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Tata Exports Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1984)10ITD223(Mum.)
AppellantTata Exports Ltd.
Respondentincome-tax Officer
Excerpt:
.....goods manufactured by other manufacturers. during the course of the assessment proceedings it claim relief under section 35b of the income-tax act, 1961 ('the act') in respe of expenses amounting to rs. 3,45,69,974. one of the items of expenditi included in this was relating to the commission to overseas agents amounting to rs. 1,78,83,30. in the course of the assessment made under section 143(3) read with section 144b of the act, the ito observed that following the guidelines in the tribunal special bench decision in the case of j.h. & co. v. second ito [1982] 1 sot 150 (bom.) in it appeal nos. 3255 and 3330 (bom.) of 1976-77 decided on 17-6-1978, this item of expenditure along with some other items fully qualified for weighted deduction under section 35b, meaning thereby that.....
Judgment:
The points on which Inspecting Assistant Commissioner did not issue any directions under section 144B could not be said to be merged with Inspecting Assistant Commissioner's order so as not to be revised under section 263.

In respect of items on which there was no dispute between the Income Tax Officer and the assessee, and the Inspecting Assistant Commissioner had no issued any instructions under section 144B, the Income Tax Officer's order did not, therefore, got merged with the Inspecting Assistant Commissioner's instructions. The Commissioner could interfere with such order of Income Tax Officer in the present case.

Revision under s. 263--ERRONEOUS AND PREJUDICIAL ORDER--Commissioner invoking wrong provision.

Where Commissioner invoking wrong provision, order of Commissioner quashed for erroneous assumption of section not mentioned in assessment order.

1. The assessee is a compa engaged in large scale export of engineering goods manufactured by other manufacturers. During the course of the assessment proceedings it claim relief under Section 35B of the Income-tax Act, 1961 ('the Act') in respe of expenses amounting to Rs. 3,45,69,974. One of the items of expenditi included in this was relating to the commission to overseas agents amounting to Rs. 1,78,83,30. In the course of the assessment made under Section 143(3) read with Section 144B of the Act, the ITO observed that following the guidelines in the Tribunal Special Bench decision in the case of J.H. & Co. v. Second ITO [1982] 1 SOT 150 (Bom.) in IT Appeal Nos. 3255 and 3330 (Bom.) of 1976-77 decided on 17-6-1978, this item of expenditure along with some other items fully qualified for weighted deduction under Section 35B, meaning thereby that the assessee was entitled to the entire claim under Section 35B in respect of this item whereas in respect of some other items, the assessee was entitled to the claim to the extent of 75 per cent. The ITO allowed the assessee's claim 'as per last year's order and keeping in view the directions issued by the IAC, Companies Range-I, under Section 144B'.

2. On a perusal of the assessee's record, the Commissioner observed that the ITO had allowed weighted deduction of Rs. 59,61,100 on an amount of Rs. 1,78,83,301 being the commission paid to the overseas agents. The Commissioner observed that the deduction was allowed by the ITO under Section 35B(i)(b)(iii) as claimed by the assessee. According to him, under the aforesaid provision of the Act, weighted deduction was permissible in respect of the expenditure incurred wholly and exclusively on distribution, supply or provision outside India of goods, services or facilities, where such expenditure was incurred before 1-4-1978. As the assessee's accounting period for the present assessment year began on 1-4-1978, as such, the aforesaid commission incurred after that date was not eligible for relief under Section 35B.Further, according to him, deduction under Section 35B was also not admissible in view of the Madras High Court decision in the case of CIT v. Southern Sea Foods (P.) Ltd. [1983] 140 ITR 855. In the opinion of the Commissioner, therefore, the ITO's order in allowing the aforesaid relief of Rs. 59,61,100 was erroneous, relief having been granted without examining whether the expenditure was eligible for relief under Section 35B. He, therefore, initiated proceedings under Section 263 of the Act by a notice dated 11-8-1983 calling upon the assessee to show cause why an order under Section 263 should not be passed by setting aside the assessment order made by the ITO and directing the ITO to make a fresh assessment in accordance with law and the relevant facts.

3. Thereafter, after hearing the assessee's representatives and after considering their submissions, the Commissioner passed an order on 27-8-1983 observing that no such deduction was permissible under Section 35B(1)(b)(iii) for any such expenditure incurred after 1-4-1978 and, therefore, the ITO erred in allowing the deduction of Rs. 59,61,100 on this ground. Hence, he considered that the assessment order of the ITO for the assessment year 1979-80 was erroneous insofar as it was prejudicial to the interests of the revenue. He, therefore, set aside the assessment. He directed the ITO to make a fresh assessment order in accordance with law and facts and after taking into account the facts and circumstances of the case and after making proper inquiries. The ITO was directed to give a reasonable opportunity to the assessee of being heard.

4. The assessee has appealed against this order of the Commissioner on various grounds. The first ground is to the effect that the assessment having been made by the ITO under Section 143(3) read with Section 144B, it was not amenable to interference by the Commissioner under Section 263. In this connection, it was urged that under the scheme of Section 144B the ITO was expected to submit a draft of the assessment order to the IAC where there was a difference of more than Rs. 1,00,000 between the income as declared by the assessee and the income as proposed to be assessed by the ITO. Copy of the draft assessment order was expected to be furnished to the IAC. After hearing objections, if any, of the assessee, the IAC was expected to give instructions to the ITO. Once the ITO made an assessment under instructions from the IAC issued under Section 144B, the ITO's order merged with that of the IAC's instructions under Section 144B and such an order could not be interfered with by the Commissioner under Section 263. Our attention is invited to the observations made by the ITO in the assessment order to the effect that the decision in this respect was taken by the ITO in view of the instructions issued by the IAC under Section 144B.5. On behalf of the revenue, our attention is invited to the draft assessment order submitted by the ITO to the IAC and the instructions of the IAC dated 23-9-1982 in this respect. It was stated on behalf of the revenue that the ITO himself had proposed to grant relief under Section 35B in respect of this item of expenditure amounting to Rs. 1,78,83,301. Therefore, the IAC had not issued any instructions under Section 144B with reference to this item of expenditure. In this connection, our attention was invited to the Tribunal Special Bench decision in the case of East Coast Marine Products (P.) Ltd. v. ITO [1983] 4 ITD 73 (Hyd.) in IT Appeal No. 1398 (Hyd.) of 1980 decided on 16-3-1983 wherein the learned Members of the Special Bench have held that, no doubt, the ITO's order under Section 143(3) merged with the IAC's instructions issued under Section 144B in respect of items on which there was a dispute between the ITO and the assessee and where the IAC had issued such instructions under Section 144B and, therefore, the Commissioner could not interfere with such an order under Section 263. But the items in respect of which there was no dispute between the ITO and the assessee and the IAC had not issued any instructions under Section 144B, the ITO's order did not merge with the IAC's instructions under Section 144B. The Commissioner could interfere with the ITO's order in respect of such items under the powers vested in him under Section 263.

6. We have carefully considered the facts and circumstances of the case and the arguments on either side. We find that there was no dispute between the assessee and the ITO in respect of the assessee's entitlement to the relief under Section 35B as regards the commission to the overseas agents amounting to Rs. 1,78,83,301. The ITO himself had proposed to allow the relief under Section 35B claimed by the assessee. Naturally, there were no instructions from the IAC in respect of this item. The Tribunal Special Bench decision in the case of East Coast Marine Products (P.) Ltd. (supra) will apply. We find that the Tribunal Special Bench at Hyderabad has in this case considered the entire case law on the subject and arrived at a decision that in such circumstances, the Commissioner was justified in interfering with the order of the ITO under Section 263. No contrary decision even of the Tribunal has been brought to our notice on behalf of the assessee. We, therefore, reject the assessee's objection on this ground.

7. The second objection on behalf of the assessee is to the wrong assumption of the jurisdiction by the Commissioner under Section 263.

It is explained by the learned counsel on behalf of the assessee that the Commissioner has proceeded on the assumption that the ITO had made the allowance in the assessment order under Sub-clause (iii) of Section 35B(1)(b). It is submitted that the assessee had in the return of income claimed the relief under Section 35B without indicating the sub-clause of Section 35B(1)(b). A copy of the relevant statement accompanying the return of income has been shown to us. The ITO has allowed the relief under Section 35B following the guidelines in the Tribunal Special Bench decision in the case of J. H. & Co. (supra). He has allowed it 'as per the last year's order and keeping in view the directions issued by the IAC, Companies Range-I, under Section 144B'.

The learned counsel proceeded to point out that for the year under consideration the IAC has not issued any instructions under Section 144B in respect of this item as discussed in paragraph 6 above. It was submitted by the learned counsel that even in the preceding assessment year, i.e., for the assessment year 1978-79, there was no dispute concerning this item and, therefore, the IAC had no occasion to issue any instructions under Section 144B in respect of this item. He has furnished a copy of the instructions under Section 144B(4) dated 16-4-1977 for the assessment year 1974-75 where the IAC had issued directions for allowance of the claim for relief under Section 35B in respect of the expenditure of Rs. 15,51,043 for that assessment year on payment of commission to foreign agents again without reference to the sub-clause of Section 35B(1)(b). Therefore, there were no instructions from the IAC under Section 144B for the present year as well as for the earlier years for allowance of relief under Sub-clause (iii) of Section 35B(1)(b).

8. Thereafter, the learned counsel has proceeded to point out that the only other source from which the ITO has taken any guidance for making this allowance suo moto in his order dated 23-9-1982 under Section 35B was the order of the Special Bench of the Tribunal in the case of J.H.& Co. (supra). The learned counsel has brought to our notice that in the case of J.H. & Co. (supra) also the Special Bench was concerned with the admissibility of relief under Section 35B in respect of commission on foreign business. The learned members recorded their decision in respect of this item in the following terms : The commission payment in this case was to parties who brought about the export sales. It was those parties who furnished information to the assessee about the foreign buyers and publicised the assessee's goods to those buyers. It was they who brought together the buyer and the seller for concluding the sales. It was through them that the goods were supplied outside India. That being so this expenditure is allowable under Sub-clauses (i) and (ii) of Clause (b) of Sub-section (1) of Section 35B.From the above extract it would be seen that the allowance had been made under Sub-clauses (i) and (ii) of Section 35B(1)(b). It was not under Sub-clause (iii). Therefore, if at all, the ITO could be deemed to have made the allowance under any particular sub-clause of Section 35B(1)(b) which were Sub-clauses (i) and (ii) of Section 35B(1)(b) and not Sub-clause (iii) as presumed by the learned Commissioner.

9. Further, pointing to the contents of the notice issued by the Commissioner under Section 263, the learned counsel has pointed out that the Commissioner's objection to the ITO's action in allowing the relief under Section 35B was that Sub-clause (iii) of Section 35B(1)(b) was deleted from the statute book with effect from 1-4-1981. The assessee's accounting period for the assessment year began on 1-4-1978.

As such, the expenditure incurred after that date by the assessee was not eligible for deduction under Section 35B. Even in the order under Section 263 of the Act the Commissioner in paragraph 8 has mentioned this as the sole reason for holding that the ITO was in error in allowing the relief under Section 35B(1)(b)(iii) in respect of this expenditure. It was pointed out that Sub-clause (iii) of Section 35B(1)(b) was deleted from the statute book with effect from 1-4-1981 by the Finance (No. 2) Act, 1980. Apparently, the Commissioner was labouring under some misapprehension as to the state of law even if the assessee's claim fell under Sub-clause (iii) of Section 35B(1)(b).

10. Apart from the assessee's objection on the wrongful assumption of jurisdiction under Section 263 by the Commissioner, the learned counsel for the assessee has proceeded to support the ITO's action in allowing this relief in the case of the assessee on the facts and in the circumstances of the case as discussed earlier in this order. The learned counsel has pointed out that the assessee had made the claim under Section 35B without indicating the Sub-clause of Section 35B(1)(b) under which the assessee's claim was admissible. The ITO had apparently allowed the claim under Sub-clauses (i) and (ii) as mentioned in paragraph 8 above. The question, according to the learned counsel, was whether in the first instance the Madras High Court decision in the case of Southern Sea Foods (P.) Ltd. (supra) in any manner disentitled the assessee from claiming this relief. No doubt, the Madras High Court had held that the relief was not admissible to an assessee under similar circumstances either under Sub-clause (ii), (iv) or (viii) of Section 35B(1)(b). The Madras High Court also held that relief would not be admissible to that assessee even under Sub-clause (iii) as the payment in that case was made in India. The learned counsel pointed out that the payments in the instant case were made abroad to parties in the respective countries with the permission of the RBI through the RBI. Therefore, the condition laid down under Sub-clause (iii) of Section 35B(1)(b) that the payment should be made abroad and not in India did not hit the assessee. As regards the objection in the case of Southern Sea Food (P.) Ltd. (supra) to the allowance being made under Sub-clauses (ii), (iv) and (viii) of Section 35B(1)(b), the learned counsel has referred to the Bombay High Court decision in the case of CIT v. Eldee Wire Ropes Ltd. [1978] 114 ITR 485. The learned Judges had made it abundantly clear that the ban on payments in India applied only to Sub-clause (iii) and not other sub-clauses. Further, reference was also made to another Bombay High Court decision in the case of Universal Ferro & Allied Chemicals Ltd. v. P.G.K. Warrier [1983] 143 ITR 959. Reference was also made to the Tribunal decision dated 15-7-1976 in the case of L.D. Ltd. [IT Appeal No. 1921 (Bom.) of 1974-75] where the payment of commission was held to be covered under Sub-clauses (i) and (viii) of Section 35B(1)(b). As to the services rendered by the foreign agents, it was submitted that the assessee had only one overseas office at Cairo. Since it did not have offices in any other country, it was necessary to have an international marketing network which was achieved by appointment of agency in other countries. The contribution made by this agent in promoting the sale outside India of goods, services and facilities was demonstrated by the steady growth turnover of the assessee outside India, as indicated below :____________________________________________________________________________Assessment year Total export turnover Total commission paid of the assessee by the assessee to____________________________________________________________________________ (Rupees in crores)1974-75 20.09 0.161975-76 32.20 0.331976-77 54.86 0.671977-78 81.94 0.851978-79 84.00 0.881979-80 84.00 1.79____________________________________________________________________________ The payments to these agents were made abroad. As to the nature of the services rendered by these agents, the learned counsel has placed before us copies of the agreements with the various agents from which it was pointed out that the agents rendered the following services : 1. to exert with diligence his best efforts to promote, expand, advance and develop foreign and export business of the appellant and to that end- a. explore and study market conditions prevailing in the world markets ; b. establish business connection with prospective buyers and secure orders from them for purchase of the appellant's products ; 2. to be responsible for sales negotiations covering the entire range of activity including- b. visiting prospective buyers and collect information regarding their requirements ; c. organising demonstrations of the appellant's products and services ; e. creating a specific department for the appellant to handle the appellant's export business ; f. in course of time and as may be necessary, expanding the establishment according to the experience and requirements ; and g. generally, doing all such acts and things necessary and desirable for the successful negotiation and finalisation of contracts and for the promotion of the appellant's export business ; a. facility of telex for receiving messages, fees of charge and transmitting messages, charged separately ; b. facility of letter/cable despatching by post and messenger services for collecting mail from post office and distributing local letters ; d. staff time for the above as well as for providing services regarding legal and corporate affairs, accounting supervision, keeping books of accounts as per local laws, auditing and taxation facilities ; e. all matters concerned with local Government agencies in fulfilment of local requirement.

11. On behalf of the revenue, it was pointed out that the expenses were considered by the ITO under Sub-clause (iii) of Section 35B(1)(b) as stated by the Commissioner in his order. Further, the Commissioner's order was not final. Observations were not conclusive. We have to judge on the facts of the case whether the ITO's order was erroneous or not and it was erroneous and prejudicial to the interests of the revenue, the Commissioner had valid jurisdiction under Section 263 to interfere with the order of the ITO. Further, it was pointed out that the assessee was constantly shifting grounds inasmuch as once it was claimed that the assessee was eligible under Sub-clauses (i) and (ii), sometimes it was stated that the assessee was eligible for relief under Sub-clause (iv) and at times under Sub-clause (viii). The assessee should be pinned down to a specific provision under the Act under which it was claiming relief.

12. On behalf of the assessee, on rejoinder, it was pointed out that the ITO had allowed the claim under Sub-clauses (i) and (ii), which has been upheld by the Tribunal in various cases as admissible. The assessee was eligible for relief under Sub-clause (iv) and also under Sub-clause (viii)-Our attention was invited to the Tribunal decision in the case of Indian Hotels Co. Ltd. v. ITO in IT Appeal No. 467 (Bom.) of 1975-76 decided on 30-9-1976. The Tribunal has held in unambiguous terms that the various sub-clauses of Section 35B(1)(b) were overlapping and the assessee could be held to be entitled to relief under various sub-clauses at the same time. The revenue had sought a reference to the High Court under Section 256(1) of the Act, which was rejected. Having failed under Section 256(2) before the Bombay High Court, the revenue approached the Supreme Court with a special leave petition, which was also rejected. In the circumstances, it was submitted that there was no substance in the argument on behalf of the revenue that the assessee had to make the claim only under one Sub-clause in respect of one specific item of expenditure and none other.

13. We have carefully considered the facts and circumstances as to the further objection on behalf of the assessee to the order of the Commissioner. The assessee had preferred the claim under Section 35B without specifying the Sub-clause of Section 35B(1)(b). The ITO had not indicated the sub-clause under which he was allowing the claim. On a reference to the material relied upon by him while framing the assessment, it is patent that he has made the allowance under Sub-clauses (i) and (ii) of Section 35B(1)(b). Therefore, in our opinion, the Commissioner was in error in proceeding to hold that the ITO had made the allowance under Sub-clause (iii) of Section 35B(1)(b) and, therefore, the order of the ITO was erroneous.

14. Coming to the question whether the ITO's order suffered from any infirmity which rendered his order erroneous and, therefore, prejudicial to the interests of the revenue, we find that the assessee had made the aforesaid payment of Rs. 1,78,83,301 to non-resident parties in foreign countries through the RBI for rendering services enumerated at the end of paragraph 10 above. The ITO has allowed the assessee's claim under Sub-clauses (i) and (ii) of Section 35B(1)(b).

On a reference to Section 35B(1)(b), Sub-clauses (i) and (ii) it is found that the ITO could make such allowance if the expenditure under consideration was for (i) 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 and (ii) obtaining information regarding markets outside India for such goods, services or facilities. On a careful study of the nature of duties performed by the foreign agents enumerated in paragraph 10 above, it is clear that the assessee was eligible for relief under Section 35B in respect of these payments under Sub-clauses (i) and (ii) of Section 35B(1)(b). The ITO's order did not suffer from any infirmity so as to render it erroneous and, hence, prejudicial to the interests of the revenue.

15. During the course of the hearing before us, no doubt, the assessee's counsel has argued that the assessee was eligible for relief in respect of this expenditure under Sub-clauses (iv) and (viii) as well. We do not propose to examine the assessee's claim under these sub-clauses, because all that we are interested in knowing is whether the ITO's action in allowing the claim under Sub-clauses (i) and (ii) suffered from any infirmity, to which our answer is in the negative.

16. As to the objection on behalf of the revenue on the ground that the assessee was pressing its claim under various sub-clauses of Section 35B(1)(b), in our opinion, the assessee's argument on the basis of the Tribunal decision in the case of Indian Hotels Co. Ltd. (supra), provides a perfect answer. Since the Tribunal decision in that case has been finally confirmed by the Supreme Court decision, we do not propose to give any further time to this issue.

17. Finally, therefore, in our opinion, the ITO's order suffered from no infirmity whereby it could be held that his order was erroneous and prejudicial to the interests of the revenue. Further, the Commissioner's action in assuming jurisdiction under Section 263, on the facts and in the circumstances of the present case, was totally unwarranted.


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