1. This group of references from the Income-tax Appellate Tribunal, Madras, relate to the same assesee, and raise various points for consideration. The first relates to a claim for weighted deduction under s. 35B of the I.T. Act, 1961. This point arises in a ground of assessments for the years 1968-69 to 1973-74. The second point for consideration also is a common one for the group of assessment years 1967-68 to 1970-71, but it is concerned one for the group of assessment years 1967-68 to 1970-71, but it is concerned with the tax treatment of surplus realized from holdings of foreign exchange owning to devaluation of the rupee. The third and last point is limited to one year, viz., 1972-73, and it relates to the claim for deduction of a provision for gratuity.
2. The assessee is a domestic company engaged in the business of exporting iron and steel goods and other sundry articles. The assessee claimed weighted deduction under s. 35B in respect of expenditure incurred in its export business. The claims, which are now the subject of the present references, were laid by the assessee before the Tribunal as being eligible for weighted deduction under s. 35B(1)(b)(iii) of the Act. At the material time relevant to the assessment years in question in the present references, this provision granted weighted deduction in respect of expenditure incurred wholly and exclusively on the distribution, supply or provision inside India of goods, services or facilities which the assessee deals in, or provides, in the course of his business in India, although in connection with the distribution, supply or provision of the goods outside India. The Tribunal has accepted the fact that the assessee is engaged in the export business of supplying iron and steel goods outside India. But, on an examination of the expenses in detail, the Tribunal, however, recorded a finding that they were incurred in India, and not outside India. On this basis, the Tribunal negatived the assessee's claim under s. 35B(1)(b)(iii), agreeing in this regard with the ITO's decision.
3. Mr. S. V. Subramaniam, learned counsel for the assessee, did not contest the Tribunal's finding that the items of expenditure for which the assessee claimed weighted deduction were incurred in India and not outside, as required by s. 35B. One of the assessee's claims, for instance, related to clearing and forwarding charges paid by the assessee at Madras Part on goods exported to foreign countries. This expenditure was clearly incurred in India, because the situs of payment of the charges was Madras Port. The position was the same as respect attestation fees, stamp charges on drafts, export licence fees, bank commission, rents paid for godowns situate in India and various other sundry expenses. All these items of expenditure were incurred only in India, and not aboard, Indeed, in examining the assessee's claim under s. 35B(1)(b)(iii), the Tribunal observed :
'It was admitted before us that all the items included under this head by the assessee pertain to expenditure incurred in India.'
4. In the face of this admission and in the face of the clear provision that the expenditure qualifying for weighted deduction must be expenditure 'not being expenditure incurred in India', the Tribunal's decision must be upheld as correct, and the questions of law referred to us or decision on this point for the years 1968-69 to 1973-74 must be answered against the assessee.
5. Mr. Subramaniam for the assessee, however, submitted that the items of expenditure in question must be held to have answered the statutory requirement, because they must be dealt with as having been 'incurred on distribution, supply or provision outside India of the assessee's goods'. Learned counsel urged that for expenses to be incurred on distribution of goods outside India, within the meaning of the section, it is not necessary that the expenditure must be incurred outside India. If the distribution of goods is outside India, according to Mr.. Subramaniam, it does not matter whether the expenditure on such distribution is incurred in India or abroad. By reading the expression 'on' literally as equivalent to 'in respect of', there might be something to be said in favour of learned counsel's argument, up to a point, but only up to a point. The latter part of leraned counsel's contention cannot, in any event, be accepeted as a correct interpretation of the provision. As earlier mentioned, sub-clause (iii) of s. 35B(1)(b) expressly excludes 'expenditure not being expenditure incurred in India in connection therewith'. To maintain that weighted deduction is available even where expenditure is incurred inside India would go against the teeth of this specific exclusionary provision. A Look at the other sub-clauses of s. 35B(1)(b), such for instance as sub-clauses (i), (iv), (vi), (vii), (viii) and (ix), also shows the insistence of Parliament that the weighted deduction cannot be exigible unless the expenditure under the different heads are incurred 'outside India', a phrase which occurs again and again in the various sub-clauses. To accept learned counsel's argument that the Indian situs of the expenditure is no disqualification for eligibility for weighted deduction would be to bring in under one broad indiscriminate sweep, all expenses in an exporter's business. If the were the position, Parliament need not have troubled to enact so many clauses in s. 35B. The section would have been simpler and been enacted differently. We have, therefore, no hesitation in rejecting the construction of s. 35B advocated by Mr. Subramaniam for the assessee.
6. The second point on which our opinion is sought in this group of references is about gains on devaluation of the rupee. The assessee exported goods abroad and got payment in foreign currency. The price, in terms of foreign currency agreed earlier between the parties, was not alterned, but only the rupee equivalent showed an excess, as compared to the rupees conversion prior to the devaluation of the rupee. The decision of the Tribunal was that the devaluation gains was a trading receipt and bore the same character as the purchase price for the exported goods, namely, revenue receipt. This decision of the Tribunal is questioned in this reference. Learned counsel for the assessee, however, did not contest the position that the exchange profit related to the trading account. Learned counsel also conceded that the nature of the receipt is concluded by a decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT : 116ITR1(SC) . In that case, the Supreme Court laid down the board principles that (headnote) :
'Where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss, if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business.'
7. The third and last question of law for our consideration is the one which has been referred by the Tribunal at the instance of the Department. The question is on of the following terms :
'Whether, on the facts and in the circumstances of the case, the Appellant Tribunal was right in allowing the deduction of the provision for gratuity in respect of the employees at Calcutta region for the assessment year 1972-73 ?'
8. The assessee was employing staff and workmen in various places. For the first time in the relevant account year, the assessee made provision for gratuity for all its staff in the aggregate sum of Rs. 88,224. The ITO negatived the whole claim. Of this provision for gratuity, an amount of Rs. 51,186.25 related to the staff in the assessee's establishment at Calcutta. In the appeal against the relevant assessment before the Tribunal, the assessee restricted its claim for deduction to the provision for gratuity in the Calcutta office alone, on the ground that the provision was in accordance with the West Bengal Gratuity Act, which had come into force in 1971. The Tribunal, while considering the assessee's claim, re-stated the legal position that a provision for gratuity may be allowed as a charge against profits if the provision were arrived at on a scientific basis. Since the provision had not been examined from that point of view, the Tribunal remanded the matter to the ITO for a fuller consideration.
9. The frame of the question of law at the instance of the Department might suggest that the Tribunal had gone to the extent of allowing the claim for deduction of the provision for gratuity on merits. As we indicated earlier, the Tribunal has only sent the case back to the ITO for a detailed examination of the claim. We do not think the Tribunal erred in law in doing so, or that the remand was an irregular exercise of its power in that regard. We would accordingly answer the question of law against the Department. We would only add, by way of information, that the law on the subject of provision for gratuity has been recently re-stated by the the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT : 132ITR559(SC) . In that decision, the Supreme Court has clearly laid down when, under what conditions, and to what extent a provision or gratuity can be regarded as a charge against profits. We would observe that the guidelines stated by the Supreme Court might also be kept in view by the ITO while considering the assessee's claim on remand.
10. We dispose of the reference on the three points in the manner we have indicated against each. In view of the mixed results of the reference, we make no order as to costs.