V. Guruvaiah Naidu and Sons vs Commissioner of Income Tax

Thanikkachalam, J.—In pursuance of the direction given by this Court in TCP No. 278 of 1982, dt. 21st February, 1983, the Tribunal

referred the following two questions for the opinion of this Court under s. 256(2) of the IT Act, 1961, hereinafter referred to as the ''Act'' :

""Whether the Tribunal was right in law in holding that the assessee was not entitled to the weighted deduction under s. 35B(1)(b)(iii) of the IT

Act, 1961, in respect of the expenditure incurred by it on transport by way of freight charges of Rs. 2,86,635.39 and marine insurance of Rs.

44,843.80 ?

Whether the Tribunal was right in holding that there was clear authority in s. 35B(1)(b)(iii) for disallowing the claim of the assessee for weightage

and freight and insurance ?

The assessee is a registered firm doing business in export of tanned skins. It claimed weighted deduction on a number of items in the asst. yr.

1975-76. The claim was disallowed in respect of freight charges to the extent of Rs. 2,86,635.39 described as export expenses in the accounts

and marine insurance to the extent of Rs. 44,843.80. But the weighted deduction was allowed by the AAC on appeal on the basis of the decision

of the Tribunal in another case. Aggrieved, the Department filed an appeal before the Tribunal. It was pointed out before the Tribunal that in a Full

Bench decision, the Tribunal upheld the disallowance of weighted deduction in ITA Nos. 3255 and 3330 (Bom), 1976-77, dt. 17th June, 1978.

Certain observations of the Madras High Court in the case of Commissioner of Income Tax Vs. Kasturi Palayacat Co., were also relied upon to

suggest that the retrospective amendment made would also discourage allowance of weighted deduction on freight charges and marine insurance.

On considering the submissions made by the Department as well as the assessee, the Tribunal came to the conclusion that weighted deduction

cannot be allowed on freight and insurance in view of sub-cl. (iii) of cl. (b) of sub-s. (1) of s. 35B. The Full Bench decision of the Tribunal as well

as the observation of the High Court in Commissioner of Income Tax Vs. Kasturi Palayacat Co., support the Revenue''s contention. In the result,

the Departmental appeal was allowed.

Before us the learned counsel appearing for the assessee submitted that the Tribunal was not correct in disallowing weighted deduction on

freight charges an marine insurance. According to the learned counsel, this Court in the case of V. Guruviah Naidu and Sons Vs. Commissioner of

Income Tax, , held that weighted deduction under s. 35B(1)(b)(iii) is allowable on freight charges and marine insurance. It was therefore submitted

that the Tribunal ought to have granted weighted deduction in respect of freight charges and marine insurance. However, the learned standing

counsel appearing for the Department, relying upon various decisions of certain High Courts, contended that in view of the provisions contained in

s. 35B(1)(b)(iii), weighted deduction on freight charges and marine insurance cannot be allowed.

The decision on this issue depends upon the interpretation placed with regard to sub-cl. (iii) of cl. (b) of sub-s. 1(a) of s. 35B, which runs as

under :

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)"".

According to the decision rendered by this Court in V. Guruvaiah Naidu & Sons vs. CIT cited supra, cl. (b). Item (iii) of cl. (b) of s. 35B(1) is

divisible as (1) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in

connection therewith, and (2) 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 first part ""distribution, supply or provision outside India of such goods, services or facilities not being

expenditure incurred in India in connection therewith"" is separated by the disjunctive ""or"" from the second part ""expenditure (wherever incurred) on

the carriage of such goods to their destination outside India or on the insurance of such goods while in transit"". If the qualifying expression ""not

being expenditure incurred in India"" is imposed on the second part ""expenditure (wherever incurred) on he carriage of such goods to their

destination outside India or in the insurance of such goods while in transit"", the expression ""wherever incurred"" shall be of no purpose and will be

surplus. The most fitting meaning which these words appear to convey is that the expenditure incurred wholly or exclusively on distribution, supply

or provision outside of such goods, services or facilities should not be expenditure incurred in India and the expenditure on the carriage of goods to

their destination outside India or on the insurance of such goods while in transit need not necessarily to one not incurred in India. Any doubts,

however, that expenditure on distribution, supply or provision outside India of such goods, services or facilities can only be outside India are

removed by the qualifying expression ""not being expenditure incurred in India in connection therewith"", which expression was not originally there,

but has been retrospectively inserted by s. 8 of the Finance Act, 1970. The legislature, however, carefully divided the qualifying expressions and

while retrospectively inserting ""not being expenditure incurred in India in connection therewith"" to qualify ""expenditure on distribution, supply or

provision outside India"" to qualify ""expenditure on distribution, supply or provision outside India"", it separated"" expenditure on the carriage of such

goods to their destination outside India or on the insurance of such goods while in transit"" by clearly pronouncing ""expenditure wherever incurred"".

Further, according to the abovesaid decision, the Explanation appended to the section retrospectively by the Finance Act, 1973 has clearly

excluded the expenditure incurred on certain items by an assessee engaged in the business of operation of any ship or other vessel, aircraft, or

vehicle or carriage of or making arrangements for carriage of passengers, livestock, mail or goods and expenditure incurred on the provision of any

benefit, amenity or facility to the crew, passengers or livestock, provided it is connected with export. In the everextending trade and demands of

time, it is difficult to conceive that the transport cost on export of goods in India will not be available for deduction under s. 35B(1)(b)(iii) of the

Act. There are good reasons to read in the words of the statute its intention to cover the expenditure on transport of goods for export incurred in

India for the allowance under s. 35B(1)(b)(iii) of the Act. So far as insurance is concerned, all that is required is, that it should be insurance of the

goods while in transit. In any view, since the expenditure on transport and expenditure on insurance in transit are clubbed together, insurance

should receive the same treatment as the carriage of goods.

However, the learned standing counsel for the Department submitted that the words ""not being expenditure"" would qualify for both the clauses

contained in sub-cl. (iii) of cl. (b) of sub-s. (1) of s. 35B. In other words, the words ""not being"" should not confine only to the first part, viz.,

distribution, supply or provision outside India on such goods, services or facilities not being expenditure incurred in India in connection therewith"".

It was further submitted that the words ""not being expenditure"" would qualify the entire sentence occurred in between the brackets. It means that

weighted deduction is not permissible in respect of freight charges wherever incurred and the marine insurance are not eligible for weighted

deduction under s. 35B(1)(b)(iii) of the Act. In order to support this contention, reliance was placed upon Notes on cl. No. 8 in the Finance Bill,

1970, which runs as under :

Clause 8 seeks to amend s. 35B of the IT Act (relating to the grant of export markets development allowance ""retrospectively from the 1st April,

1968, i.e., the date from which that section was introduced in the IT Act. The amendment makes it clear that expenditure on the distribution,

supply or provision outside India of the goods, services or facilities dealt in or provided by the taxpayer in the course of his business (which is one

of the heads of expenditure specified in that section as qualifying for the grant of export markets development allowance) will not include any

expenditure incurred in India in connection therewith or expenditure on the carriage of the goods to their destination outside India or on the

insurance of the goods while in transit"". So also while explaining the amendment, which will take effect retrospectively from 1st April, 1968 (1970)

75 ITR 97 , it is stated as under :

Amendment of provision for grant of export markets development allowance so as to bring out the intention underlying the said provision

:

The Finance Act, 1968, introduced a new provision in the IT Act under which domestic companies and resident non-corporate taxpayers,

incurring expenditure under specified heads for development of export markets for Indian goods on a long-term basis, will be entitled to an export

markets development allowance in the computation of their taxable profits. This allowance consists of a weighted deduction in an amount equal to

1-1/3rd times the amount of the qualifying expenditure. One of the heads of expenditure specified in the relevant provision as qualifying for the

weighted deduction is that incurred on ''distribution, supply or provision outside India'' of the goods, services or facilities dealt in or provided by the

taxpayer in the course of his business. This provision is susceptible to the interpretation that expenditure incurred by an exporter on payment of

ocean freight, insurance, etc., in connection with sale of goods to a foreign purchaser on the c.i.f. basis, would qualify for the weighed deduction.

As this is not the intention underlying the provision, it is proposed to amend the relevant clause so as to make it clear that expenditure on

''distribution, supply or provision outside India'' of goods, services or facilities will not include 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. This amendment will take effect retrospectively from 1st April, 1968, from which date the relevant provision was introduced in the IT Act"".

Reliance was placed upon the decision of the Madhya Pradesh High Court in CIT vs. K. N. Oil Industries (1982) 134 ITR 651 : TC 15R.494

wherein while considering the provisions of s. 35B(1)(a)(b)(iii) of the IT Act, 1961, the Madhya Pradesh High Court held as under :

The words 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'' were inserted in cl. (b)(iii) of s. 35B(1) by the Finance Act, 1970,

w.e.f. 1st April, 1968. The first part of this clause which reads ""distribution, supply or provision outside India of such goods, services or facilities

deals with the expenditure which qualifies for grant of development allowance. The second part of the clause which starts with the words"" ""not

being"" and which was added by the Finance Act, 1970, deals with the expenditure which is not to be taken into account in granting the

development allowance. The second part of the clause, in our opinion, has to be read as ""not being expenditure incurred in India in connection

therewith, or not being expenditure (wherever incurred) on carriage of such goods to their destination outside India or on the insurance of such

goods while in transit''. The presence of a comma after the word ''facilities'' and the omission of a comma after the words ''in connection therewith'',

and the presence of the word ''or'' before the words ''expenditure (wherever incurred)'' supports this construction. Further, a reference to cl. (a) or

s. 35B(1) will show a similar style of drafting in the words ''not being in the nature of capital expenditure or personal expenses of the assessee''.

These words clearly mean not being in the nature of capital expenditure or not being in the nature of personal expenses of the assessee. Similar

interpretation is to be adopted of the words ''not being'' occurring in the second part of cl. (b)(iii). In our opinion, expenditure on the carriage of

goods to their destination outside India and on the insurance of the goods while in transit cannot be taken into account for the grant of weighted

deduction. This is how the clause has been read by the Madras High Court in CIT vs. Kasturi Palayacat Co. (supra) and by three leading

commentaries : Iyengar on Income tax, 6th Edn., Vol. 1, p. 861; Sundaram''s Law of Income tax, 11th Edn., Vol. 2, pp. 1162-1163 and

Chaturvedi and Pithisaria''s Income Tax Law, 2nd Edn., Vol. 1, pp. 653-654. The second part of cl. (b)(iii), as rightly stated by Sampath Iyengar,

excludes from the computation of export markets allowance the following :

(a) expenditure incurred in India in connection with the distribution, supply or provision of the goods, etc., outside India;

(b) expenditure wherever incurred for the carriage of the goods to their destination outside India; and,

(c) expenditure incurred to insure the goods while in transit.

Learned counsel for the assessee relied upon the observations in Aiyar''s Income Tax Act, 2nd Edn., p. 544. This does support the learned

counsel but for the reasons already stated by us, we are unable to agree with the meaning of the section given in this book"".

Reliance was also placed upon the decision of the Delhi High Court in Handicrafts & Handloom Export Corpn. vs. CIT (1982) 140 ITR 532 :

TC 15.443 wherein the Delhi High Court while considering the provisions of s. 35B(1)(b)(iii) held that the correct interpretation of sub-cl. (iii) of s.

35B(1)(b) is that it allows all expenditure on distribution, supply, etc., of goods outside India, except (1) expenditure incurred in India in

connection with supply, distribution or provision, and (ii) expenditure on carriage or transit insurance of such goods, wherever incurred. While

rendering this decision, the Delhi High Court also repelled the contention put forward by the learned counsel appearing for the assessee in line with

the decision rendered by this Court in V. Guruviah Naidu and Sons Vs. Commissioner of Income Tax, .

Reliance was also placed upon the decision of the Calcutta High Court in Bharat General and Textile Industries Ltd. Vs. Commissioner of

Income Tax, wherein the Calcutta High Court while considering the provisions of s. 35B(1)(b)(iii) of the Act, held as under :

The substitution of sub-cl. (iii) of s. 35B(1)(b) by the Finance Act, 1970, w.e.f. 1st April, 1968, i.e., the date from which s. 35B was introduced,

makes it clear that the expenditure on the distribution, supply or provision outside India of 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 s. 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 (whichever incurred) on the

carriage of the goods to their destination outside India or on the insurance of the goods while in transit. There are three prohibitions in sub-cl. (iii) of

s. 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 (e.g.

freight etc) and, thirdly, expenditure, whether incurred in India or outside India, on the insurance of such goods while in transit. Therefore, items

like clearing and forwarding charges paid by an assessee in Indian Ports on goods exported to foreign countries and expenditure on the carriage of

goods to their destination outside India or on the insurance of such goods while in transit are not entitled to weighted deduction under s. 35B(1)(b)

(iii). Therefore, the Tribunal was right in holding that the expenditure on freight, loading charges, insurance etc., incurred in connection with export

business were not entitled to weighted deduction"".

In order to come to the above conclusion, the Calcutta High Court also relied upon the decision of the Delhi High Court in Handicraft and

Handloom Export Corpn. of India vs. CIT (supra) and that of the V.D. Swami and Co. Pvt. Ltd. Vs. Commissioner of Income Tax, Tamil Nadu-

I, .

So also the Kerala High Court in K.E. Kesavan and Co. Vs. Commissioner of Income Tax, while considering the provisions of s. 35B(1)(b)

(iii) of the Act, held as under :

It, thereafter, follows that expenditure incurred on the carriage of goods to destination outside India and those incurred on the insurance of such

goods while in transit do not qualify for weighted deduction. According to the assessee, expenses incurred for carriage of goods after their landing

at the port of destination to places where they were sold or delivered, also qualify for weighted deduction. We agree with the Tribunal that this

claim is unsustainable. Goods are admittedly sold only as the assessee''s goods on consignment basis by the assessee''s foreign agents. When such

goods are carried from the part of destination to other places where they are ultimately sold and delivered, it would still be carriage of the

assessee''s goods to destination outside India and, therefore, expenses incurred would not qualify for weighted deduction. The expression

''destination'' in sub-cl. (iii) of cl. (b) of sub-s. (1) of s. 35B cannot mean the port of destination mentioned in the bills of lading. It would include the

ultimate place or places where the goods are taken and sold. In this view, the expenses incurred under the above items would be expenses

incurred in respect of distribution of goods outside India which would not qualify for weighted deduction"".

Likewise this Court in CIT vs. Kasturi Palayacat Co. (supra) while considering the provisions of s. 35B(1)(b)(iii), held that under s. 35B(1)(b)

(iii) only expenditure on the carriage of the goods to their destination outside India or on the insurance of such goods while in transit, is not entitled

to the allowance.

In the case of K. Vensimal and Sons Vs. Commissioner of Income Tax, this Court while considering the provisions of s. 35B(1)(b) of the IT

act, 1961, held as under :

Sec. 35B(1)(b) of the IT Act, 1961, sets out the details of the expenditure that would be eligible for weighted deduction under s. 35B(1)(a) and

sub-cl. (iii) thereof relates to expenditure incurred wholly and exclusively on distribution, supply or provision outside India of such goods, services

or facilities which means that if the expenditure had been incurred partly for export and partly for other activities in India, the entire expenditure

cannot get the benefit of weighted deduction and it is only the expenditure that is relatable to the actual export that will be entitled to the weighted

deduction. Similarly, expenditure like freight, insurance, packing, cooly charges etc., incurred in India in connection with export cannot be treated

as expenditure available for weighted deduction"".

Thus a plain reading of the decision rendered by this Court in V. Guruvaiah Naidu & Sons vs. CIT (supra) along with other decisions cited

(supra) would go to show that there are two conflicting views : one expressed by the decision of this Court in V. Guruviah Naidu and Sons Vs.

Commissioner of Income Tax, and another expressed by the various High Courts in the rest of the decisions cited supra (including this Court.)

Therefore it remains to be seen that two conflicting views were on this aspect one in V. Guruviah Naidu and Sons Vs. Commissioner of Income

Tax, and another expressed by the various High Courts in the rest of the decisions cited supra. Under such circumstances, in order to resolve this

conflict, we direct the Registry to place this matter before Our Lord, the Honourable Chief Justice, for constituting a Full Bench, so as to enable

the Full Bench to answer the question framed by us hereunder :

In view of the decisions of various High Courts including this Court cited supra, whether this Court was correct in rendering its decision in V.

Guruvaiah Naidu & Sons vs. CIT (cited supra) while interpreting the provisions of s. 35B(1)(b)(iii) of the IT Act, 1961 ?