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Commissioner Of Income-Tax v. Assam Frontier Tea Ltd.

Gauhati High Court

Aug 19, 1996

Judgment

Subsequent
References

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Factual and Procedural Background

This is a reference under section 256(1) of the Income-tax Act, 1961 made by the Income-tax Appellate Tribunal (ITAT), referring three specific questions for the opinion of this Court.

The assessee is a company with tea estates (registered office at Talap, District Tinsukia). The Assessing Officer made an assessment under sections 143(3)/263/251 for the assessment year 1981-82; the relevant accounting year was 1979-80. In that assessment the assessee claimed Rs. 49,10,069 as account sale charges, of which Rs. 28,41,431 related to expenditure on maintaining warehouses in foreign countries. The assessee claimed this amount as a weighted deduction under section 35B of the Act.

The Assessing Officer disallowed the claim on the basis that maintenance of warehouses in foreign countries did not qualify for weighted deduction under section 35B(1)(b)(iv). The Assessing Officer also held that the benefit under rule 6AA (Income-tax Rules, 1962), read with section 35B(1)(b)(ix), could not be given because rule 6AA came into effect only from 1 August 1981.

The assessee appealed to the Commissioner of Income-tax (Appeals), who allowed the claim under section 35B(1)(b)(iv), reasoning that the assessee had not itself maintained any warehouse but the expenses were incurred by its agent in London and reimbursed by the assessee. The Revenue then appealed to the ITAT. The ITAT, by order dated 20 August 1991, sustained the CIT(A)'s order allowing deduction under section 35B(1)(b)(iv). The ITAT also considered rule 6AA (effective 1 August 1981) and held that since the assessment year had not yet ended, the benefit of deduction was available to the assessee, thereby dismissing the Revenue's appeal. That decision gave rise to the present reference.

The Court heard Mr. G.K. Joshi for the Revenue and Dr. A.K. Saraf for the assessee. The Court noted that rule 6AA (introduced by the Income-tax (Eighth Amendment) Rules, 1981 effective 1 August 1981) prescribes, inter alia, "maintenance outside India of a warehouse for the promotion of the sale outside India of such goods" as an activity for the purposes of sub-clause (ix) of clause (b) of sub-section (1) of section 35B.

Legal Issues Presented

Whether the Tribunal erred in fact and law in holding that rule 6AA (made effective from 1 August 1981 and held to be substantive law by the Tribunal) would be applicable in respect of pending assessments as on 1 August 1981.
Whether the Tribunal erred in fact and law in holding that rule 6AA (stated to be substantive law and brought into the statute with effect from 1 August 1981) would apply in respect of expenses incurred on or before 30 June 1980.
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is entitled to weighted deduction under section 35(1)(b)(iv) as well as under section 35(1)(b)(ix).

Arguments of the Parties

Revenue's Arguments (as represented by Mr. G.K. Joshi)

The Assessing Officer's position: maintenance of warehouses in foreign countries did not qualify for weighted deduction under section 35B(1)(b)(iv).
Rule 6AA came into force only on 1 August 1981 and is substantive in nature, and therefore should not be given retrospective effect to apply to pending assessments as at that date.
The Tribunal erred in applying rule 6AA to an assessment year that, in the Revenue's view, should not benefit from the rule's later commencement date.

Assessee's Arguments (as represented by Dr. A.K. Saraf)

The assessee asserted entitlement to weighted deduction under section 35B(1)(b)(iv) even where the expenditure was incurred by an agent abroad and reimbursed by the assessee (i.e., it is not necessary that the assessee itself maintain an office or branch abroad).
Relied on judicial authority (Calcutta High Court decisions) for the proposition that 'agency' has a distinct meaning and that operating through a foreign agent can satisfy the requirement of maintenance of an agency abroad for section 35B(1)(b)(iv).
Counsel for the assessee also relied upon authority (Kerala High Court) indicating that storage and handling charges incurred in foreign agents' cold storage qualify as distribution and supply expenses for weighted deduction purposes.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Maxwell on the Interpretation of Statutes, 11th ed., p. 204	Presumption that legislation is not retrospective; statutes operate prospectively unless clearly intended otherwise.	The Court quoted this principle to support the presumption against giving rule 6AA retrospective effect, noting no indication by the rule-making authority of retrospective operation.
CIT v. Bishnauth Tea Co. Ltd., [1992] 197 ITR 150 (Calcutta High Court)	Held that rule 6AA (introduced with effect from 1 Aug 1981) did not have retrospective operation for assessment year 1980-81, even if the assessment was completed after the rule came into force.	The Court found the present facts similar and expressly agreed with and followed the Calcutta High Court's conclusion that rule 6AA is prospective and not retrospective; this supported answers to Questions 1 and 2.
CIT v. Usha Telehoist Ltd., [1995] 212 ITR 177 (Calcutta High Court)	Interpretation of 'agency' in section 35B(1)(b): agency is distinct from 'office' or 'branch'; an assessee need not itself maintain an office or branch abroad and may operate through a foreign agent for the purposes of the deduction.	The Court relied on this decision to hold that expenditure incurred by a foreign agent (with appropriate arrangements) can qualify the assessee for deduction under section 35B(1)(b)(iv); this supported answering Question 3 in favour of the assessee as to sub-clause (iv).
CIT v. Asiatic Sea Foods, [1986] 160 ITR 869 (Kerala High Court)	Held that expenditure incurred wholly and exclusively for distribution and supply outside India (including storage and handling charges when goods are stored in a foreign agent's cold storage) qualifies for weighted deduction, provided it is not part of carriage expenditure.	The Court noted this authority in support of the proposition that storage/handling charges incurred abroad by an agent can qualify as distribution/supply expenses for weighted deduction under section 35B; it informed the Court's affirmative answer on section 35B(1)(b)(iv).

Court's Reasoning and Analysis

The Court structured its reasoning in two principal strands: (A) whether rule 6AA has retrospective effect so as to apply to the pending assessments; and (B) whether expenditure incurred by a foreign agent and reimbursed by the assessee qualifies for weighted deduction under section 35B(1)(b)(iv).

A. On rule 6AA and retrospective operation:

The Court observed that rule 6AA (introduced by the Income-tax (Eighth Amendment) Rules, 1981, effective 1 August 1981) is a provision of substantive law and that there was no indication from the rule-making authority that it should have retrospective effect.
The Court quoted the principle from Maxwell on the Interpretation of Statutes that statutes are presumed not to operate retrospectively unless a clear intention appears to the contrary.
The Court referred to the Calcutta High Court decision in CIT v. Bishnauth Tea Co. Ltd., which dealt with similar facts and concluded that rule 6AA did not have retrospective application to the assessment year 1980-81, even though the assessment was completed after the rule came into force.
On that basis, the Court concluded that rule 6AA operates prospectively from 1 August 1981 and accordingly answered Questions 1 and 2 in the negative (i.e., rule 6AA is not applicable retrospectively to pending assessments as on 1 August 1981, nor to expenses incurred on or before 30 June 1980).

B. On entitlement under section 35B(1)(b)(iv):

The Court considered whether the assessee could claim weighted deduction under section 35B(1)(b)(iv) where the expenditure was incurred by an agent abroad and reimbursed by the assessee.
Relying on Calcutta High Court authority in CIT v. Usha Telehoist Ltd., the Court accepted the interpretation that 'agency' has a distinct meaning from 'office' or 'branch', and that the statute does not require the assessee itself to maintain a physical office or branch abroad; operation through an independent foreign agent can suffice.
The Court also noted the Kerala High Court decision in CIT v. Asiatic Sea Foods, which held that storage and handling charges incurred in a foreign agent's cold storage qualify as distribution and supply expenses and therefore may attract weighted deduction under section 35B, provided such expenses are not part of carriage of goods to a destination outside India.
Applying those authorities to the facts, the Court concluded that the assessee is entitled to weighted deduction under section 35B(1)(b)(iv) in respect of the relevant expenditure incurred through an agent abroad.
However, the Court distinguished the position under section 35B(1)(b)(ix) as reflected in rule 6AA, reiterating that rule 6AA could not be applied retrospectively; thus the assessee could not claim benefit under sub-clause (ix) for the period before rule 6AA's commencement.

Holding and Implications

Core Ruling: The Court held that rule 6AA of the Income-tax Rules, 1962 is prospective in operation (effective from 1 August 1981) and does not have retrospective effect; and that the assessee is entitled to weighted deduction under section 35B(1)(b)(iv) but is not entitled to the benefit of section 35B(1)(b)(ix) as conferred by rule 6AA for the period prior to its commencement.

Implications:

Direct effect on the parties: Questions 1 and 2 were answered in the negative (in favour of the Revenue and against the assessee): rule 6AA does not apply retrospectively to pending assessments as on 1 August 1981 nor to expenses incurred on or before 30 June 1980.
Question 3 was answered partly in the assessee's favour and partly in the Revenue's favour: the assessee was entitled to weighted deduction under section 35B(1)(b)(iv) for expenditure incurred through a foreign agent (affirmative for the assessee), but not entitled under section 35B(1)(b)(ix) as rule 6AA could not be given retrospective operation (negative for the assessee in respect of sub-clause (ix)).
No broader change in law was announced by the Court beyond applying established principles and following the cited High Court authorities; the opinion applied existing authorities to the facts rather than laying down a new rule of law.

Show all summary ...

D.N Baruah, J.:— In this reference under section 256(1) of the Income-tax Act, 1961 (for short “the Act”), the following three questions have been referred by the Income-tax Appellate Tribunal for the opinion of this court:

“1. Whether the Tribunal did not err in facts as well as in law in holding that rule 6AA which was made effective from August 1, 1981, and which was held to be substantive law by the Tribunal itself, would be applicable in respect of pending assessments as on August 1, 1981?”

2. Whether the Tribunal did not err in facts as well as in law in holding that rule 6AA which was stated to be substantive law and which was brought into the statute with effect from August 1, 1981, would apply in respect of expenses incurred on or before June 30, 1980?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is entitled to weighted deduction under section 35(1)(b)(iv) as well as under section 35(1)(b)(ix)?”

2. The assessee is a company incorporated under the Companies Act, having tea estates in various places with its registered office at Talap in the District of Tinsukia. The Assessing Officer made the assessment under section 143(3)/263/251 of the Act for the relevant assessment year 1981-82. The accounting year was 1979-80. While making the assessment in respect of the relevant assessment year, the Assessing Officer found that the assessee claimed Rs. 49,10,069 relating to account sale charges out of which an amount of Rs. 28,41,431 was towards the expenditure on maintaining warehouses in foreign countries for which it claimed weighted deduction under section 35B of the Act. According to the Assessing Officer, the maintenance of warehouses in foreign countries was not qualified for weighted deduction under the said provisions of section 35B(1)(b)(iv) of the Act, and as such, he disallowed the same. He also held that the benefit of weighted deduction under rule 6AA of the Income-tax Rules, 1962 (for short “the Rules”), read with section 35B(1)(b)(ix) could not be given to the assessee since the said rule came into effect only from August 1, 1981. Being aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). However, the Commissioner of Income-tax (Appeals) allowed the claim of the assessee under section 35B(1)(b)(iv) because, according to him, the assessee did not maintain any warehouse of its own or together with some other parties, but the expenses on account of hiring of warehouses were incurred by its agent in London and the assessee reimbursed the said expenses to the agent and in that view of the matter, he reversed the order of the Assessing Officer and allowed the deduction.

3. Against the said order passed by the Commissioner of Income-tax (Appeals), the Revenue preferred an appeal before the Income-tax Appellate Tribunal (for short “the Tribunal”). The Tribunal by order dated August 20, 1991, sustained the order of the Commissioner of Income-tax (Appeals) holding that the appellant was entitled to the benefit of deduction under section 35B(1)(b)(iv) of the Act. That apart, the Tribunal also considered the benefit of rule 6AA of the Rules which came into effect from August 1, 1981, specifically making provision to allow weighted deduction in connection with the expenditure on maintenance of warehouses outside India. The Tribunal further held that since the entire assessment year was yet to come to an end, the benefit of deduction was available to the assessee and accordingly confirmed the order of the Commissioner of Income-tax (Appeals) and dismissed the appeal of the Revenue. Hence, the present reference.

4. We have heard Mr. G.K Joshi, learned senior standing counsel appearing on behalf of the Revenue, and Dr. A.K Saraf, learned counsel appearing on behalf of the assessee.

5. Rule 6AA of the Rules was introduced by the Income-tax (Eighth Amendment) Rules, 1981, with effect from August 1, 1981. As per the said Rules, in order to give effect to sub-clause (ix) of clause (b) of sub-section (1) of section 35B other activities for the promotion of the sale outside India of goods, services or facilities which the assessee deals in or provides for in the course of his business shall be as follows:

(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;

6. Undoubtedly this provision is a substantive law. Therefore, there is no indication from the rule-making authority that it will have retrospective effect.

7. In this connection, reference can be made to Maxwell on the Interpretation of Statutes, Eleventh edition, page 204, wherein it has been observed as under:

“Upon the presumption that the Legislature does not intend what is unjust rests the leaning against giving certain statutes a retrospective operation. Nova constitutio futuris formam imponere debet, non praeteritis. They are construed as operating only in cases or on facts which come into existence after the statutes were passed unless a retrospective effect be clearly intended. It is a fundamental rule of English law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication.”

8. Mr. Joshi has drawn our attention to a decision of the Calcutta High Court in CIT v. Bishnauth Tea Co. Ltd. reported in [1992] 197 ITR 150. In the said decision, the Calcutta High Court had the occasion to deal with the provision of rule 6AA of the Rules with reference to section 35B(1)(b)(ix) of the Income-tax Act, 1961, which provides that weighted deduction will be allowed also on such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed. By rule 6AA of the Income-tax Rules, 1962, which was introduced only with effect from August 1, 1981, the other activities as mentioned in section 35B(1)(b)(ix) have been prescribed. This rule does not have any retrospective operation in respect of the assessment year 1980-81, although the assessment for the assessment year in question was completed after rule 6AA came into force.

9. The facts of the present case are entirely similar with that case and, therefore, we fully agree with the decision and conclusions arrived at by the Calcutta High Court and hold that rule 6AA does not have any retrospective effect and its operation is prospective with effect from August 1, 1981. In view of the above, we answer questions Nos. 1 and 2 in the negative and in favour of the Revenue and against the assessee. As regards question No. 3 learned counsel for the assessee has contended that it is not necessary that the assessee should maintain an office or branch. For claiming the benefit of section 35B(1)(b)(iv) of the Act, even if the expenditure is incurred by an agent, the assessee can claim deduction of the same. In this connection, Dr. Saraf has placed reliance on a decision of the Calcutta High Court in CIT v. Usha Telehoist Ltd., [1995] 212 ITR 177, wherein the Calcutta High Court held as under (at page 182):

“The word ‘agency’ used in the section has acquired a clear and definite meaning both under law and in trade. The same meaning shall be attributed to the word in the section and not the meaning suggested by counsel for the Revenue. It is all the more so because the Legislature has deliberately used the disjunctive expression ‘or’ denoting that the meaning of the words ‘branch’, ‘office’ or ‘agency’ cannot be the same.”

10. The High Court further observed as under (at page 183):

“It is not necessary that the assessee should maintain an office or branch. The question is whether the assessee appointed an agent for the purpose of promotion of sales. The agreement in this case indicates without any doubt, that the agent was appointed for sales promotion and commission was paid. For such promotion payment has been made to the foreign agent with the approval of the Reserve Bank of India.”

11. Dr. Saraf has further drawn our attention to a decision in CIT v. Usha Telehoist Ltd., [1995] 212 ITR 177 (Cal). In the said decision the Calcutta High Court held as under (headnote):

“Sub-clause (iv) of section 35B(1)(b) of the Income-tax Act, 1961, permits a deduction in respect of expenditure incurred wholly and exclusively on maintenance outside India of a branch, office or agency. Agency is an expression of which the content has nothing to do with the preceding words ‘office or branch’. As a matter of fact, if the assessee has an agency abroad, that agency cannot refer to any independant establishment of the assessee being maintained abroad because agency always connotes the independence of the agent. An agent is a total master of himself. Hence, it cannot be said that section 35B(1)(b)(iv) enjoins that the assessee himself has to maintain an office or agency outside India. He can operate through a foreign agent. While the Legislature requires that an agency shall have to be maintained abroad, the requirement is sufficiently satisfied if there is an agent outside who promotes the sales of the asses-see's exports.”

12. Reliance has also been placed by learned counsel of the assessee on a decision reported in CIT v. Asiatic Sea Foods, [1986] 160 ITR 869, wherein the Kerala High Court held as under (at page 871):

“The expenditure incurred wholly and exclusively for distribution and supply outside India of the goods would qualify for weighted deduction so long as such expenditure does not form part of that incurred on the carriage of goods to a destination outside India. When the goods are stored in the foreign agent's cold storage, the expenditure incurred as storage and handling charges would be expenses on distribution and supply of goods outside India qualifying for weighted deduction.”

13. In view of the above, we answer question No. 3 so far as section 35B(1)(b)(iv) is concerned in the affirmative, in favour of the assessee and against the Revenue. So far as section 35B(1)(b)(ix) is concerned, we answer the question in the negative, i.e, in favour of the Revenue and against the assessee.