TMI Blog1981 (12) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... see is carrying on business in the export of handlooms, handicrafts and antiques and this export business is its only business activity. We are concerned in this reference with the assessment year 1970-71 for which the relevant previous year was the financial year 1969-70. The Tribunal has referred to us four questions of law which read as follows : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that cash assistance of Rs. 11,70,000 rendered by the STC was not a trading receipt in the hands of the assessee and thereby deleting the addition of Rs. 11,70,000 made by the Incometax Officer to the income of the assessee-company for the assessment year 1970-71 ? (2) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 6,64,387 being general administration expenditure in India qualified for weighted deduction under section 35B of the Incometax Act, 1961 ? (3) Whether, on the facts and in the circumstances of the case, the weighted deduction under section 35B of the Income-tax Act, 1961, is allowable in respect of the assessee's claim of Rs. 6,05,935 ? and (4) Whether, on the facts and in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s unnecessary to discuss the details here because we find that the Tribunal has not dealt with the assessee's claim at all in regard to this subject-matter. The assessee in its grounds of appeal had stated that the AAC should have allowed the entire claim of Rs. 5,96,128 and the Tribunal proceeded to dispose of the assessee's appeal under the impression that this entire amount was in dispute before it. However, it proceeded to say as follows : " It was contended that the items comprised in the aforesaid amount had become ascertained liability in the year under appeal. Out of this amount only the disallowance of the following amounts were challenged before us: Rs. Customs 5,18,435 Freight 2,356 Purchase 66,156 Difference in exchange 18,988 The customs duty of Rs. 5,18,435 was paid in New York and as such it is not an expenditure incurred in India so as to qualify for a deduction u/s. 35B. Similarly, the freight of Rs. 2,356 was incurred there in New York from port to Sona Shop and is inadmissible. The items of purchases of Rs. 66,156 and a difference in exchange of Rs. 18,988 do not fall un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... STC of India. In this export business the assessee suffered losses year after year. In the previous year relevant to the assessment year 1965-66, an amount of Rs. 6,05,000 was received by the assessee from the STC in order to make good the losses suffered by the assessee. Similarly, in the accounting year relevant to the assessment year 1966-67, the assessee received sum of Rs. 4,52,000 from the STC. The question arose in those assessments whether the sums thus received by the assessee from the STC were liable to be treated as part of the assessee's income. It was held by this court that the amounts had been given by the STC to the assessee to enable it to recoup the losses incurred by it and that they were only in the nature of contribution of capital. On behalf of the Department, it was pointed out that the assessee had also received, during those years, a subsidy from the Government by way of a grant-in-aid towards exports and that the Tribunal had accepted the Department's case that the grants received from the Government were taxable and it was urged that the same principles were applicable also to the amounts received from the STC. This contention was negatived by the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the losses had been recouped by the amounts given in earlier years and the sum of Rs. 2,04,640 was given with a view to enable the assessee to write off all the losses of the earlier years' So far as this item is concerned both the AAC and the Tribunal deleted it and the correctness of their findings is the subject-matter of ITR No. 196/77, which is pending before this court. We are not here concerned with it. So far as the sum of Rs. 11,70,000 is concerned, however, the AAC rejected the plea of the assessee but the Tribunal accepted it and it is the correctness of the conclusion of the Tribunal that is challenged before us. We have heard learned counsel on both sides in regard to this matter and we agree with the conclusion of the Tribunal that the sum of Rs. 11,70,000 stands on no different footing from the amounts received from the STC in earlier years. We have pointed out that what happened in earlier years was that the assessee, having incurred certain losses in its export business, approached the STC for assistance to enable it to meet its liabilities consequent on such losses and the STC agreed to do so by reimbursing the losses incurred by the assessee. There was, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sugar mills to compensate them for the loss of profits resulting from the Government orders to pay wages at an enhanced rate. We may also refer, in this context, to the decision of the Punjab Haryana High Court in Ludhiana Central Co-operative Consumers' Stores Ltd. v. CIT [1980] 122 ITR 942, which also dealt with the assessability of a Government subsidy to recoup revenue expenditure incurred by an assessee. There is, in our opinion, a basic difference between grants made by a Government or from public funds generally to assessees in a particular line of business or trade, with a view to help them in the trade or to supplement their general revenues or trading receipts and not earmarked for any specific or particular purpose and a case of a private party agreeing to make good the losses incurred by an assessee on account of a mutual' relationship that subsists between them. The former are treated as trading receipts because they reach the trader in his capacity as such and are made in order to assist him in the carrying on of the trade. The amounts with which we are concerned are different. They are not grants received from an outsider or the Government on such general groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(a) referred to above and sub-s. (2), which are not applicable here) in extenso: " 35B. (1)(a) Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th day of February, 1968, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in clause (b), he shall, subject to the provisions of this section, be allowed a deduction of sum equal to one and one-third times the amount of such expenditure incurred during the previous year ....... (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rting the goods imported from India from one place to another in U.S.A. 2,356 (c) purchase of goods effected by the New York office in U.S.A. for purposes of sale. 66,156 (d) Difference in exchange accounted for in the New York office with regard to the goods imported from India for sales in U.S.A. 18,988 Out of the above items the AAC held that the claim in respect of customs duty, freight and purchases in U. S. A. could clearly not be treated as qualifying expenses in view of the provisions of sub-cl. (iii) of cl. (b) of s. 35B(1). In regard to the payment of differences in exchange the AAC held that since these were losses incurred in India in connection with distribution, supply or provision of goods and services outside India it was hit by sub-cl. (iii). The Appellate Tribunal, as already pointed out, dealt with these items under a wrong impression that it was part of a sum of Rs. 5,96,128 but it disposed of the assessee's claim as follows. It held that the customs duty having been paid in New York and having not been incurred in India, it was not deductible. The freight had been incurred for sendin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure " on the carriage of the goods ". The assessee is, therefore, entitled to deduct this item under sub-cl. (iii) referred to above. This conclusion also derives support from the judgment of the Madras High Court in the case of CIT v. Kasturi Palayacat Co. [1979] 120 ITR 827 in which this point is dealt with in brief at p. 836. (b) Freight: We do not think that the assessee is entitled to deduction under s. 35B(1)(b)(iii) in respect of the expenses on freight. This is because the freight in question clearly falls under the description of expenditure (incurred in the States) on the carriage of the assessee's goods to their destination outside India. As pointed out by the AAC and the Appellate Tribunal the freight was incurred in transporting goods from the port to Sona Shop which was their destination in New York. We, therefore, think that the Tribunal was correct in disallowing this item. Sri Bishamber Lal suggests that, once we come to the conclusion that the freight is an expenditure on carriage of goods, the assessee is entitled to the benefit of weighted deduction. According to him, sub-cl. (iii) permits the allowance of expenditure on the" distribution, supply or provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd facilities " and it was the intention of the Legislature to allow such expenditure also the benefit of weighted deduction, the Legislature, it seems to us, would have made the position clear by mentioning this type of expenditure as an independent item covered by another sub-clause. There would in that event be no necessity or purpose in referring to it in sub-cl. (iii) and that too at the tail end of an exception carved out in that sub-clause. .For these reasons we are of opinion that the correct interpretation of sub-cl. (iii) is that it allows all expenditure on distribution, supply, etc., of goods, etc., outside India, except-(i) expenditure, incurred in India in connection with supply, distribution or provision; and (ii) expenditure on carriage or transit insurance of such goods, wherever incurred. The assessee is, therefore, not entitled to weighted deduction in respect of the freight. (c) Expenditure on purchases: So far as this item is concerned, prima facie, it does not appear to fall under any of the sub-clauses of cl. (b). But it was explained on behalf of the assessee that sometimes as a result of having entered into contracts for the supply of certain goods abroa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity under s. 35B of a sum of Rs. 6,64,387. This represents the general administration expenses incurred by the assessee in India on account of salary and other establishment charges of the head office at Delhi and the branch at Madras. The assessee's claim was that though this amount represented the expenditure incurred in India generally for running the assessee's business it was still allowable under s. 35B: Firstly, because the assessee is a company whose only business was that of exports and, therefore, any expenditure incurred by it was with a view to develop its exports and, secondly, because the administrative establishment located at Delhi and Madras was attending to the following aspects of the export business carried on by the assessee: (a) attending to the supply of goods in respect of orders secured by the foreign office from foreign customers ; (b) obtaining information regarding the market outside India and keeping watch over the taste and demand of the corporation's goods in several countries ; (c) sending samples and descriptive information regarding the corporation's product to foreign buyers which resulted an increase in sales; and (d) executing order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at this was a reasonable claim. He contended that a much larger percentage of the total administrative expenditure had been allowed by the Commissioner (Appeals) for the assessment year 1971-72 and by the ITO himself for the assessment year 1977-78. He submitted before us charts giving the details of the claim in respect of everyone of the items of the subclause of cl. (b) under which the items would fall and the extent to which the claim had been allowed, in the years above referred to. He contended that, in the circumstances, he was entitled to the weighted deduction in respect of the conservative claim for only 25% of the expenditure made by the assessee this year. We do not propose to refer to the documents relied upon by Sri Bishamber Lal, for these papers do not relate to the accounting year presently under consideration and they are not part of the statement of the case submitted to us. We are, however, of opinion that the question cannot be answered on the materials available in the printed papers and will require an itemwise examination of the constituent elements of the administrative expenses incurred by the assessee and a meticulous analysis to arrive at the extent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on no material and that its conclusion that only 2 1/2% and 50/. of the expenditure referable to item (d) will qualify for deduction smacks of arbitrariness and guess-work. We say so for the reasons discussed below. In the first place, it appears to us that the categorisation of the administrative expenses into four heads for purposes of analysis was only of a general nature. It was not correct to treat it as an exhaustive or comprehensive categorisation of the expenditure by reference to the various sub-clauses of cl. (b). It appears to have been assumed that all expenses falling under heads (a) and (d) related to sub-cl. (iii), those under head (c) to sub-cl. (vi) and those under head (b) to sub-cl. (ii). So far as items falling under heads (a) and (d) were concerned this was not a correct assumption. To give an example, to the extent the administrative expenditure contains items relatable to the preparation and submission of tenders for the supply and provision outside India of goods, services or facilities and activities incidental thereto it would fall under sub-cl. (v) of cl. (b) and not under sub-cl. (iii). Similarly, expenses of administration but connected with the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee and for business promotion in the States. But the case of the assessee that a portion of the general administrative expenditure is also attributable for obtaining information regarding market outside India, keeping track of the taste and demand of its foreign customers, forwarding samples and descriptive information to foreign buyers and carrying out the orders received from abroad has been ignored by the AAC and the Tribunal. In our opinion, the assessee should be entitled to a deduction of a proper percentage of the expenditure on general administration which may be attributed to activities falling under these items. Similarly, so far as head (c) is concerned, it is no doubt true that the AAC has roughly estimated such expenditure at 2 1/2% and the Tribunal has allowed about 5%. But both of them have been under the impression that a good part of the expenditure falling under items (b) and (c) have already been claimed and allowed under s. 35B and it was in this view that the allowance has been restricted to the extent above-mentioned. We are of opinion that in these circumstances, it is necessary that the Tribunal should examine the nature of the expenditure specifically cla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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