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Mettur Beardsell Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1985)11ITD631(Mad.)
AppellantMettur Beardsell Ltd.
Respondentincome-tax Officer
Excerpt:
.....act'). in the assessment year 1974-75, the assessee has come in appeal before us for the claim of weighted deductions on the items of expenditure which are there in ground no. 1 of the grounds of appeal, but the learned counsel for the assessee, at the time of arguing the case, has stated that the appeal of the assessee is there to keep the matter alive on the following items : it was also stated that ground no. 2 is not pressed. therefore, we confirm the order of the commissioner (appeals) on the items mentioned hereafter for the disallowance of weighted deduction : now we have to consider whether weighted deduction is to be allowed on the remaining items of expenditure mentioned above. the contention of the learned counsel for the assessee is that in view of the decision of the.....
Judgment:
1. The assessee has preferred these appeals against the consolidated order dated 1-11-1982 of Dr. N.R. Sivaswamy, Commissioner (Appeals), who partly allowed the appeals against the even dated orders 17-3-1982 of Shri T. Narayanankutty, ITO.2. We are disposing of these appeals on consolidating these together and thereby passing a consolidated order for the sake of convenience, as these are arising out of the impugned consolidated order and the issue involved is also common.

3. The common issue involved in these appeals is regarding the market development allowance under section 35B of the Income-tax Act, 1961 ('the Act'). In the assessment year 1974-75, the assessee has come in appeal before us for the claim of weighted deductions on the items of expenditure which are there in Ground No. 1 of the grounds of appeal, but the learned counsel for the assessee, at the time of arguing the case, has stated that the appeal of the assessee is there to keep the matter alive on the following items : It was also stated that Ground No. 2 is not pressed. Therefore, we confirm the order of the Commissioner (Appeals) on the items mentioned hereafter for the disallowance of weighted deduction : Now we have to consider whether weighted deduction is to be allowed on the remaining items of expenditure mentioned above. The contention of the learned counsel for the assessee is that in view of the decision of the Tribunal in the case of J.H. & Co. v. Second ITO [1982] 1 SOT 150 (Bom.) (SB), weighted deduction is to be allowed on the remaining items of expenditure, while the learned departmental representative contends that the business of the assessee is export and local. Therefore, weighted deduction is to be allowed if the assessee brings the remaining items of expenditure under any categories of Section 35B(1)(b) and proves that the expenditure is actually expended.

Moreover, the decision of the Madras High Court in CIT v. Southern Sea Foods (P.) Ltd. [1983] 140 ITR 855 is to be taken in view and not that of the Special Bench of the. Tribunal in the case of J.H. & Co.

(supra).

4. We have heard the rival contentions and gone through the records before us. We are of the opinion that the contention of the learned departmental representative is well founded and roust prevail. The reason is that the Madras Benches of the Tribunal are within the jurisdiction of the Hon'ble Madras High Court and, as such, the decision of the Madras High Court is binding on the Madras Benches of the Tribunal. Hence, the decision of the Special Bench of the Tribunal is not to be followed by the Madras Benches ; rather the decision of the Hon'ble Madras High Court is to be followed being the settled law on the issue that the decision of the High Court is to be followed by the Tribunal in which its Benches are functioning. The High Court has held in the decision of Southern Sea Foods (P.) Ltd. (supra) that weighted deduction is to be allowed on the items of expenditure expended wholly and exclusively for the purpose of export business and, therefore, the ratio laid down by the decision of the Tribunal in J.H.& Co.'s case (supra) is not good law in view of the decision of the Hon'ble Madras High Court.

5. General expenses viewed from this angle and applying the ratio decidendi of the Hon'ble Madras High Court in Southern Sea Foods (P.) Ltd.'s case (supra), we hold that it is for the assessee to prove that the expenses incurred are wholly and exclusively on export and are actually expended for this purpose. The assessee has not brought any material on record to prove it, rather he has stated that when salary to employees employed in the export department of the assessee has been allowed at the rate of 75 per cent, then the expenses on the building, where such employees resided, and the furniture used by them and taxes, etc., paid on the items of goods exported, are to be taken as expenses for the purpose of export. We do not accept this contention as there is no substance in it in view of the decision of the Hon'ble Madras High Court. Moreover, these expenses are in India and furniture in the bungalow and its repair is there to provide facility to the managing director and, therefore, it has no nexus with the export business and it cannot be taken as salary to the managing director and to the employees allowed at the rate of 75 per cent; therefore, the weighted deduction is also not to be allowed accordingly, on these expenses.

Similarly, we hold that building repairs, furniture, godown rent, garage rent, fire and general insurance are the expenses incurred within India and there is no material on record to prove that these are exclusively and solely for the purpose of export business and it cannot be there in the case of assessee in view of the fact that the assessee is having export and local business. Moreover, these expenses are in India and there is no nexus between the export business and these expenses to prove that these are wholly and exclusively for the purpose of export business. Therefore, following the decision of the Hon'ble Madras High Court in the case of Southern Sea Foods (P.) Ltd. (supra), we hold that the assessee is not entitled to weighted deduction on these expenses. Hence, we reject this claim for the weighted deduction.

6. In the assessment year 1975-76, the claim is regarding the following items: No weighted deduction is to be allowed on the items of bank charges, fire and general insurance, marine insurance in view of the proviso to Sub-clause (iii) of section 35B(1)(b). No weighted deduction is to be allowed on the item of general expenses, professional charges, repairs to machinery, repairs to building, repairs to furniture, rates and taxes in view of the fact that these expenses are incurred within India and the assessee has not proved by bringing or furnishing details or material on record to show that these expenses were wholly and exclusively for the purpose of export business and has been actually expended. Moreover, these cannot be there in view of the fact that the business of the assessee is that of export and local and the expenses are incurred on repairs on the machinery, professional charges, repairs to building, repair to furniture, etc., which is manifestly and apparently within India and on the items of expenses, which has no direct connection or nexus with export The learned counsel for the assessee has merely stated that when on the item of salary, weighted deduction is allowed at the rate of 75 per cent regarding the employees who are working in the export department of the assessee, then, on the same analogy, it is to be allowed on the aforesaid items of expenditure. We do not see any force in this contention of the assessee as the weighted deduction is to be allowed on any expenditure, if the assessee has brought such item of expenditure in any category of section 35B(1)(b)(i) and proved that it is expended on such items wholly and exclusively for the purpose of export business. This criteria laid down by the Hon'ble Madras High Court has not been met by the assessee and, therefore, following the aforesaid decision of the Hon'ble Madras High Court, we hold that the assessee is not entitled to weighted deduction on these items of expenses. Since the authorities below have rejected the claim of the assessee for weighted deduction on these items of expenditure, hence, we confirm the impugned order holding further that it is in accordance with the decision of the Madras High Court. The appeals are dismissed.

1. I have gone through my learned brother, the Judicial Member's order, With great respect, I wish to dispose of the appeals differently.

2. The assessee-company has an export division for export of handloom goods. Regarding the export division expenditure, the assessee claimed deduction under Section 35B for the assessment year 1974-75 before the ITO, inter alia, on the following items, consequent on the Tribunal's order, dated 28-1-1980, in IT Appeal No. 158 (Mad.) of 1978-79, restoring the issues of weighted deduction for fresh decision to the ITO : In the ITO's consequential order dated 17-3-1982, the ITO disallowed the assessee's claim in respect of the above items. However, regarding a number of other items including salaries and wages of Rs. 1,54,175, the ITO allowed deduction on certain percentage basis 'as there were activities for which expenditure was not admissible', weighted deduction on 75 per cent of salaries and wages being allowed. Before the Commissioner (Appeals) in appeal, as will be seen from the copy of the assessee's grounds of appeal before him, the assessee's first ground was that the ITO erred in, rejecting the claim for deduction of the expenses incurred by the export department, such as provident fund, bank charges, etc. The assessee's second ground was that the ITO erred in restricting the claim of other expenses to varying proportion of the expenses incurred, that the ITO should have followed the principles laid down by the Special Bench of the Tribunal in IT Appeal Nos. 3255 and 3330 (Bom.) of 1976-77. The Commissioner (Appeals), in his order dated 1-11-1982, referred to his earlier order dated 19-8-1982 in IT Appeal No. 190 of 1981-82 for the assessment year 1978-79 and disposed of the appeal as under: The ITAT, Special Bench, Bombay, exhaustively dealt with the quantification of the relief under Section 35B in the case of J.H. & Co. v. ITO in IT Appeal No. 255 of 1916-11, dated 11-6-1978. 1 follwed that decision in my appellate order dated 19-8-1982. I shall follow the same principles for disposing of the present appeal also.

In the result, the assessee will get weighted deduction in respect of the following items of expenditure appearing in its profit and loss account :Salaries 100 per centProvident fund 100 per centPrinting and stationery 100 per centSales promotion expenses 100 per centElectricity 50 per centNewspapers and periodicals 50 per centPostage 50 per centTelegrams 50 per centTelephones 50 per centMedical expenses 75 per centStaff welfare 75 per centSamples 100 per centUniforms 75 per centExport Credit Guarantee Corporation 100 per cent After ascertaining the eligible expenditure in this manner, the ITO should allow 50 per cent of the eligible expenditure as weighted deduction. It must be noted that only expenditure debited to the profit and loss account will be eligible for weighted deduction but not the expenditure debited to the manufacturing account or the trading account.

3. The assessee is before us in appeal against the Commissioner (Appeals)'s order. Though the assessee's written grounds of appeal contained a number of items, the assessee's learned counsel, at the time of hearing, restricted the claim to the following items : The learned counsel for the assessee submitted that the assessee was entitled to weighted deduction on 75 per cent of serial Nos. 4, 5 and 6, which related to the export manager, Mr. Kozcki, since this item should be treated as part of his remuneration and the ITO had allowed weighted deduction on 75 per cent of the salaries paid including to this person (upheld in Bench 'C order, dated 23-7-1983, in IT Appeal Nos. 396 and 397 (Mad.) of 1983 in the department's appeals). It was further submitted that the assessee was entitled to weighted deduction on 50 per cent of the remaining items, viz., serial Nos. 1, 2, 3, 7 and 8. It was stated that repairs to building related to the assessee's export office premises in First Lane Beach ; the godown rent related to the godown where the goods were stocked ; the item described as garage rent was actually the office rent for First Lane Beach, the assessee's head office being situated at Netaji Subash Road. The learned counsel for the assessee pressed this claim relying on the cited Special Bench decision in the case of J.H. & Co. (supra). In reply, the learned departmental representative submitted that the matter required reconsideration in view of the Madras High Court decision in Southern Sea Foods (P.) Ltd.'s case (supra).

4. I have carefully considered the rival submissions. I am unable to agree with the department that the ratio of Southern Sea Foods (P.) Ltd.'s case (supra) goes against the guidelines laid down in the Special Bench decision and that, hence, the decision is no longer to be followed. In Southern Sea Foods (P.) Ltd's case (supra), the High Court observed that Section 35B has laid down strict condition for the grant of weighted allowance and it should be ensured that the statutory conditions are strictly followed. That case was concerned with the issue of commission paid to an Indian company for the purpose of procuring orders from the foreign buyers. The High Court held that none of the sub-clauses of Section 35B(1)(i) applied in the assessee's favour for the detailed reasons given by it and concluded that the assessee was not entitled to the weighted deduction under Section 35B in respect of such commission. The statutory condition laid down in Section 35B is that weighted deduction can be allowed only on the expenditure which is incurred wholly and exclusively on the various items of expenditure detailed in Sub-clauses (i) to (ix) of Section 35B(1)(b). The Special Bench of the Bombay Tribunal in J.H. & Co.'s case (supra) considered the scope of Section 35B and summarised the features of Section 35B, including the condition that the expenditure must have been wholly and exclusively incurred on activities referred to in Sub-clauses (i) to (ix). The Tribunal further went on to say : ... we would add that whatever of the common expenses incurred by an assessee that could properly and fairly be apportioned on any of the activities referred to above may also be taken for the purposes of the section as wholly and exclusively on such activity. As already mentioned, no hard and fast rule is possible to be outlined as to how such apportionment should be effected. Nor is it possible to postulate in a general discussion what all kinds of expenditure can properly be brought under the various Sub-clauses of Section 35B(1)(b). Whether a particular claim raised by an assessee falls under any one or more of the activities specified in those sub-clauses can at best be judged only with reference to the facts of the particular case and the nature of the claim.

It will, thus, be seen that the Special Bench also insisted that the expenditure should be wholly and exclusively incurred on the specified activities in Section 35B(1)(b) but regarding common items of expenditure such as salary, stationery, etc., where the expenses would also include items not related to the specified activities, the Tribunal directed that such expenditure should be properly and fairly apportioned and only the part of the expenditure allocated on reasonable estimate to such specified activities would be eligible for weighted deduction. On this principle, in that case, the Tribunal held that 75 per cent of the salary of persons exclusively handling the export business and 50 per cent of the rent would be eligible for weighted deduction. Regarding the rent, the Tribunal's reason for proportionate allowance was that in the absence of any branch office or agency outside India, the activities of the assesses falling within Section 35B must necessarily start from the rented place (para 25 of the Special Bench's order). I am unable to find any observation in the High Court's judgment to suggest that no such allocation of the common expenditure relating to the specified activities can be made. The Special Bench's view was that only that part of the common expenditure, which could, on a fair and proper estimate, be held to be wholly and exclusively incurred on the specified items, would be entitled for weighted deduction, in the case of common expenditure such allocation being unavoidable. This interpretation of Section 35B was also accepted by the Board--vide Board's Instruction No. 1441 in F. No.268/738/81-ITJ, dated 28-12-1981. Hence, in my opinion, the ratio of the Special Bench's decision is not contrary to the High Court judgment and, hence, it should be followed, the decision on principle being also accepted by the Board.

5. In the present case, the Commissioner (Appeals) has observed that he is following the principles laid down in J.H. & Co.'s case (supra) (vide para 2 of his appellate order for the assessment year 1974-75).

However, though he has allowed weighted deduction only regarding a number of other items, he has not allowed weighted deduction regarding these items disputed before him and no reasons are given why the assessee is not entitled to weighted deduction on these items also.

Taking up the individual items, I am inclined to agree with the department that the assessee is not entitled to weighted deduction on general expenditure of Rs. 8,425, since there are no details thereof to support the assessee's claim of weighted deduction. Regarding fire and general insurance, which is stated to be related to stock, I am of the view that this will not fall under any of the expenditure specified in the sub-clauses of Section 35B(1)(b). Regarding bungalow maintenance, LTA, rent, bungalow and passage, passage and LTA, it is the assessee's contention that they, in effect, form part of the remuneration paid to the export manager and, therefore, eligible for weighted deduction.

Similarly, regarding repairs to building, godown rent and garage rent (stated to be actually export office rent), the assessee's contention is that these items represent rent and other incidental expenses relating to the office premises. However, the orders of the ITO and the Commissioner (Appeals) do not give the details regarding the nature of the expenditure nor the reasons for the rejection of the assessee's claim. The factual position regarding the above items is not clear and, hence, it becomes difficult to adjudicate on the assessee's claim. 1 am, hence, of the view that the Commissioner (Appeals)'s finding regarding weighted deduction on the above items should be vacated and the matter should go back to the Commissioner (Appeals) for fresh decision according to law after giving due opportunity to both the parties.

6. For the assessment year 1975-76, the position is similar. Though the assessee's grounds of appeal before us contained a number of items, at the time of hearing, the learned counsel for the assessee restricted the assessee's claim to the following items : Regarding general expenses and fire and general insurance, I am of the view that for the same reasons, as given above, for the assessment year 1974-75, these two items will not be eligible for weighted deduction.

Regarding repairs to buildings of Rs. 342, though a small item, the assessee's eligibility would depend on the nature of the expenditure and how it relates to the assessee's export activity. Since I am of the view that the identical item for the assessment year 1974-75 should go back to the Commissioner (Appeals) for fresh consideration, I am of the opinion that regarding this item also, the Commissioner (Appeals)'s order should be vacated and the matter restored to him for fresh decision according to law after giving due opportunity to both the parties.

7. In the result, the assessee's appeals are treated as partly allowed for statistical purposes.

REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 - Whereas we are unable to agree on the point set out below for the assessment years 1974-75 and 1975-76, we refer the following point of difference of opinion to the President for reference to Third Member, under Section 255(4) of the Act : Whether, on the facts and in the circumstances of the case, the Tribunal should consider the assessee's claim for weighted deduction under Section 35B in respect of the items of the expenditure in question incurred in the export division on the basis of the Bombay Special Bench decision of the Tribunal in the case of J. Hemchand & Co. in IT Appeal Nos. 3255 and 3330 (Bom.) of 1976-77, dated 17-6-1978, as not being contrary to the Madras High Court decision in CIT v. Southern Sea Foods (P.) Ltd. [1983] 140 ITR 855; or whether it should be held by the Tribunal that the ratio laid down by the above decision of the Tribunal is not good law in view of the Madras High Court decision in Southern Sea Foods (P.) Ltd.'s case (supra).

1. There being difference of opinion between the learned Members of the Tribunal, the following question has been referred to me for decision ; Whether, on the facts and in the circumstances of the case, the Tribunal should consider the assessee's claim for weighted deduction under Section 35B in respect of the items of the expenditure in question incurred in the export division on the basis of the Bombay Special Bench decision of the Tribunal in the case of J.H. & Co. [IT Appeal Nos. 3255 and 3330 (Bom.) of 1976-77, dated 17-6-1978] as not being contrary to the Madras High Court decision in CIT v. Southern Sea Foods (P.) Ltd. [1983] 140 ITR 855 or whether it should be held by the Tribunal that the ratio laid down by the above decision of the Tribunal is not good law in view of the Madras High Court decision in Southern Sea Foods (P.) Ltd.'s case (supra).

2. The assessee-company, inter alia, carries on export business in hand-looms. For the assessment years 1974-75 and 1975-76, it claimed weighted deduction under section 35B in respect of certain items of expenditure. The ITO disallowed the claim. On appeal, the Commissioner (Appeals) partly allowed the same. On further appeal by the assessee, the Tribunal set aside the order of the Commissioner (Appeals) and restored the case to the file of the ITO for re-deciding the claim of the assessee in the light of the decision of the Special Bench of the Tribunal in the case of J.H. & Co. (supra).

3. Thereafter, the ITO partly allowed the claim of the assessee for each of the assessment years 1974-75 and 1975-76. On appeal, the Commissioner (Appeals) granted further relief to the assessee in respect of some more items. Aggrieved by the consolidated order of the Commissioner (Appeals), the assessee went in appeal before the Tribunal.

4. Before the Tribunal, the assessee confined its claim under Section 35B, only to the following items of expenditure :SI. No. Item of expenditure Amount Rs.S. No. Item of expenditure Amount Rs. 5. During the course of arguments before the Tribunal, the learned representative of the assessee submitted that the claim of the assessee should be allowed according to the decision of the Special Bench of the Tribunal in the case of J.H. & Co. (supra). The learned representative of the department, on the other hand, submitted that weighted deduction was to be allowed if the assessee brought the remaining items of expenditure under any categories of Section 35B(1)(b) and proved that the expenditure was actually expended. He also submitted that the decision of the Madras High Court in Southern Sea Foods (P.) Ltd.'s case (supra) was to be taken in view and not that of the Special Bench of the Tribunal in the case of J.H. & Co. (supra).

6. The learned Judicial Member observed that the weighted deduction was to be allowed on the items of expenditure incurred wholly and exclusively for the purpose of export business and, therefore, the ratio laid down by the decision of the Tribunal in J.H. & Co.'s case (supra) was not good law in view of the decision of the Hon'ble Madras High Court in the case of Southern Sea Foods (P.) Ltd. (supra). On merits, the learned Judicial Member held that the assessee was not entitled to weighted deduction as the expenditure, apart being incurred in India, had not been wholly and exclusively expended for the purpose of export business.

7. The learned Accountant Member, on the other hand, observed that the ratio of the decision of the Special Bench of the Tribunal in the case of J.H. & Co. (supra) was not, in any way, contrary to the decision of the Madras High Court in the case of Southern Sea Foods (P.) Ltd. (supra). He pointed out that the Madras High Court had laid down in Southern Sea Foods (P.) Ltd.'s case (supra) that the conditions of Section 35B should be strictly complied with, and the Special Bench of the Tribunal had also insisted that the expenditure should be wholly and exclusively incurred on the specified activities in section 35B(1)(b). So, according to him, there was no contradiction in the two decisions. On merits, the learned Accountant Member held that the assessee was not entitled to weighted deduction in respect of the items of expenditure under the heads (i) general expenses, (ii) repairs to buildings, and (iii) fire and general insurance. As regards the other items of expenditure, he directed the Commissioner (Appeals) to re-examine the case and decide the matter afresh, inasmuch as the factual position in respect of these items of expenditure was not clear.

8. It is in these circumstances that the aforesaid question has been referred to me for resolving the dispute.

9. After going through the record and hearing the learned representatives of the parties, I am inclined to agree with the learned Accountant Member. In essence, the question posed to me is whether the decision of the Special Bench of the Tribunal in the case of J.H. & Co.

(supra) has been overruled by the decision of the Madras High Court in the case of Southern Sea Foods (P.) Ltd. (supra). My answer to this question is in the negative. It would appear that the only question involved in the case of Southern Sea Foods (P.) Ltd. (supra) was whether the assessee-company was entitled to weighted deduction in respect of the commission paid by it to its agents who were engaged for the purpose of procuring orders from foreign buyers. The Madras High Court held that since the object of the provisions of Section 35B was not purely fiscal, but, on the contrary, to advance the policy of the State to promote exports, the conditions laid down under Section 35B should be strictly followed before allowing relief to the assessee. On merits, the Madras High Court held that the expenditure incurred by the assessee-company on payment of commission did not satisfy the conditions laid down either under Sub-clause (ii) or Sub-clause (iv) or Sub-clause (viii) of Section 35B(1)(b). The High Court, accordingly, concluded that the expenditure on commission incurred by the assessee was not eligible for weighted deduction. The High Court has not anywhere disapproved the principles laid down by the decision of the Special Bench of the Tribunal in the case of J.H. & Co. (supra). On the contrary, even the Special Bench of the Tribunal has held, in para 22 of its judgment in the said case, that the expenditure, as contemplated under Section 35B, must be incurred wholly and exclusively on activities referred to in Sub-clauses (i) to (viii) of Clause (b) of Sub-section (1) of Section 35B. Evidently, therefore, there is no contradiction between the views taken by the Madras High Court and the Special Bench of the Tribunal. It cannot, therefore, be held that the Madras High Court has overruled the decision of the Special Bench of the Tribunal in the case of J. H. & Co. (supra) or that it has declared that the decision of the Special Bench is not good law. Each case has to be disposed of in accordance with its own facts and so, in my opinion, the learned Accountant Member has rightly directed the Commissioner (Appeals) to re-examine the claim of the assessee in respect of certain specific items of expenditure after ascertaining further facts and then to re-decide the matter in accordance with law.

10. Thus, my answer to the question posed to me is that the decision of the Special Bench of the Tribunal in J.H. & Co.'s case (supra) is not contrary to the decision of the Madras High Court in Southern Sea Foods (P.) Ltd.'s case (supra) and, hence, it is good law.

11. The case will now go back to the Bench for disposal according to the opinion of the majority.


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