Commissioner of Income Tax vs Indo Carpet Factory

B.P. Saraf, C.J.—By this reference u/s 256(1) of the Income Tax Act, 1961 (""the Act""), the Income Tax Appellate Tribunal, Amritsar

Bench, Amritsar (""the Tribunal""), has referred the following two questions of law to this court for opinion at the instance of the Revenue :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that the livability and the quantum of interest

charged under Sections 139(8) and 217 of the Income Tax Act can be challenged by the assessee in appeal filed u/s 246(1)(c) of the Act ?

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding in the manner it has done that

weighted deduction was allowable on :

(1) establishment expenditure;

(2) rent, rates and taxes expenditure ;

(3) stationery and printing expenditure, postage, telegram, telephone and telex expenditure ;

(4) export sale promotion expenditure ; and

(5) commission ?

This reference pertains to the assessment year 1978-79. The assessee is a registered firm engaged in the business of manufacture, purchase and

sale of carpets. The assessee also exports carpets outside the country. The head office of the assessee is at Srinagar. It has also a branch at Delhi.

By this reference the Tribunal has referred two questions of law to this court for opinion. The controversy in the first question pertains to the right

of appeal u/s 246(l)(c) of the Act against charge of interest u/s 139(8) and Section 217 of the Act. The Tribunal has held that the assessee can also

challenge the leviability and quantum of interest charged u/s 139(8) and Section 217 of the Act. Aggrieved by the decision of the Tribunal, the

Revenue applied for reference of question No. 1 to this court for opinion which the Tribunal has done. The controversy in the second question

pertains to the allowability of weighted deduction in respect of certain items of expenditure. The Tribunal has allowed weighted deduction to the

assessee in respect of the following items of expenditure :

(1) establishment expenditure ;

(2) rent, rates and taxes expenditure ;

(3) stationery and printing expenditure, postage, telegram, telephone and telex expenditure ;

(4) export sale promotion expenditure ; and

(5) commission.

The grievance of the Revenue is that the Tribunal could not have allowed weighted deduction in respect of the above items of expenditure

without specifying as to under which Sub-clauses of clause (b) of Section (1) of Section 35B of the Act the expenditure in question would be

covered and without having any relevant material to show that the expenditure under consideration did fall under any of those Sub-clauses.

So far as the first question is concerned, the controversy raised therein now stands concluded by the ratio of the decision of the Supreme Court

in Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income Tax, . In that case, the question before the Supreme Court was

whether orders levying interest under Sub-section (8) of Section 139 and u/s 215 are appealable u/s 246 of the Income Tax Act, 1961. The

Supreme Court held (page 966) :

Clause (c) of Section 246 provides an appeal against an order where the assessee denies his liability to be assessed under the Act or against any

assessment under Sub-section (3) of Section 143 or Section 144, where the assessee objects to the amount of income assessed or to the amount

of tax determined or to the amount of loss computed or to the status under which he is assessed. Inasmuch as the levy of interest is a part of the

process of assessment, it is open to an assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy

at all.

The ratio of the above decision would also apply to appeal against levy of interest u/s 217 of the Act.

We are supported in our above conclusion about the maintainability of appeal against levy of interest u/s 217 of the Act, by the decision of the

Bombay High Court in Fort Properties Pvt. Ltd. Vs. Commissioner of Income Tax, . In that case also, the controversy before the court was

whether the Appellate Assistant Commissioner was justified in entertaining the ground against the levy of interest u/s 217 of the Act. The contention

of the assessee was that no advance tax being payable by the assessee on capital gains, the dispute regarding levy of interest u/s 217 for non-

payment of the same was not a dispute in regard to the quantum of interest but a challenge to the levy of interest u/s 217 of the Act. The High

Court held (page 256) :

. . . the decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income Tax, will apply and the

appeal will be maintainable. It will be open to the assessee to dispute the levy of interest in appeal subject to the limits laid down by the Supreme

Court in the above decision.

In view of the above we are of the opinion that levy of interest being a part of the process of assessment, it is open to the assessee to dispute the

levy in an appeal u/s 246(l)(c) of the Act provided he limits himself to the ground that he is not liable to the levy at all. Question No. 1 is answered

accordingly.

The controversy in the second question pertains to allowance of weighted deduction u/s 35B of the Act in respect of various items of

expenditure. The grievance of the Revenue is that there is nothing in the order of the Tribunal to show under which Sub-clauses of clause (b) of

Section 35B(1) of the Act, according to the Tribunal, the expenditure in respect of which weighted deduction has been allowed, is covered nor is

there any material to show that the expenditure would fall under any of the Sub-clauses of Clause (b) of Section 35B(1). Learned counsel for the

Revenue submits that in such circumstances allowance of weighted deduction in respect of the various items of expenditure cannot be sustained.

We have given our careful consideration to the above submission of learned counsel for the Revenue and perused the provisions of Section 35B

of the Act. It is clear from a plain reading of the above Section that weighted deduction is permissible only if the expenditure is laid out wholly and

exclusively for the purposes mentioned in Clause (b) of Section 35B(1). It is the assessee's duty to prove facts, which will bring the case within any

of the sub-clauses of Clause (b). In other words, the onus is on the assessee to prove that he is entitled to weighted deduction. Unless that is done,

the assessee will not be entitled to get this deduction.

This legal position has been well-settled now by the decisions of the Supreme Court in Commissioner of Income Tax, Delhi Vs. Stepwell

Industries Ltd. and etc. etc., and Commissioner of Income Tax (CNTL), Ludhiana Vs. Hero Cycles Pvt. Ltd., Ludhiana, .

In Commissioner of Income Tax, Delhi Vs. Stepwell Industries Ltd. and etc. etc., , the controversy before the Supreme Court was whether the

Tribunal was justified in allowing weighted deduction in respect of various items of expenditure. The Supreme Court interpreted Section 35B of the

Act and held (at page 175) :

In order to get this deduction, the assessee will have to prove that the expenditure was incurred during the previous year wholly and exclusively

for the purposes set out in Clause (b) of Section 35B. There cannot be any blanket allowance of the expenditure nor can there be any blanket

disallowance. Every case has to be discussed specifically and the expenditure must be found to be of the nature mentioned in any one of the Sub-

clauses. If the expenditure does not fall in any of these categories, it cannot be allowed as a deduction. Some of the sub-clauses provide that if the

expenditure is incurred in India, it cannot be allowed but in some of the sub-clauses this requirement is not there. In such cases, the expenditure

may or may not be incurred in India. Every case will have to be examined in the light of the provisions of the sub-clauses and the facts proved by

the assessee.

The Supreme Court considered the facts of that case in the light of the legal position set out above and observed (at page 177) :

It appears that the Tribunal did not examine the claim of the asses-see by reference to any of the sub-clauses of Section 35B(1)(b). No

expenditure can be allowed u/s 35B generally. The assessee must be able to establish the facts to prove that the expenditure falls within the ambit

of Sub-clauses (i) to (ix) of clause (b) of Section 35B(1). This has not been done ...

In view of the above finding, the Supreme Court set aside the order of the High Court as also the Tribunal and remanded the case back to the

Tribunal with the following direction (at page 177) :

We are of the view that the appellate order of the Tribunal has to be set aside. We set aside the order of the High Court as also the appellate

order of the Tribunal and remand the case back to the Tribunal. The assessee will have an opportunity of proving the nature of the expenditure and

establishing that the expenditure falls within any one of the Sub-clauses of Section 35B(1)(b). It has to be remembered that the onus is on the

assessee to establish the facts to obtain the deduction claimed. The appeal is allowed with the above observations. There will be no order as to

costs.

The legal position in regard to the allowability of weighted deduction u/s 35B of the Act has been reiterated by the Supreme Court in

Commissioner of Income Tax (CNTL), Ludhiana Vs. Hero Cycles Pvt. Ltd., Ludhiana, in the following words (at page 468):

The deduction is permissible if the expenditure is laid out wholly and exclusively for the purposes mentioned in Clause (b) of Section 35B(1). It is

for the assessee to prove that the entire expenditure involved was exclusively for the purposes mentioned in Clause (b) of Section 35B(1). The

Tribunal has also to give a finding as to the entitlement of the assessee with reference to the particulars of Clause (b) of Section 35B(1). The facts

have to be found out and the law has to be applied to those facts.

On a perusal of the facts of the case before it, the Supreme Court observed that the Tribunal was unmindful of the various sub-clauses of

Section 35B(1)(b) and had allowed the deduction without verifying or examining the sub-clauses under which the deduction claimed by the

assessee could be allowed. The Supreme Court, therefore, set aside the order of the Tribunal and sent the matter back to the Tribunal to dispose

of the same after examining the facts afresh.

We have examined the order of the Tribunal in the light of the law laid down by the Supreme Court. We find that the Tribunal has allowed the

deduction without verifying or examining the sub-clauses under which it could be allowed. There is no material on record to show that any of the

expenditure in respect of which weighted deduction has been allowed fall under any Sub-clauses of Clause (b) of Section 35B(1) of the Act. In

that view of the matter, we set aside the order of the Tribunal and remand the matter back to the Tribunal for re-examination of the case in the light

of the law laid down above.

For the foregoing reasons question No. 2 is answered in the negative, i.e., in favour of the Revenue and against the assessee.

This reference is disposed of accordingly with no order as to costs.