Citation Codes

Equivalent Citations

citation codes

Case Number

Civil Appeals Nos. 2600-03 of 1994 with No. 3788 of 1999, decided on February 15, 2000

Disposition

dismissed

Advocates

K.N Raval, Additional Solicitor General and M.L Verma, Senior Advocate (Ms Neera Gupta, Ms Sushma Suri, Shail Kr. Dwivedi, S. Rajappa, B.K Prasad, Hemant Sharma, K.N Shukla, K.C Kaushik, A.K Sharma, M.B Rao, Ms A. Subhashini, Advocates, with them) for the Appellant;
Ranjit Kumar, Ankur Chauhan, R. Karanjawala, Ms Nandini Gore and Ms M. Karanjawala, Advocates, for the Respondent.

Judges

Justice D.P. Wadhwa

Acts

Section 40(c)(iii)/40(a)(v) of the Act
Section 35-B of the Income Tax Act (for short “the Act”)
Section 35-B of the Act
Section 5, Subsection 2 of the 1983 Income Tax Act
Section 256(1) of the Act

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Smart Summary

Commissioner of Income-Tax (Revenue) v. Bombay Burmah Trading Corporation Ltd. (Assessee)

Factual and Procedural Background

The respondent, an Indian resident company engaged in the export of tea, claimed a weighted deduction of ₹1,95,935 under Section 35-B of the Income-tax Act, 1961 for expenses incurred on exporting tea from East Africa to the United Kingdom during Assessment Years 1967-68 to 1970-71 and 1974-75. The Income-tax Officer disallowed the claim, holding that Section 35-B applies only to exports made directly from India. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal (ITAT) upheld that view.

At the ITAT’s instance, the following questions were referred to the Bombay High Court under Section 256(1): (1) the applicability of Section 40(c)(iii)/40(a)(v) to employees of the assessee’s overseas branches; and (2) the assessee’s entitlement to weighted deduction under Section 35-B for the East Africa–UK exports. The High Court answered Question 1 in favour of the assessee, relying on earlier precedent, and answered Question 2 in the assessee’s favour as well. The Revenue appealed to the Supreme Court in five civil appeals; the substantial issue before the Court concerned Question 2.

Legal Issues Presented

Whether Section 35-B of the Income-tax Act requires that exports be made directly from India (“ex-India”) for an assessee to claim weighted deduction.
Whether the expenditure of ₹1,95,935 incurred on exporting tea from East Africa to the United Kingdom qualifies under Section 35-B(1)(b)(viii) as “performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods.”
Whether, absent a specific factual finding by the ITAT on the nature of the expenditure, the High Court (and consequently the Supreme Court) could uphold the assessee’s claim without calling for a supplementary statement of facts.

Arguments of the Parties

Revenue’s Arguments

Although no longer disputing that Section 35-B does not mandate exports directly from India, the Revenue asserted that the assessee’s claim was specifically under sub-clause (viii) of Section 35-B(1)(b) and that the ITAT had made no factual finding establishing that the expenditure represented performance of services outside India linked to the export contract.
The High Court allegedly erred in making a fresh factual finding on this point; according to the Revenue, a supplementary statement from the ITAT was required before such a conclusion could be reached.

Assessee’s Arguments

The orders of the Income-tax Officer, Appellate Assistant Commissioner, Commissioner, and ITAT left no real dispute as to the character of the expenditure—namely, that it related to services performed outside India in connection with exporting tea to the United Kingdom.
Because the nature of the expenditure was evident on the record and was embedded in Question 2 itself, no supplementary statement from the ITAT was necessary.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Continental Construction Ltd., (1998) 2 SCC 632; 230 ITR 485	Section 40(c)(iii)/40(a)(v) does not apply to remuneration paid to employees in overseas branches.	Relied on to resolve Question 1 against the Revenue; established that expenditures on overseas employees are not hit by the disallowance provisions.
Continental Construction Ltd. v. CIT, (1990) 185 ITR 178 (Del)	Same principle as above; later affirmed by the Supreme Court.	Cited as part of the chain of authority confirming the inapplicability of Section 40(c)(iii)/40(a)(v) to overseas employees.
Bombay Burmah Trading Corpn. Ltd. v. CIT, (1984) 145 ITR 793 (Bom)	Earlier High Court decision involving the same assessee; held Section 40 provisions inapplicable to overseas branches.	The Bombay High Court followed this decision for Question 1; the Supreme Court noted it but resolved the issue on the basis of Continental Construction.

Court's Reasoning and Analysis

The Court first reproduced the relevant portions of Section 35-B(1) and identified five cumulative conditions for obtaining weighted deduction: (i) the assessee must be a domestic resident company; (ii) the expenditure must have been incurred between 29 February 1968 and 1 March 1983; (iii) it must not be capital or personal in nature; (iv) it may be incurred directly or jointly; and (v) it must fall within one of the sub-clauses of Section 35-B(1)(b).

On a “plain reading” of the statute, the Court concluded that nothing in Section 35-B requires the export to be “ex-India.” Therefore, the ITAT’s contrary interpretation was incorrect, and the High Court rightly rejected it. Counsel for the Revenue expressly did not dispute this construction.

The remaining dispute centred on whether the expenditure satisfied sub-clause (viii). After examining the orders of the Income-tax Officer, the appellate authorities, the ITAT, and the High Court—although the assessee’s detailed return was not on record—the Supreme Court found “no doubt” that the deduction was claimed for services performed outside India (East Africa and the United Kingdom) in connection with the export contract. The Court noted that this fact was “embodied in Question 2 itself,” undermining the Revenue’s contention that an additional factual finding was necessary.

Because the essential facts were already part of the record and the statutory conditions were met, the Court held that no supplementary statement from the ITAT was required. Consequently, the High Court’s decision allowing the weighted deduction stood unassailable.

Holding and Implications

The Supreme Court dismissed all five appeals with costs, thereby affirming the High Court’s order that the assessee is entitled to weighted deduction under Section 35-B for the expenditure incurred on exports routed through East Africa to the United Kingdom.

Implications: The judgment clarifies that Section 35-B relief does not hinge on the physical export of goods from Indian territory; what matters is that the assessee is a resident domestic entity and that the expenditure satisfies one of the enumerated categories in clause (b). The decision reinforces the principle that courts may decide eligibility for deduction where the relevant facts are already part of the stated questions, obviating the need for further factual remand. No new precedent was set regarding Section 40 issues, as that matter was already conclusively resolved by earlier Supreme Court authority.

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Commissioner Of Income Tax v. Bombay Burmah Trading Corporation .

Syed Shah Mohammed Quadri, J.— In these five appeals the parties are common; the Revenue is the appellant and the assessee is the respondent. CAs Nos. 2600-03 of 1994, which relate to Assessment Years 1967-68 to 1970-71, arise from the judgment and order of the Division Bench of the High Court of Judicature at Bombay in Income Tax Reference No. 242 of 1976 dated 12-12-1988. Following that judgment the Division Bench disposed of Income Tax Reference No. 10 of 1987 which pertains to Assessment Year 1974-75 on 30-7-1998 which is under challenge in Civil Appeal No. 3788 of 1999. The common substantial question of law, which arises in these appeals, is Question 2 noted below.

2. Briefly stated, the facts giving rise to these appeals are as follows:

The respondent assessee is an Indian resident company. It is carrying on the business of exporting tea. In the aforementioned assessment years it claimed weighted deduction under Section 35-B of the Income Tax Act (for short “the Act”) in respect of the expenditure of Rs 1,95,935 incurred on export of tea from East Africa to the United Kingdom. The claim was disallowed by the Income Tax Officer on the ground that Section 35-B would apply only if the exports were made from India. That view was upheld by the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal. Among others, the following two questions in Income Tax Reference No. 242 of 1976 and Question 2 in Income Tax Reference No. 10 of 1987 were referred to the High Court of Judicature at Bombay by the Income Tax Appellate Tribunal under Section 256(1) of the Act:

“(1) Whether on the facts and in the circumstances of the case, the provisions of Section 40(c)(iii)/40(a)(v) applied in the case of the employees of the assessee in its overseas branches?

(2) Whether on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction under Section 35-B in respect of the expenditure of Rs 1,95,935 incurred on export of tea from East Africa to the United Kingdom?”

3. The first question was answered in the negative i.e in favour of the assessee and against the Revenue following the judgment in the case of the respondent assessee for the earlier assessment years in Bombay Burmah Trading Corpn. Ltd. v. CIT (1984) 145 ITR 793 (Bom). It is conceded by the learned counsel for the parties that this question is covered against the Revenue by the judgment of this Court in CIT v. Continental Construction Ltd. (1998) 2 SCC 632, (1998) 230 ITR 485 affirming the judgment in Continental Construction Ltd. v. CIT (1990) 185 ITR 178 (Del).

4. Adverting to the second question, the High Court answered it in the affirmative i.e in favour of the assessee and against the Revenue. It will be apt to refer to Section 35-B of the Act, which is the subject-matter of debate in all the five appeals.

“35-B. 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, but before the 1st day of March, 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;

(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 ….;

***

(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;”

On a plain reading of the provision of sub-section (1), extracted above, it is clear that to claim the benefit of this section the following conditions have to be satisfied:

(i) the assessee must be a domestic company which is resident in India;

(ii) it must have incurred expenditure after 29-2-1968 but before 1-3-1983;

(iii) such expenditure should not be in the nature of capital expenditure or personal expenses of the assessee;

(iv) the expenditure might have been incurred either directly or in association with any other person; and

(v) the nature of the expenditure must answer the description referred to in any one of the sub-clauses of clause (b).

On these requirements being satisfied the assessee Company becomes entitled to the weighted deduction under Section 35-B. It is not necessary that the export should be directly ex-India (from India).

5. The Tribunal's reading of the section that the export should be ex-India is not supported by the language of the provision or any authority. The High Court has, therefore, rightly concluded that to avail the benefit of weighted deduction the provision does not require that the export should be ex-India. It must be observed in fairness to Mr M.L Verma, learned Senior Counsel appearing for the Revenue, that he does not seriously dispute this proposition. Once this position is accepted, the order under challenge has to be sustained.

6. However, what Mr Verma contends is that the respondent claims the expenditure under sub-clause (viii) for which there is no factual finding by the Tribunal. The High Court, submits Mr Verma, has gone wrong in recording a fresh finding — “the expenditure was incurred with regard to the performance of the service outside India i.e from East Africa to United Kingdom in connection with the execution of contract for supply of tea in the United Kingdom” — and on that basis upholding the claim of the respondent under Section 35-B, his further submission is that neither the High Court nor this Court can do so without calling for a supplementary statement from the Tribunal on this aspect of the fact.

7. Mr Ranjit Kumar, learned counsel appearing for the respondent assessee Company, invited our attention to the orders passed by the Income Tax Officer, the Commissioner and the Tribunal and contended that there was no dispute with regard to the nature of the expenditure and therefore Mr Verma's contention has to be rejected.

8. We have perused the orders of the Income Tax Officer, the Commissioner, the Appellate Assistant Commissioner and the Tribunal as also the order under appeal passed by the High Court. Though a copy of the return containing details of the expenditure claimed by the respondent under the above provision has not been placed on record, the orders of the departmental authorities as well as the Tribunal and of the High Court leave us in no doubt that the weighted deduction under Section 35-B was claimed in respect of the expenditure incurred with regard to the performance of the services outside India i.e in East Africa and the United Kingdom in connection with the execution of the contract for the supply of tea in the United Kingdom. Indeed, the said fact is embodied in Question 2 itself.

9. In view of the position pointed out above, we find no illegality in the orders under challenge in these appeals. The appeals are accordingly dismissed with costs.

Commissioner Of Income Tax v. Bombay Burmah Trading Corporation .

Commissioner of Income-Tax (Revenue) v. Bombay Burmah Trading Corporation Ltd. (Assessee)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Revenue’s Arguments

Assessee’s Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income Tax v. Bombay Burmah Trading Corporation .

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