Commissioner of Income Tax vs National Palayacot Co.

R. Jayasimha Babu, J.—The questions of law referred to us are as follows:

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the expenses relating to the execution of contracts already secured in prior periods abroad constituted expenses incurred on the maintenance of office abroad and entitled to weighted deduction u/s 35B of the Act ?

Whether the Appellate Tribunal was correct in law in holding that the assessee was entitled to weighted deduction u/s 35B on expenses such as surtax, customs duty and sales tax incurred in respect of foreign offices ?

Whether the Appellate Tribunal was correct in holding that the weighted deduction u/s 35B should be allowed on expenses to maintain a foreign office even though such expenses were incurred in India ?"

Except question No. 1 all others are required to be answered in favour of the Revenue and against the assessee.

Question No. 1 does not arise from the order of the Tribunal. Hence, it is returned unanswered.

The Tribunal has held that the assessee is entitled to weighted deduction in respect of customs duty and sales tax incurred in respect of its foreign office. The Supreme Court in the case of Commissioner of Income Tax, Delhi Vs. Stepwell Industries Ltd. and etc. etc., held that the customs duty cannot be allowed to be treated as an item of expenditure for the purpose of allowing weighted deduction u/s 35B and the same reasoning would apply to sales tax also, which is a statutory liability.

The transaction was an internal transaction between the petitioner and its foreign office. Whether the Indian office or the foreign branch paid the amounts is material. The second question is, therefore, answered in favour of the Revenue.

The Tribunal has held that the assessee is entitled to weighted deduction on the expenses incurred in India for maintaining a foreign office. The relevant provision, namely, Section 35B(1)(b)(iv) of the Income Tax Act, 1961, refers only to the maintenance outside India of a branch or office. The emphasis is on the branch or office outside India. The expenses incurred should be for the maintenance of that office which can only be the expenses incurred outside India of that office. The Tribunal has erred in allowing expenses in India as qualifying for weighted deduction u/s 35B(1)(b)(iv) of the Act. The third question is, therefore, answered in favour of the Revenue and against the assessee.