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TMI Blog1979 (2) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... h, 1973. The assessee filed an appeal before the AAC but, being rejected on some of the points, has come up in second appeal. To the extent the AAC has given relief to the assessee, the Revenue is not in appeal and, therefore, we shall be involving ourselves only with the disputes which are protected from the memorandum of appeal and to the extent these are agitated before us. 3. At the outset, we like to make it clear that Shri. D.S. Gupta, Advocate, appearing in the company of Shri Ravinder Gupta, Advocate for the assessee-company, not only specifically sought this Bench's permission to withdraw ground No. 4 but also gave up some of the agitation's in respect of ground No. 3. The learned Advocate's request was accepted. Therefore, treatment given to parts of ground No. 3, with which we shall be dealing later in those order. 4. In ground No. 1 the contention raised is that the AAC wrongly confirmed the disallowance of Rs. 9,901 out of the employees welfare expenses. Related facts are that the assessee arranged trips of its employees to Vaishnu Devi, a pilgrimage some 42 miles from Jammu City (J&K State) and in that connection incurred expenditure totalling Rs. 9,901. The ITO h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 2,318 incurred by the assessee on its foreign visitors to boost its export. The claim before the ITO, and which was rejected, was that the prohibition of s. 37 (2B) of the Act could not play any role in respect of weighted deduction as provided under s. 35B of the Act. The AAC upheld the ITO's action. 7. Before we proceed with the arguments of the parties we like to notice the provisions of s. 37 (1) and also like to keep in focus s. 35B of the Act and for that reason such provisions are reproduced as follows: "37(1) Any expenditure (not being expenditure of the nature described in ss. 30 to 36 and s. 80 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed in computing the income chargeable under the head " profits and gains of business or profession." "35(B) (1) (a). Where an assessee, being a domestic company of a person (other than a company) who is resident in India, has incurred after the 29th February, 1968 whether directly or in association with any other person, any expenditure (not being in the nature of capital expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of — (i) operation of any ship or other vessel, aircraft or vehicle, or (ii) carriage of, or making arrangements for carriage of, passengers, live-stock, mail or goods, on or in relation to such operation or carriage or arrangements for carriage (including in each case expenditure incurred on the provision of any benefit, amenity or facility to the crew, passengers or livestock) shall not be regarded as expenditure incurred by the assessee on the supply outside India of services or facilities. 2. Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to in sub-s. (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year. 3. Shri D.S. Gupta referring to the opening words of ss. 37(1) and 37 (28) of the Act submitted that s. 37, its benefits and prohibition come into operation only if an expenditure is not covered under ss. 30 to 36 of the Act. The argument was that there was no question of bringing in the provisions of s. 37 of the Act at all as the assessee was not claiming the said expenditure of Rs. 2,318 under s. 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t paid to ECGC Corpn. Bombay 391.13 13-8-1970 Amount paid to ECGC Corpn. Bombay towards premium for July, 1970 302.55 4-9-1970 Amount paid to ECGC Corpn. Bombay, towards premium 10.15 10-9-1970 Amount of premium paid to ECGC, Bombay on export incentive for the month of August, 1972. 412.50 9-10-1972 C/o free samples sent to M/s Hari Chand Lodha Pvt. Ltd., Bombay 14.00 26-10-1970 Amount of freight paid through Sh. Daya Parkash, 4.20 4-12-1970 C/o one chain wheel set sent to M/s Mambs Cycle Ind. Pvt. Ltd., Daresalla, as free sample 5.00 15-4-1972 Amt, of expenses through Sh. Omesh Goyal on the visit of Sh. Surdar Kallur from West Germany 187.43 26-4-1971 Amount of expenses incurred through Sh. H.D. Vijay on the visit of Mr. G, Jaonnou from New York 60.29 11-5-1971 Amt. of expenses incurred through Sh. P.K. Walia on the visit of Mr. G. Jaonnou, New York. 169.85 18-5-1971 Amt. of expenses incurred through Sh. N.D. Vijay on the visit of Mr. G, Jaonnou from New York 30.40 14-6-1971 Amount remitted to Bank of India Bombay, being the charges. 30.55 16-6-1971 Amt. of expenses incurred through Sh. N.D. Vijay on the visit of Mr. Paul from U.S.A. 104.05 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quarely applies. 11. Before we proceed further, we like to reproduce in this order some portion of the special Bench decision, as noted above, in order to project that not only the dispute was hotly agitated but all aspects of s. 35B of the Act were in focus before the Special Bench and have been analysed. Since we are relying on the Special Bench decision, and the reasons recorded therein for deciding this appeal, we shall not be dealing with the arguments raised for the Revenue before us if any portion of the Special Bench decision has the effect of taking care of such argument. Reproduction of the paras of the Special Bench order shall have the effect of dealing with the case before us from all angles and in its proper perspective— "1. The amplitude of the operation arena of s. 35B of the Act. The tax-payers having anything to do in the nature of export business, be it in scale big or small and in engagement full or part wanting to stretch it to the utmost for bringing within its perimeter for weighted deduction any and every king of expenditure incurred in connection with or in relation or as incidental to such business irrespective of whether the relationship of the expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit would be available only to the assessee's who have in fact exported goods during the relevant year or have earned profits out of exports. The admissibility of the allowance under the section, as appears to us, is irrespective of the question whether the assessee has exported any goods during the relevant year or whether he has earned any profit out of exports. 10. The section speaks itself in precise terms that the benefit of the weighted deduction referred to in clause (a) of its sub-s. (1) is confined squarely to only such expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) as are referred to in clause (b) of that sub section. In face of this unambiguous condition specified, the contention urged on the side of the assessee that what are given in clause (b) need only be taken as descriptive by way of guidance, is clearly unsustainable. The positive prescription contained in clause (a), in out opinion, should be, on the other hand, emphatically shut out from the beneficent penumbra of the section any expenditure whatever its purpose and effect, which does not squarely fall in any of the sub-clauses of clause (b). It is not for u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for its export business except where these are incidental to the activities outside India such as preparation and submission of tendors, referred to in item (vi), is not sustainable. In fact, the Bombay High Court in its order in I.T. Application No.258 of 1976 in the case of M/s. Eldee Wire Ropes Ltd., has rejected such a stand taken by the Department, observing thus : "It would appear that where the legislature desired to exclude the expenditure incurred in India for the purposes of giving benefit of weighted deduction to the assessee, it expressly did so by specifically mentioning such exclusion in the sub-section for example in sub-cl. (iii). It must follow that where this was not done, the expenditure can be incurred by the assessee either outside India or in India but it must pertain to the purposes mentioned in the various sub-sections, which purposes are indicated as pertaining to various activities outside India". It must follow that an assessee would be entitled to weighted deduction of expenses referred to in sub-cls. (i) (ii) and (iv) to (viii) of s. 35B (1) irrespective of the question whether they are incurred outside or inside India.". "14. Sub-cl. (i) deals w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vi) similarly takes care of expenditure. Here again irrespective of the place where it is incurred or furnishing to a person outside India samples or technical information for the promotion of sale under sub-cl. (vii), expenditure incurred wholly and exclusively on travelling outside India, for the promotion of the sale outside India, including travelling outward from and return to India, qualifies for weighted deduction. As in the other cases, referred to ante, here too there is nothing barring a claim in respect of such expenditure incurred in India. Sub-cl. (viii) brings within the ambit of the section expenditure wholly and exclusively incurred on performance of services outside India in connection with or incidental to the execution of any contract for the supply outside India of such goods, services or facilities. In this too, as in sub-clause. "(V), incidental activities are brought in. Here again, it is clear that such incidental activities must have a nexus with the execution of contract. And also such expenditure, wherever incurred, would be qualified. The only restriction is what is imposed by Expln. 2 to s. 35B (1) which lays down that expenditure referred to therein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are not prepared to go with Sh. Jain. When we observe this, we have in clear focus his contention that motive, purpose and activity are three different concepts. As a matter of fact, it is because of the said three distinct concepts which prompt us to decide the issues in favour of the assessee. In the present case, the motive, purpose and the activity of the assessee in treating its foreign visitors was to boost its export and the expenditure clearly falls within the purview of cl. (i) and/or (ii) of s. 35B. We have also not been able to appreciate the learned Departmental Representative's submission that unless an expenditure is allowable under any of the provisions of the Act, the question of weighted deduction under s. 35B simply does not arise. S. 35B (1) (a) in term speaks of deduction being allowed and, therefore, the Revenue's contention that s. 35B of the Act only quantifies a relief without being an instrument for relief being granted, is rejected. 13. The provisions of s. 37 and the prohibition contained therein has a role to play in respect of a claimed expenditure only if ss. 30 to 36 of the Act do not cover the situation. As far as the expenditure of Rs. 2,318 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alternatively, that s. 35B contemplates only pre-sale and not post-sale expenses and the commission payment necessarily being a post-sale feature only, the said expenditure was rightly denied the benefit of weighted deduction. As far situs question is concerned, we reject the Revenue contention that unless the expenditure is incurred out-side India, s. 35B of the Act plays no role. The reason is that only expenditure as contemplated under sub-cl. (iii) is outside the preview of weighted deduction if the situs is not outside India. The Special Bench has discussed this aspect of length in paras 10 and 13, reproduced above, and we are in complete agreement with the reasoning of the Special Bench. The commission payment to M/s. Kabul Trading Co., is held to be entitled to weighted deduction independently under sub-cls. (i), (ii) & (vi) of s. 35B (1)(b) of the Act because it was that partly who furnished information to the assessee and published its goods in Kabul and it was through that party that 1530 cycles were exported. We do not find any support for the Revenue's contention that unless the expenditure as contemplated under s. 35B of the Act is incurred before the services are rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e annexture at the impugned order. I have carefully considered the computation made by the ITO and the arguments on behalf of the appellant. In the absence, the ITO was justified in estimating such expenses. The estimates made by him are also considered reasonable in the case of K.L. Sharma. Consequently, the addition of Rs. 5,613 made by the ITO under s. 40A(5) is upheld. Shri Gupta relying on the Gujarat High Court judgement dated 23rd March, 1976 in Addl. CIT vs. Tarun Commercial Mills Ltd(3). submitted that the upper limit of permissible remuneration payable to the directors of a company being Rs. 72,000 per annum, the ITO and the AAC fell in error in bringing into play the provisions of ss. 40A(5) and 40(c) of the Act do not conflict with each other. The argument was that s. 40(c) of the Act is restrictive in nature which lays down that even reasonable remuneration exceeding Rs. 72,000 per annum to directors would not be permissible and the provisions of s. 40A (5) of the Act have a different field to operative inasmuch as it lays down that perquisites cannot exceed 1/5th of the amount of the salary. The noted Gujarat High Court judgement is a clear authority for the propositi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so far as s. 40 provided for non-deductible amounts in computing the income chargeable under the head profits and gains of business or profession" a clear distinction was made in case of companies where expenses objected resulted directly or indirectly in the pro vision of any benefit or amenity or perquisite to a director and which resulted directly or indirectly in the provision of benefit, amenity or perquisite to an employee; that by the legislative changes brought out in clause (c) by the Finance Act, 1968 which deleted sub-cl. (iii) of clause (c) and inserted sub-cl. (5) to clause (a) in s 40 of the Act, the distinction between an employee and director of a company-assessee was not sought to be done away with (by the said amendment). The High Court pointed out that the distinction in the matter of deductibility of expenses made by the company in a case of directors and employees before the Finance Act of 1964 or thereafter continued to prevail because in the ultimate analysis, the Legislature was making different provisions about the amount of expenses which would not be deductible in computing the income chargeable under the head 'profits and gains of business or profession' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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