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Hmm Ltd. v. Commissioner Of Income-Tax.
Factual and Procedural Background
The question was referred to this High Court by the Income-tax Appellate Tribunal, Chandigarh Bench, under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee. The reference asked whether the Tribunal was right in holding that no weighted deduction under section 35B was allowable in respect of specified export-related expenses and 50% of stationery expenditure.
Relevant facts (as given in the opinion): the applicant-assessee is a limited company. For the assessment year 1977-78 (previous year ending 31 March 1977) the assessee claimed weighted deduction under section 35B for Rs. 10,62,723. The Income-tax Officer allowed the claim except in respect of certain items (freight, octroi, insurance, loading/unloading, conveyance), obtaining prior approval under section 144B. The Commissioner of Income-tax, considering that the ITO's order was erroneous and prejudicial to the Revenue, issued a notice under section 263 and directed revision of the assessment, withdrawing weighted deduction in respect of expenditure amounting to Rs. 38,536 comprising:
Rs.
(i) Charges paid for inspection and supervision of export goods: 23,315
(ii) Bank charges paid for export: 6,173
(iii) Cost of excise revenue stamps and hundi papers for export documentation: 330
(iv) Cost of stationery used in connection with export: 881
(v) Miscellaneous expenditure incurred in connection with export: 7,837
The assessee challenged the Commissioner's order before the Tribunal. The Tribunal dismissed the assessee's claim for weighted deduction except as to stationery (in light of a Special Bench decision in J. Hem Chand and Co.), and the assessee sought a reference to this High Court under section 256(1). The Tribunal referred the question stated at the outset for the High Court's opinion.
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in holding that no weighted deduction is allowable in respect of inspection and supervision charges, bank charges, cost of excise revenue stamps and miscellaneous expenses and also for 50% of expenditure on stationery?
Arguments of the Parties
Petitioner's (Assessee's) Arguments — Mr. G.C. Sharma (senior advocate)
- Section 35B was enacted to encourage export of goods outside India and to enable exporters to compete in foreign markets by granting relief on certain export-related items.
- The expenses in question (inspection and supervision charges, bank charges for export, cost of excise revenue stamps and miscellaneous export expenses) fall within the scope of section 35B(1)(b), clause (iii), and therefore qualify for weighted deduction.
Respondent's (Revenue's) Argument — Mr. Ashok Bhan (senior advocate)
- The controversy is settled by the decision of the Calcutta High Court in Organon (India) Ltd. v. CIT, [1988] 172 ITR 354, which supports disallowance of items such as freight and insurance and, by implication, related export expenses.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Special Bench decision in J. Hem Chand and Co. (dated 17 June 1978; I.T.A. Nos. 3255 & 3330 of 1976-77) | Held that certain export-related items are not allowable for weighted deduction under section 35B. | The Tribunal relied on this Special Bench decision to dismiss the assessee's claim in respect of the listed items except stationery; the High Court noted that the Tribunal's view was consistent with this Special Bench decision. |
| Organon (India) Ltd. v. CIT, [1988] 172 ITR 354 (Calcutta High Court) | Held that freight and insurance charges (and related export expenditures) are not allowable for weighted deduction under section 35B, relying on earlier Calcutta decisions. | Respondent relied on this decision; the High Court observed that Organon took a similar view and that the Calcutta High Court's approach supported the Tribunal's conclusion in the present case. |
| Bharat General and Textile Industries Ltd. v. CIT / Textile Industries Ltd. v. CIT, [1985] 153 ITR 747 (Calcutta High Court) | Interpreted section 35B(1)(b)(iii) to exclude: (1) expenditure incurred in India in connection with distribution/supply outside India; (2) expenditure on carriage of goods to their destination outside India (freight); and (3) expenditure on insurance of goods while in transit. | The High Court quoted and relied on this interpretation as authoritative for the proposition that carriage, freight and insurance (and similar charges incurred in India) are not allowable for weighted deduction under section 35B. |
| CIT v. K.N. Oil Industries, [1982] 134 ITR 651 (Madhya Pradesh High Court) | Earlier authority (Madhya Pradesh High Court) dealing with interpretation of the scope of section 35B and related questions (as relied upon by Calcutta High Court). | The Calcutta High Court (and in turn this Court) noted that Organon and Textile Industries had relied upon this Madhya Pradesh decision; the High Court treated it as supporting the restrictive interpretation of section 35B. |
| Secheron (D & H) Electrodes P. Ltd. v. CIT, [1984] 149 ITR 400 (Madhya Pradesh High Court) | Another Madhya Pradesh High Court decision bearing on the interpretation of section 35B. | Referenced as part of the line of authority relied upon by the Calcutta High Court to support the exclusionary reading of clause (iii) of section 35B(1)(b). |
Court's Reasoning and Analysis
The court conducted a textual analysis of section 35B (as it stood at the relevant time). The key analytical steps in the opinion are:
- The court examined the language of section 35B(1)(b), observing that the statutory relief is directed to expenditure "wholly and exclusively on" activities such as advertisement/publicity outside India, obtaining market information outside India, and distribution/supply/provision outside India.
- Attention was focussed on clause (iii) of section 35B(1)(b), which explicitly excludes "expenditure incurred in India in connection therewith" and also excludes "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 court read this language as creating clear exclusions.
- From the express exclusions in clause (iii), the court concluded that the legislature intended that relief not be available for expenditure incurred in India in connection with distribution/supply outside India, and also not be available for carriage/insurance costs (wherever incurred).
- Applying that textual interpretation to the facts, the court held that items such as charges for inspection and supervision of export goods, bank charges paid for export, cost of excise revenue stamps and hundi papers for export documentation, and miscellaneous export-related expenditure do not fall within the qualifying expenditure in clause (iii) and therefore are not allowable for weighted deduction under section 35B.
- The court noted the Tribunal's treatment of stationery (Rs. 881) — the Tribunal had held that 50% of the stationery cost ought to have been disallowed by the Commissioner; the High Court recorded that aspect in its reasoning (the opinion leaves the Tribunal's approach on stationery intact).
- The court also observed and relied upon relevant precedents (Calcutta High Court's decisions in Organon and Textile Industries, and Madhya Pradesh decisions) which adopted a similar restrictive interpretation of section 35B(1)(b)(iii), reinforcing the court's textual conclusion.
Holding and Implications
ANSWERED IN THE AFFIRMATIVE — IN FAVOUR OF THE REVENUE.
Direct effect on the parties:
- The High Court held that the Tribunal was correct in disallowing weighted deduction under section 35B in respect of the following expenses: charges for inspection and supervision of export goods (Rs. 23,315); bank charges paid for export (Rs. 6,173); cost of excise revenue stamps and hundi papers for export documentation (Rs. 330); and miscellaneous expenditure incurred in connection with export (Rs. 7,837).
- The Tribunal's approach to stationery (Rs. 881) — disallowing 50% — was noted and left as treated by the Tribunal/Commissioner in the assessment process.
- There is no order as to costs.
Broader implications:
The opinion rests on a restrictive textual interpretation of section 35B(1)(b)(iii) and aligns with prior High Court and bench decisions cited in the opinion. The judgment does not discuss or announce any broader change in the law beyond applying that interpretation to the facts; the direct consequence is the disallowance, in this case, of weighted deduction for the listed items in favour of the Revenue.
Jai Singh Sekhon, J.:— The following question has been referred for the opinion of this court by the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh, under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), at the instance of the assessee:
“Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in holding that no weighted deduction is allowable in respect of inspection and supervision charges, bank charges, cost of excise revenue stamps and miscellaneous expenses and also for 50% of expenditure on stationery?”
2. A brief resume of facts relevant for disposal of this reference is that the applicant-assessee is a limited company. The controversy relates to the income-tax assessment year 1977-78 for which the relevant previous year ended on March 31, 1977. In the course of the assessment proceedings, the assessee had claimed weighted deduction under section 35B of the Act in respect of expenditure amounting to Rs. 10,62,723. The Income-tax Officer allowed the claim of the assessee in respect of all the items other than freight expenses, octroi duty, insurance charges, loading and unloading charges and conveyance charges. While doing so, the Income-tax Officer had obtained the prior approval of the Inspecting Assistant Commissioner as envisaged under section 144B of the Act. The Commissioner of Income-tax finding the said order erroneous and prejudicial to the Revenue served a notice dated September 8, 1980, under section 263 of the Act and after considering the assessee's reply in response to the said notice passed, an order directing the Income-tax Officer to revise the assessment while withdrawing weighted deduction in respect of expenditure amounting to Rs. 38,536 comprising the following items:—
Rs. (i) Charges paid for inspection and supervision of export goods : 23,315 (ii) Bank charges paid for export : 6,173 (iii) Cost of excise revenue stamps and hundi papers for export documentation : 330 (iv) Cost of stationery used in connection with export : 881 (v) Miscellaneous expenditure incurred in connection with export : 7,837
3. The assessee challenged this order of the Commissioner of Income-tax before the Tribunal. The claim of the assessee for weighted deduction under section 35B of the Act was dismissed except in respect of stationery in the light of the Special Bench decision dated June 17, 1978, in I.T.A Nos. 3255 and 3330 of 1976-77 in the case of J. Hem Chand and Co. The Special Bench had held that the assessee is not entitled to any relief under section 35B of the Act on the following items:
Rs. (i) Charges paid for inspection and supervision of export goods : 23,315 (ii) Bank charges paid for export : 6,173 (iii) Cost of excise revenue stamps and hundi papers for export documentation : 330 (v) Miscellaneous expenditure incurred in connection with export : 7,837
4. Feeling aggrieved against the said order of the Tribunal, the assessee filed an application under section 256(1) of the Act for making a reference to this High Court on two points. The Tribunal did not refer the question regarding the jurisdiction of the Income-tax Commissioner under section 263 of the Act but referred the above referred question for the opinion of this court Mr. G.C Sharma, learned senior advocate appearing on behalf of the petitioner, contended that the provisions of section 35B of the Act were enacted by the Legislature in order to encourage export of goods outside India for earning foreign exchange and thus he maintained that the relief was given by the Legislature on certain items to the assessee-exporter in order to enable him to compete in the foreign market with similar goods manufactured in other countries. Further, he maintained that the expenses incurred by the assessee on the charges paid for inspection and supervision of export goods, bank charges paid for export, cost of excise revenue stamps and miscellaneous expenses incurred in connection with export would be covered by section 35B(1)(b), clause (iii). Mr. Ashok Bhan, learned senior advocate, on the other hand, maintained that this controversy is fully settled by the decision of the Division Bench of the Calcutta High Court in Organon (India) Ltd. v. CIT, [1988] 172 ITR 354.
5. The relevant provisions of section 35B as it stood at the relevant time read 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.”
6. A bare perusal of the above referred provisions of this section leaves no doubt that relief has been given from the imposition of tax on expenditure incurred on advertisement, publicity in obtaining information, distribution, supply, etc., outside India and not within the country. Clause (iii) specifically excludes expenditure incurred in India in connection with the distribution, supply, services or facilities as well as expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit. Thus, the intent of the Legislature is very clear regarding the assessee being not entitled to any relief on expenditure on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit even outside India. Under these circumstances, the Tribunal rightly upheld the order of the Income-tax Commissioner regarding the assessee being not entitled to any weighted deduction on the expenses incurred upon charges paid for inspection and supervision of the goods, bank charges paid for export, cost of excise revenue stamps and hundi papers for export documentation besides other miscellaneous expenditure incurred in connection with export. The Tribunal, however, in respect of cost of stationery used in connection with export which amounted to Rs. 881 held that the asses-see's claim ought to have been disallowed by the Commissioner of Income-tax in respect of 50% of the same.
7. Similar view was taken by the Calcutta High Court in Organon (India) Ltd.'s case, [1988] 172 ITR 354 in respect of freight and insurance charges by relying upon the earlier decision of that court in Bharat General and Textile Industries Ltd. v. CIT, [1985] 153 ITR 747 (Cal). The Calcutta High Court, in Bharat General and Textile Industries' case, [1985] 153 ITR 747, 757, has dealt with the matter as follows:
“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 the 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.
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.”
8. In that case, the Calcutta High Court had relied upon the decisions of the Madhya Pradesh High Court in CIT v. K.N Oil Industries, [1982] 134 ITR 651 (MP) as well as in Secheron (D and H) Electrodes P. Ltd. v. CIT, [1984] 149 ITR 400 (MP).
9. For the foregoing reasons, we are of the view that the Tribunal was right in holding that on the expenditure on inspection and supervision of export goods, bank charges, cost of excise revenue stamps and hundi papers and miscellaneous expenditure, the assessee was not entitled to weighted deduction. We, therefore, answer the question in the affirmative, i.e, in favour of the Revenue. There is no order as to costs.
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