Per Shri B. S. Ahuja, Judicial Member - The department is in appeal against the order of the Commissioner (Appeals) holding that the assessee-company is not entitled to weighted deduction under section 35B (1A) of the Income-tax Act, 1961 (the Act), for the assessment year 1979-80 as it has not satisfied the conditions laid down in the said section.
2. The assessee is an exporter of diamonds. It imports rough diamonds, gets them cut, polished and assorted in various lots and then exports them. It had set up its own manufacturing unit at Kallur In Kerala State. The total quantity of diamonds manufactured by this small-scale industrial undertaking owned by the assessee was 314.42 carats out of a total export of 30,412 carats. The assessee claimed weighted deduction on the plea that it was a small-scale exporter within the meaning of section 35B (1A) (a) (i). The ITO held that the assessee had exported only 10 per cent of the diamonds manufactured by itself and was, therefore, not entitled to weighted deduction. The Commissioner (Appeals) came to the conclusion that the assessee satisfied all the conditions and was entitled to weighted deduction.
3. It is a fact that the assessee owned a small-scale industrial undertaking in Kerala and did not own any other industrial undertaking. It exported goods and it is a domestic company. The Commissioner (Appeals) held that there was no stipulation in the section that the exports of the goods must entirely be those which have been manufactured by the domestic company itself in its own undertaking or that such exports should form substantial portion of other exports.
4. The department is aggrieved and is in appeal. We have heard the learned departmental representative and also the learned counsel for the assessee. It is the contention of the department that the assessee cannot claim that it is a small-scale exporter, when it is manufacturing only less than 10 per cent of the diamonds exported by it and more than 90 per cent of the exports are as a trader purchasing diamonds from others and getting them cut and polished from other parties.
5. The assessee-company, on the other hand, submitted the assessee satisfied all the conditions in the said section. The assessees contention was that since it exported goods manufactured by it, the relief could not be restricted only to the proportion of the total exports with reference to the quantity manufactured by itself, but that the weighted deduction should be allowed on the entire export in respect of the qualifying expenditure. He stressed the provision of section 35B (1A) (a) (i) where the words used are :
Business of export of goods.
The contention of the learned counsel for the assessee was that these words were unnecessary if the assessee was not entitled to weighted deduction on the entire export. Reliance was placed on the Supreme Courts decision in Cloth Traders (P.) Ltd. v. Addl. CIT : 118ITR243(SC) for the proposition that there was difference between the qualifying conditions and the quality of income.
6. We do not propose to refer to this ruling since, in our opinion, it is totally of no assistance in resolving the point at issue before us.
7. The further contention of the learned counsel for the assessee was that the expenses which qualified for weighted deduction under section 35B (1A) (b) (i) would be as exporter of goods and not as a small-scale exporter. Therefore, he urged that the Commissioner (Appeals) had rightly allowed weighted deduction on the entire qualified expenditure on the export. But in the alternative, he claimed that at least to the extent that the assessee had qualified as a small-scale exporter, it would be entitled to weighted deduction on the proportionate expenditure.
8. We have considered the rival contentions. The question for our decision pertains to the interpretation of section 35B (1A) which came into effect from 1-4-1978 and was on the statute book up to 31-3-1980. Before attempting to interpret the said sub-section we produce it below :
'(1A) Notwithstanding anything contained in sub-section (1), no deduction under this section shall be allowed in relation to any expenditure incurred after the 31st day of March, 1978, unless the following conditions are fulfilled, namely :-
(a) the assessee referred to in that sub-section is engaged in -
(i) the business of goods and is either a small-scale exporter or a holder of an Export House Certificate; or
(ii) the business of provision of technical know-how, or the rendering of services in connection with the provision of technical know-how, to persons outside India; and
(b) the expenditure referred to in that sub-sections incurred by the assessee wholly and exclusively for the purposes of the business referred to in sub-clause (i) or, as the case may be, sub-clause (ii) of clause (a).
Explanation : For the purposes of this sub-section, -
(a) small-scale exporter means a person who exports goods manufactured or produced in any small-scale industrial undertaking or undertakings owned by him :
Provided that such person does not own any industrial undertaking which is not a small-scale industrial undertaking;
(b) Export House Certificate means a valid Export House Certificate issued by the Chief Controller of Imports and Exports, Government of India;
(c) provision of technical know-how has the meaning assigned to it in sub-section (2) of section 80MM;
(d) small-scale industrial undertaking has the meaning assigned to it in clause (2) of the Explanation below sub-section (2) of section 32A.'
9. It has to be remembered that in the two years when sub-section (1A) was on the statute book, the right to weighted deduction was severely curtailed. Not only the eligibility of the assessees was curtailed by introduction of clauses (a) (i) (ii) and (b), but even the heads of expenditure in sub-clauses (i) and (iii) of clause (b) of section 35B (1A) were omitted from entitlement to weighted deduction. It is in the background of this policy change that the provisions of sub-section (1A) have to be interpreted.
10. Sub-section (1A) opens with non obstinate clause and says that notwithstanding anything contained in sub-section (1), no deduction under this section shall be allowed in relation to any expenditure incurred after 31-3-1978, under the following conditions are fulfilled :
(a) The assessee referred to in that sub-section is engaged in -
(i) the business export of goods and is either a small-scale exporter or a holder of an export house certificate; or
(ii) the business of provision of technical know-how or the rendering of services in connection with the provision of technical know-how, to persons outside India; and
(b) The expenditure referred to in that sub-section is incurred by the assessee wholly and exclusively for the purposes of the business referred to in sub-clause (i) or, as the case may be, sub-clause (ii) clause (a).
11. Now, the assessee before us is indeed a small-scale exporter insofar as it exports goods manufactured or produced in a small-scale industrial undertaking owned by it in Kerala. The total production therein which the assessee exported this year was 314.42 carats out of the total exports of 30,412.85 carats. The export as a small-scale exporter was, thus, only 9.68 per cent of the total export.
12. The question arise, would the assessee be entitled to claim weighted deduction on expenses incurred on the entire export when the qualifying export as a small-scale exporter is only 9.68 per cent of the total In our opinion, the answer is in the negative, particularly in view of the provisions of sub-section 1A (b) which lays down that 'the expenditure incurred after 31-3-1978 is incurred by the assessee wholly and exclusively for the purposes of the business referred to in sub-clause (i) or, as the case may be, sub-clause (ii) of clause (a)'. This provision has tone read with subsection 1A (a) (i) which was the and after the business of export of goods and before is either a small-scale exporter.
13. Thus, only the expenditure incurred wholly and exclusively as a small-scale exporter would qualify for weighted deduction and not as a merchant exporter by purchasing the diamonds from other traders or small-scale or large-scale manufacturers. This is the plain literal meaning of the sub-section (1A) and it also accords with the intention of the Legistrature in enacting this provision. That this restrictive provision did not yield goods results is clear from the fact that after two years, it was omitted from the statute book. The extent of the restriction would be clear from the definition of a small-scale exporter in the explanation that it must own the small-scale industrial undertaking and does not own any large-scale industrial undertaking. The benefit was severely restricted only to those who owned small-scale industrial undertaking or undertakings and exported goods manufactured therein.
14. The reference to words used in sub-clause (i) of section (1A) (a) The assessee referred to therein is engaged in the business of export; of goods does not mean that the weighted deduction was allowable on the entire expenditure on total exports, but the words were used in contradistinction with export of services of facilities which did not qualify for weighted deduction in those two years except to the extent of the export of technical know-how, as provided in sub-clause (ii).
13. We, therefore, do not agree with the Commissioner (Appeals) that the assessee was entitled to weighted deduction on the entire qualifying expenditure. We hold that the assessee is entitle to weighted deduction only in regard to 9.68 per cent of the qualifying expenditure to be comput4ed by the ITO under section 35B (1) (b), having regard to the decision of the Special Bench of the Tribunal in the case of J. Hemchand & Co.
16. The departments appeal is partly allowed.