Commissioner of Income Tax vs South India Corporation (Agencies) Ltd.

Janarthanam, J.—The assessee, South India Corporation (Agencies) Ltd., Madras, is a private limited company carrying on business in

various types of goods, such as, iron, hardware, pipes, electrical goods, etc. It also acts as clearing agents and shipping agents, besides owning an

engineering works.

The assessment year involved is 1978-79, for which the previous year ended on March 31, 1978.

In the course of the assessment proceedings, the assessee had- claimed weighted deduction amounting to Rs. 2,96,329, which was

subsequently revised by the assessee''s letter dated March 23, 1981, to Rs. 2,93,894, as allowable u/s 35B of the Income Tax Act, 1961 (Act

No. 43 of 1961--for short ""the Act""), in respect of its chartering business carried on by it in its offices at Madras, Bombay and Delhi.

The Income Tax Officer rejected such a claim made by the assessee for the assessment year in question holding that it will not fall under any of

the Sub-clauses (i) to (ix) of Clause (b) of Sub-section (1) of Section 35B of the Income Tax Act.

The Commissioner of Income Tax (Appeals) (""the CIT"") was of the view that the expenditure incurred by the assessee on its goodwill chartering

business may fall under any one of the nine sub-clauses of Clause (b) of Sub-section (1) of Section 35B.

On further appeal, the Tribunal also held the view that such expenditure may fall under anyone of the four sub-clauses, namely (i), (ii), (vi) and

(vii) of Clause (b) of Sub-section (1) of Section 35B of the Income Tax Act and directed the. Income Tax Officer to verify under which of those

four sub-clauses, the expenditure incurred by the assessee would fall and give the necessary relief.

The assessee also claimed, in the course of assessment proceedings, disallowance of interest claimed u/s 40A(8) of the Income Tax Act on net

interest.

The Income Tax Officer rejected such a claim and he held that if at all any disallowance is to be made u/s 40A(8), it should be on the gross

interest amount.

The Commissioner of Income Tax took a contrary view and held that for the purpose of disallowance u/s 40A(8), the same should be on the

basis of net interest.

The Tribunal, on further appeal, confirmed the order of the Commissioner of Income Tax on this aspect of the matter.

It is on these facts, the Tribunal, at the instance of the Commissioner of Income Tax, Central-II, Madras, made a reference on the questions of

law, as below, for the opinion of this court :

(1) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee is entitled to weighted

deduction u/s 35B of the Income Tax Act, 1961, in respect of the expenditure incurred by it on its goodwill chartering business in the assessment

year 1978-79 ?

(2) Whether the Appellate Tribunal was correct in law in holding that the interest received by the assessee should be deducted from the gross

interest paid by the assessee, while calculating the disallowance u/s 40A(8) of the Income Tax Act, 1961 ?

The arguments of Mr. R. Sivaraman, learned counsel representing Mr. C.V. Rajan, learned junior standing counsel for the Revenue, and of

Mrs, Asha Vijayaraghavan, of Subbaraya Aiyar, Padmanabhan and Ramamani, learned counsel appearing for the assessee, were heard.

Section 35B deals with export markets development allowance.

Clause (a) of Sub-section (1) of Section 35B prescribes :

Where an assessee, being a domestic company or a person (other than a company) who is a 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.

The expenditure referred to in Clause (a) is catalogued in Clause (b) and the expenditure so catalogued must be incurred wholly and

exclusively for the purposes mentioned jn any of the Sub-clauses (i) to (ix) of Clause (b).

The expenditure catalogued in the nine sub-clauses reflects as under :

(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.

Rule 6AA of the Income Tax Rules, 1962 (for short ""the I.T. Rules""), is relatable to prescribed activities for export markets development

allowance. The said rule reads as under :

For the purposes of Sub-clause (ix) of Clause (b) of Sub-section (1) of Section 35B, other activities for the promotion of the sale outside India of

the goods, services or facilities, which the assessee deals in or provides in the course of his business shall be as follows, namely :

(a) conducting of pre-investment surveys or the preparation of feasibility studies or project reports :

Provided that the pre-investment surveys are conducted or the feasibility studies are made or the project reports are prepared on the request in

writing made by the Central Government or a foreign party to whom such goods, services or facilities are likely to be sold or provided by the

assessee ;

(b) maintenance outside India of a warehouse for the promotion of the sale outside India of such goods ;

(c) maintenance of laboratory or other facilities for quality control or inspection of such goods :

Provided that in a case where only part of the sales is made outside India, the amount of expenditure incurred on the maintenance of such

laboratory or other facilities which shall qualify for deduction under Clause (a) of Sub-section (1) of Section 35B shall not exceed the amount

which bears the same proportion as the value of the turnover in respect of such exports bears to the turnover of the business in respect of which

the laboratory or other facilities are maintained ;

(d) purchase of foreign trade periodicals or journals related to the business of the assessee ;

(e) litigation outside India for the purposes of the protection of the business interests of the assessee or of trading activities relating to the goods,

services or facilities which the assessee deals in or provides in the course of his business.

There is no pale of controversy that the assessee-company, in the course of its business of chartering cargo to the foreign shippers has incurred

expenditure on its own staff and maintenance of offices at Madras, Bombay and Delhi and that sort of an expenditure was sought to be claimed as

a weighted deduction u/s 35B of the Income Tax Act.

This sort of an expenditure as alleged to have been incurred by the assessee-company, can, by no stretch of imagination, be stated to fall under

any one of the sub-clauses of Clause (b) of Sub-section (1) of Section 35(B) of the Income Tax Act, if a cursory glance or glimpse or look at the

aforesaid various sub-clauses or Clauses (a) to (e) of Rule 6AA of the Income Tax Rules, 1962, is made.

To put it aptly and pithily, we may say, the nature and character of the expenditure incurred by the assessee is such, as is not falling under any

one of the nine sub-clauses of Clause (b) of Sub-section (1) of Section 35B or any of the Clauses (a) to (e) of Rule 6AA of the Income Tax Rules.

At this juncture, we may profitably refer to what the Supreme Court said in two recent decisions, as relatable to the claim for weighted

deduction u/s 35B of the Income Tax Act

In Commissioner of Income Tax, Delhi Vs. Stepwell Industries Ltd. and etc. etc., , their Lordships said that when a claim for weighted

deduction is made, it is for the assessee to satisfy the Income Tax Officer that the expenditure falls under any of the sub-clauses of Clause (b) of

Section 35B(1) of the Income Tax Act. The onus is on the assessee to prove that he is entitled to weighted deduction allowed u/s 35B. 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(1). 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.

In Commissioner of Income Tax (CNTL), Ludhiana Vs. Hero Cycles Pvt. Ltd., Ludhiana, their Lordships of the Supreme Court said that

expenses can be allowed u/s 35B of the Income Tax Act, only if they are wholly and exclusively incurred for any of the purposes mentioned in the

sub-clauses of Section 35B(1)(b). The section is quite clear and categorical. There is no way that any other expenditure can be given weighted

deduction, u/s 35B. It is the asses-see''s duty to prove the facts which will bring the case within any of these sub-clauses. Unless that is done, the

assessee will not be entitled to get this deduction. The Tribunal has also to give a finding as to the entitlement of the assessee with reference to the

particular sub-clause of Section 35B(1)(b). The facts have to be found out and the law has to be applied to those facts.

What the apex court said, as above, in the two decisions, squarely app-lies to the facts of the instant case, in the sense of the assessee-

company not discharging the onus sliding on its shoulders of proving the factual matrix relatable to a particular specified expenditure falling under

any one of the Sub-clauses (i) to (ix) of Clause (b) of Sub-section (1) of Section 35B of the Income Tax Act or of any of the Clauses (a) to (e) of

Rule 6AA of the Income Tax Rules.

We may also state, by way of reiteration, for the sake of emphasis, that the character of the expenditure incurred by the assessee, as already

stated, would indicate, in a crystal clear fashion, that such sort of an expenditure is not at all falling under any one of the nine sub-clauses of Clause

(b) of Sub-section (1) of Section 35B of the Income Tax Act or any one of Clauses (a) to (e) of Rule 6AA of the Income Tax Rules.

For the reasons, as above, we are of the view that the Appellate Tribunal was not right in law in holding that the assessee is entitled to

weighted deduction u/s 35B of the Income Tax Act in respect of the expenditure incurred by it on its goodwill chartering business in the assessment

year 1978-79 and we answer this question accordingly.

Question No. (2) as framed, we rather feel, is not reflecting the view, as held by the Tribunal. The Tribunal''s view is reflected in the following

terms :

In our view, it stands to reason, justice and fair play that both the accounts should be considered together and only- the net interest payment

should be considered for purposes of disallowance u/s 40A(8) of the Act.

Such being the case, question No. (2), as framed, requires to be re-framed and the reframed question reads as under :

Whether the Appellate Tribunal was correct in law in holding that the net interest payment alone should be considered for the purposes of

calculating disallowance u/s 40A(8) of the Income Tax Act ?

Section 40A(8) of the Income Tax Act provides that where the assessee, being a company (other than a banking company or a financial

company), incurs any expenditure by way of interest in respect of any deposit received by it, fifteen per cent. of such expenditure shall not be

allowed a.s deduction.

The moot question or issue covered by question No. 2 is relatable to interpretation of the expression or phraseology, ""incurs any expenditure

by way of interest"", Whether the term ""interest"" referred to therein is relatable to ""net interest"" or ""gross interest"" is the question, before ever fifteen

per cent. deduction is not to be allowed.

It is not as if such a question did not arise for consideration before and the plain fact is that such a question did arise for consideration, before a

Division Bench of this court in the case of Andhra Prabha (P.) Ltd. Vs. Commissioner of Income Tax, , wherein a Division Bench of this court said

that there is no scope for taking into account the interest income of the assessee and setting off the same against the expenditure by way of interest

before applying Section 40A(8). This is because, the section itself does not use the word ""net interest"". The assessee is not entitled to refer to the

net expenditure after setting off the interest income.

While so holding, the Division Bench distinguished the decision in Keshavji Ravji and Co. v. CIT : [1990]183ITR1(SC) .

It is worthwhile to extract the weighty observations as relatable to the interpretation of the statutory language of the Supreme Court in the case

of Keshavji Ravji and Co. : [1990]183ITR1(SC) and it reads as under (head-note) :

As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes

impermissible. The supposed intention of the Legislature cannot then be appealed to to whittle down the statutory language which is otherwise

unambiguous. If the intendment is not in the words, it is nowhere else. The need for interpretation arises when the words used in the statute are, on

their own terms, ambivalent and do not manifest the intention of the Legislature.

For the reasons, as above, we are of the view that the Appellate Tribunal is not correct in law in holding that the net interest payment alone

should be considered for the purposes of calculating disallowance u/s 40A(8) of the Income Tax Act. The question is answered accordingly.

This tax case (reference) is thus disposed of. There shall, however, be no order as to costs, on the facts and in the circumstances of the case.