Ranganathan, J.:— This is a combined reference made by the Income-tax Appellate Tribunal on applications made before it by the Commissioner of Income-tax as well as the assessee seeking the reference of certain questions of law for the decision of this court. The applications for reference arose out of an order of the Tribunal dated September 13, 1976, by which it disposed of an appeal filed by the assessee in relation to the assessment year 1970-71 partly in favour of the appellant and partly in favour of the Department which is why both the parties filed applications for reference.
2. The assessee is the Handicrafts and Handloom Export Corporation of India Ltd. (hereinafter referred to as “the assessee”). It is a cent per cent. subsidiary of the State Trading Corporation of India (hereinafter referred to as “the STC”). The assessee is carrying on business in the export of handlooms, handicrafts and antiques and this export business is its only business activity. We are concerned in this reference with the assessment year 1970-71 for which the relevant previous year was the financial year 1969-70. The Tribunal has referred to us four questions of law which read as follows:
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that cash assistance of Rs. 11,70,000 rendered by the STC was not a trading receipt in the hands of the assessee and thereby deleting the addition of Rs. 11,70,000 made by the Income-tax Officer to the income of the assessee-company for the assessment year 1970-71?
(2) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 6,64,387 being general administration expenditure in India qualified for weighted deduction under section 35B of the Income-tax Act, 1961?
(3) Whether, on the facts and in the circumstances of the case, the weighted deduction under section 35B of the Income-tax Act, 1961, is allowable in respect of the assessee's claim of Rs. 6,05,935? and
(4) Whether, on the facts and in the circumstances of the ease, the sum of Rs. 5,96,128 which related to the previous year's adjustments is admissible as expenditure for the accounting year relevant to the assessment year 1970-71 in which it was claimed to have been incurred?”
3. At the outset it may be convenient to deal with the fourth question first. The assessee claimed weighted deduction under s. 35B in respect of a number of items. Some of these will come up for consideration when we deal with questions Nos. 2 and 3. So far as this item is concerned the ITO merely disallowed the amount by way of adjustment to the profit returned by the assessee stating that this amount represented expenditure relating to previous years claimed as expenditure during the year under consideration. The AAC gave a break-up of these expenses in para. 16 of his order. But this break-up does not cover the entire sum of Rs. 5,96,128. It runs as follows:
Rs.
“(i) Expenses relating to Nairobi office
80,014.33
(ii) Man and his World Fair, Montreal
67,433.00
(iii) New York office
13,605.00
(iv) Bombay office
6,000.00
(v) Delhi office
1,94,150.00”
4. The AAC allowed items (i), (iii) and Rs. 1,88,104 out of item No. (v). In regard to items (ii) and (iv), he gave a clear finding that the liability had accrued in an earlier year and that, therefore, no deduction was permissible in the year of account. Similarly, in regard to the balance of Rs. 6,046 under item (v) he gave a finding that the debit to the P. & L. a/c was due to a mistake in effecting proper entries in the preceding year and that, therefore, the sum could not be allowed as a deduction in the computation of the taxable profits in the year under consideration. Thus, in all, the AAC gave a relief of Rs. 2,81,723 out of Rs. 5,96,128. He does not discuss the rest of the items while dealing with the objection against the disallowance of Rs. 5,96,128 raised by the assessee in its grounds of appeal. Mr. Bishamber Lal, learned counsel for the assessee, placed before us a comparative statement showing the various items that were included in the claim of Rs. 5,96,128, the various items allowed by the AAC and the balance of the amount that was in dispute before the Tribunal. We have taken this typed statement on record. But it is unnecessary to discuss the details here because we find that the Tribunal has not dealt with the assessee's claim at all in regard to this subject-matter. The assessee in its grounds of appeal had stated that the AAC should have allowed the entire claim of Rs. 5,96,128 and the Tribunal proceeded to dispose of the assessee's appeal under the impression that this entire amount was in dispute before it. However, it proceeded to say as follows:
“It was contended that the items comprised in the aforesaid amount had become ascertained liability in the year under appeal. Out of this amount only the disallowance of the following amounts were challenged before us:
Rs.
Customs
5,18,435
Freight
2,356
Purchase
66,156
Difference in exchange
18,988
The customs duty of Rs. 5,18,435 was paid in New York and as such it is not an expenditure incurred in India so as to qualify for a deduction u/s. 35B. Similarly, the freight of Rs. 2,356 was incurred there in New York from port to Sona Shop and is inadmissible. The items of purchases of Rs. 66,156 and a difference in exchange of Rs. 18,988 do not fall under any of the clauses of section 35B. Hence, we confirm these disallowances.”
5. The order of the Tribunal suffers from two defects. In the first place, the Tribunal does not discuss the various items about which there was a controversy before it or give specific findings as to why these amounts or any part thereof could not be allowed for the assessment year 1970-71. The second important defect is that the items referred to by the Tribunal do not at all form part of the sum of Rs. 5,96,128. On the other hand, as we shall explain while dealing with question No. 3, items referred to by the Tribunal which aggregate to Rs. 6,06,935 form the subject-matter of question No. 3 which we shall discuss later. Thus, so far as the fourth question is concerned, the figure of Rs. 5,96,128 mentioned in it is wrong, the correct figure of disallowance to which the assessee objected before the Tribunal being only Rs. 3,14,405. As the Tribunal has not considered the relevant facts or given any findings either in regard to the aggregate amount or the component amounts thereof vis-a-vis the ground of disallowance, namely, that they did not relate to the accounting year relevant to the assessment year 1970-71 we have no other option but to decline to answer the question. The result of this, however, will be that the appeal before the Tribunal in relation to this ground will stand revived and it will be for the Tribunal, when disposing of the appeal conformably to this judgment, to deal with this ground of appeal de novo and in accordance with the law. This disposes of question No. 4 which has been referred to us.
6. It may now be convenient to take up question No. 1 in relation to the sum of Rs. 11,70,000. We do not propose to set out the facts relating to this question at length because a similar question had arisen in connection with the assessments of the same assessee for the assessment years 1965-66 and 1966-67 and the relevant facts have been set out in our judgment dated 14th July, 1981, in I.T Rs. Nos. 17 & 94/74 (Addl. CIT v. Handicrafts and Handloom Export Corpn., [1982] 133 ITR 590). We shall, therefore, state only a few facts which will be necessary to take up the issue from the point where it was left in our previous judgment.
7. It has been mentioned that the assessee is a cent per cent. subsidiary of the STC. Its business activity of export is wholly financed by the STC of India. In this export business the assessee suffered losses year after year. In the previous year relevant to the assessment year 1965-66, an amount of Rs. 6,05,000 was received by the assessee from the STC in order to make good the losses suffered by the assessee. Similarly, in the accounting year relevant to the assessment year 1966-67, the assessee received a sum of Rs. 4,52,000 from the STC. The question arose in those assessments whether the sums thus received by the assessee from the STC were liable to be treated as part of the assessee's income. It was held by this court that the amounts had been given by the STC to the assessee to enable it to recoup the losses incurred by it and that they were only in the nature of contribution of capital. On behalf of the Department, it was pointed out that the assessee had also received, during those years, a subsidy from the Government by way of a grant-in-aid towards exports and that the Tribunal had accepted the Department's case that the grants received from the Government were taxable and it was urged that the same principles were applicable also to the amounts received from the STC. This contention was negatived by the Tribunal which observed that the nature of the amounts received from the STC was very much different from the nature of the amount received by the assessee as grant-in-aid from the Government. The STC, though in law a separate entity, was the holding company of the assessee and it was only recouping the losses incurred by the assessee and the amounts so given could not be treated as income. By our judgment in I.T Rs. Nos. 17 & 94/74 (Addl. CIT v. Handicrafts & Handloom Export Corpn., [1982] 133 ITR 590), referred to earlier, we have confirmed that finding of the Tribunal.
8. In the course of the previous year relevant to the year 1970-71, the assessee received from the STC Rs. 11,70,000. The ITO held that this amount stood on a different footing from the amounts received in the earlier years and that it was taxable as income. The AAC confirmed this. He pointed out that, at a meeting held on December 9, 1969, between the STC and the assessee, a tentative agreement had been arrived at that the quantum of financial assistance to be given to the assessee was to be 7% of the existing turnover and 5% of the additional turnover. However, eventually, the cash assistance was given, as already stated, at 6% on the foreign earnings of the assessee-company. The attempt of the Department before the Tribunal was to argue that there were two points of difference which placed the sum of Rs. 11,70,000 on a different footing from the amounts which it had received from the STC in the earlier years which had been held to be not taxable. The first was that the amount had been paid in pursuance of an arrangement entered into during the previous year and effective for the financial year 1969-70. The second was that in the earlier years, the STC had given amounts to the assessee to reimburse it in respect of the actual losses incurred by it; but the payment this year was by way of a percentage of its export earnings and not by way of recoupment of losses. The Tribunal did not accept this contention and hence question No. 1 in the present reference.
9. Before dealing with the objections raised by the assessee we may mention that even for the assessment year 1970-71, the assessee-company had received a sum of Rs. 2,04,640 from the STC. This was the balance amount which had been received by the assessee towards the reimbursement of its losses in earlier years. As already pointed out, a portion of the losses had been recouped by the amounts given in earlier years and the sum of Rs. 2,04,640 was given with a view to enable the assessee to write off all the losses of the earlier years. So far as this item is concerned both the AAG and the Tribunal deleted it and the correctness of their findings is the subject-matter of ITR No. 196/77, which is pending before this court. We are not here concerned with it. So far as the sum of Rs. 11,70,000 is concerned, however, the AAC rejected the plea of the assessee but the Tribunal accepted it and it is the correctness of the conclusion of the Tribunal that is challenged before us.
10. We have heard learned counsel on both sides in regard to this matter and we agree with the conclusion of the Tribunal that the sum of Rs. 11,70,000 stands on no different footing from the amounts received from the STC in earlier years. We have pointed out that what happened in earlier years was that the assessee, having incurred certain losses in its export business, approached the STC for assistance to enable it to meet its liabilities consequent on such losses and the STC agreed to do so by reimbursing the losses incurred by the assessee. There was, therefore, even in those years an agreement on the part of the STC to recoup the losses made by the assessee. The circumstance, therefore, that in the present year, there was an agreement during the previous year by which the STC agreed to give financial assistance to the assessee will not, therefore, make any difference in principle. We are also of opinion that the other distinguishing feature pointed out by the Department does not also make a difference. As pointed out by the Tribunal the nature and purpose of the payments by the STC to the assessee is the same in the earlier years as well as this year. In all the years the STC has only provided monies to the assessee-corporation with the object of enabling it to offset the losses which it had incurred in the course of its business. The fact that the contribution which the STC was prepared to make to enable the assessee to do this was measured in terms of a percentage of its export earnings and was not a flat or round sum of money as in the prior years does not, it seems to us, make any difference. In all the years it is only a case of a cent per cent. holding company coming to the rescue of its subsidiary which has incurred losses and enabling it to recoup those losses and continue to carry on the business in spite of such losses. In the circumstances, what we have said in our earlier judgment in ITR Nos. 17 and 94/74 (Addl. CIT v. Handicrafts & Handloom Export Corpn., [1982] 133 ITR 590) will equally apply in regard to the assistance received by the assessee from the STC during the current year.
11. On behalf of the Department reliance was placed on two judgments, one of the Allahabad High Court in the case of Ratna Sugar Mills Co. Ltd. v. CIT, [1958] 33 ITR 644 and the other one of the Madras High Court in the case of Meenakshi Achi v. CIT, [1963] 50 ITR 206, which has been subsequently confirmed by the Supreme Court in Meenakshi Achi's case, [1966] 60 ITR 253. We are, however, in agreement with the Appellate Tribunal that these decisions do not help the Department. Both were cases in which grants-in-aid were received by an assessee from the Government. In the case of Meenakshi Achi v. CIT, [1966] 60 ITR 253 (SC), the amounts were paid out of a fund on the basis of the rubber produced by the assessee and against the expenditure incurred by it. In the Allahabad case, the subsidy was paid by the U.P Government to sugar mills to compensate them for the loss of profits resulting from the Government orders to pay wages at an enhanced rate. We may also refer, in this context, to the decision of the Punjab & Haryana High Court in Ludhiana Central Co-operative Consumers' Stores Ltd. v. CIT, [1980] 122 ITR 942, which also dealt with the assessability of a Government subsidy to recoup revenue expenditure incurred by an assessee. There is, in our opinion, a basic difference between grants made by a Government or from public funds generally to assessees in a particular line of business or trade, with a view to help them in the trade or to supplement their general revenues or trading receipts and not earmarked for any specific or particular purpose and a case of a private party agreeing to make good the losses incurred by an assessee on account of a mutual relationship that subsists between them. The former are treated as trading receipts because they reach the trader in his capacity as such and are made in order to assist him in the carrying on of the trade. The amounts with which we are concerned are different. They are not grants received from an outsider or the Government on such general grounds. As found by the Tribunal, these are specific amounts paid by the STC to the assessee in order to enable the assessee, which was its subsidiary and was incurring losses year after year, to recoup those losses and to enable it to meet its liabilities. These amounts, we are of opinion, cannot form part of the trading receipts of the assessee. As stated in our order for the earlier year, the position will be clear if we consider the case of a father agreeing to recoup the losses incurred by a son in his business. The amounts given by the father will be only in the nature of gifts or voluntary payments motivated by affection or personal relationship and not stemming from any business considerations. The position is similar here.
12. For the above reasons, we are of opinion, that the Tribunal arrived at a correct conclusion in the matter and we answer the first question that has been referred to us in the affirmative and in favour of the assessee.
13. We may now turn to questions Nos. 2 and 3 which have been referred to us. These pertain to the claims made by the assessee under s. 35B of the I.T Act, 1961. This section provides what has been described as a weighted deduction in respect of the expenditure incurred for the development of an export market. It is called a weighted deduction because the assessee is permitted to deduct not merely the whole of the expenditure of the nature described in cl. (b) of the section but also an additional 33-⅓% of that expenditure. In fact by a proviso to sub-s. (1)(a) inserted by the Direct Taxes (Amendment) Act, 1974, with effect from April 1, 1973, the deduction under this section in the case of a domestic company in which the public are substantially interested has been raised to 150% in respect of the expenditure incurred after February 28, 1973. The idea of weighted deduction is to offer special incentives for the export of goods, services and facilities by domestic companies and other persons who are resident in India. This section was inserted by the Finance Act, 1968, with effect from April 1, 1968. There were subsequent amendments (other than the insertion of the proviso earlier referred to by the Finance Acts of 1970 and 1973, which were made retrospective with effect from April 1, 1968. It is necessary for the purpose of considering the questions referred to us to set out the section (except the proviso to sub-s. (1)(a) referred to above and sub-s. (2), which are not applicable here) in extenso:
“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 (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 a sum equal to one and one third times the amount of such expenditure incurred during the previous year………
(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;
(ii) obtaining information regarding markets outside India for such goods, services or facilities;
(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;
(v) preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities and activities incidental thereto;
(vi) furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities;
(vii) travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from, and return to, India;
(viii) performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities;
(ix) such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed.
Explanation 1.— In this section, ‘domestic company’ shall have the meaning assigned to it in clause (2) of section 80B.
Explanation 2.— For the purposes of sub-clause (iii) and sub-clause (viii) of clause (b), expenditure incurred by an assessee engaged in the business of—
(i) operation of any ship or other vessel, aircraft or vehicle, or
(ii) carriage of, or making arrangements for carriage of, passengers, livestock, mail or goods,
on or in relation to such operation or carriage or arrangements for carriage (including in each case expenditure incurred on the provision of any benefit, amenity or facility to the crew, passengers or livestock) shall not be regarded as expenditure incurred by the assessee on the supply outside India of services or facilities.”
14. The interpretation of the above section is called for in this case in regard to two amounts of Rs. 6,64,387 (question No. 2) and Rs. 6,05,935 (question No. 3). It will be convenient to take up the third question first.
15. The assessee claimed that it was entitled to weighted deduction under s. 35B in respect of the following expenses:
Rs.
(a) Customs duty paid by New York office on goods exported from India to U.S.A
5,18,435
(b) Freight paid by the New York office for transporting the goods imported from India from one place to another in U.S.A
2,356
(c) purchase of goods effected by the New York office in U.S.A for purposes of sale.
66,156
(d) Difference in exchange accounted for in the New York office with regard to the goods imported from India for sales in U.S.A
18,988
16. Out of the above items the AAC held that the claim in respect of customs duty, freight and purchases in U.S.A could clearly not be treated as qualifying expenses in view of the provisions of sub-cl. (iii) of cl. (b) of s. 35B(1). In regard to the payment of differences in exchange the AAC held that since these were losses incurred in India in connection with distribution, supply or provision of goods and services outside India it was hit by sub-cl. (iii). The Appellate Tribunal, as already pointed out, dealt with these items under a wrong impression that it was part of a sum of Rs. 5,96,128 but it disposed of the assessee's claim as follows. It held that the customs duty having been paid in New York and having not been incurred in India, it was not deductible. The freight had been incurred for sending the goods from the port to Sona Shop and was, therefore, inadmissible. The other two items, it was held, did not fall under any of the clauses of s. 35B.
17. On behalf of the assessee, it is contended that the view taken by the AAC and the Appellate Tribunal is not correct because all the items of expenditure referred to above are permissible under sub-cl. (iii) of cl. (b) of s. 35B(1).
18. Taking up these items one by one:
(a) Customs duty: The AAC does not elaborate why he considered customs duty “clearly” not allowable under cl. (b)(iii). He perhaps thought that the customs duty, freight and expenditure on purchases incurred by the assessee could not be said to be expenditure incurred by it on distribution, supply or provision outside India of its goods, services or facilities. We do not agree. In order to supply its goods in U.S.A the assessee had to export these goods out of India and had also to incur expenditure in New York by way of duty for importing them into U.S.A The payment of customs duty was, therefore, an item of expenditure which the assessee incurred in the process of supplying or providing outside India its goods, services and facilities. The Bombay High Court in CIT v. Eldee Wire Ropes Ltd., [1978] 114 ITR 485 was dismissing an application under s. 256(2). In the course of the discussion, it pointed out that “export duty” could, if at all, fall for consideration as expenditure on the supply, etc., of goods outside India. The Tribunal, it would seem, is of the same view on this aspect, for it has disallowed the expenditure not on the ground that it does not fulfil the above description but only because it has not been incurred in India. It is difficult to understand this, for what sub-cl. (iii) excludes from allowance is expenditure incurred in India in connection with the supply, etc., of goods outside India—and that is why the Bombay High Court said in the case cited above that the assessee should not perhaps have got a deduction for “export duty”—and not expenditure incurred outside India—as was the “customs duty here. It could not be that the Tribunal considered this as expenditure on the carriage of goods to their destination outside India, because, for an exclusion of an item of expenditure on that ground the place of the expenditure would be immaterial. It is also difficult, in our view, to describe the customs duty as expenditure on the carriage of the goods”. The assessee is, therefore, entitled to deduct this item under sub-cl. (iii) referred to above. This conclusion also derives support from the judgment of the Madras High Court in the case of CIT v. Kasturi Palayacat Co., [1979] 120 ITR 827 in which this point is dealt with in brief at p. 836.
(b) Freight: We do not think that the assessee is entitled to deduction under s. 35B(1)(b)(iii) in respect of the expenses on freight. This is because the freight in question clearly falls under the description of expenditure (incurred in the States) on the carriage of the asses-see's goods to their destination outside India. As pointed out by the AAC and the Appellate Tribunal the freight was incurred in transporting goods from the port to Sona Shop which was their destination in New York. We, therefore, think that the Tribunal was correct in disallowing this item. Sri Bishamber Lal suggests that, once we come to the conclusion that the freight is an expenditure on carriage of goods, the assessee is entitled to the benefit of weighted deduction. According to him, sub-cl. (iii) permits the allowance of expenditure on the “distribution, supply or provision outside India of such goods, services or facilities”. However, it was thought that this allowance should not be allowed in respect of expenditure incurred in India and this is indicated by the clause “not being expenditure incurred in India in connection therewith”. According to the learned counsel while reading the clause we should pause at the word “therewith”. Up to this stage, the clause has set out completely a rule of allowance and an exception to it. The words which follow this, viz., the words “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” have nothing whatever to do with the earlier part of the clause which we have just referred to. According to counsel, these words are not qualified by the words “not being” which occur earlier in the clause and are intended to describe another type of expenditure—viz., expenditure on carriage and insurance,—which (wherever incurred) would be allowable under sub-cl. (iii). We find that a Special Bench of the Income-tax Appellate Tribunal has rejected this contention (by its order dated June 17, 1978, in I.T As. Nos. 3255 and 3330 (Bom.)—76-77 placed before us), we think, rightly. The arrangement of the section is quite clear. Expenditure on various kinds of activities which are to be given the benefit of weighted deduction are enumerated in the several sub-clauses of cl. (b). The presence of the “comma” after the word “facilities” in sub-cl. (iii) indicates that the exclusion is in respect of all that follows. The word “expenditure” is repeated in the second part of the saving clause not to mark it from the earlier part but to mark out the distinction that whereas the first part refers to “expenditure incurred in India”, the exclusion by the second part is intended to be of “expenditure wherever incurred”. Explanation 2 which clarifies that carriage expenses will not be treated as distribution or supply expenses only in the case of assessees engaged in business as carriers indicates that, except in this category of cases, they would be and that, this being so, they are excluded from allowability by the saving clause. If, as is contended by counsel, carriage and insurance expenditure would not be a normal part of the expenditure on the “distribution, supply or provision of goods, services and facilities” and it was the intention of the Legislature to allow such expenditure also the benefit of weighted deduction, the Legislature, it seems to us, would have made the position clear by mentioning this type of expenditure as an independent item covered by another sub-clause. There would in that event be no necessity or purpose in referring to it in sub-cl. (iii) and that too at the tail end of an exception carved out in that sub-clause. For these reasons, we are of opinion that the correct interpretation of sub-cl. (iii) is that it allows all expenditure on distribution, supply, etc., of goods, etc., outside India, except—(i) expenditure incurred in India in connection with supply, distribution or provision; and (ii) expenditure on carriage or transit insurance of such goods, wherever incurred. The assessee is, therefore, not entitled to weighted deduction in respect of the freight.
(c) Expenditure on purchases: So far as this item is concerned, prima facie, it does not appear to fall under any of the sub-clauses of cl. (b). But it was explained on behalf of the assessee that sometimes as a result of having entered into contracts for the supply of certain goods abroad, the assessee was constrained, in order to honour its contract, to make some local purchases. The expenditure incurred on these purchases, it is said, is nothing but expenditure incurred as a necessary incidence of the distribution, supply or provision outside India of the assessee's goods, services or facilities. In our opinion, there are no facts on record to enable us to come to any conclusion on this matter. Neither the AAC nor the Tribunal have considered or discussed the circumstances in which these expenses came to be incurred or the precise nature of these expenses. We would, therefore, leave the question unanswered for paucity of material. The result will be that the matter will have to be adjudicated upon by the Tribunal afresh when the matter goes back to it and dispose of the issue after a consideration of the relevant facts and details.
(d) The same direction has to be given even in respect of the differences in exchange. Here again it was explained on behalf of the assessee that these expenses were incidental to the supply, distribution, etc., of goods abroad and the maintenance of offices abroad. It is explained that differences in exchange rates arise in two ways:
(i) the accounts of foreign branches had to be maintained in foreign currency and then converted at the end of the year at the bank rate on 31st March.
(ii) Remittances from India to foreign offices for expenses and also remittances from abroad by way of payments for goods were entered in the two sets of accounts in the respective currencies and needed conversion at the end of the year at the prevalent exchange rate.
19. According to the assessee, the differences would constitute expenditure deductible under sub-cls. (iii) or (iv). Here again, the Appellate Tribunal has not considered the relevant facts and in the absence of any material facts, we are unable to deal with the assessee's contentions. In these circumstances, we are of opinion that even in regard to this item the proper course would be to decline to answer the question one way or the other and leave it to the Tribunal to dispose of the issue after looking into the relevant facts and considering the assessee's explanation as to how it attempts to bring these two items within the framework of sub-cl. (iii) or (iv) referred to above.
20. This leaves for consideration only the second question regarding the deductibility under s. 35B of a sum of Rs. 6,64,387. This represents the general administration expenses incurred by the assessee in India on account of salary and other establishment charges of the head office at Delhi and the branch at Madras. The assessee's claim was that though this amount represented the expenditure incurred in India generally for running the assessee's business it was still allowable under s. 35B: Firstly, because the assessee is a company whose only business was that of exports and, therefore, any expenditure incurred by it was with a view to develop its exports and, secondly, because the administrative establishment located at Delhi and Madras was attending to the following aspects of the export business carried on by the assessee:
(a) attending to the supply of goods in respect of orders secured by the foreign office from foreign customers;
(b) obtaining information regarding the market outside India and keeping watch over the taste and demand of the corporation's goods in several countries;
(c) sending samples and descriptive information regarding the corporation's product to foreign buyers which resulted an increase in sales; and
(d) executing orders received from foreign countries.
21. The AAC dealt with each of these items seriatim. He pointed out that so far as items (a) and (d) are concerned, the expenses could not qualify because sub-cl. (ii) of cl. (b) after its amendment with retrospective effect by the Finance Act of 1970 permitted the allowance only of expenditure incurred outside India. So far as item (b) is concerned, he was of opinion that two amounts of Rs. 1,07,546 by way of consultancy fee and Rs. 33,180 in respect of business promotion expenditure had been separately allowed by him and that no part of the other expenses of general administration could be considered under this head. So far as item (c) is concerned he agreed that the expenditure might fall under cl. (vi) of cl. (b) but observed that the appellant's representative was unable to tell him what part of expenses of general administration could be attributable to this and in the absence of precise data he attributed Rs. 15,000 (slightly more than 2 ½% of the total expenses of general administration) as falling under this head. The Appellate Tribunal disposed of the matter very briefly because it agreed to the observations of the AAC that expenditure falling under items (a) and (d) would not qualify for deduction under s. 35B. So far as the expenditure claimed under items (b) and (c) were concerned, the Tribunal was of opinion that the estimate made by the AAC was somewhat low and increased it to Rs. 30,000 as falling under s. 35B, otherwise the assessee's claim was rejected.
22. Mr. Bishamber Lal, learned counsel for the assessee, submitted that the assessee had actually claimed only 25% of the total administration expenses as falling under s. 35B. He pointed out that the total expenditure incurred in India on personnel (i.e, by way of payment of salary and other benefits to staff) came to Rs. 16,67,933 and the other administration expenditure in India (by way of rent, road taxes, travelling allowance, conveyance, postage, telegrams, telephones, etc.,) came to Rs. 11,33,910 out of which expenses incurred on foreign tours amounting to Rs. 1,43,295 had been separately claimed under s. 35B leaving a balance of Rs. 9,90,615. Thus, the total administration expenditure incurred in India came to Rs. 26,58,548 of which only 25%, namely, Rs. 6,64,387 had been claimed as attributable to the activities envisaged under s. 35B(1)(b) and that this was a reasonable claim. He contended that a much larger percentage of the total administrative expenditure had been allowed by the Commissioner (Appeals) for the assessment year 1971-72 and by the ITO himself for the assessment year 1977-78. He submitted before us charts giving the details of the claim in respect of everyone of the items of the subclause of cl. (b) under which the items would fall and the extent to which the claim had been allowed, in the years above referred to. He contended that, in the circumstances, he was entitled to the weighted deduction in respect of the conservative claim for only 25% of the expenditure made by the assessee this year.
23. We do not propose to refer to the documents relied upon by Sri Bishamber Lal, for these papers do not relate to the accounting year presently under consideration and they are not part of the statement of the case submitted to us. We are, however, of opinion that the question cannot be answered on the materials available in the printed papers and will require an itemwise examination of the constituent elements of the administrative expenses incurred by the assessee and a meticulous analysis to arrive at the extent to which such expenditure can be correlated to the eight categories of activities described in cl. (b). We shall briefly indicate our reasons for coming to this conclusion.
24. At the outset, we may refer to two contentions of a preliminary nature urged before us. It was sought to be made out on behalf of the Department that the assessee being a pure export company all administrative expenses incurred by it (which, by and large, represent expenditure on staff, postage, travelling and the like) must be held either not to fall in any of the sub-clauses of cl. (b) and, therefore, ineligible for the exemption or to relate to the distribution, supply and provision of the assessee's goods, etc., outside India and having been incurred in India excluded under sub-cl. (iii). In a like manner, it was suggested on behalf of the assessee that since the only business activity of the assessee is of export, all its expenditure must be allowed the weighted deduction, except only to the extent specifically correlated to the two exceptions outlined in sub-cl. (iii). We think that these contentions represent two extreme stands neither of which can be accepted. The correct interpretation lies in between these two extremes. In our view, one should eschew a purely literal interpretation of the section and adopt a practical and workable interpretation which will on the one hand help to implement the true spirit and objective of the allowance provided for by statute and at the same time ensure that expenditure otherwise than in relation to the specified activities is not given the benefit of this special provision. Adopting this approach, we broadly agree with the AAC and the Appellate Tribunal that the administrative expenditure incurred by the company in India would qualify for weighted deduction to the extent it can be correlated, on analysis, to any of the activities listed in sub-cls. (i) to (viii) of cl. (b) and not beyond that. In our opinion, the Tribunal has not gone into the details of the various items of administrative expenditure and examined the extent of which each such item could or could not be referable to the said activities. In the absence of such an analysis, the conclusion of the AAC and the Appellate Tribunal that out of the four heads into which the expenditure was classified by the assessee's representative items (a), (b) and (d) did not at all qualify is based on no material and that its conclusion that only 2 ½% and 5% of the expenditure referable to item (d) will qualify for deduction smacks of arbitrariness and guess-work. We say so for the reasons discussed below.
25. In the first place, it appears to us that the categorisation of the administrative expenses into four heads for purposes of analysis was only of a general nature. It was not correct to treat it as ah exhaustive or comprehensive categorisation of the expenditure by reference to the various sub-clauses of cl. (b). It appears to have been assumed that all expenses falling under heads (a) and (d) related to sub-cl. (iii), those under head (c) to sub-cl. (vi) and those under head (b) to sub-cl. (ii). So far as items falling under heads (a) and (d) were concerned this was not a correct assumption. To give an example, to the extent the administrative expenditure contains items relatable to the preparation and submission of tenders for the supply and provision outside India of goods, services or facilities and activities incidental thereto it would fall under sub-cl. (v) of cl. (b) and not under sub-cl. (iii). Similarly, expenses of administration but connected with the maintenance of the foreign branches of the assessee would fall under sub-cl. (iv) and not under sub-cl. (iii). Likewise administrative expenses in India attributable to advertisement or publicity outside India would certainly fall under sub-cl. (i). Some of such administrative expenditure may have been classified, for example, as establishment expenditure. But if the staff in question attended to the above activities, a proportion of the establishment expenditure would be apportionable to these activities and thus eligible for relief under sub-cls. (i), (iv) or (v) and cannot be disallowed because of sub-cl. (iii). In other words, the general category (a) mentioned by the assessee cannot imply an automatic disqualification from allowance of all items falling under that head including the various items of expenditure attributable to the activities above-mentioned. Similarly, the classification under head (d) is very wide and may include expenditure relatable to activities falling under sub-cls. (v) and (viii) of cl. (b). From this point of view, we are of opinion that a thorough reconsideration of the various heads of the administrative expenditure to see if some correlation exists between the nature of the expense and the various types of activities envisaged in s. 35B(1)(b) is necessary before a logical apportionment of the expenditure which can be attributed to such activities can be made. Such a correlation appears to have been attempted by the assessee in subsequent years and accepted by the Department to some extent. This would indicate that a further analysis is possible than has been attempted by the AAC and the Tribunal. We think it should be done if a fair determination of the expenditure qualifying for deduction under s. 35B is to be made. Again, it appears to us that the AAC and the Tribunal have fallen into a similar error in excluding all the expenditure falling under the head (b) from consideration. Though the AAC and the Tribunal agreed that the expenditure falling under this head would qualify for deduction, their further conclusion that the items falling under cl. (b) should be restricted to the claims of Rs. 1,07,546 by way of consultancy fee and Rs. 33,180 by way of business promotion expenditure does not appear to be correct. Those items represented separate and individual items of expenditure incurred by the assessee by way of consultancy fee and for business promotion in the States. But the case of the assessee that a portion of the general administrative expenditure is also attributable for obtaining information regarding market outside India, keeping track of the taste and demand of its foreign customers, forwarding samples and descriptive information to foreign buyers and carrying out the orders received from abroad has been ignored by the AAC and the Tribunal. In our opinion, the assessee should be entitled to a deduction of a proper percentage of the expenditure on general administration which may be attributed to activities falling under these items. Similarly, so far as head (c) is concerned, it is no doubt true that the AAC has roughly estimated such expenditure at 2 ½% and the Tribunal has allowed about 5%. But both of them have been under the impression that a good part of the expenditure falling under items (b) and (c) have already been claimed and allowed under s. 35B and it was in this view that the allowance has been restricted to the extent above-mentioned. We are of opinion that in these circumstances, it is necessary that the Tribunal should examine the nature of the expenditure specifically claimed under these heads and to consider whether in addition to the expenditure already claimed and allowed under s. 35B the same or a higher percentage should be apportioned out of general administration expenses as pertaining to these heads.
26. To sum up, we agree with the approach of the Tribunal and the AAC that even the administration expenditure incurred by the assessee in India can be allowed to be deducted under the said provisions of s. 35B if it is possible to say that some of these items of expenditure can be attributed to the various classes of activities specified in sub-cl. (b). We also agree with the Tribunal that to the extent the administration expenditure is attributable to the supply, distribution or provision of the assessee's goods outside India such administration expenditure cannot be allowed under s. 35B because it represents expenditure incurred in India and falls within the prohibition of sub-cl. (iii). We also agree with the view of the Tribunal that so far as items falling under items (b) and (c) discussed above are concerned, an apportionment should be made of the administration expenses attributable to these items. We are, however, of opinion that the Tribunal's approach, though broadly correct, is for the reasons already discussed, vitiated by a failure to consider the heads under which administration expenditure was claimed and to attempt to correlate an estimated percentage thereof to the activities qualifying under cl. (b).
27. In these circumstances, it appears to us that we have no option but to leave the question referred to us on this issue unanswered. The result will be that when the matter goes back to the Tribunal it will be necessary for the Tribunal to examine the facts and attempt a more detailed classification and analysis of the administration expenditure and to arrive at an estimate of the allowable expenditure on a more solid basis as indicated earlier. In doing so, it will be open to the Tribunal to permit the assessee to place a more comprehensive and detailed analysis and to attempt to establish that much more than the amount of Rs. 30,000 allowed to it can be attributed out of the administration expenditure to the various activities, the expenditure in respect of which is permissible under cl. (b) of s. 35B(2). For the reasons mentioned above, so far as questions Nos. 2 and 3 are concerned, we answer them by saying, (a) that the assessee would be entitied to the deduction of Rs. 5,18,435 but hot the deduction of Rs. 2,356 included in question No. 3, and (b) that in respect of the other items of Rs. 66,156, Rs. 18,988 (included in question No. 3) and Rs. 6,64,387 (referred to in question No. 2) the assessee would be eligible for the allowance of such of the amounts or portions thereof as can be established to be attributable to the activities set out in cl. (b) of sub-s. (2) of s. 35B. The result of this answer will be to restore these items to the file of the Tribunal for fresh consideration and disposal in accordance with law after giving such opportunity as the Tribunal may consider appropriate to the assessee and to the Department to put forward their respective contentions.
28. The questions are answered as indicated above. The reference are disposed of accordingly. But as neither party has wholly succeeded, we make no order as to costs.