the entire assessment year 1981-82 as the assessment was pending on August 1, 1981, at the appellate stage. The Department's plea was, therefore, rejected by the Tribunal and the deduction allowed by the Commissioner on various expenditures under sub-clause (ix) of clause (b) of section 35B(1) read with rule 6AA was upheld. The Tribunal, in the assessee's appeal, also allowed deduction under section 35B in respect of the expenditure incurred on samples and also on the amount of comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to allow deduction of the value of the samples lying in the closing stock. The Commissioner allowed part relief to the assessee by adopting a lower rate for the 'purpose of valuation. The Tribunal, however, allowed the entire claim of the assessee in respect of the closing stock of the samples. Since the assessee had claimed deduction in respect of closing stock of the samples, sub-clause (vi) of clause (b) is not attracted. It is further to be noticed that sub-clauses (ii), (iii), (v), (vi) and (viii) of clause (b) of section 35B(1) of the Act were omitted by the Finance (No. 2) Act, 1980, with effect from April 1, 1981. In the Notes on Clauses appended to the Finance (No. 2) Bill, 1980, it has been stated in respect of the aforesaid amendment, whereby five sub-clauses of clause (b) of section 35B(1) were omitted, as under : "These amendments will take effect from April 1, 1981, and will accordingly apply in relation to the assessment year 1981-82 and subsequent years." Since the assessee claimed deduction in respect of sample designing for the assessment year 1981-82, benefit under sub-clause (vi) of clause (b) of section 35B(1) could not be made available to him inasmuc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etained by the assessee at his manufacturing unit and was shown in the closing stock. The third set of samples was not furnished to the foreign buyers. Sub-clause (i) of clause (b) of section 35B(1) was, thus, not attracted, because it was not a case of sending of samples by way of advertisement or publicity outside India. Learned counsel for the assessee has also placed reliance on a decision of the Madras High Court in Lucas TVS Ltd. v. CIT [1996] 217 ITR 382. After considering rule 6AA of the Rules, it was held that the said rule was a clarificatory rule in respect of the pre-investment surveys, preparation of feasibility studies or project reports. Clause (a) of rule 6AA was examined in the light of sub-clause (vi) of clause (b) of section 35B(1) and it was held that clause (a) of rule 6AA being declaratory in nature was retrospective in its operation. With respect, we are unable to take the same view. As has been noticed earlier, sub-clause (vi) of clause (b) of section 35B(1) was omitted with effect from April 1, 1981, whereas rule 6AA was inserted in the Rules by the Income-tax (Eighth Amendment) Rules, 1981, with effect from August 1, 1981. Thus, rule 6AA came into force ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the rule. Thus, expenditure on sample designing does not fall under rule 6AA of the Rules. In view of the above discussion, questions Nos. 1 and 2, referred to this court at the instance of the assessee, are answered to the effect that the manufacturing expenditure or the cost of samples was not eligible for deduction under section 35B of the Act. The questions referred to this court for opinion at the instance of the Revenue relate to the deduction or expenditure incurred by the assessee on quality control, advertisement, subscription, free samples, export promotion, MFHC commission and WEEP commission under sub-clause (ix) of clause (b) of section 35B(1) of the Act. Expenditure on advertisement is covered under sub-clause (i) of clause (b) if the advertisement or publicity is made outside India in respect of the goods exported by the assessee. Expenditure on samples, furnished to a buyer outside India attracts sub-clause (vi) of clause (b). The other expenditure, namely, expenditure on quality control, subscription, export promotion, MFHC commission and WEEP commission does not qualify for deduction as this expenditure does not fall under any of the sub-clauses of clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... help the assessee in respect of his plea that rule 6AA, which came into force with effect from August 1, 1981, would be applicable to the accounting period ending on March 31, 1981. Expenditure on quality control and on the purchase of foreign trade periodicals and journals is not eligible for deduction inasmuch as rule 6AA of the rules would not be available to the aid of the assessee. Expenditure on advertisement and samples would also not be eligible under sub-clause (ix) of clause (b) of section 35B(1) of the Act. It is not clear as to under what circumstances deduction of expenditure on advertisement and free samples was claimed and considered under sub-clause (ix) of clause (b) and not under sub-clauses (i) and (vi) of clause (b) of section 35B(1) of the Act. Be that as it may, expenditure on advertisement and samples does not qualify for deduction under sub-clause (ix) of clause (b) of section 35B(1) of the Act. Expenditure on export promotion and commission does not qualify for deduction under any of the sub-clauses of clause (b) of section 35B(1) of the Act. Question No. 1 at the instance of the Revenue is, therefore, answered in the negative, i.e., in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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