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Commissioner of Income-tax Vs. Kasturi Palayacat Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberT.C. Nos. 115 of 1976, 481 to 483 and 842 of 1977
Judge
Reported in(1980)15CTR(Mad)378; [1979]120ITR827(Mad)
ActsIncome Tax Act, 1961 - Sections 35B and 35B(1)
AppellantCommissioner of Income-tax
RespondentKasturi Palayacat Co.
Appellant AdvocateA.N. Rangaswami and ;Nalini Chidambaram, Advs.
Respondent AdvocateN.C. Ananthachari, Adv.
Cases ReferredBushell v. Hammond
Excerpt:
direct taxation - deduction - sections 35b and 35b (1) of income tax act, 1961 - assessee firm had two branch offices in foreign country - whether assessee entitled to weighted deduction under section 35b in respect of overhead charges incurred for maintenance of two foreign branches and custom duty paid custom duty and packing charges incurred by branches for import of textile good - assessee exported goods from india which were not utilized in india - entitled to weighted deduction under section 35b only if foreign branch dealt abroad in indian goods exported from india - not necessary to claim relief under section 35b to use goods within india - held assessee entitled to weighted deduction under section 35b to claim relief. - .....incurred wholly and exclusively on- (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 ;...... (iii) distribution, supply or provision outside india of such goods, services or facilities, not being expenditure incurred in india in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside india or on 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, services or facilities...' 11. it is unnecessary to refer to the rest of the provision. in sub-clause (iii) the expression ' such goods ' occurs. in sub-clause.....
Judgment:

Sethuraman, J.

1. All these references raise a common point. In T.C. No. 842 of 1977, relating to the assessment year 1969-70, the following question has been referred to this court :

' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to relief under Section 35B in respect of expenses after February 29, 1968, incurred by the branches in Kulalumpur and Penang '

2. In. T.C. No. 115 of 1976, relating to the assessment year 1970-71, the following question has been referred :

' Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted (sic) under Section 35B of the Income-tax Act, 1961, in respect of the overhead charges incurred by it for the maintenance of its branches at Penang and Kulalumpur for the assessment year 1970-71 ?'

3. There is apparently an omission of the word ' deduction ' after the word ' weighted ', where we have added the expression ' sic '.

4. In T.C. Nos. 481 to 483 of 1977, the question referred, relating to the assessment years 1971-72, 1972-73 and 1973-74, runs 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 overhead charges inccurred by it for the maintenance of the two foreign branches at Kulalumpur and Penang and the customs duty paid and packing charges incurred by the said branches for the import of the textile goods from India, for the assessment years 1971-72, 1972-73 and 1973-74 '

5. There is an additional aspect in the question referred for the years 1971-72 to 1973-74, which we shall consider separately at the appropriate stage.

6. We may take the statement of the case for 1969-70 in T.C. No. 842 of 1977 as typical of the facts in relation to all these years. The assessee is a registered firm carrying on business in textiles with its head office at Madras with two branches outside India, one at Kulalumpur and the other at Penang. It filed its return for the assessment year 1969-70, but in a letter dated March 16, 1970, it claimed Rs. 16,47,059 as relief under Section 35B of the I.T. Act, 1961, which gives a weighted allowance for expenses incurred abroad. The ITO noticed that the assessee had included the entire cost of goods purchased as part of the expenses of maintaining the foreign branches. The overhead expenses for Kulalumpur and Penang branches amounted to 50,685 and 11,264 Malaysian dollars, totalling in all to 61,949 Malaysian dollars. He considered that one-third of the amount converted into Indian currency, viz., Rs. 50,386 was admissible as deduction under Section 35B. In his view, the overhead expenses necessary for the maintenance of the branches in respect of the goods exported from India would alone be admissible. He completed the assessment accordingly.

7. The Addl. CIT examined the records and came to the conclusion that the ITO, in allowing the sum of Rs. 50,386 had acted prejudicially to the interests of the revenue. He, therefore, took proceedings under Section 263 of the Act. He found that part of the expenditure had been incurred prior to February 29, 1968, and that such expenditure could not be brought within the category of expenses to be considered under Section 35B, which dealt with expenses incurred after February 29, 1968. He gave the necessary notice to the assessee to explain why the entire amount could not be disallowed, and after hearing the assessee's objection, he came to the conclusion that the overhead expenses of the branch could not be said to have been incurred for the purpose of the assessee's business in exports and that the assessee was not, therefore, entitled to the allowance of Rs. 50,385. He directed the ITO to modify the assessment accordingly.

8. The assessee appealed to the Tribunal and the Tribunal, after considering the facts came to the conclusion that the expenditure incurred on these branches are wholly and exclusively incurred for the promotion of sales and that such expenses were liable to be allowed under Section 35B of the Act. The facts relating to the other years, except for some difference in figures, are identical and, therefore, it is not necessary to set them out separately. It is against these orders of the Tribunal that the questions extracted already, have been referred.

9. Section 35B of the I.T. Act was introduced by the Finance Act of 1968 with effect from 1st April, 1968. The provision, in so far as it is relevant, runs as follows :

' 35B. (1) (a) Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th day of February, 1968, whether directly or in association with any other person, any expenditure......referred to in Clause (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year......?'

10. The deduction of one and one-third (1-1/3) times the amount of expenditure incurred during the previous year was increased to one and one-half (1-1/2) times by the proviso with effect from February 28, 1973. Clause (b) of Section 35B, to the extent relevant, runs as follows :

' (b) The expenditure referred to in Clause (a) is that incurred wholly and exclusively on-

(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 ;......

(iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on 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, services or facilities...'

11. It is unnecessary to refer to the rest of the provision. In Sub-clause (iii) the expression ' such goods ' occurs. In Sub-clause (iv) the expression that occurs is ' such goods, services or facilities '. The reference of ' such goods, services or facilities ', as the case may be, is to the goods, services or facilities dealt with in Sub-clause (i). Thus the expenditure must have been incurred in respect of the goods dealt with or services or facilities provided in the courae of his business. The main point sought to be submitted by the learned counsel for the CIT was that the assessee must be a dealer of the said goods, services or facilities in India. He referred to the finding in the present case that the assessee had practically no business at Madras, except for dealing in dyes quota. There were no purchase and sale of textiles by the Madras office, and so he submitted that unless the assessee dealt with those goods in India and exported them outside India, the assessee would not be eligible for the allowance contemplated under Section 35B, He sought to support this submission by a reference to the marginal note to Section 35B, which runs thus :

' Export markets development allowance. '

12. The marginal note is liable to be taken into account only in cases where there is some doubt as to the construction of the provision. In the present case, Section 35B(1)(a) refers to the category of persons whom the section is intended to benefit. The category of persons is a domestic company or a person residing in India. The assessee is a person residing in India, and, therefore, there is no difficulty about the category which Section 35B intended to benefit. The expenditure that is considered for allowance is an expenditure which is referred to in Clause (b). Clause (b) gives the details of the expenditure that would qualify for the allowance in the manner provided therein. For instance, Sub-clause (i) refers to advertisement or publicity expenses outside India. In Sub-clause (iii) also, there is indication that the expenditure should have been incurred outside India. There is a disallowance of part of the expenditure even outside India, if such expenditure related to the carriage of goods to their destination outside India or on the insurance of such goods while in transit. Similarly, Sub-clause (iv) provides for expenditure or maintenance outside India of a branch, office or agency for the promotion of the sale outside India of goods, services or facilities. The goods, services or facilities must be those in which the assessee dealt. Though in the present case, the Commissioner has pointed out that the assessee had not dealt in the goods, which the foreign branches dealt in, still there is nothing in Sub-clause (iv) which requires that the goods dealt in the foreign branches should also be dealt in India, Unless the words not found in the provision are supplied to the effect that the assessee would have to deal in such goods in India before he can qualify for the allowance of the expenditure outside India, the construction, which the learned counsel for the Commissioner contends for, cannot find acceptance.

13. It was pointed out by Craies on Statute Law, 7th edn., at page 196, thus :

' The modern cases, however, are clear that marginal notes can afford no legitimate aid to construction...... Lord Macnaghten in the Privy Council considered it well settled that the marginal notes cannot be referred to for purposes of construction and Lord Hanworth M. R., referring to the Superannuation Act of 1859, said : ' It was contended that these catchwords could be used to explain the meaning of sections upon which they appear. As explained by Baggallay L.J., in Att. Gen. v. G.E.Ry. [1879] 11 Ch D 449 marginal notes are not part of an Act of Parliament. The Houses of Parliament have nothing to do with them, and I agree with the learned Lords Justices in that case that the courts cannot look at them '.'

14. The reference to Lord Macnaghten's judgment in the Privy Council was in the case of Thakurain Balraj Kunwar v. Rae Jagatpal Singh [1904] LR 31 IA 132 ; ILR 26 All 393 which, it may be noticed, is an appeal from India. At page 197, there is a reference to a recent pronouncement of Lord Reid and the passage runs as follows (Craies on Statute Law) :

' The final word to date (1970) on marginal notes came from Lord Reid in Chandler v. D.P.P. [1964] AC 763 who said : ' In my view sidenotes cannot be used as an aid to construction. They are mere catchwords and I have never heard......that an amendment to alter a sidenote could be proposed in either House...... So sidenotes cannot be said to be enacted in the same sense as the long title or any part of the body of the Act'.'

15. In a later case, in Director of Public Prosecutions v. Schildkamp [1969] 3 All ER, 1640 Lord Reid had this to say on the same subject at page 1641 :

' But a sidenote is a poor guide to the scope of a section, for it can do no more than indicate the main subject with which the section deals.

If we take these matters into consideration then we are in effect searching for the intention of the draftsman rather than the intention of Parliament.'

16. In the same case, Lord Upjohn, after referring to Chandler v. Director of Public Prosecutions [1964] AC 763 observed as follows (p. 1657) :

' In Chandler v. Director of Public Prosecutions [1962] 3 All ER 142 ; [1964] AC 763 Lord Reid said the marginal or sidenote to an Act affords no guidence to the construction of an Act and I believe that to be a sound working general rule. A sidenote is a very brief precis of the section and therefore forms a most unsure guide to the construction of the enacting section, but it is as much a part of the Bill as a cross-heading and I can conceive of cases where very rarely it might throw some light on the intentions of Parliament just as a punctuation mark.'

17. The law in India is the same. In Chandroji Rao v. CIT : [1970]77ITR743(SC) it is laid down by the Supreme Court :

' The marginal heading cannot control the interpretation of the words of the section particularly when the language of the section is clear and unambiguous.'

18. Thus the law is clear that a marginal note is an unsure guide and cannot be resorted to for the purpose of construction excepting in cases of ambiguity. In the present case, we do not find any ambiguity in the section as such and, therefore, the marginal note cannot be taken as controlling the operation or construction of the provision.

19. Learned counsel for the CIT drew our attention to two of the decisions of the Supreme Court in this connection. One is, Bhinka v. Charan Singh ; : 1959CriLJ1223 . The relevant passage occurs at page 809 (page 966 of AIR) and it runs as follows :

' If there is any doubt in the interpretation of the words in the section, the heading certainly helps us to resolve that doubt.'

20. This passage also reiterates the well known principle that unless there is a doubt in the interpretation of the words in the section, the heading could not be referred to for resolving that doubt. However, we cannot create & doubt for ourselves and proceed to refer to the marginal note for the purpose of resolving that doubt.

21. In Indian Aluminium Company v. Kerala State Electricity Board : [1976]1SCR70 the Supreme Court again pointed out at page 86 (p. 1977 of AIR) thus :

' It is true that the marginal note cannot afford any legitimate aid to a construction of a section, but it can certainly be relied upon as indicating the drift of the section, or, to use the words of Collins M.R. in Bushell v. Hammond [1904] 2 KB 563 'to show what the section was dealing with'.'

22. The submission was that the drift of the section was in relation to export from India and not with reference to maintenance of a branch in which the stocks from India were dealt abroad. Even before finding out what the drift of the section is, there must be some room for doubt as to the direction the section takes. If the meaning of the section is clear from its own words, the drift of the section would be clear enough and reference to the marginal note for the purpose of ascertaining the drift would be superfluous. We, therefore, reject the contention based on the marginal note.

23. Learned counsel for the Commissioner then contended on the basis of the speech of the Finance Minister and the memorandum accompanying the budget that the whole section was intended to apply only to the cases where products were exported from India. The Finance Minister in his speech introducing the budget stated with reference to the provision now under consideration, as follows:

' I propose also to provide for the grant of an Export Markets Development Allowance to taxpayers other than foreign companies at the rate of one and one third of the revenue expenditure incurred for the development of export markets. Further, to encourage export of technical ' know-how ' and technical services by Indian companies, I propose to exempt from tax the whole of their income consisting of dividends, royalties and fees derived through these activities from foreign companies.'

24. In the notes on clauses, the following passage occurs in relation to Section 35B :

' New Section 35B provides for the grant of 'Export markets development allowance' to an assessee being a domestic company or a person (other than a company) resident in India, who incurs, after the 29th February, 1961, expenditure under specified categories for development of export markets. The allowance is in an amount equal to one and one-third times the amount of the qualifying expenditure. The qualifying categories of expenditure include, inter alia, expenses on advertisement or publicity outside India in respect of goods, services or facilities which the assessee deals in or provides in the course of his business, expenditure on obtaining information regarding foreign markets for such goods, services or facilities, expenses on the maintenance of a branch, office or agency abroad for the promotion of the sale of such goods, services or facilities, expenses oa the preparation and submission of tenders abroad for the supply or provision of such goods, services or facilities, etc. The allowance will be available with reference to expenditure of the specified categories incurred directly by the taxpayer and also that incurred in association with any other person. '

25. In the memorandum explaining the provisions in the Finance Bill, 1968, para. 48 refers to this provision and the following passage may be quoted from it :

' It is proposed to make the following provisions in the Income-tax Act for promoting our exports : (1) Domestic companies and also non-corporate taxpayers resident in India, who incur any expenditure under specified heads to facilitate or promote the sale, outside India, of any goods, services or facilities dealt in or provided by them in the course of their business will be allowed a weighted amount of deduction in respect of such expenditure. This deduction will be in a sum equal to one and one-third times the amount of the qualifying expenditure. The heads of expenditure qualifying for this deduction are the following 1--......'

26. All these heads of expenditure are merely repetitions of Section 35B(1)(b), It is unnecessary to go into the question how far the speech of the Finance Minister or the notes on clauses, or the memorandum explaining the provisions in the Finance Bill are admissible as aids to construction. Even taking these extracts into account, it is by no means clear that the assessee must deal in those goods both in India and abroad before he could get the allowance. AH these passages emphasise that the expenses incurred in the development of export markets are to be allowed. The only conditions are :--(i) there must be a business in India carried on by a domestic company or a person resident in India ; (ii) there must be exports from India of goods, services or facilities ; and (iii) the assessee himself (not a third party) must be a dealer thereof abroad. To illustrate, the assessee may be a dealer in textiles in India, but may export hardware from India abroad and deal in them through a branch there. In such a case, the assessee would be eligible for the allowance notwithstanding the fact that the said goods are not traded in India. The whole scheme behind the provision is to encourage exports from India by Indian traders, and the contention for the Commissioner appears to sap the provisions of this objective and it cannot be accepted.

27. In this context, it is necessary to refer to a few facts of this case. Out of the total purchase of 17,03,999 Malaysian dollars in Kulalumpur branch, goods to the extent of 4,77,802 Malaysian dollars were purchased from parties in India and the balance of goods worth 12,26,197 Malaysian dollars were purchased locally at Kulalumpur. The ITO himself in his order pointed out ;

'The assessee has claimed by his letter dated 16-3-70 a sum of Rs. 16,47,059 as relief under Section 35B, For the computation of this amount, the assessee has included the entire cost of the goods purchased as part of the expenses of maintaining the foreign branches. This is indeed a strange claim. It is, as if the entire trading activity of the assessee in the foreign countries (sic) and therefore only such overhead expenses as are necessary for the purpose of maintaining the branches would be admissible. Such overhead expenses come to only 61,949 dollars and l/3rd of this will be admissible as relief Under Section 35B. Applying the rate of Rs. 2-44 per dollar, the relief admissible comes to Rs. 50,386.'

28. It is to disturb this relief of Rs. 50,386 that the Commissioner took proceedings under Section 263. In the order of the Commissioner in para, 5 it is stated :

' It is explained that in the Penang Branch the goods dealt in are those purchased only from India there being no local purchases and that all these transactions are adjusted in the Kulalumpur branch books. This is found to be correct on verification. '

29. It is only because the transactions of the Kulalumpur branch amounted to 17,03,999 Malaysian dollars and the goods imported from India came to 4,77,802 dollars, the proportion of roughly one-third was applied by the ITO and the relief was granted accordingly. The Commissioner considered that no part of the relief could have been granted to the assessee because the assessee had dealt in the same goods in India. According to the Commissioner, even a proportionate allowance was not possible as the assessee did not have any business in the same goods in India. This is clearly against the tenor of the provision as explained earlier. We consider that the assessee will be eligible for the allowance of the expenditure mentioned in Section 35B(1)(b) as admissible, provided the assessee in the foreign branch dealt abroad in Indian goods exported from India. If the assessee had made only local purchases abroad then there would be no scope for allowance of the weighted expenditure contemplated for allowance under Section 35B, as to that extent there were no exports from India. The assessee cannot get allowance for some one else's exports of Indian goods. But, so long as the assessee had exported goods from India, even though the assessee did not deal in those goods in India, the assessee will be eligible for allowance, as there is nothing in the provision which requires the assessee to deal in those goods in India also before he can get the relief under Section 35B in respect of the expenses incurred abroad. If the real intention behind the provision is what the Commissioner contends for, then to borrow the expression of Lord Macmillan in IRC v. Ayrshire Employers Mutual Insurance Association Ltd. [1948] 16 ITR (Supp) 80 'The Legislature has plainly missed fire'.

30. The result is, that the question referred for the assessment years 1969-70 and 1970-71 are answered in the affirmative and in favour of the aseessee. The same answer would hold good for the other years too. There is one additional point to be considered in the reference relating to the assessment years 1971-72, 1972-73 and 1973-74. The customs duty paid and the packing charges incurred by the said branches for the import of the textile goods from India were claimed as allowance under Section 35B. The learned counsel for the Commissioner contended that these expenses could not have been allowed under Section 35B. We do not agree. The ban is on expenditure on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit, as seen from Section 35B(1)(b)(iii) of the Act. The customs duty paid and the packing charges incurred do not fall within this category contemplated by Sub-clause (b) of Section 35B(1). The question referred to us for the assessment years 1971-72, 1972-73 and 1973-74 is also answered in the affirmative and in favour of the assessee. The assessee will be entitled to costs. Counsel's fee Rs. 500 one set.


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