1. The question which has been referred to this court under s. 256(1) of the I.T. Act run as follows:
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction under section 35B of the Income-tax Act, 1961, in respect of the expenditure incurred by the non-resident firm of which he was a partner for carrying on its business in Malaysia for the assessment years 1970-71 and 1971-72 ?'
2. The assessee is a partner in a firm known as Chitra Palayacat Co., Penang, which is a non-resident firm and which carries on business in Malaysia. It does not have a branch in India. For the assessment year 1970-71, the assessee admitted an income of Rs. 8,845 from the said firm and claimed a deduction of Rs. 19,313 as allowable expenditure under s. 35B of the Act. By his order dated July 5, 1971, the ITO determined the taxable income at Rs 17,880 accepting the aforesaid claim of the assessee.
3. The Addl. Commissioner was of the view that the assessee was not entitled to such an allowance and he, therefore, took proceedings under s. 263 of the Act and passed an order on May 30, 1973, withdrawing the allowance of Rs. 19,313.
4. For the assessment year 1971-72, the assessee's share of loss from the non-resident firm was Rs. 38,000. At the time of the assessment, the assessee claimed a deduction of Rs. 2,99,413 as allowable under s. 35B of the Act to the computation of his share of loss from the non-resident firm. The ITO rejected this claim on the ground that the assessee had not carried on any business as required under s. 35B of the Act.
5. The assessee appealed to the AAC contending that the non-resident firm had imported handloom goods from India and sold the same in Malaysia and that since the assessee was a partner of the said firm, he was entitled to the relief allowable under. 35B of the Act. The AAC rejected this contention of the assessee and the assessee appealed to the Tribunal both as against the order of the AAC and also against the order of the Commissioner passed under s. 263 of the Act.
6. The Tribunal confirmed the order of the AAC as well as of the Commissioner for the respective assessment years and the assessee has brought this reference before this court. Mr. T. V. Balakrishnan, learned counsel for the assessee, contended that under the law, any business carried on by a firm is a business carried only its partner and that in the present case the non-existence of any business in India is of no consequence. His submission was that the assessee carrying on business in Malaysia in partnership with others should be taken to be carrying on business to which the provisions of s. 35B of the Act could be applied. For the Department the submission was that the assessee was not carrying on the business of export of good from India, that the provision does not apply to the import of good from the non-resident firm in the present case and that the assessee can get deduction only to the extent provided in s. 67(3) of the Act or of an amount which could be taken to have been spent wholly and exclusively for the purpose of earning the share income from the firm. In the present case it was contended that the assessee did not qualify himself for deduction either under s. 67(3) of the Act or under the general concept of deduction of expenditure to earn the share income.
7. Section 35B provides what is known as export markets development allowance. Where an assessee being a domestic company of a person other than a company who is resident in India has incurred, whether directly or in association with any other person, any expenditure, not being capital expenditure or personal expenses, he shall, subject to the provisions of s. 35B, be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year. In the case of companies a larger relief was allowable, namely, one and a half times the actual expenditure incurred. Clause (b) of s. 35B of the Act describes the categories of expenses which were to be taken into account in this connection. The categories of expenses are:
(i) advertisement of publicity outside India in respect of the goods which the assessee deals in,
(ii) obtaining information regarding markets outside India for such goods,
(iii) distribution, supply or provision outside India of such goods other than expenditure on the carriage of such goods to their destination outside India or the insurance of such goods while in transit,
(iv) maintenance outside India of a branch office or agency for the promotion of the sale outside India of such goods, and
(v) travailing outside India for the promotion of the sale, outside India, of such goods.
8. There are other categories of expenses with which we are not now concerned. There is a residuary category prescribed in sub-clause (ix) of clause (b) of the section. That relates to expenditure on prescribed categories of activities for the promotion of the sale outside India of the goods. We are not also concerned with such residuary category.
9. A parcel of the provision would go to show that the whole provision is intended to develop the export markets for Indian goods. The country is badly in need of foreign exchange, and this is one of the incentives granted to the assesses in India to export their goods from India and earn foreign exchange in the bargain. The way in which the provision is designed goes to how that the expenditure must have been incurred in effecting exports from India. In the present case, the Tribunal has found that the firm in question did not export any goods from India and it partners also had not exported any goods on behalf of the firm. It is on account of this finding that the Tribunal came to the conclusion that s. 35B of the Act would not be applicable to the present case.
10. The learned counsel for the assessee contended that in an import transaction by the non-resident in the present case there is an element of export as there can be no import without an export from the corresponding country. But the section is designed only to held the Indian exporter of goods from India and is not intended to assist non-resident institutions or entities carrying on business outside India. The postulate of the provision appears to us to be that there must be an export by the person who claim the expenditure in India. The export may be either of goods or of services. There can be no claim for an expenditure under the provision by any person who did not do so from India. The claim of the assessee fails on the language of the provision.
11. The learned counsel for the assessee took us through the decisions in Dulichand Laxminarayan v. CIT : 29ITR535(SC) , CIT v. Jethalal Zaverchand Patalia : 61ITR357(Guj) and CIT v. Arun Industries : 61ITR241(Guj) , in support of his proposition that where a business is carried on by the firm in which the assessee is a partner, it would be correct to say that the business is carried on by the assessee, that a partnership is not a person as such known to law and that, therefore, the claim for deduction could be had by the assessee who carried on the business through the mechanism of the partnership. Even assuming that this line of decisions is applicable to a case like this, still, we consider that the assessee's claim falls on the ground that neither the assessee nor the firm of which he is a partner did export any good from India. The learned counsel for the assessee admitted that the firm only imported good from India and, therefore, the assessee is only in the position of an importer who is not liable to be brought within the scope of s. 35B.
12. Our attention was also drawn to another decision rendered by us in CIT v. Kasturi Palayacal Co. : 120ITR827(Mad) . That was a case where there was an export by the assessee. But the contention of the Department was that the assessee did not carry on any business in India similar to that which was being carried on abroad. This contention was rejected by us and we pointed out that what is necessary under s. 35B of the Act is the existence of a business in India carried on by a domestic company or a person residing in India, that there must be export from India of goods, services of facilities and that the assessee himself and not a third party must be a dealer thereof abroad. As these requisites were satisfied, the assessee was held to be entitled to allowance under s. 35B of the Act. But the assessee, it was observed, could not get an allowance for someone else's export of Indian goods. This decision, apart from not helping the contention urged on behalf of the assessee in the present case, supports the Department's stand. This is a case where the assessee is seeking to get a deduction for expenses on account of someone else's or some third party's export of goods from India. In fact, in the present case, there is not only a claim for deduction of expenses in respect of someone else's export business but also in respect of an import business carried on abroad. We have already pointed out that there was no export of any goods by the assessee from India, and that an import business cannot be a beneficiary of the allowance. Therefore, the assessee cannot claim any deduction under s. 35B of the Act. The question is accordingly answered in the negative and against the assessee.
13. T.C. Nos. 126, 127 and 128 of 1977: In this common reference for the assessment years 1970-71, 1971-72 and 1972-73, the question of law referred to this court is as follows:
'Whether, on the facts and in the circumstances of the case, the assessee is not entitled to weighted deduction of Rs. 19,313, Rs. 2,99,415 and Rs. 1,38,800 from his share income from the firm of M/s. Chitra Palayacat Co., under s. 35B of the I.T. Act, 1961, for the assessment years 1970-71, 1971-72 and 1972-73 ?'
14. The assessee is another partner of the same firm in Malaysia which was the subject-matter of consideration in T.C. Nos. 56 and 57 of 1977. The facts in this case are not different from those discussed in the other and in fact the contentions were common. The answer to the question referred in this case is also that the assessee i not entitled to the weighted deduction from the share income from the firms of M/s. Chitra Palayacat Co., under s. 35B of the Act. The Department will be entitled to its costs. Counsel's fee Rs. 500 (one set).