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Commissioner Of Income-Tax v. Kerala Nut Food Co.

Kerala High Court

Jun 18, 1987

Judgment

Subsequent
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Summary of Opinion — Income-tax References Nos. 91 to 102, 203 and 211 of 1984 and Original Petitions Nos. 8381, 8382, 8384, 8387, 8388, 8450, 8451, 8676, 8677, 8712, 8713 and 8737 of 1984 (Decided June 18, 1987)

Factual and Procedural Background

These are connected cases decided by K.S. Paripoornan, J. The Appellate Tribunal referred a common question of law under section 256(1) of the Income-tax Act asking whether commission payments made in India in respect of exports by the assessees to the U.S.S.R. are entitled to weighted deduction under section 35B of the Income-tax Act, 1961.

Original petitions were filed by the Department (Revenue) under section 256(2) of the Income-tax Act. The factual dispute (as presented in the proceedings) concerned commission payments made in India to various persons in relation to exports to the U.S.S.R., for which the assessees claimed weighted deduction under section 35B.

Procedurally: the Income-tax Officer disallowed the claim on the ground that the payments were made in India and did not fall within the sub-clauses of section 35B(1)(b). The Commissioner of Income-tax (Appeals) allowed the claim, following prior Tribunal decisions. The Appellate Tribunal in appeals (I.T.A. Nos. 333–336 (Coch.) of 1981) held the commission payments qualified for weighted deduction; the Revenue sought references to this Court. The Tribunal ultimately referred a consolidated question to this Court and related income-tax references were included.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the commission payments made in India in respect of exports made by the assessees to the U.S.S.R. are entitled to weighted deduction under section 35B of the Income-tax Act, 1961?
Whether, on the facts and in the circumstances of the particular cases, the commission payment qualifies for weighted deduction under section 35B(1)(b)(i) and (ii) of the Income-tax Act, 1961?
Whether, on the facts and in the circumstances of the case, the Tribunal was right and reasonable in finding that collecting necessary information regarding the goods for export from the exporters by the trade representative in India through the seller's agent is a necessary indication that the agents render services to the exporters by obtaining information regarding markets outside India for their goods?
Whether, on the facts and in the circumstances of the case, and considering the "services" referred to by the Tribunal, the Tribunal was right in law and fact in holding:
1. that what the agents actually do is to give advertisement and publicity outside India in respect of the goods of the assessee and obtain information regarding markets outside India for such goods; and
2. that these are services incidental to the formation of the contract falling under sub-clauses (i) and (ii) of clause (b) of section 35B(1)?

Arguments of the Parties

Revenue's Arguments (Mr. Menon)

The Appellate Tribunal erred in holding that the assessees were entitled to weighted deduction under section 35B(1)(b)(i) and (ii).
The Tribunal's reasoning (paragraph 11 of its judgment dated February 26, 1983) — that agents render services by obtaining market information and give trade representation, market reports and publicity outside India — was patently erroneous and unsustainable in law.
Reliance was placed on a Division Bench decision of this Court in CIT v. C. Tharian and Sons, [1987] 166 ITR 607, for the proposition that the assessee must establish that the "expenses incurred were outside India" for the "specified activities performed outside India", and that the burden is on the assessee to prove the commission was paid wholly and exclusively for specified activities conducted outside the country.
In light of the above authority, the Revenue contended the Tribunal's decision was erroneous and sought directions to have additional questions referred to this Court.

Assessees' Arguments (Mr. Balachandran)

The Tharian and Sons decision may require reconsideration; it cannot be said as a general rule that the assessee must always establish expenses were incurred outside India to attract section 35B.
The various sub-clauses of section 35B(1)(b) import different ingredients; particularly for section 35B(1)(b)(ii), it may not be necessary to establish that the expenses were incurred outside India.
The Appellate Tribunal had followed a Special Bench decision of the Tribunal in I.T.A Nos. 3255 and 3330 (Bom) of 1976–77; the Central Board of Direct Taxes issued a circular dated December 28, 1981 accepting that Special Bench decision in so far as allowability of weighted deduction under section 35B is concerned, and commissioners were instructed not to proceed with similar cases — therefore, counsel contended the matter should be treated as closed in these cases.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. C. Tharian and Sons, [1987] 166 ITR 607 (Division Bench)	The proposition that an assessee must establish that "the expenses incurred were outside India" for the "specified activities performed outside India"; burden on the assessee to prove commission was paid wholly and exclusively for activities conducted outside the country.	The Revenue relied on this decision to challenge the Tribunal's conclusions. The Court acknowledged the authority but declined to adjudicate on the correctness of the decision at this stage.
Appellate Tribunal — I.T.A Nos. 333 to 336 (Coch.) of 1981 (judgment dated February 26, 1983)	The Tribunal held that commission payments made by the assessee qualified for weighted deduction under section 35B.	This Tribunal judgment formed part of the appellate history and was the basis for the Revenue's challenge and the reference of questions to this Court.
Special Bench of the Appellate Tribunal — I.T.A No. 3255 of 1976–77 (and related I.T.A Nos. 3255 and 3330 (Bom) of 1976–77)	A Special Bench decision accepted (according to submissions) by the Revenue and followed by the Appellate Tribunal; said to concern allowability of weighted deduction under section 35B.	The assessees relied on this Special Bench decision and on a Central Board circular accepting it. The Court noted these documents were not before it and directed that they be produced and included in the statement of the case sent by the Appellate Tribunal.
Central Board of Direct Taxes Circular dated December 28, 1981 (referenced)	Reportedly accepted the Special Bench decision in so far as allowability of weighted deduction under section 35B is concerned and purportedly instructed Commissioners not to proceed with similar cases.	The Court observed the circular was not before it, and directed the Revenue to place the circular before the Appellate Tribunal so that it may be included in the statement of the case sent to this Court.
CIT v. Novelty Trading Corporation, [1984] 150 ITR 453 (Allahabad High Court)	Referenced in the judgment for the fact that it refers to the Special Bench decision and the circular (as recorded in that High Court decision).	The Court noted the reference in that High Court decision but observed the underlying documents (Special Bench decision and circular) were not before this Court and therefore could not be relied upon without production.
Commissioner Of Income-Tax, Delhi-I v. Jay Engineering Works, [1984] 149 ITR 297 (Delhi)	Referenced for a similar reason as the Novelty Trading Corporation decision (reference to the Special Bench decision/circular).	The Court noted the reference but observed the primary documents were not before it; it therefore directed production of those documents to the Tribunal and to this Court in the statement of the case.

Court's Reasoning and Analysis

The Court proceeded by first identifying the common legal question referred by the Tribunal under section 256(1), and by noting the original petitions filed by the Revenue under section 256(2). The Court summarized the procedural history: disallowance by the Income-tax Officer, allowance by the Commissioner (Appeals), and the Tribunal's judgment in favour of the assessees, which led to the present petitions and references.

On submissions, the Court set out the contentions of both sides. The Revenue attacked the Tribunal's factual and legal findings (particularly paragraph 11 of the Tribunal's February 26, 1983 judgment) and relied on a Division Bench authority (CIT v. C. Tharian and Sons) to press the view that expenses must be shown to have been incurred outside India for specified activities performed outside India. The assessees countered that the Tharian decision may require reconsideration and that different sub-clauses of section 35B(1)(b) have different ingredients; in particular, for clause (b)(ii) it might not be necessary to show expenses were incurred outside India. The assessees further relied on an existing Special Bench Tribunal decision and a Central Board circular said to accept that decision.

The Court determined that it was not necessary at the present stage to resolve the competing contentions on the correctness of Tharian or the detailed legal import of the sub-clauses. Instead, the Court was satisfied that three specific questions of law raised by the Revenue (set out in the judgment) did arise out of the Tribunal's order and required reference to this Court. Accordingly, the Court directed the Appellate Tribunal to refer those three questions for this Court's decision.

Regarding the assessees' contention that a Special Bench decision and a Central Board circular had settled the issue administratively, the Court observed those documents were not before it. The Court declined to rely on or accept that submission in the absence of the primary documents. In the interests of justice, the Court directed the Revenue to place the Special Bench judgment (I.T.A No. 3255 of 1976–77) and the Central Board circular dated December 28, 1981 before the Appellate Tribunal, and directed the Tribunal to forward the statement of the case including those documents to this Court expeditiously.

Finally, the Court addressed the separate income-tax references (Nos. 91 to 102, 203 and 211 of 1984). It concluded that the question referred in those cases was vague and ambiguous and could not be satisfactorily answered in the absence of further materials and amendment; moreover, the question would be subsumed by the three questions the Court had directed to be referred. Therefore, the Court declined to answer the referred question in those income-tax references as unnecessary or superfluous at this stage.

Holding and Implications

Core Ruling: The Court directed that the Appellate Tribunal refer three specific questions of law (as set out in the judgment) for the decision of this Court, declined to answer the vague question referred in Income-tax References Nos. 91 to 102, 203 and 211 of 1984, and disposed of the original petitions and the income-tax references accordingly.

Direct effects and immediate consequences:

The Appellate Tribunal is directed to refer the three specified questions of law to this Court (questions are reproduced in the judgment).
The Appellate Tribunal must include in the statement of the case copies of the Special Bench decision (I.T.A No. 3255 of 1976–77) and the Central Board of Direct Taxes circular dated December 28, 1981, after the Revenue obtains and places those documents before the Tribunal.
The Revenue was directed to place those two documents before the Appellate Tribunal so they can be forwarded with the statement of the case.
The Court declined to answer the referred question in the separate Income-tax References as that question was vague/ambiguous and was to be subsumed by the three referred questions; therefore no substantive answer was given on that referred question at this stage.
There shall be no order as to costs.
A copy of the judgment under the seal of the Court and signature of the Registrar is to be forwarded to the Appellate Tribunal, Cochin Bench.

Broader implications:
The opinion does not state or establish any new general precedent on the substantive question of whether commission payments made in India qualify for weighted deduction under section 35B; instead, it frames specific legal questions for further consideration by this Court and directs production of certain documents for a fuller adjudication. No broader doctrinal conclusion was reached in this judgment on the substantive tax point.

Show all summary ...

Income-tax References Nos. 91 to 102, 203 and 211 of 1984 and Original Petitions Nos. 8381, 8382, 8384, 8387, 8388, 8450, 8451, 8676, 8677, 8712, 8713 and 8737 of 1984

Decided on June 18, 1987

The Judgment of the Court was delivered by

K.S Paripoornan, J.:— These are connected cases. The Income-tax Appellate Tribunal has referred the following common question of law in all the income-tax referred cases under section 256(1) of the Income-tax Act:

“Whether, on the facts and in the circumstances of the case, the commission payments made in India in respect of exports made by the assessees to the U.S.S.R are entitled to weighted deduction under section 35B of the Income-tax Act, 1961?”

2. The original petitions are filed by the Revenue under section 256(2) of the Income-tax Act.

3. The respondents in these original petitions are the assessees. They claim weighted deduction under section 35B in respect of commission payments made in India to various persons on exports made by them to the U.S.S.R The claim was negatived by the Income-tax Officer. He held that the payments were made in India and they did not fall under any of the sub-clauses of section 35B(1)(b) of the Act. The Commissioner of Income-tax (Appeals) held that the assessees are entitled to weighted deduction under section 35B of the Act. He held so following the decision of the Appellate Tribunal in similar cases. In the appeals filed by the Department, the Appellate Tribunal, by its detailed judgment in I.T.A Nos. 333 to 336 (Coch.) of 1981 dated February 26, 1983, held that the commission payments made by the assessee qualified for weighted deduction as has already been held by the Tribunal earlier in similar cases. The Revenue filed petitions under section 256(1) of the Income-tax Act praying that four questions formulated by it may be referred for the decision of this court. By a consolidated order dated November 23, 1983, the Appellate Tribunal referred the question of law (quoted supra) for the decision of this court. In the various income-tax references, this common question arises for consideration.

4. We heard counsel for the Revenue, Mr. Menon, and also for the respondents-assessees, Mr. Balachandran. Counsel for the Revenue contended that the Appellate Tribunal was in error in holding that the assessees are entitled to the weighted deduction claimed under section 35B(1)(b)(i) and (ii) of the Income-tax Act. Counsel attacked the reasoning and finding entered by the Appellate Tribunal contained in paragraph 11 of its judgment dated February 26, 1983. It was contended that the finding of the Appellate Tribunal to the following effect:

“It is a necessary indication that the agents render services to the exporters by obtaining information regarding markets outside India for their goods. When they give the trade representation, regular market reports like the raw cashew nuts real position both in India and other producing countries, the price prevailing in all these sources of supply, the kernel's price on consultation with the exporters what the agents actually do is to give advertisement and publicity outside India in respect of the goods of the assessee and obtain information regarding markets outside India for such goods. These are services incidental to the formation of the contract under sub-clauses (i) and (ii) of clause (b) of section 35B(1),”

is patently an error. The reasoning and findings aforesaid are attacked as unsustainable and erroneous in law. They formed the subject-matter of the three questions sought to be referred to this court in the original petitions.

5. Counsel for the Revenue placed reliance on a Bench decision of this Court in CIT v. C. Tharian and Sons, [1987] 166 ITR 607 and contended that the assessee must establish that “the expenses incurred were outside India” for the “specified activities performed outside India.” It was also submitted that the burden is on the assessee to prove that the commission was paid wholly and exclusively for the specified activities conducted outside the country. In the light of the above Division Bench decision, it was submitted that the decision of the Appellate Tribunal is erroneous in law and the circumstances disclosed warrant an appropriate direction from this court to direct the Appellate Tribunal to refer the questions formulated in paragraph 7 of the original petitions. On the other hand, counsel for the assessee contended that the Division Bench decision in Tharian and Sons' case, [1987] 166 ITR 607 (Ker) may require reconsideration and it cannot be said that the assessee must establish that the expenses were incurred outside India in all the cases, to attract the applicability of section 35B of the Act. The various sub-sections of section 35B(1)(b) import different ingredients and in certain cases, and in particular, for obtaining relief under section 35B(1)(b)(ii), it may not be necessary to establish that the expenses were incurred outside India. For the purpose of disposing of these cases at this stage, it may not be necessary to adjudicate the correctness of the rival contentions put forward before us at this stage though the matter deserves a second look. Suffice it to say that, in the light of the contentions raised, we are satisfied that the three questions of law formulated by the Revenue in paragraph 7 of the original petitions do arise out of the order of the Appellate Tribunal. They are as follows:

“1. Whether, on the facts and in the circumstances of the case, the commission payment qualifies for weighted deduction under section 35(1)(b)(i) and (ii) of the Income-tax Act, 1961?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right and reasonable in finding that collecting the necessary information regarding the goods for export from the exporters by the trade representative in India through the seller's agent is a necessary indication that the agents render services to the exporters by obtaining information regarding markets outside India for their goods?

3. Whether, on the facts and in the circumstances of the case, and considering the ‘services’ referred to by the Tribunal, the Tribunal is right in law and fact in holding:

(i) what the agents actually do is to give advertisement and publicity outside India in respect of the goods of the assessee and obtain information regarding markets outside India for such goods?

(ii) these are services incidental to the formation of the contract falling under sub-clauses (i) and (ii) of clause (b) of section 35B(1)?”

6. We, accordingly, direct the Appellate Tribunal to refer the above three questions of law for the decision of this court.

7. Before passing, we should advert to a contention advanced by counsel for the assessees. Mr. Balachandran, counsel for the assessees, brought to our notice that the Appellate Tribunal in this case has only followed the decision of the Special Bench of the Appellate Tribunal in I.T.A Nos. 3255 and 3330 (Bom) of 1976-77, and the said decision has been accepted by the Revenue and a circular has been issued by the Central Board of Direct Taxes dated December 28, 1981, accepting the said decision in so far as the question of allowability of weighted deduction under section 35B of the Act is concerned. Mr. Balachandran further submitted that, in the light of the above Special Bench decision of the Appellate Tribunal and the circular of the Central Board of Revenue, instructions have been given to various Commissioners of Income-tax not to proceed with the cases raising similar questions. So, counsel submitted, that in these cases, in the light of the above Special Bench decision and the circular by the Central Board of Revenue, the matter should be treated as closed and a direction to the Appellate Tribunal to refer the questions of law for the decision of this Court is really an empty formality. We are afraid, we cannot accept this submission in toto, at this stage. The decision of the Special Bench of the Appellate Tribunal in I.T.A No. 3255 of 1976-77, as also the Circular of the Central Board of Revenue dated December 28, 1981, are not before us. These two documents are referred to in a decision of the Allahabad High Court reported in CIT v. Novelty Trading Corporation, [1984] 150 ITR 453, 454. There is also a reference to the same in the decision in Commissioner Of Income-Tax, Delhi-I v. Jay Engineering Works., [1984] 149 ITR 297, 298 (Delhi). But, in the absence of these documents, we are not in a position to place reliance on them or adjudicate the plea raised by Mr. Balachandran, counsel for the assessee. But, all the same, we consider that, in the interests of justice, when the Appellate Tribunal forwards the statement of the case along with the necessary documents placed before it, the Appellate Tribunal shall forward a copy of the judgment in I.T.A No. 3255 of 1976-77, as also a copy of the Circular of the Central Board of Direct Taxes dated December 28, 1981, after obtaining it from the Commissioner of Income-tax, Kerala. We direct the Revenue to place these two documents before the Appellate Tribunal so as to enable the Appellate Tribunal to include them in the statement of the case. The Appellate Tribunal is directed to forward the statement of the case in these original petitions along with all necessary documents inclusive of the above Special Bench decision and the above-mentioned circular as expeditiously as possible.

8. In the light of the disposal of the original petitions, we have to consider the nature of disposal of the Income-tax Referred Cases Nos. 91 to 102 and 203 and 211 of 1984. The question referred to this court has been extracted hereinabove (paragraph 1). We are of the view that the question in the referred cases is rather vague or ambiguous and cannot be answered satisfactorily in the light of the contentions raised before us by counsel for the Revenue and also counsel for the respondents-assessees. It is agreed that the question referred to us by the Appellate Tribunal will be taken in by the questions which we have directed the Appellate Tribunal to refer for our decision in the various original petitions. In that light, a consideration of the questions referred to us in the various income-tax referred cases is superfluous or unnecessary at this stage. We decline to answer the question referred to us in the various income-tax referred cases in the light of our direction in the original petitions and also in view of the fact that the question referred to us is rather vague and cannot be satisfactorily answered without further materials and further amendment of the question itself. We decline to answer the question referred to us in Income-tax References Nos. 91 to 102, 203 and 211 of 1984, in the light of our decision in the original petitions

9. The original petitions and the income-tax references are disposed of as above. There shall be no order as to costs.

10. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Appellate Tribunal, Cochin Bench.