The Judgment of the Court was delivered by

K.P Balanarayana Marar, J.:— AS directed by this court by judgment dated April 10, 1985, in Original Petition No. 4278 of 1981, the Income-tax Appellate Tribunal, Cochin Bench, has referred the following two questions of law for a decision thereon:

“(i) Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim any deduction under section 35B of the Income-tax Act, 1961?

(ii) Whether, on the facts and in the circumstances of the case and since the assessee is not qualified and entitled to deduction under section 36(1)(iv) of the Income-tax Act, the contribution made to the Executive Staff Provident Fund is a permissible deduction under section 37 of the Income-tax Act, 1961?”

2. The assessee is a public limited company carrying on the business of manufacture and sale of coffee and purchase and sale of coir yarn. For the assessment year 1977–78, the assessee returned an income of Rs. 14,59,212 and claimed deduction of Rs. 52,781 being contribution to the Executive Staff Provident Fund Account and a further sum of Rs. 58,312 under section 35B of the Income-tax Act, 1961. Weighted deduction of Rs. 58,408 was claimed by way of salary, bonus, overtime, etc., paid to the employees and Rs. 17,535 towards 50 per cent, of the remuneration paid to the export adviser. The Income-tax Officer disallowed the claim made towards the contribution to the Executive Staff Provident Fund holding that it was not deductible since the conditions laid down under section 36(1)(iv) of the Income-tax Act had not been fulfilled. The claim of weighted deduction under section 35B was also rejected for the reason that expenditure incurred in India was not eligible for weighted deduction. On appeal by the assessee, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. The matter was carried to the Income-tax Appellate Tribunal. Following the decision of this court in the case of CIT v. High Land Produce Co. Ltd., [1976] 102 ITR 803, the Tribunal held that the provision made to the executive staff provident fund was an admissible deduction. The Tribunal opined that the assessee had satisfied the requirements under section 40(a)(v) and the provision made towards the provident fund was allowable as a deduction under section 37. Regarding the claim for weighted deduction under section 35B, the Tribunal found the same to be allowable though not in its entirety in terms of the decision of the Special Bench of the Tribunal in I.T.A No. 3255 of 1976–77 in the case of J. Hemchand and Co. v. Second ITO, B-11 Ward, Bombay. That claim was restricted to Rs. 36,488 and the same was allowed in addition to what was already allowed by the Income-tax Officer. The Commissioner of Income-tax required the Appellate Tribunal to refer the questions of law arising out of the order to this court. The Tribunal refused to state the case on the ground that no question of law arises. It was thereafter that the Revenue moved this court under section 256(2) of the Income-tax Act, 1961, by Original Petition No. 4278 of 1981. In accordance with the judgment of this court in that original petition, the questions of law hereinbefore mentioned were referred by the Tribunal under section 256(2) of the Income-tax Act, 1961.

3. Heard counsel on both sides.

4. Deduction of Rs. 72,896 was claimed by the assessee under section 35B. Out of this amount, Rs. 58,408 represented 50 per cent, of the total salary, provident fund, medical expenses, etc., incurred on the staff employed and the balance amount of Rs. 14,488 represented 50 per cent, of the amount paid to Sri R.V Kamath, who was employed as the export adviser. The Tribunal found that these amounts come under sub-clauses (ii), (v) and (vi) of section 35B(1)(b) and as such the fact that the expenditure was incurred in India is of no consequence. The Tribunal has also referred to the decision of the Special Bench of the Tribunal in I.T.A No. 3255 of 1976–77 in the case of Hemchand and Co. v. Second ITO. Still, the Tribunal restricted the claim to 50 per cent, of the amount claimed on the basis of the findings of the Special Bench decision of the Tribunal referred to above. Assailing this finding, learned counsel for the Revenue would point out that the claim of the assessee includes expenditure incurred on salaries, overtime, provident fund contribution, medical expenses, bonus and stationery relating to the export department of the company's business. This claim, according to counsel, is under six different items which had not been separately shown. But it is noticed that the Appellate Assistant Commissioner of Income-tax in annexure-B order has referred only to the salaries paid to the staff engaged in the appellant's export department as well as the commission paid to the appellant's export adviser. These figures are seen to have been adopted by the Tribunal while allowing weighted deduction to the extent of Rs. 36,448. It is thus clear that what has been allowed is only the expenses incurred towards salaries paid to the employees in the appellant's export department and the commission paid to the export adviser. A question, therefore, arises as to whether allowances can be claimed for these amounts..

5. This Bench had occasion to consider the eligibility of weighted deduction in respect of commission paid to agents for marketing of goods outside India as well as commission paid in India. After referring to the various sub-clauses in section 35B(1) as it stood then and the circular of the Central Board of Direct Taxes, this court held that the commission payments will certainly qualify for weighted deduction under section 35B(1)(b)(i) and (ii) of the Income-tax Act. While coming to this conclusion, this court placed reliance on the decision of the Special Bench in Hemchand and Co.'s case and the circular of the Central Board of Direct Taxes—F. No. 268/738.SI-ITJ, dated December 28, 1981. The circular is extracted in the abovementioned decision and it is observed that it has the force of law and that it can even supplant the law in cases where it is beneficial to the assessee and has mitigated or relaxed the rigour of the law. After observing that the circular can be enforced by courts, it was held that commission payment made to the parties to bring about the export sales will be entitled to weighted deduction irrespective of the fact whether the same is incurred in India or outside India.

6. We have now to see whether the amount claimed by way of deduction qualifies for deduction in the light of the aforesaid decision of this Bench in Commissioner Of Income-Tax v. 1. Kerala Nut Food Co., [1991] 192 ITR 585. In this reference we are concerned with the assessment year. 1977–78. Section 35(1)(a) of the Income-tax Act as it then stood permitted deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year. But that expenditure should wholly and exclusively be on advertisement or publicity outside India in respect of goods, services or facilities which the assessee deals in or provides in the course of his business and for obtaining information regarding markets outside India for such goods, services or facilities. Sub-clauses (v) and (vi) of section 35B(1)(b) relate to expenditure incurred for preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto and for furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities. The Tribunal has found that, in the instant Case, the claim of weighted deduction in respect of 50 per cent, of the salary paid to the staff and 50 per cent, of the remuneration paid to the export adviser is not made under sub-clause (iii) but under subclauses (ii), (v) and (vi) of section 35B(1)(b). It was observed that the fact that the expenditure was incurred in India is of no consequence. The Tribunal has also referred to the decision of the Special Bench of the Tribunal in I.T.A No. 3255 of 1976–77. It was for these reasons that the Tribunal found that allowance has to be given under section 35B in respect of the claims made towards salary paid to the staff in the export department and commission paid to the export adviser. Still, the Tribunal restricted the claim to Rs. 36,448, since that was found to be reasonable relating to purchase operations. In this connection, learned counsel for the Revenue would point out that the export adviser mentioned in the order of the Tribunal was a practising member of the Cochin Bar and that the amounts paid to him cannot be treated as expenditure eligible for allowance under section 35B. But the Tribunal has found that the expenditure would have been incurred by the assessee and coming within subclauses (ii), (v) and (vi) of section 35B(1)(b). In the light of the decision in Commissioner Of Income-Tax v. 1. Kerala Nut Food Co., [1991] 192 ITR 585 (Ker), and the reasons given by the Tribunal, we see no error in the finding of the Tribunal allowing Rs. 36,448 as weighted deduction allowable under section 35B of the Income-tax Act. Question No. 1 has, therefore, to be answered in the affirmative and in favour of the assessee.

7. The next question relates to the contribution made to the unrecognised Executive Staff Provident Fund. The contention of the Revenue is that this amount is not a permissible deduction under section 37 of the Act since the assessee is not qualified and entitled to deduction under section 36(1)(iv) of the Act. An identical question was considered by a Bench of this court in respect of the same assessee in CIT v. Aspinwall and Co. (Travancore) Ltd., [1992] 194 ITR 739. The question referred in that case was “whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of the contribution of Rs. 90,220 made to the unrecognised Executive Staff Provident Fund?” The very same contention that deduction cannot be claimed under section 37 of the Act in view of the specific provision made in section 36(1)(iv) was raised in that case also. The Bench found the answer to the question in the decision in CIT v. High Land Produce Co. Ltd., [1976] 102 ITR 803 (Ker). Therein also, similar contentions were raised by the Revenue in the matter of deductions towards gratuity liability. This court in that decision held (at page 807):

“The residuary nature of the provision in section 37(1) will, therefore, have to be given its full play. Bearing in mind the reason for the introduction of the words within brackets ‘not being expenditure of the nature described in sections 30 to 36’, we have to remember that those words do not preclude certain species of liabilities but only exclude consideration of liabilities which would fall under any of those sections.”

8. That decision was affirmed by the Supreme Court in CIT v. High Land Produce Co. Ltd., [1986] 158 ITR 419. This court in CIT v. Aspinwall and Co. (Travancore) Ltd., [1992] 194 ITR 739, observed that the two decisions relied on by the Revenue cannot be treated as good law in view of the decision of the Supreme Court. The contention of the Revenue was rejected and it was held that the assessee was entitled to claim deduction under section 37(1) in respect of the contribution to the Executive Staff Provident Fund. The question was answered in favour of the assessee and against the Revenue. That decision related to the assessment year 1979–80 in respect of the same assessee. In view of the aforementioned decision, the Tribunal has not committed any error in allowing a deduction of Rs. 52,781 paid by the assessee to the Executive Staff Provident Fund. Question No. 2 also has to be answered in the affirmative and in favour of the assessee. For the aforesaid reasons, both the questions are answered in the affirmative, i.e, in favour of the assessee and against the Revenue.

9. A copy of this judgment under the seal of the court and signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, forthwith.