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Case Number

W.P No. 2359 of 1990

Attorney(S)

F.V Irani with J.N Shah
R.V Desai, Senior Counsel with J.P Deodhar and P.S Jetly instructed by H.D Rathod

Judges

S.H Kapadia
V.C Daga, JJ.

Acts

SECTION 264 INCOME TAX ACT 1961
sub-clauses of section 35-B
section 35-B(1)(b)(iv)
section 35-B

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Smart Summary

Structured Summary of the Opinion (V.C Daga, J.)

Factual and Procedural Background

The petitioner is a nationalised bank operating from numerous branches in India and, at the relevant time, 32 foreign branches. For Assessment Year (A.Y.) 1975–1976 the bank filed its return on 20 February 1975 declaring income of Rs. 6,48,75,800/-. In that return the bank did not claim any weighted deduction under section 35-B of the Income-tax Act, 1961 for (a) expenses incurred in maintaining its foreign branches outside India, or (b) expenses incurred on its International Division in India.

The assessment under section 143(3) was completed on 11 September 1978 assessing income at Rs. 6,49,08,910. Subsequently the bank was advised that it might be entitled to a deduction under section 35-B for the relevant expenditures and filed a revision application under section 264 on 21 August 1979 asking the Commissioner (respondent No. 1) to direct the Assessing Officer to grant the deduction.

The revision application was disposed of by the Commissioner on 21 February 1986 (approximately 6½ years later). The Commissioner rejected the application with respect to the foreign-branch expenditure on the ground that section 35-B(1)(b)(iv) required the expenditure to be incurred "for the promotion of the sale outside India of such goods, services or facilities" and he held that the foreign branches were engaged in normal banking business and not in promotion of banking services or facilities. He also rejected the claim in respect of the International Division as not falling within any sub-clause of section 35-B.

The bank appealed to the Income Tax Appellate Tribunal (Bombay) on 11 April 1986; the tribunal dismissed that appeal as not maintainable under section 253. The bank challenged the Commissioner's order by filing the present writ petition.

Legal Issues Presented

Whether, on the facts and in the circumstances, the Assessing Officer (and the Commissioner in revision) was right in holding that the bank was not entitled to a weighted deduction under section 35-B of the Income-tax Act for the Assessment Year 1975–1976 in respect of (a) expenses for maintenance of foreign branches and (b) expenses of the International Division in India?

Arguments of the Parties

Petitioner-Bank's Arguments

The bank had 32 foreign branches rendering banking services and incurred expenditure aggregating Rs. 2,51,23,848 for maintenance of those foreign branches; it was therefore entitled to relief under section 35-B(1)(b)(iv) for expenditure incurred for maintaining branches outside India.
The bank also claimed relief under section 35-B for expenditure on its International Division/overseas branches in India that exercised supervision, control and undertook business activities outside India.
Counsel relied on prior decisions of the Appellate Tribunal (Bombay Bench) in the bank's own case for A.Y. 1976–1977 and other Tribunal decisions, submitting that the Assessing Officer was bound to follow those Tribunal decisions.

Revenue's Arguments

The Assessing Officer had obtained reports from officers exercising jurisdiction at Bombay confirming that claims under section 35-B had not been accepted in other banks' cases; reliance was placed on those reports.
On a textual reading of section 35-B(1)(b)(iv), the phrase "for the promotion of" limits the provision to branches/offices/agencies outside India that are maintained specifically "for promotion of the sale outside India of the goods, services, or facilities" provided by the assessee. The Revenue contended that the foreign branches of the bank were engaged in ordinary banking business and could not be characterized as maintained for promoting banking services outside India; hence the Assessing Officer was justified in rejecting the deduction claim.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Decision of the Madras Bench of the Income Tax Appellate Tribunal in the case of Indian Overseas Bank (referred to by the Tribunal)	Supported the proposition that expenditure on bank facilities and services rendered outside India could be within section 35-B; i.e., banks similarly circumstanced could be allowed benefits under section 35-B.	The Tribunal relied on this decision when holding that the petitioner-bank would be entitled to relief under section 35-B for expenses incurred on services rendered outside India; the High Court treated the petitioner as similarly circumstanced and accepted that reasoning.
Order of the Apex Court in the case of India Hotels Ltd. (Special Leave Petition dismissed)	The SLP dismissal was treated as corroborative support for the Tribunal's view in related matters (i.e., accepting the Tribunal's conclusion in that context).	The Tribunal relied upon the Apex Court's dismissal of SLP in India Hotels Ltd. as part of the basis for its ruling; the High Court noted that the Tribunal relied on that order as supporting its conclusions.
C.C.E. v. Dunlop India Ltd., (1985) 1 SCC 260 : AIR 1985 SC 330	Principle concerning hierarchical judicial discipline: lower authorities must accept loyally the decisions of higher tribunals/courts; the "last word" of the superior tribunal must be accepted by lower tiers.	The Court invoked this authority to emphasise that the Assessing Officer, being inferior to the Tribunal, was bound to follow the Tribunal's decisions and should not distinguish them on untenable grounds; this supported quashing the Commissioner’s order.

Court's Reasoning and Analysis

The court proceeded by first identifying the statutory text and requirement: section 35-B(1)(b)(iv) allows deduction for "maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities" provided the expenditure is "wholly and exclusively" for that purpose. The court then examined the factual matrix: the petitioner rendered services and facilities overseas and in India through its numerous branches; services were rendered to Indian customers in overseas countries and the petitioner’s foreign branches carried out typical banking activities.

The court placed weight on subsequent adjudications in which, during pendency of assessment, the Tribunal (in respect of A.Y. 1976–1977 and 1977–1978) held that the petitioner would be entitled to relief under section 35-B for expenses on bank facilities and services rendered outside India. The Tribunal had relied on the Madras Bench decision in Indian Overseas Bank and on the Apex Court's dismissal of the SLP in India Hotels Ltd. The Revenue's reference application to the Tribunal under section 256(1) questioning the Tribunal's correctness was rejected by the Tribunal for A.Y. 1976–77 to 1981–82, and that rejection was affirmed by the High Court under section 256(2), rendering the Tribunal's orders final and conclusive.

Given that the Tribunal's decisions had become final and were being accepted (the opinion notes "The same appears to have been accepted even by the revenue"), the court emphasised the binding character of Tribunal decisions on subordinate authorities. Citing C.C.E. v. Dunlop India Ltd., the court reiterated the necessity of hierarchical judicial discipline whereby lower authorities, including the Assessing Officer, must accept and follow the Tribunal's determinations. The court found that the Assessing Officer was wrong to distinguish the Tribunal's decisions on untenable grounds and, on the combined factual and precedential basis, held that the petitioner-bank was entitled to claim relief under section 35-B for the expenditure in question.

The court therefore quashed and set aside the impugned order of the Assessing Officer dated 21 February 1986 and allowed the writ petition.

Holding and Implications

Holding: The writ petition was allowed and the impugned order dated 21st February 1986 of the Assessing Officer/first respondent was quashed and set aside. Rule made absolute with no order as to costs.

Implications

Direct effect: The bank is held entitled to claim relief under section 35-B of the Income-tax Act for the expenditure incurred on maintenance of its foreign branches and in respect of its International Division for A.Y. 1975–1976, and the Assessing Officer's contrary order has been set aside.
Binding authority point: The decision underscores that subordinate tax authorities must follow final Tribunal decisions and should not attempt to distinguish those decisions on untenable grounds; the court expressly relied on C.C.E. v. Dunlop India Ltd. to reinforce hierarchical judicial discipline.
Broader precedent: The opinion does not purport to lay down novel principles beyond applying existing Tribunal conclusions and hierarchical authority; it relies on final Tribunal rulings and established hierarchical principle as the basis for relief. No separate new precedent beyond these applications is articulated in the opinion.

Writ petition allowed.

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Bank Of Baroda v. H.C Shrivatsava And Another

V.C Daga, J.:— Having heard the parties at length, this petition was allowed for the reasons to be recorded subsequently. We, accordingly, give our reasons for allowing the petition.

2. This petition is directed against the revisional order dated 21st February 1986, passed under section 264 of the Income tax Act, 1961 (‘Act’ for short), holding that the assessee, the petitioner Bank was not entitled to get deduction under section 35 of the Act in the assessment year 1975–1976, in respect of the expenses incurred outside India, and also on its International Division in India.

THE FACTS

3. The facts leading to the present petition may be stated briefly:

4. The petitioner is one of the leading nationalised Banks of the country, engaged in the business, of banking and carries on banking operations from its branches situated all over India as well as abroad. At the material time it had, 32 foreign branches situate outside India, spread over in several countries of the world. The foreign branches at the relevant time carried on various banking activities such as accepting deposits, advancing money and other banking services etc.

5. The petitioner-Bank had filed return of income for the Assessment Year 1975–1976 on 20th February, 1975 declaring therein income in the sum of Rs. 6,48,75,800/-. In the return filed the petitioner had not made any claim for weighted deduction under section 35-B in respect of the expenses incurred on maintaining foreign branches as also on its International Division. The assessment for the assessment year 1975–1976 was completed under section 143(3) of the Act, on 11th September, 1978 and the income was assessed at Rs. 6,49,08,910. The petitioner-Bank neither in the return nor during the course of assessment made any claim for weighted deductions under section 35-B in respect of expenses incurred for maintaining its foreign branches as well as its International Division for the relevant Assessment Year 1975–1976.

6. The petitioner-Bank was, subsequently, advised that it would be entitled to a deduction under section 35-B of the Act in respect of expenditure outside India for the maintenance of its branches as well as in its International Division in India. It therefore, preferred a revision application before the respondent No. 1, and requested him to direct the Assessing Officer to grant necessary deductions under section 35-B of the Act.

7. Although, the petitioner's revision application was filed as early as 21st August, 1979 it came to be disposed of sometime on 21st February, 1986 i.e approximately after 6½ years. The 1st Respondent rejected the said application under section 264 of the Act with regard to the expenditure incurred on the maintenance of foreign branches, on the ground that section 35-B(1)(b)(iv) required that the expenditure has to be incurred wholly and exclusively on the maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities. In other words, respondent No. 1 was of the view that the foreign branches of the petitioner-Bank were not promoting banking services or facilities but were engaged in normal banking business not amounting to promotions of banking services or facilities. Thus, it was of the view that the petitioner/Bank was not entitled to get benefit of section 35-B(1)(b)(iv) of the Act.

8. The respondent No. 1 also held that it was unable to agree with the views expressed by the Tribunal in the petitioner's own case, details of Which are referred to in the paragraphs appearing hereinafter. He further held that the petitioner-Bank's claim for deductions in respect of expenditure incurred on its International Division was not allowable as the same did not fall within any of the sub-clauses of section 35-B of the Act.

9. Aggrieved by the aforesaid order, the petitioner-bank preferred an appeal to the Tribunal at Bombay, on 11th April, 1986. The said appeal was dismissed by the tribunal as not maintainable under the provisions of section 253 of the Act. Consequently, the original order passed by respondent No. 1 on 21st February 1986, has been impugned in this petition.

SUBSEQUENT DEVELOPMENTS

10. The developments, subsequent to the assessment year 1975–1976, have significant role to play. The factual developments lie in a narrow compass and they are as under:

(a) During the pendency of the assessment for the year 1975–1976 before the 1st respondent, the claim set up by the petitioner-Bank for deduction of expenditure incurred on maintenance of its branch offices outside India came to be adjudicated upon by the Income Tax Appellate Tribunal for the Assessment Year 1976–1977 and 1977–1978. The Tribunal by order dated 23rd August 1983 held that the petitioner would be entitled to relief under section 35-B of the Act in respect of expenses incurred on bank facilities and other services rendered by the petitioner outside India, in coming to this conclusion the Tribunal relied upon a decision of the Madras Bench of the Tribunal in the case of Indian Overseas Bank as well as order of the Apex Court; whereby the Special Leave petition was dismissed in the case of India Hotels Ltd. Co. Consequently, the Tribunal had reiterated its views expressed in the orders dated 21st May 1983, 2nd January 1985, 19th June 1986, August 1988, 15th December 1989, copies of which were produced on records.

11. Respondent No. 1 had filed reference application before the Tribunal under section 256(1) of the Act, and had raised a question as to: whether on the facts and in the circumstances of the case the Tribunal was right in holding that the assessee-bank was eligible for weighted deduction under section 35-B of the Act? However, the Tribunal rejected the said application for reference for the Assessment Years 1976–1977 to 1981–1982 and the said rejection has been affirmed by this Court under section 256(2) of the Act. In the result, it is clear that orders of the Tribunal referred to hereinabove have become final and conclusive. The same appears to have been accepted even by the revenue.

RIVAL SUBMISSIONS

12. The petitioner-Bank contended that at the relevant time it had 32 branches outside India, rendering banking services and had incurred expenditure aggregating to Rs. 2,51,23,848/- for maintenance of these branches outside India. The Bank was thus entitled to relief under section 35-B(1)(b)(iv) of the Act, for the expenditure incurred for maintaining the branches outside India. In addition to this, the Bank has also alleged that they were entitled to relief under section 35-B of the Act in respect of the expenditure incurred on international divisions/overseas branches in India who were exercising supervision, control and undertaking the work of their business activities outside India. The learned Counsel for the petitioner relied upon decision of the Appellate Tribunal, Bombay Bench with regard to Assessment Year 1976–1977 in the case of the very assessee-Bank and prayed that the Assessing Officer was bound to follow the various decisions rendered by the Tribunal in this regard.

13. Per contra, the learned Counsel for the Revenue contended that the Assessing officer relied upon the reports called for from officers exercising jurisdiction at Bombay, wherein it was confirmed by all the officers exercising jurisdiction that claim under section 35-B had not been accepted by them in any of the cases of other Banks. Apart from this, learned Counsel for-the respondent has further tried to canvas on the text of section 35-B(1)(iv) of the Act, and contended that the words used in sub-clause (iv) of the said section “for the promotion of” are restricted only to the cases where branch office or agency outside India is “for promotion of the sale outside India of the goods services, or facilities” dealt in or provided by the assessee in the course of its business. In his submission, the foreign branches of the assessee-Bank were being engaged in normal banking business. It could not be said that they were maintained for promoting banking services outside India. He, therefore, contended that Assessing Officer was perfectly justified in rejecting the deductions claimed by the bank under section 35-B of the Act.

STATUTORY PROVISIONS

14. Before examining the above contentions it is necessary to have a look at the scheme of the Act.

35B. Export markets development allowance. — (1)(a) Where an assessee, being a domestic or a person (other than a company) who is resident in India, has incurred after the 29th day of February 1968, but before the 1st day of March 1983, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in clause (b) he shall, subject to the provisions of this section be allowed a deduction of sum equal to one and one-third times the amount of such expenditure incurred during the previous year.

Provided that in respect of the expenditure incurred after the 28th day of February 1973, but before the 1st day of April 1978, by a domestic company, being a company in which the public are substantially interested, the provisions of this clause shall have, effect as if for the words ‘one and one third times’, the words ‘one and one-half times’ had been substituted.

(b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on—

(i) ………..

(ii) ………..

(iii) ……….

(iv) Maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities.

…………………………”

THE ISSUE

15. In the light of the above rival contentions, the following question arises for our consideration:

1. “Whether in the facts and circumstances the Assessing Officer was right in holding that the bank was entitled to weighted deduction under section 35-B of the Act and that for the Assessment Year 1975–1976.”

FINDINGS

16. Having considered the rival submissions, section 35-B(1)(b)(iv) requires that the expenditure referred to in clause (a) is that incurred wholly and exclusively on maintenance outside India of a branch, office or agency for promotion of the sale outside India of such goods, services or facilities.

17. Turning to the facts of the case at hand, it would be clear that the petitioner renders services and facilities to the overseas and also in India. The petitioner-Bank have numerous branches in India as also abroad, which render banking services and facilities. Services are also rendered to Indian customers in overseas countries. If the Indian Overseas bank, which was similarly circumstanced could be allowed the benefits under section 35-B, the petitioner Bank can also be held entitled to the same benefits being a similarly circumstanced assessee. In the circumstances, we hold that the petitioner-bank was entitled to claim relief under section 35-B of the Act.

18. At this juncture, we cannot resist from observing that the judgment delivered by the Income Tax Tribunal was very much binding on the Assessing Officer. The Assessing Officer was bound to follow the judgments in its true letter and spirit. It was necessary for the judicial unity and discipline that all the authorities below the Tribunal must accept as binding the judgment of the Tribunal. The Assessing Officer being inferior officer vis-a-vis Tribunal, was bound by the judgment of the Tribunal and the Assessing Officer should not have tried to distinguish the same on untenable grounds. In this behalf, it will not be out of place to mention that in the hierarchical system of Courts' which exists in our country, “it is necessary for each lower tier” including the High Court, “to accept loyally the decisions of the higher tiers”. “It is inevitable in hierachical system of Courts that there are decisions of the supreme appellate tribunal which do not attract the unanimous approval of all members of the judiciary. But the judicial system only works if someone is allowed to have the last word, and that last word once spoken is loyally accepted.” The better wisdom of the Court below must yield to the higher wisdom of the Court above as held by the Supreme Court in the matter of C.C.E v. Dunlop India Ltd., (1985) 1 SCC 260 : AIR 1985 SC 330.

19. In the aforesaid backdrop, for the reasons stated hereinabove, the impugned order of the Assessing Officer dated 21st February, 1986 is quashed and set aside. In the result, the writ petition is allowed. Rule is made absolute with no order as to costs.

Writ petition allowed.

Bank Of Baroda v. H.C Shrivatsava And Another

Structured Summary of the Opinion (V.C Daga, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner-Bank's Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Implications

Bank Of Baroda v. H.C Shrivatsava And Another

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