1. The revenue has filed this appeal against the order of the Commissioner (Appeals) on various grounds. The first ground relates to the assessee's claim for depreciation on assets which were formerly used for scientific research. By the Finance (No. 2) Act, 1980, the provisions of Section 35(2)(iv) of the Income-tax Act, 1961 ('the Act') were amended retrospectively so as to deny the assessee's claim for relief under Section 32 of the Act in respect of such assets. The assessee, therefore, filed a writ petition in the Bombay High Court under article 226 of the Constitution of India restraining the ITO from taking into account the retrospective amendment of Section 35(2)(iv) for the assessment year under consideration. The High Court by the order dated 17-12-1980 granted injunction as prayed by the assessee.
And yet, the ITO while framing the assessment for the year under consideration made an assessment under Section 143(3) of the Act by applying the retrospective amendment of Section 35(2)(iv). The assessee appealed before the Commissioner (Appeals) against the action of the ITO in this respect. The Commissioner (Appeals) took note of the High Court order and granted consequential relief.
2. The revenue is in appeal against the order of the Commissioner (Appeals) in this respect. At the time of the hearing of the appeal, the factual position as laid out above was discussed. We find that the order of the Commissioner (Appeals) is in conformity with the High Court's order dated 17-12-1980 and calls for no interference.
3. The assessee, in the course of the assessment proceedings, claimed relief under Section 35B of the Act in respect of expenses amounting to Rs. 16,76,647. The ITO was of the opinion that out of the above expenses, expenses of Rs. 3,43,171 were not eligible for relief under Section 35B. In respect of the balance, he allowed relief under Section 35B. Included in the above expenses in respect of which the ITO granted relief under Section 35B was an item of entertainment to foreign customers amounting to Rs. 52,196. The assessee's claim was, however, confined to the expenses amounting to Rs. 6,559 out of the same. Thus, the ITO allowed deduction of 50 per cent of Rs. 6,559 in the assessment as required under Section 35B. However, he disallowed total entertainment expenses of Rs. 34,586 wherein was included the aforesaid amount of Rs. 6,559. This disallowance was stated to have been made under Section 37 of the Act.
4. The assessee appealed before the Commissioner (Appeals) on the ground that while allowing deduction of extra 50 per cent in respect of the entertainment expenses incurred by the assessee for the foreign customers in the amount of Rs. 6,559, the ITO had accepted that the assessee had incurred this expenditure for promotion of exports, but the ITO had disallowed the item of expenditure of Rs. 6,559 itself. The ITO's action was totally incongruous. The Commissioner (Appeals) accepted this argument and allowed the assessee's claim for the expenditure of Rs. 6,559.
5. The revenue is in appeal against the order of the Commissioner (Appeals) in this respect. It was submitted that admittedly the expenditure of Rs. 6,559 was for the purposes of entertainment and the Commissioner (Appeals) could not have allowed it under Explanation 2 to Section 37(2). On behalf of the assessee, the same argument as was made before the Commissioner (Appeals), has been repeated, viz., that having held that the expenditure was for the promotion of exports, the claim had to be examined under Section 35B. Once the claim was considered under Section 35B, it could not be examined again under Section 37.
6. We have carefully considered the facts and circumstances of the case and the arguments on either side. The assessee is a manufacturer of radios and has large volume of exports. For the purpose of promotion of these exports, it has incurred expenses to the extent of Rs. 16,76,647.
The assessee has claimed this expenditure as for the promotion of exports. The ITO has, in fact, accepted the assessee's plea to the extent of Rs. 13,33,472. Included therein is the amount of Rs. 6,559 for the entertainment of foreign customers. The question for consideration is whether this claim for deduction of the sum of Rs. 6,559 should be examined under the provisions of Section 35B or under the provisions of Section 37. Under the provisions of Section 35B where an assessee has incurred any expenditure wholly and exclusively for the various purposes laid down in Section 35B(1)(b) he shall, subject to the provisions of the Section, be allowed a deduction of the sum equal to one and one-third times the amount of such expenditure incurred during the previous year. In the ease of a domestic company in which public are substantially interested, the allowance is to the extent of one and one-half times. Under the provisions of Section 37 any expenditure (not being expenditure of the nature described in Sections 30 to 36 and Section 80VV of the Act 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'. [Emphasis supplied]. On a plain perusal of these two sections together, it is clear that when an assessee makes a claim for expenditure, the ITO has to examine the admissibility of the expenditure first under Sections 30 to 36 and Section 80VV. If the expenditure does not fall under any of the aforesaid sections, then the ITO has to examine the same under the residuary provisions of Section 37. If the claim is to be and has been considered under any of the Sections 30 to 36 or Section 80VV, the claim cannot be considered again by the criteria laid out under Section 37. In the instant case, the ITO has apparently considered the claim under Section 35B, he has said so in so many words and held that the expenditure of Rs. 6,559 was eligible for relief under Section 35B.Having done so, it was obligatory on the ITO to have granted as much relief as was admissible under Section 35B. Further, he could not have circumscribed the relief under any other provisions of the Act, such as Section 37. The ITO has committed two mistakes in this case. In the first place, he should have granted relief under Section 35B of one and one-half times. He has merely granted the relief of a half time. The second mistake is that he has sought to circumscribe the relief by the severe restrictions laid down on entertainment expenditure under Section 37. Having once found that the expenditure was for the purposes of promotion of export trade, he should have focussed all his attention to the provisions of Section 35B and not other section. The Commissioner (Appeals) in his order under appeal before us has rectified both these errors by allowing deduction in respect of this expenditure equal to one and one-half times of the expenditure. No doubt, the order of the Commissioner (Appeals) is not very happily worded. But the intention and the effect thereof are quite patent. The order of the Commissioner (Appeals) calls for no interference and is upheld.7 and 8. [These paras are not reproduced here as they involve minor issues.]