1. In this reference under Section 256(1) of the I.T. Act, 1961, at the instance of the assessee, the following questions, have been referred for the assessment year 1974-75 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,94,776 being cash assistance on exports are liable to be assessed as revenue receipts ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that expenses on freight, loading charges, insurance, etc., incurred in connection with the export business, were not entitled to weighted deduction under Section 35B of the Income-tax Act, 1961?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for the purpose of computing the capital employed for granting deduction under Section 80J of the Income-tax Act, 1961, the value of assets should be taken at the written down value and not at the original cost to the assessee ?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability for gratuity of Rs. 56,025 is not an allowable deduction in computing the total income of the assessee even when no provision has been made in the books of account maintained by the assessee ?"

5. So far as the first question is concerned, it must be answered in the affirmative and in favour of the Revenue in view of the decision of this court in the case of Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448.

6. So far as the fourth question is concerned, it must also be answered in the affirmative and in favour of the Revenue in view of the decision of this court in the case of CIT v. New Swadeshi Mills of Ahmedabad Ltd. [1984] 147 ITR 163.

7. The next question which falls for consideration is whether for the purpose of computing the capital employed for granting deduction under Section 80J, the value of the assets should be taken as the written down value and not at the original cost to the assessee.

8. section 80j of the i.t. act, 1961, in so far as it is relevant for our present purpose reads as follows :

"80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.--(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the aggregate of the deductions, if any, admissible to the assessee under Section 80H and Section 80HH of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the- assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year);......

(2) The deduction specified in Sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (such assessment year being hereafter, in this section, referred to as the initial assessment year) and each of the four assessment years immediately succeeding the initial assessment year :......"

9. In exercise of the rule-making power vested under Section 295 of the Act, the Central Board of Revenue has framed Rule 19A, which reads as follows :

"19A. (1) For the purposes of Section 80J, the capital employed in an industrial undertaking or the business of a hotel shall be computed in accordance with Sub-rules (2) to (4), and the capital employed in a ship shall be computed in accordance with Sub-rule (5).

(2) The aggregate of the amounts representing the values of the assets as on the first day of the computation period, of the undertaking or of the business of the hotel to which the said Section 80J applies, shall first be ascertained in the following manner :

(i) in the case of assets entitled to depreciation, their written down value;

(ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee ;

(iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business ;

(iv) in the case of assets being debts due to the person carrying on the business, the nominal amount of those debts ;

(v) in the case of assets being cash in hand or bank, the amount thereof.

Explanation 1.--In this rule, 'computation period' means the period for which profits and gains of the industrial undertaking or business of 'the hotel are computed under Sections 28 to 43A.

Explanation 2.--The value of any building, machinery or plant or any part thereof as is referred to in Clause (a) or Clause (b) of the Explanation at the end of sub-section (6) of section 80J shall not be taken into account in computing the capital employed in the industrial undertaking or, as the case may be, the business of the hotel.

Explanation 3.--Where the cost of any asset has been satisfied otherwise than in cash, the then value of the consideration actually given for the asset shall be treated as the actual cost of the asset."

10. It may be mentioned that by the Finance (No. 2) Act, 1980, Section (1A) was added to Section 80J with retrospective effect from April I, 1972, which so far as relevant for our purpose reads as follows:

"(1A). (I) For the purposes of this section, the capital employed in an industrial undertaking or the business of a hotel shall, except as otherwise expressly provided in this section, be computed in accordance with Clauses (II) to (IV) and the capital employed in a ship shall be computed in accordance with Clause (V).

(II) The aggregate of the amounts representing the values of the assets as on the first day of the computation period of the undertaking or of the business of the hotel to which this section applies shall first be ascertained in the following manner :

(i) in the case of assets entitled to depreciation, their written down value;

(ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee ;

(iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business ;

(iv) in the case of assets, being debts due to the person carrying on the business, the nominal amount of those debts;

(v) in the case of assets, being cash in hand or bank, the amount thereof.

Explanation 1.--In this clause, 'actual cost' has the same meaning as in clause (i) of section 43.

Explanation 2.--In this clause and in Clause (III), 'computation period' means the period for which profits and gains of the industrial undertaking or business of the hotel are computed under Sections 28 to 43A.

Explanation 3.--In this clause and in Clause (V), 'written down value' has the same meaning as in clause (6) of section 43.

Explanation 4.--Where the cost of any asset has been satisfied otherwise than in cash, the then value of the consideration actually given for the asset shall be treated as the actual cost of the asset."

11. Section 80J directs that capital employed in an industrial undertaking should be computed in the prescribed manner, that is to say, in accordance with Rule 19A as it stood at the material time. In the case of an asset entitled to depreciation, the written down value, while in the case of an asset not entitled to depreciation the cost to the assessee, is required to be taken into account in computing the capital employed in the industrial undertaking. The expression "written down value" for this purpose is to be understood in the same sense as denned in Section 43(6) of the Act. There is no ambiguity either in the provision of rule 19a or in section 80j as amended. section 80J contemplates the deduction of an amount equal to 6% calculated on the capital employed in the undertaking which is to be computed in accordance with the relevant provisions. Aggregate of the amounts representing the values of the assets has to be ascertained for the purpose of computation of capital employed in the undertaking. Where the capital asset is entitled to depreciation and depreciation has been allowed in computing the profits or gains from the industrial undertaking, for the purpose of determining the income-tax liability, the value of the capital assets should be taken as the written down value. The profits and gains of the industrial undertaking are reduced to the extent depreciation is allowed on the capital assets of that undertaking. Depreciation is not an actual expenditure. It, therefore, remains with the assessee in some form or other. Such depreciation is either transferred to reserve account or general reserve account. The amount of depreciation allowed remains with the assessee and it does not represent any fresh capital. If after allowing depreciation to the assessee on the assets of the industrial undertaking, the actual cost is adopted for computing the capital employed, in that event, the assessee would be entitled to double benefit which is not warranted under the provisions of section 80j or rule 19a.

12. We are, therefore, of the view that for the purpose of computation of the capital employed in the case of assets entitled to depreciation, their written down value has to be adopted and not the original cost at which the assets were acquired. We, therefore, answer the third question in the affirmative and in favour of the Revenue.

13. The next question being the second question in this reference which calls for consideration, is whether the freight, loading charges and insurance, etc., incurred in connection with the export business are entitled to weighted deduction under Section 35B of the I.T. Act, 1961. Section 35B provides for export markets development allowance. Any assessee within the meaning of Section 35B who has incurred revenue expenditure under specified heads for development of export markets will be entitled to a weighted deduction of an amount equal to one and one-third times and one and one-half times, as the case may be, the amount of such expenditure. Section 35B as it stood for the assessment year in question with which we are concerned here reads as under :

" 35B. Export markets development allowance.--(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 :

Provided that in respect of the expenditure incurred after the 28th day of February, 1973, by a domestic company, being a company in which the public are substantially interested, the provisions of this clause shall have effect as if for the words 'one and one-third times', the words one and one-half times ' had been substituted.

(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.

(2) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to in such Sub-section (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year."

14. It was by the Finance Act, 1968, and with effect from April 1, 1968, that this section was inserted. The section then was without either the proviso to Sub-section (1)(a) or Explanation 2 of that Sub-section. The same were inserted by the Finance Act, 1973, the former with effect from April 1, 1973, and the latter with retrospective effect from April 1, 1968. Sub-clause (iii) of Clause (b) of the sub-section in its original form was "distribution, supply or provision outside India of such goods, services or facilities". It was by the Finance Act, 1970, that with retrospective effect from April 1, 1968, the sub-clause was amended to the present form with the words "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" added to what stood originally.

15. We are concerned here with the interpretation of the words underlined by us in Sub-clause (iii) of Section 35B(1)(b) of the Act as it stood originally. The said words came up for consideration before the Madras and Madhya Pradesh High Courts. In the case of CIT v. Kasturi Palayacat Co. [1979] 120 ITR 827, the Madras High Court took the view that in Sub- Clause (iii) there is an indication that the expenditure should have been incurred outside India. There is a disallowance of part of the expenditure even outside India, if such expenditure related to the carriage of goods to their destination outside India or on the insurance of such goods while in transit. It was held that under Section 35B(1)(b)(iii), only expenditure on the carriage of the goods to their destination outside India or on the insurance of such goods while in transit is not entitled to the allowance. Customs duty paid and the packing charges incurred by the branches abroad for the import of the goods do not fall within this category and hence are entitled to the allowance.

16. The Madhya Pradesh High Court in the case of CIT v. K. N. Oil Industries [1982] 134 ITR 651, considered the scope of the said clause. In that case, the assessee claimed weighted deduction in respect of shipping freight, railway freight and insurance charges relating to some of its commodities. The Madhya Pradesh High Court held that the first part of Clause (b)(iii) of Section 35B(1) of the I.T. Act, 1961, which reads "distribution, supply or provision outside India of such goods, services or facilities" deals with the expenditure which qualifies for the grant of export markets development allowance. The second part of the clause which starts with the words "not being" deals with the expenditure which is not to be taken into account in granting development allowance. The second part of the clause has to be read as "not being expenditure incurred in India in connection therewith or not being expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit". The presence of a comma after the word "facilities", the omission of a comma after the word "in connection therewith" and the presence of the word "or" before the words "expenditure (wherever incurred)" support this construction. Further, a reference to clause (a) of section 35b(1) shows a similar style of drafting in the words "not being in the nature of capital expenditure or personal expenses of the assessee". These words clearly mean "not being in the nature of capital expenditure or not being in the nature of personal expenses of the assessee". Similar interpretation is to be adopted of the words "not being" as occurring in the second part of Clause (b)(iii). Therefore, the expenditure on the carriage of goods to their destination outside India and on the insurance of such goods while in transit cannot be taken into account for the grant of weighted deduction for development allowance under Section 35B(1)(b)(iii).

17. The Delhi High Court in the case of Handicrafts and Handloom Export Corporation of India v. CIT [1983] 140 ITR 532 also considered the scope of the said clause. The assessee claimed weighted deduction under Section 35B of various expenses. There, the Delhi High Court held that freight paid by the New York office of the assessee for transportation of goods imported from India from one place to another in the USA fell under the description of expenditure incurred on the carriage of the assessee's goods to their destination outside India and did not qualify for weighted deduction. The Delhi High Court held that the correct interpretation of Sub-clause (iii) of Section 35B(1)(b) is that it allows all expenditure on distribution, supply, etc., of goods 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.

18. In the case of Swami and Co. Pvt. Ltd. v. CIT [1984] 146 ITR 425, the Madras High Court held that the assessee claimed weighted deduction regarding clearing and forwarding charges paid by the assessee at Madras Port on goods exported to foreign countries. The other expenditure was attestation fees, stamp charges on drafts, export licence fees, bank commission, rents paid for godowns situate in India and various other sundry expenses. AH these items of expenditure were incurred only in India and not abroad. There, the Madras High Court held that the weighted deduction under Section 35B(1)(b)(iii) of the I.T. Act, 1961, will be available only in respect of expenses incurred outside India and not in respect of expenses incurred in India if the distribution of the goods is outside India. To maintain that weighted deduction will be available even where expenditure is incurred in India would go against the teeth of the specific exclusionary provision. A look at the other Sub-clauses of section 35b(1)(b) also shows the insistence of Parliament that the weighted deduction cannot be exigible unless the expenditure under the different heads are incurred outside India. Accordingly, it was held that the assessee would not be eligible for weighted deduction as the expenditure was incurred in India.

19. The Madhya Pradesh High Court in the case of D & H Secheron Electrodes Pvt. Ltd. v. CIT [1984] 149 ITR 400, considered eligibility of weighted deduction under Section 35B in respect of transportation and freight expenses and on foreign travelling expenses of directors incurred towards export sales. The Madhya Pradesh High Court held that the second part of Clause (b)(iii) of Section 35B(1) of the I.T. Act, 1961, which starts with the words "not being", which was added by the Finance Act, 1970, deals with expenditure which is not to be taken into account in granting the export markets development allowance. It has to be read as not being expenditure incurred in India in connection therewith or not being expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit. Hence, weighted deduction cannot be claimed in respect of transportation and freight charges.

20. The substitution of Sub-clause (iii) of Section 35B(1)(b) by the Finance Act, 1970, with effect from April 1, 1968, i.e., the date from which Section 35B was introduced, makes it clear that expenditure on the distribution, supply or provision outside India of the goods, services or facilities dealt in or provided by the assessee in the course of his business (which is one of the heads of expenditure specified in Section 35B(1) as qualifying for the grant of export markets development allowance) shall not include any expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of the goods to their destination outside India or on the insurance of the goods while in transit. It appears to us that there are three prohibitions in Sub-clause (iii) of Section 35B(1)(b). Firstly, expenditure incurred in India in connection with distribution, supply or provision outside India of such goods, services or facilities. Secondly, expenditure, whether incurred in India or outside India, on the carriage of such goods to their destination outside India (i.e., freight, etc.) and, thirdly, expenditure, whether incurred in India or outside India, on the insurance of such goods while in transit.

21. Having regard to the provisions of Section 35B(1)(b)(iii) and the decisions referred to above, items like clearing and forwarding charges paid by the assessee in Indian ports on goods exported to foreign countries, expenditure on the carriage of goods to their destination outside India or on the insurance of such goods while in transit are not allowable for weighted deduction under Section 35B(1)(b)(iii) inasmuch as they were incurred in India. We are, therefore, of the view that the Tribunal was right in holding that the expenditure on freight, loading charges, insurance, etc., incurred in connection with export business was not entitled to weighted deduction. We, therefore, answer the second question in the affirmative and in favour of the Revenue.

22. There will be no order as to costs.

Dipak Kumar Sen, J.

23. I agree.