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Commissioner of Income-tax, Tamil Nadu-iii Vs. C.R. Narayana Rao - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 862 of 1976 (Reference No. 710 0f 1976)
Judge
Reported in[1984]146ITR310(Mad)
ActsIncome Tax Act, 1961 - Sections 35B, 35B(1), 37 and 80-O
AppellantCommissioner of Income-tax, Tamil Nadu-iii
RespondentC.R. Narayana Rao
Appellant AdvocateJ. Jayaraman and ;Nalini chidambaram, Advs.
Respondent AdvocateR. Balasubramanian, Adv.
Cases ReferredGraham v. Green
Excerpt:
.....expenses to and fro and the like. 9. it is now well settled that the test for allowance of business expenditure is that it should be incurred or laid out wholly and exclusively for the purposes of the assessee's business. it is also well settled that it is not a pre-condition for the allowance that the outlay of expenditure should have yielded any income receipts. mark the words enclosed within brackets 'not being in the nature of capital expenditure or personal expenses of the assessee' occurring in section 35b(1)(a) and the words 'incurred wholly and exclusively' occurring in section 35b(1)(b). these words have a familiar ring that are a constant reminder to us of the language of section 37. we are satisfied that the tribunal was right in its interpretation and application of..........of being only the personal expenses of the assessee. how s. 35b dealt with these familiar items of business expenditure was to take them up for special treatment and grant to the exporting assessee the actual cost of the expenditure plus something in addition. in the assessment of indian companies, the plus element is 50 per cent. of the actual expenditure. in the case of other indian exporters of goods and services, the extra allowance would be equal to one-third of the actual cost of the export expenses. the totality of the allowance under this section, therefore, would be one and a half and one and one-third of the actual expenditure of the kind described in the various sub-clauses of the section. it is this feature of the section, namely, the grant of allowance by loading the.....
Judgment:

Balasubrahmanyan, J.

1. The assessees is this income-tax reference are a firm of architects with three parters. They practice in this country as consulting architects and engineers. They also have a few clients abroad. For carrying on their profession on this scale, they maintain an establishment. They incur expenses in travel. They have other overheads to meet. In 1969, the assessees took up a contract work in Ceylon for a foreign company. The project was to design and erect a spinning and weaving mill at Colombo. This entailed travel expenses to the extent of Rs. 44,970.

2. In connection with their firm's assessment to income-tax for the relevant assessment year 1972-73 the assessees claimed that they were entitled not only to a deduction of the actual travelling expenses to and from Ceylon in the sum of Rs. 44,970 but also to an extra allowance under s. 35B of the I.T. Act, 1961.

3. Section 35B grants what its marginal note describes as an 'export markets development allowance'. This provision came into the statute book in the year 1968. Just about that time, the Central Government's industrial policy was to develop India's export markets and give a fillip to export of goods and services by Indian businessmen, Indian professionals and Indian craftsmen. Government aid to export promotion might assume several forms. Exporters may be proffered with prizes or titles. They may be given subventions and grants in cash or otherwise. They may be granted drawbacks of customs duty. They may be given exemption or reduction from other levies. There may be several other ways of implementing the 'Export or Perish' slogan adopted as a natural policy. Income-tax, especially at latter day levels of charge in the higher income-brackets, was grudgingly recognised as a disincentive not only to productive effort generally, but to export trade in particular. It was apparently thought that even within the framework of the I.T. Act ways and means must and could be found to advance the export promotion, by provisions as tax exemption, special or extra allowances, and the like. Section 35B was obviously the outcome of this line of thinking in the Treasury.

4. The section sets down fairly clearly the types of expenditure, which would qualify for this special allowance intended as a fillip to export markets development. The categories of expenses include advertisement or publicity expenses incurred outside India, expenses incurred in maintaining a branch office, outpost or agency in foreign parts, expenses incurred in submission of tenders and furnishing of trade samples abroad, travelling expenses to and fro and the like. It may be observed generally that all these items of expenditure are eligible for deduction in the normal course of computation of the assessee's taxable profits from business, subject only to the risk of disallowance if they are found to be capital in natural or if they smack of being only the personal expenses of the assessee. How s. 35B dealt with these familiar items of business expenditure was to take them up for special treatment and grant to the exporting assessee the actual cost of the expenditure plus something in addition. In the assessment of Indian companies, the plus element is 50 per cent. of the actual expenditure. In the case of other Indian exporters of goods and services, the extra allowance would be equal to one-third of the actual cost of the export expenses. The totality of the allowance under this section, therefore, would be one and a half and one and one-third of the actual expenditure of the kind described in the various sub-clauses of the section. It is this feature of the section, namely, the grant of allowance by loading the expenditure with an extra fraction, which has led to the allowance being popularly known as the 'weighted deduction'. This jargon has become so much a part of the common speech of tax lawyers and Tribunals that we are not surprised that it has found its way into the question of law posed for our consideration in this reference. The question is worded thus :

'Whether, on the facts and in the circumstances of the case, the assessee was entitled to the weighted deduction under section 35B of the Income-tax Act, 1961, of Rs. 56,960 ?'

5. The ITO denied the allowance claimed by the assessee-firm under s. 35B. His main reason was that there was no income during the relevant account year from the assessee-firm's Ceylon project. According to the officer's understanding of s. 35B, weighted deduction cannot be granted to an exporter who cannot show corresponding receipts from the subject of the expenditure.

6. The assessees keep their accounts on the cash basis. Under this system, only actual outgoing are debited in the accounts as expenditure. In similar fashion, credit is given only for actual receipts coming in during the year. Under the quite different mercantile system of accountancy, particularly as applied to works contract business, it would be necessary to balance the accounts every year by valuing the work-in-progress and give appropriate credit to such value in every year's profit and loss account, even though no actual receipts from the contract work might fructify during the year. In the assessee-firm's case, however, while there was actual expenditure during the year, there was no actual income. And this was how their accounts too recorded the position. The ITO thought that s. 35B does not apply to a case of kind. He accordingly disallowed the entire expenditure.

7. The Tribunal, however, took a different view and allowed the assessee's appeal. They held that the claim of an exporter under s. 35B cannot be refused merely for the reson that the year's trading does not show any receipts against which the export expenses could be set off.

8. We agree with the Tribunal's view of s. 35B. Export expenses do not differ in kind or nature from inland expenses. It follows, therefore, that apart from the weightage factor enacted in s. 35B, export expenses must qualify for allowance even under the general principles. In other words, what is special about the allowance under s. 35B is not the nature of the expenses or their eligibility to deduction, but the weightage given to them by Parliament as a matter of legislative policy. It follows, therefore, that the basic principles which we apply to allowance of trading expenses cannot be ruled out as inapplicable to claims for deduction under section 35B.

9. It is now well settled that the test for allowance of business expenditure is that it should be incurred or laid out wholly and exclusively for the purposes of the assessee's business. It is also well settled that it is not a pre-condition for the allowance that the outlay of expenditure should have yielded any income receipts. The year's trading may show a profit, or it may show a loss. There may be receipts in the year or there may be no receipts whatever. In all cases, the test is whether the expenditure has been incurred wholly for the purposes of the business. Courts have extended this principle of allowance even to the computation of income under 'other sources', where the test of allowance is that the expenditure must have been laid out 'to earn the income'. Despite the enacted words last mentioned, the Supreme Court has held that the making or earning of income is not a necessary pre-requisite for the allowance of expenditure even for purposes of computation of the taxable income under 'Other sources'. Vide Eastern Investments case : [1951]20ITR1(SC) and Rajendra Prasad Moody's case : [1978]115ITR519(SC) . The position is a fortiori in the computation of business profits. Section 35B is among a whole gamut of statutory provisions governing deductions and allowances in the computation of taxable income under the head 'Profits and gains of business or profession'. There is nothing either express or implied in any of these provisions to show that business expenditure cannot be allowed because it has produced no receipts. Nor is there any indication in the language of section 35B which limits the allowance to fruitful expenditure alone. On the contrary, there are clear indications in the text of this provision to hold that the same principles which apply to the general provision of section 37 of the Act also apply to the weighted allowances under this section. Mark the words enclosed within brackets 'not being in the nature of capital expenditure or personal expenses of the assessee' occurring in section 35B(1)(a) and the words 'incurred wholly and exclusively' occurring in section 35B(1)(b). These words have a familiar ring that are a constant reminder to us of the language of section 37. We are satisfied that the Tribunal was right in its interpretation and application of section 35B in this case.

10. We have to mention in this connection one feature of the assessment order, which makes us wonder whether the ITO had not misdirected himself even on the general law governing deduction of business expenditure. For, while negativing the claim for weighted allowance in the sum of Rs. 59,960, the officer added back the entire figure. This was plainly wrong. In a given case, an item of business expenditure may not be eligible for weighted allowance under s. 35B but that does not mean that even the amount actually laid out as an outgoing should not be granted deduction under s. 37 or any other general provision.

11. The Tribunal, while rendering their decision in the assessee's favour for the reasons aforesaid, took some pains to examine another aspect of a factual nature. They entered into a debate whether the Ceylon contract was part and parcel of the assessee-firm's regular professional practice as architects or whether, it was merely an odd kind of job which came their way. The Tribunal, after considerable discussion, concluded that it must be treated as part of the firm's regular professional practice as architects and engineers. Mr. Jayaraman, learned standing counsel for the Department, thought that as a piece of legal inference, the Tribunal's conclusion was not based on a reasonable view of the facts. All the same he did not attempt to argue the point, considering the narrow scope of the question of law propounded in the case stated. For our part, however, we are disposed to regard the Tribunal's inquiry as an avoidable excursion into the region of metaphysics. So long as there is no suggestion that when the partners were at work in Ceylon they did not represent their private or family pursuits, but related only to matters of architectural design and construction, there is no point in the further discussion whether it was an integral part of their Indian business or whether it stood apart as an odd job out. Business, as Rowlatt J., reminded us in Graham v. Green [1975] 9 TC 309 (KB) stands out as a peculiar phenomenon even as a bundle of sticks differs from their sum total. If we may change the Rowlattian metaphor, 'business' is not a static thing, nor a collection of them, but a movement or a flow. To arrest one's attention over its eddies and pools is to miss its course.

12. There might, no doubt, be a sense in which the Ceylon contract may be regarded as a foreign source of income, but when it comes to a computation of profit or loss, it is the business which must figure as a unit and not its several sources or feeders. The I.T. Act. contemplates the computation of income accourding to heads of income, and not according the sources of income which are different things altogether. It follows that a business or profession must not be cut up into fragments of transactions to see if each qualified separately for any deductions. There can be only one profit and loss account for a business. There cannot be as many profit and loss accounts as there are transactions in a business. It is not, therefore, surprising that the statutory allowances under Chap. IV-D should be business-wise and not transaction-wise. In this context s. 35B has perforce to be applied to the business as a whole and not fragmentally to each and every one of its transactions.

13. One other reason mentioned by the ITO in his assessment order for not granting to the assessee-firm any weighted deduction under a 35B was the possibility that the assessee-firm might any day become eligible for relief under s. 80-O of the I.T. Act. This latter provision gives an out-and-out tax exemption to a resident assessee who earns income abroad from the activity of making available his industrial, commercial, or scientific knowledge or from allowing the use of his design and brings into this country the income earned therefrom. The section imposes the condition that between the resident assessee and the foreign enterprise there must be a binding agreement and that agreement must be approved by the Central Government. The ITO noticed that the assessee-firm had not the Central Government's approval for its contract with the Ceylon company for the design and construction of the spinning and weaving mill at Colombo. The officer also envisaged that the assessee would not have to pay any income-tax whatever when the final reckoning of the results of their contract with the Ceylon part proved to be a profit and that profit was brought to this country. According to the officer's logic, since the assessee-firm was qualified to get this overall tax exemption of his foreign profit under the Ceylon contract work, they must be denied the allowance under s. 35B this year.

14. The Tribunal, in appeal, however, held that the weighted deduction under s. 35B cannot be denied on the off-chance that the assessee-firm might get further relief by fulfilling the conditions of s. 80-O.

15. The Tribunal, in our opinion, was correct in holding that the weighted deduction was not dependent on the assessee not being eligible to relief under s. 80-O. The two provisions grant independent reliefs. The one does not add anything to or take away anything from the other. The one relates to a particular method of computation of expenditure under a particular head of income; the other relates to exemption from tax of a particular class of income from the total taxable inocme. There is nothing to show that the reliefs were alternative, as the choice, either of the Department or of the assessee. We are, therefore, in agreement with the conclusion reached by the Tribunal.

16. In the result, we answer the question referred to us in the affirmative and against the Department. The assessees would be entitled to their costs. Counsel's fee Rs. 500.


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