Citation Codes

Equivalent Citations

citation codes

Case Number

Tax Case No. 1021 of 1987 (Reference No. 606 of 1987)

Judges

Janarthanam
A. Subbulakshmy, JJ.

Acts

section 35B of the Income-tax Act, 1961 (for short the Act), on the following:Rs. (a) Foreign travel expenses 57,882 (b) Agency commission 2,57,219 (c)
sub-clause (ix) of clause (b) of sub-section (1) of section 35B. Rule 6AA of the Rules,
sub-clause (ix) of clause (b) of sub-section(1) of section 35B,
prescribed.14. Rule 6AA of the Income-tax Rules, 1962,
clauses (a) to (e) of rule 6AA of the Rules.
rule 6AA of the Income-tax Rules, 1962,
rule 6AA of the Income-tax Rules
provisions of section 35B(1)(b).4.

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Smart Summary

Structured Summary of the Judgment delivered by Janarthanam, J.

Factual and Procedural Background

The assessee, Yuvaraj International, Tirupur, a manufacturer and exporter of hosiery clothes, filed its return for the assessment year 1981-82 admitting an income of Rs. 1,51,260. In computing income the assessee claimed weighted deduction under section 35B of the Income-tax Act, 1961 for the following items totaling Rs. 4,10,551:

Foreign travel expenses: Rs. 57,882
Agency commission: Rs. 2,57,219
Interest, commission and foreign bank charges: Rs. 95,450

The Income-tax Officer, completing the assessment under section 143(3), allowed weighted deduction for foreign travel only to the extent of Rs. 45,000, treated agency commission as admissible, and disallowed the entire interest/foreign bank charges (Rs. 95,450) as ineligible for weighted deduction.

On first appeal the Commissioner of Income-tax (Appeals) allowed the entire foreign travel expenditure for weighted deduction but sustained disallowance in respect of the other expenses as not admissible under section 35B(1)(b). The assessee also sought to rely on rule 6AA of the Income-tax Rules, 1962 (which came into force on August 1, 1981) to raise an increased aggregate claim of Rs. 2,61,454; the CIT(A) admitted the fresh ground but rejected the contention that the rule applied for the assessment year.

The assessee appealed to the Income-tax Appellate Tribunal (the Tribunal). The Tribunal held that the interest/foreign bank charges could not be allowed as weighted deduction because the relevant sub-clause had been deleted with effect from April 1, 1981, and held that rule 6AA could not be applied retrospectively to the assessment year. The Tribunal referred three questions of law to the High Court for its opinion.

Legal Issues Presented

Whether the Tribunal was right in holding that the assessee is not entitled to weighted deduction under section 35B in respect of interest, commission and foreign bank charges?
Whether the Tribunal was right in holding that the assessee is not entitled to weighted deduction under section 35B to the extent of Rs. 2,61,454 being the correct claim made based on rule 6AA of the Income-tax Rules?
Whether the Tribunal was right in holding that rule 6AA of the Income-tax Rules which came into effect on August 1, 1981, is not applicable to the assessment year 1981-82?

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Palaniswamy, [1996] 219 ITR 380 (Division Bench)	States that although the charge is on income of the previous year, the law to be applied is the law in force as on the first day of April of the assessment year (i.e., the statutory provisions in force at the commencement of the assessment year govern that assessment year).	The Court relied on this principle to support its conclusion that rule 6AA, which came into force on August 1, 1981, could not be applied to the assessment year 1981-82 that commenced on April 1, 1981; thus rule 6AA is not retrospective and does not assist the assessee for that assessment year.

Court's Reasoning and Analysis

The Court proceeded by examining the statutory framework of section 35B and the content of rule 6AA of the Income-tax Rules, 1962, and applied those provisions to the facts referred by the Tribunal.

Statutory framework examined:

Section 35B(1)(a) provides that a resident assessee (subject to the section's provisions) shall be allowed a deduction equal to one and one-third times certain enumerated expenditure incurred in the relevant period (with a proviso containing a different multiplicand for certain domestic companies and periods).
The types of expenditure that qualify are enumerated in section 35B(1)(b) and must be wholly or exclusively within one of the specific sub-clauses (i) to (ix) of clause (b).

First question — interest, commission and foreign bank charges:

The assessee claimed interest, commission and foreign bank charges (Rs. 95,450) as falling under sub-clause (iv) of clause (b) (expenditure concerning maintenance outside India of a branch, office or agency for promotion of sale outside India).
The Court found it impossible to regard such interest, commission and bank charges as expenditure that are properly characterised as expenditure for maintenance outside India of a branch/office/agency for promotion of sales. The Court observed that the "nature of the expenditure speaks for itself" and does not, on its face, fall within sub-clause (iv).
Accordingly, the Court concluded that the Tribunal was correct in holding that these items were not eligible for weighted deduction under section 35B, and answered the first question in the negative for the assessee.

Second question — claim of Rs. 2,61,454 under section 35B(1)(b)(ix) and rule 6AA:

Section 35B(1)(b)(ix) permits deduction for "such other activities for the promotion of the sale outside India" as may be prescribed.
Rule 6AA (inserted into the Rules and operative from August 1, 1981) specifies the activities that qualify under sub-clause (ix): clauses (a) to (e) list specific activities such as pre-investment surveys/feasibility studies, maintenance of an overseas warehouse, maintenance of a laboratory for quality control, purchase of foreign trade periodicals, and litigation outside India to protect business interests.
The Court examined the assessee's claimed Rs. 2,61,454 and found those expenses to be of a general nature and not of the specific kinds described in clauses (a) to (e) of rule 6AA. The Court therefore held that only expenses falling within the specific clauses of rule 6AA can qualify under section 35B(1)(b)(ix); general expenses cannot be shoehorned into that provision.
On that basis, the Court held that the Tribunal was right in rejecting the claim of Rs. 2,61,454 for weighted deduction under section 35B(1)(b)(ix).

Third question — applicability of rule 6AA to assessment year 1981-82:

Rule 6AA came into force on August 1, 1981. The assessment year in question commenced on April 1, 1981.
The Court applied the ordinary legal proposition (supported by the cited precedent) that the law to be applied for an assessment year is the law in force on the first day of April of that assessment year; a rule or provision that comes into force after that date cannot ordinarily be applied to that assessment year.
Accordingly, the Court agreed with the Tribunal that rule 6AA is not retrospective to April 1, 1981, and so it could not be used to enlarge the assessee's claim for the assessment year 1981-82.

The Court therefore answered all three referred questions in favour of the revenue and against the assessee, on the statutory interpretations and temporal operation of rule 6AA as explained above.

Holding and Implications

Holding: The Court dismissed the tax case and answered the referred questions in favour of the Revenue. In particular, the Court held that the assessee is not entitled to weighted deduction under section 35B in respect of interest, commission and foreign bank charges, is not entitled to the claimed Rs. 2,61,454 under section 35B(1)(b)(ix), and that rule 6AA (effective August 1, 1981) is not applicable to the assessment year 1981-82 which commenced April 1, 1981.

Implications (direct effects on the parties):

The assessee's claims for weighted deductions in respect of (a) interest, commission and foreign bank charges (Rs. 95,450) and (b) general expenses claimed as Rs. 2,61,454 under rule 6AA/section 35B(1)(b)(ix) were rejected.
The Court confirmed that rule 6AA could not be applied to the assessment year 1981-82 because it came into force after the commencement date of that assessment year.
There shall be no order as to costs.

The opinion does not purport to set any new, broader principle beyond the application of the statutory text and the established temporal rule for applicability of newly framed rules; it primarily affirms the Tribunal's statutory interpretation and temporal application in the facts of this case.

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Yuvaraj International v. Commissioner Of Income-Tax

The Judgment of the Court was delivered by

Janarthanam, J.:— The assessee—Yuvaraj International, Tirupur, is a manufacturer and exporter of hosiery clothes.

2. For the assessment year 1981-82, it filed a return admitting an income of Rs. 1,51,260. In arriving at the income, the applicant claimed weighted deduction under section 35B of the Income-tax Act, 1961 (for short “the Act”), on the following:

Rs. (a) Foreign travel expenses 57,882 (b) Agency commission 2,57,219 (c) Interest commission and foreign bank charges 95,450 Total 4,10,551

The Income-tax Officer, while completing the assessment under section 143(3) of the Act allowed weighted deduction in respect of foreign travel expenses to the extent of Rs. 45,000 and disallowed the balance on the ground that the foreign travel extended beyond a period of 75 days as approved by the Reserve Bank of India. As respects the agency commission, the claim is found to be in order by the Income-tax Officer. He also disallowed the entire expenses of interest, etc., of Rs. 95,450 as ineligible for weighted deduction.

3. On appeal, the Commissioner of Income-tax (Appeals), Coimbatore, held that the entire expenses in respect of foreign travel is eligible for weighted deduction, but sustained the order of the Income-tax Officer in respect of other expenses on the ground that those expenses were not admissible under any of the provisions of section 35B(1)(b).

4. Before the Commissioner of Income-tax (Appeals), the assessee raised an additional ground that the aggregate claim under section 35B should be Rs. 2,61,454 based on rule 6AA of the Income-tax Rules, 1962, which came into force from August 1, 1981. The Commissioner of Income-tax (Appeals) admitted fresh grounds, but rejected the contention on the ground that the benefit of rule 6AA is not available to the assessee for the assessment year in question.

5. Aggrieved, the assessee filed an appeal to, the Tribunal. The Tribunal held that interest, etc., charges cannot be considered” for weighted deduction for the assessment year ‘in question, in view of the fact that these expenses fall under section 35B(1)(b)(viii) of the Act’, ‘which was “deleted with effect from April 1, 1981. As regards the applicability of rule’ 6AA for the assessment year in question, the Tribunal held that the rule cannot be said to be restrospective in operation and, therefore, cannot be applied for the assessment year in question.

6. On the above facts, the Tribunal referred the questions of law as below for the opinion of this court for the assessment year 1981-82:

“1. Whether the Tribunal was right in holding that the assessee is not entitled to weighted deduction under section 35B in respect of interest, commission and foreign bank charges?

2. Whether the Tribunal was right in holding that the assessee is not entitled to weighted deduction under section 35B to the extent of Rs. 2,61,454 being the correct claim made based on rule 6AA of the Income-tax Rules?

3. Whether the Tribunal was right in holding that rule 6AA of the Income-tax Rules which came into effect on August 1, 1981, is not applicable to the assessment year 1981-82?”

7. The arguments of Mr. K. Vaitheeswaran, learned counsel representing S. Subbaraya Aiyar, learned counsel appearing for the applicant and of Mrs. Chitra Venkataraman, learned junior standing counsel (Taxes), representing the Revenue were heard.

8. Section 35B(1)(a) dealing with export markets development allowance provides that where an assessee, being a domestic company or a person (other than a company), ‘who is resident in India, has incurred after February 29, 1968, but before March 1, 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), 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.

9. The proviso appended to the said sub-section prescribed that in respect of the expenditure incurred after February 28, 1973, but before April 1, 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.

10. The nature of the expenditure referred to in clause (a) is catalogued in clause (b). The expenditure catalogued in clause (b) must be incurred wholly or exclusively under any one of the sub-clauses (i) to (ix) of clause (b) specified therein.,

11. Interest, commission and foreign bank charges to the tune of Rs. 95,450 are sought to be claimed as the nature of the expenditure as had been provided by sub-clause (iv) of clause (b), which is relatable to expenditure concerning maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, ‘services or facilities. We are unable to comprehend as to how interest, commission and foreign bank charges, amounting to Rs. 95,450 can if at all fall as an expenditure concerning maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities. The nature of the expenditure speaks for itself and no further elucidation is necessary that such expenditure can if at all fall within sub-clause (iv) of clause (b).

12. In this view of the matter, we are of the view that the Tribunal was rather right in holding that the assessee is not entitled to weighted deduction under section 35B in respect of interest, commission and foreign bank charges and this question is answered accordingly.

13. The second question is relatable to weighted deduction claimed under section 35B(1)(b)(ix) to the extent of Rs. 2,61,454. The deduction under section 35B(1)(b)(ix) is relatable to expenditure concerning such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed.

14. rule 6AA of the Income-tax Rules, 1962, explains the nature of other activities for the promotion of sale outside India of the goods, services or facilities as had been stated in sub-clause (ix) of clause (b) of sub-section (1) of section 35B. Rule 6AA of the Rules, which is relevant for the present purpose reads as under:

“6AA. For the purposes of sub-clause (ix) of clause (b) of sub-section

(1) of section 35B, other activities for the promotion of the sale outside India of the goods, services or facilities which the assessee deals in or provides in the course of his business shall be as follows, namely

(a) conducting of pre-investment surveys or the preparation of feasibility studies or project reports:

Provided that the pre-investment surveys are conducted or the feasibility studies are made or the project reports are prepared on the request in writing made by the Central Government or a foreign party to whom such goods, services or facilities are likely to be sold or provided by the assessee;

(b) maintenance outside India of a warehouse for the promotion of the sale outside India of such goods;

Provided that in a case where only part of the sale is made outside India, the amount of expenditure incurred on the maintenance of such laboratory or other facilities which shall qualify for deduction under clause (a) of sub-section (1) of section 35B shall not exceed the amount which bears the same proportion as the value of the turnover in respect of such exports bears to the turnover of the business in respect of which the laboratory or other facilities are maintained;

(d) purchase of foreign trade periodicals or journals related to the business of the assessee;

(e) litigation outside India for the purposes of the protection of the business interests of the assessee or of trading activities relating to the goods, services or facilities which the assessee deals in or provides in the course of his business.”

15. The expenses claimed as deduction under section 35B(1)(b)(ix) to the extent of Rs. 2,61,454 is in the nature of general expenses, and definitely not of the nature of the expenses as falling within clauses (a) to (e) of rule 6AA of the Rules. Only such of those expenses as are falling under clauses (a) to (e) of rule 6AA of the Rules, can qualify for deduction under section 35B(1)(b)(ix) and not otherwise. The expenses to the tune of Rs. 2,61,454 as already stated, being in the nature of general expenses and not falling under the category of expenses described under any one of the clauses (a) to (e) of rule 6AA cannot at all be expected to qualify for deduction under section 35B(1)(b)(ix). We are, therefore, of the view that the Tribunal was right in holding that the assessee is not entitled to weighted deduction under section 35B(1)(b)(ix) to the tune of Rs. 2,61,454 being in the nature of general expenses and this question is answered accordingly.

16. As respects the third question also, we are of the view that the Tribunal was right in holding that rule 6AA of the Income-tax Rules, which came into effect on August 1, 1981, is not applicable to the assessment year 1981-82. The reasons are rather obvious. The rule has come into force only on and from August 1, 1981, is not in retrospective operation with effect from April 1, 1981, the date of the commencement of the assessment year. Axiomatic a proposition of law it is, that a rule or a provision of a statute, which is in force on and from the date of the commencement of the assessment year alone is applicable to the assessment year in question and to put it otherwise, as the rule or statutory provision came into force subsequent to the day of commencement of the assessment year, such rule or statutory provision is not at all applicable to the assessment year in question.

17. No decision for such a proposition is necessary and if any decision is needed even for such a proposition of law, we may quote here the decision emerging from a Division Bench of this court, in the case of CIT v. Palaniswamy, [1996] 219 ITR 380, wherein their Lordships of this court expressed that though the subject of the charge of income-tax is the income of the previous year, the law to be applied is the law that is in force as on the first day of April of the assessment year, unless the law is changed. In this view of the matter, as we had already stated, the Tribunal is rather right in holding that rule 6AA of the Income-tax Rules, which came into effect on August 1, 1981, is not applicable to the assessment year 1981-82 and this question is answered accordingly.

18. For the reasons as above, this tax case is dismissed. There shall, however, be no order as to costs, on the facts and in the circumstances of the case.

Yuvaraj International v. Commissioner Of Income-Tax

Structured Summary of the Judgment delivered by Janarthanam, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Yuvaraj International v. Commissioner Of Income-Tax

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