1. These are cross appeals preferred by the assessee and the revenue.
The assessment year involved is 1973-74. The controversy centres round the claim of the assessee under Section 35B of the Income-tax Act, 1961 for weighted allowance of its expenditure under various heads.
2. The assessee is solely engaged in the export of textile goods procured by it from mills and manufacturers in India. Its total turnover of the year is Rs. 77,12,111.21 and purchases Rs. 65,51,785.97. In the assessment proceedings it claimed before the ITO, for the purpose of weighted deduction under Section 35B, expenses on account of commission, postage and telegrams, local travelling expenses, sample charges, label charges, salary and bonus paid to the employees in India, sales promotion expenses and Export Credit Guarantee Corporation insurance. It is seen from the assessment order that besides claiming these expenses specifically, the assessees, by a special note, claimed beneficial treatment under the section also for all the other general expenses. The ITO was of the opinion that barring commission paid to foreigners none of the other expenses claimed could be classified as expenses for the purpose of export markets development and accordingly allowed weighted deduction only in respect of the amount of Rs. 85,097 paid as commission to foreigners.
3. The assessee took up the matter in appeal before the AAC. The AAC, for reasons made not clear, took up for consideration the assessee's claim in respect of the following only :1. Commission paid in India besides what had been allowed by the ITO 1,20,640 Corporation 10,592 ----------- Though the AAC did notice that before the ITO the assessee had contended that being engaged exclusively in exports, all its expenses would qualify for deduction under Section 35B, yet he considered that it would suffice if the assessee's claim enumerated above is examined.
And in what followed, the AAC held that the benefit of Section 35B should be made available to commission paid in India, sample charges, salary and bonus and sales promotion expenses and not to the others in the list above.
3. Regarding postage and telegrams, the AAC observed that as the expenditure on them was incurred in India in connection with the distribution, supply or provision of goods outside India, it came within the exclusion in Sub-clause (iii) of Section 35B(1)(b). For the same reasons, the AAC found the claim relating to travelling expenses also unacceptable. It was further observed by the AAC that those expenses were not shown to have been incurred for the purpose of obtaining information regarding export markets or for the purpose of advertisement or publicity of the exported goods. The expenditure on labels affixed on the exported goods was also taken by the AAC as incurred in India in connection with the distribution, supply of provision of provision of goods outside the country to fall within the same exclusion. Regarding the Export Credit Guarantee Corporation insurance, the AAC taking it to be expenditure incurred on the insurance of goods while in transit held that too will fall within the exclusion in Sub-clause (iii) of Section 35B(1)(b). These findings of the AAC are specifically challenged by the assessee in its appeal.
There is also the claim urged, as had been done earlier at any rate before the ITO, that under Section 35B the assessee is entitled to weighted deduction in respect of all the expenses incurred by them and debited to the Profit and Loss Account of the year.
4. The department in its appeal has challenged the correctness of the AAC's decision allowing weighted deduction in respect of commission, salary and bonus and sale promotion expenses.
5. We have in our order in the case of J.H. & Co. v. Second ITO [IT Appeal Nos. 3255 and 3330 of 1976-77] heard along with these appeals, considered in detail the scope of Section 35Band the ambit of its operational provisions. As the relevant portion of that order is affixed to this order as Annexure, there is no need to reiterate here our views on the subject. What needs be done is only to apply the principles laid down there to the particular facts of this case. We have held there that, except for purposes of Sub-clause (iii) of Section 35B(1)(6), the place where the expenditure incurred is of no consequence. That being so, the ground on which the ITO disallowed the assessee's claim on the disputed items only on the ground that they all represented expenditure incurred in India cannot be sustained. We have also held in the said appeals that for an expenditure to be entitled to weighted deduction under the provisions of the section, it is mandatory that it must fall in one or the other of the sub-clauses of Section 35B(1)(6). We do not know on what basis the AAC classified and took the entire expenditure incurred by the assessee in India as postage and telegrams on distribution and supply of goods outside India to fall within the exclusion of Sub-clause (iii). The matter, in our view, requires further examination and if it is seen that any part of it can be considered as expenditure on activities specified in any one or more of the other sub-clauses, then irrespective of the fact that such part of expenditure is incurred within the country, the same would be entitled to weighted deduction.
6. There is no dispute about the fact that the travelling expenses for which claim is raised for weighted deduction are all incurred on travels within India. There is no proof that these internal travels were undertaken for purposes of advertisement or publicity outside India or for obtaining information regarding foreign markets. If it had anything to do with the object specified in Sub-clause (iii), then for the very reason that the expenditure is incurred in India, it would fall within its exclusion. Also the expenditure is not shown to have anything to do with any of the objects specified in Sub-clause (iv), (v), (vi) or (vii) of Section 35B(6)(b). The travelling referred to in Sub-clause (iii) has to be outside India. As this does not fall in any of the provisions of the section, we confirm the decision of the lower authorities on this.
6A. The expenditure incurred by the assessee on the labels affixed to the exported goods also, in our opinion, does not fall within any one of the sub-clauses of Section 35B(i)(b). We have been shown one such label and it has only the assessee's address on it. We find it difficult to consider the expenditure incurred on such labels as an advertisement or publicity. We hold that the lower authorities are right in not allowing weighted deduction for this.
7. In taking the charges paid by the assessee to the Export Credit Guarantee Corporation as for insurance of goods in transit to be hit by the exclusion in Sub-clause (iii), we find that the AAC has laboured under a misconception. The services of the Corporation are taken by the assessee to obtain pertinent information about the creditworthiness of particular foreign buyers, their reputation and the outer limit up to which goods could be supplied to them before actually receiving the price thereof. It is for such services that the payment is made. This is an expenditure incurred on obtaining information regarding the foreign market. By 'information regarding a market' is to be understood not only about the demand and supply position and the rate prevalent there but also about the buyers available there, their trustworthiness, business connections, solvency, capacity, etc. That being so, in our opinion, the assessee's claim on this must be upheld as falling within Sub-clause (ii) of Section 35B(1)(b).
8. The assessee has also raised, as already mentioned, further claim in respect of other expenses debited to the profit and loss account. As the lower authorities have not considered the nature of these expenses, the purposes for which they were incurred, etc., we find it difficult to take them up for consideration here. We would hence direct the ITO to consider, in the light of what we have observed, the assessee's claim on these and to find out whether such amounts or any part thereof fall within any one or more of the sub-clauses in Section 35B(1)(b) to be entitled to weighted deduction and, if so found, to allow relief in accordance with law.
9. Taking up the department's appeal, the grievance aired therein is against the weighted deduction allowed in respect of (i) commission, (ii) salary and bonus and (iii) sales promotion expenses.
10. As we have held that, only with regard to expenditure incurred on activities referred to in Sub-clause (iii), the place where the same is incurred is relevant. The fact that the disputed commission payment is an expenditure incurred in India cannot be taken as a disqualifying factor. The payment of commission is to third parties who had brought to the assessee the foreign buyers and ultimately fixed up the sale transactions. It is by the advertisement and publicity given by those parties that the sales took place. They gave to the assessee information about the foreign markets. That being so, we agree with the AAC that this is an expenditure entitled to weighted allowance.
11. The same is to be said about the sale promotion expenses. This is an amount spent in receiving and treating foreign buyers. They are taken to the assessee's business place for showing them the exportable goods and to furnish to them all the details and information relevant for finalising sales. From them it is seen that the assessee gets information about the foreign markets. We have held in the similar case heard along with these appeals that the nature of the expenditure being such, it would clearly fall within Sub-clauses (i), (ii) and (vi). We confirm the AAC's decision on this too.
12. With regard to the other item, salary and bonus, we have the annexed order outlining the principles which could be fairly adopted in such matters. As the necessary materials are neither collected nor before us to determine how much any of this expenditure can properly and justly be taken as on activities falling within the sub-clause of Section 35B(1)(b) other than Sub-clause (iii), here too we direct the ITO to redccide the point according to law and in the light of our observations.
13. For the purposes indicated above, we restore the matter to the ITO for fresh disposal. For statistical purpose, both the appeals may be taken as allowed in part.