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JUDGEMENTS                                            I.T.R. 21/1983                                           Back To Index

High Court of Jammu & Kashmir at Srinagar
I.T.R. 21/83

Date Of Decision:

Commissioner of Income-tax, Amritsar  versus  M/S Modern Carpet Co.,. Srinagar.
Coram:
The Hon’ble Mr. Justice Dr. B. P. Saraf, Chief Justice.
The Hon’ble Mr. Justice Syed Bashir-ud-Din, Judge.

For the revenue: Mr. Anil Bhan, Senior Central Government Standing Counsel.
For the assessee: None appears.

JUDGEMENT AND ORDER

Per Dr. B. P. Saraf, Chief Justice (Oral)

By this reference under section 256 (1) of the Income-tax Act, 1961 ("Act") made at the instance of the revenue, the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar ("Tribunal") has referred the following question of law to this Court for opinion:

"Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assessee is entitled to the allowance of weighted deduction u/s 35-B of the Income-tax Act in respect of the expenditure on payment of commission?"

2. The assessee is engaged in the business of manufacture and sale of carpets. In course of its business, the assessee also exported carpets out of the country. In its assessment for the assessment year 1980-81, the assessee claimed weighted deduction under section 35B of the Income-tax Act, 1961 (" Act") in respect of commission of Rs.33,500/- paid to a carpet and textile commission agent, Shri Vinod Mewawalla . According to the assessee, Shri Mewawalla was instrumental in bringing the assessee and the foreign customers together for the sale of carpets on CIF basis. He claimed weighted deduction under section 35B in respect of the commission paid to Shri Mewawalla on the ground that he had procured information for him about the foreign buyers. The Income-tax Officer rejected the claim of the assessee as in his opinion the expenditure incurred by the assessee by way of payment of commission did not fall under any of the sub-clauses of clause (b) of sub-section (1) of section 35B of the Act. Aggrieved by the decision of the Income-tax Officer, the assessee appealed to the Commissioner of Income-tax (Appeals). Before the Commissioner (Appeals), the assessee produced four letters to show that Shri Vinod Mewawalla, to whom commission had been paid by the assessee, was instrumental in negotiating some sales to one Mr. Gall of France and one Mr. Gleen of West Germany. The Commissioner (Appeals) observed that none of those letters indicated that Mr. Mewawalla, had passed on to the assessee any information about the markets outside India of the goods manufactured and sold by him or that he did any publicity or advertisement for the assessee outside India. He also observed that none of the four letters showed that any technical information about the product of the assessee was provided to the prospective buyers outside India. The Commissioner (Appeals) held that the services rendered by Shri Mewawalla were not of the type specified in section 35B(1)(b) of the Act. He, therefore, dismissed the appeal of the assessee. The assessee appealed to the Tribunal. The Tribunal accepted the contention of the assessee and held that weighted deduction would be allowable to the assessee in respect of the amount of commission because there was a direct nexus between the expenditure incurred by the assessee and the export sales. The Tribunal reversed the order of the Income-tax Officer and the Commissioner of Income-tax (Appeals) and directed that weighted deduction should be allowed to the assessee in respect of the commission payment of Rs.33,500/-. Aggrieved by the above order, revenue is before us by way of the present reference.

3. We have heard Mr. Anil Bhan, learned counsel, for the revenue who submits that the assessee is not entitled to weighted deduction under section 35B of the Act in respect of the commission paid by it to Shri Mewawalla because it did not fall in any of the sub-clauses of section 35B (1)(b) of the Act.

4. We have given our careful consideration to the above submission of the learned counsel for the revenue. Section 35B provides that where an assessee, being a domestic company or a person who is resident in India, incurs any revenue expenditure referred to in clause (b) of sub-section (1), he would be entitled to weighted deduction of the amount equal to one and one-third times the amount of such expenditure. Section 35B, as it stood at the material time, so far as relevant, reads as follows:

"35B. Export markets development allowance.- (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 a 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 incufrred wholly and exclusively on.-

    1. 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;
    2. obtaining information regarding markets outside India for such goods, services or facilities.
    3. Furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities."

5. It is clear from a plain reading of the above section that only such expenditure will qualify for weighted deduction which is incurred wholly and exclusively on any of the activities referred to in the various sub-clauses of clause (b) of sub-section (1) of the Act. If the expenditure is not relatable to any of the activities referred to in the various sub-clauses of clause (b), no weighted deduction will be available. In order to get deduction under this section, the assessee will have to prove that the expenditure was incurred during the previous year wholly and exclusively for the purposes set out in clause (b) of sub-section (1) of section 35B. As observed by the Supreme Court in CIT v Stepwell Industries Ltd. (1997) 228 ITR 171, there cannot be any blanket allowance nor can there be any blanket disallowance. Every case has to be discussed specifically and the expenditure must be found to be of the nature mentioned in any one of the sub-clauses. If the expenditure does not fall in any of these categories, it cannot be allowed as a deduction. Every case will have to be examined in the light of the provisions of the sub-clauses of clause (b) and the facts proved by the assessee. The onus lies heavily on the assessee to prove that the expenditure falls within any of the purposes set out in the various sub-clauses of clause (b) of section 35B(1) and that he is entitled to weighted deduction. The authorities, including the Tribunal, are also required to give a finding as to the entitlement of the assessee to weighted deduction with reference to a particular sub-clause of clause (b) of section 35B(1).

6. In the present case, the Income-tax Officer held that the expenditure incurred by the assessee by way of payment of commission on the sales did not fall under any of the sub-clauses of clause (b) of sub-section (1) of section 35B.The Commissioner ( Appeals ) also approved the action of the Income-tax Officer . But the Tribunal allowed the claim on the ground that there was direct nexus between the expenditure incurred by the assessee and the export sales. The Tribunal, in our opinion, was not correct in saying so because none of the sub-clauses provide for deduction in respect of expenditure incurred on activities which have a direct or indirect nexus with the export sales. It appears that the assessee tried to contend before the Commissioner (Appeals) that the commission paid by him to the agent was covered by sub-clause (i) or (ii) or (vi) of clause (b). Sub-clause (i) speaks of expenditure incurred wholly and exclusively on advertisements and publicity outside India in respect of goods, services or facilities which the assessee deals in or manufactures in the course of his business. Sub-clause (ii) speaks of expenditure incurred on information obtained regarding markets outside India for such goods, services or facilities and sub-clause (vi) refers to expenditure incurred on furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities. We fail to understand as to how the commission paid by the assessee in the instant case can fall under any of the above clauses. From the facts of the case it appears that Mr. Mewawalla, who was a middleman, assisted the assessee in selling the goods to foreign buyers. The assessee paid commission on the sales affected by him with the help of the middleman. The commission paid to Mr. Mewawalla can by no stretch of imagination be regarded as expenditure incurred on advertisements or publicity outside India in respect of goods dealt in by the assessee. It is also not the case of the assessee that Mr. Mewawalla obtained information regarding markets outside India for the goods dealt in by it as contemplated by sub-clause (ii). Sub-clause (vi) obviously cannot be applicable because the expenditure in question was not incurred for furnishing to a person outside India samples or technical information for the promotion of sales of goods dealt in by the assessee. The payment in question is nothing but payment of sales commission to a middleman for the purposes of affecting sale. It does not make a difference whether the buyer was an Indian buyer or a foreign buyer. The Tribunal in such a case could not have held that the assessee was entitled to weighted deduction.

7. It may be pertinent in this connection to refer to the decision of the Supreme Court in CIT v Hero Cycles (1997) 228 ITR 463 wherein it has been held:

"…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)."

8. The Commissioner of Income-tax in the present case has recorded a categorical finding of fact that the person to whom the commission was paid neither passed on to the assessee any information about the market outside India of the goods manufactured and sold by him nor did he do any publicity or advertisement for the assessee outside India. He also observed that there was nothing to show that any technical information was provided by the so-called agent to the prospective buyers outside India. The Tribunal has not found fault with this finding. In view of the above finding it is apparent that this case does not fall in any of the sub-clauses of clause (b) of sub-section (1) of section 35B of the Act.

9. We are supported in our above conclusion by the decision of the Supreme Court in Arvinda Parmila Works v CIT (1999) 237 ITR 234. In that case, the assessee, who exported agarbathis, paid commission to agents outside India who had procured orders and claimed weighted deduction under section 35B(1)(b)(iv) of the Act. The claim of the assessee was disallowed by the assessing authority. Though the Commissioner (Appeals) reversed the order of the Income-tax Officer, it was upheld by the Tribunal. On reference, the High Court also held that the assessee was not entitled to deduction under section 35B(1)(b)(iv) of the Act. The assessee went in appeal to the Supreme Court. The question before the Supreme Court was whether the commission that the assessee had paid to the agents outside India who had procured orders was expenditure on the maintenance outside India of agencies for the promotion of the sale outside India of its agarbathis. It was held (at p 287):

"What is required is an analysis of the provisions of section 35B(1)(b)(iv). The expenditure that is referred to therein has to be incurred on the maintenance outside India of branch, office or agency for the promotion of sales outside India of the assessee’s goods, services or facilities. Therefore, what is requisite is that the assessee should have maintained the branch, office or agency outside India. It is also requisite that such branch, office or agency should be for the promotion of sales outside India of the assessee’s goods, services, facilities. When payment is made, as here, by an assessee of commission to agents outside India who had procured orders, the requirements of clause (iv) are far from satisfied. There is, in the first place, no maintenance by the assessee of the agency. Secondly, the expenditure has to be incurred on the promotion of sales of the assessee’s goods outside India. When expenditure is incurred by way of payment of commission on particular sales, that is not expenditure on the promotion of the assessee’s sales in general."

10. In view of the foregoing discussion, we are of the clear opinion that in the instant case, the Tribunal was not justified in holding that the assessee was entitled to weighted deduction under section 35B(1) of the Act in respect of the expenditure on payment of commission on the sales affected by it. The payment made by the assessee by way of commission is nothing but sales commission to a person for the purposes of affecting sales. Even if the middleman brought the assessee and the foreign buyers together for the sale of carpets, as contended by the assessee, the commission paid to the middleman would not fall in any of the sub-clauses, including sub-clauses (i), (ii) or (vi) of clause (b) of sub-section (1) of section 35B of the Act.

11. In the premises, the question referred to us is answered in the negative, i.e., in favour of the revenue and against the assessee.

12. This reference is disposed of accordingly, with no order as to costs.