The
Commissioner of Income Tax, Ludhiana Vs.
M/S Hero Cycles Pvt. Ltd. Ludhiana [1997] INSC 690 (28 August 1997)
SUHAS
C. SEN, S. SAGHIR AHMAD
ACT:
HEADNOTE:
Present:
Hon'ble
Mr. Justice Suhas C. Sen Hon'ble Mr. Justice S. Saghir Ahmad] T.L.V. Iyer, Sr. Adv.,
Ms. Renu George, S. Rajappa, C. Radha Krishna, Ms. Janaki Ramachandran. Ms. Meenakshi
Arora, A.T.M. Sampat Adcs. with him for the appellant in C.A.No. 4671/88,
4043/84,5775/95, 5620-21/95 and 2230-31/95.
Uma Datta
and B. Kanta Rao, Advs. for the Respondents.
O R D
E R The following Order of the Court was delivered:
With
C.A.Nos.7666, 7667, 7965/96, 1494-96/88, 556/90, 5755/95. 4043/84, 7763/95,
7045/95, 12419/96, 5620-21/95, 6942/95, 387/85, 786-88, 7847, 2230-31, 3120/95.
6085/97,
6087-6033/97, 606/97, 6089-91/97, 6-92/97, 6093/97, 6095/97, 6094/97 Civil
Appeals Nos. 6085/97, 6087-6083/97, 6086/97, 6089- 91/97, 6092/97, 6093/97,
6095, 6094/97 of 1997 (Arising out of SLP (C) Nos. 7485/86, 4588-89/89. 9027,
10982/87, 4663-65/89, 8620, 10949/95, 4671/88 and 9065/94) O R D E R Civil
Appeal Nos. 7665/96 The following question of law was referred by the Tribunal
to the High Court:
"Whether
on the facts and in the circumstances of the case on a proper interpretation of
Section 35-B of the income Tax Act, 1961, the Appellate Tribunal was right in
law in allowing assessee's claim for weighted deduction in respect of
"Export Sales Commission" "E.C.G.C. Charges" and
"Foreign Dealers Visiting Expenses"? The High Court declined to call
for a reference under Section 256(2) of the Income Tax Act, 1961. It appears
that the claim for deduction under Section 358 was not originally allowed at
all. Thereafter, on an assesee's application an order was passed by the
Commissioner of Income Tax (Appeals) Jalandhar, in which he directed certain
allowances to be given on proportionate basis after verification of the assessee's
claim under Section 358.
The
Income Tax Officer thereafter entertained assessee's prayer for rectification
of the order and allowed the assessee's claim in respect of matters like Coloured
Albums, Export staff travelling expenses, Export sales commission, E.c.G.C.,
foreign dealers visiting expenses.
Rectification
under Section 154 can only be made when glaring mistake of fact or law has been
committed by the officer passing the order becomes apparent from the record.
Rectification
is not possible if the question is debatable.
Moreover,
the point which was not examined on fact or in law cannot be dealt as mistake
apparent on the record. The dispute raised a mixed question of fact and law.
The
Tribunal was in error in upholding the assessee's claim for weighted
deductions.
There
is no point in sending the matter to the High Court to deal with the question
raised at this stage. We treat the question raised at this stage. We treat the
question as referred to this Court and answer the question in the negative and
in favour of The Revenue. There will be no order as to costs. The appeal is
allowed.
C.A.
Nos. 7666/7667/96, SPL(C) Nos.7485/86, 4588-89/89 Leave granted in Special
Leave Petitions.
The
following questions of law was sought to be raised by the Revenue from the
order of the Tribunal for reference to the High Court:
"(i)
Whether on a proper interpretation of the agreements between the S.T.C. and its
subsidiary HHEC, the Appellate Tribunal is right in law in holding that one per
cent margin money earned by the HHEC under its agreement of Export Business
Association with the assessee is in the nature of expenditure as contemplated
by Section 35B and not the income of the HHEC on its own entitlement on the
aforesaid agreements as held by the I.T.O? (ii) Whether on the facts and in the
circumstances of the case, the Appellate Tribunal is right in allowing weighted
deduction under Section 35B of the Act to the total payment of Rs. 1,87,476/-
to the HHEC without any bifurcation? (iii) Whether on a true interpretation on
Section 35B of the Act, the services rendered by the HHEC were to be related itemwise
to the various sub-clauses of Clause (b) of sub-section (1) so as to entitle
the assessee to weighted deduction in respect of them? The Commissioner of
Income Tax (Appeals) as well as the Tribunal allowed this claim of the assessee
without examining the facts of this case. The deduction is permissible if the
expenditure is laid out wholly and exclusively for the purpose mentioned in
sub-clause (b) of Section 35B. It is for the assessee to prove that the entire
expenditure involved was exclusively for the purposes mentioned in sub-clause
(b) of Section 35B. The Tribunal has also to give a finding as to the
entitlement of the assessee with reference to the particular of sub-clause (b)
of Section 35B. The facts have to be found out and the law has to be applied to
those facts. It appears that generally a certain percentage of the claim has
been allowed under Section 35B without adverting to any of the sub-clauses of
(b) of Section 35B. Under those circumstances, we think it fit to set aside the
order of the Tribunal and send the matter back to the Tribunal to dispose it of
after examining the facts afresh. The appeals are allowed. The order of the
High Court as well as the appellate order of the Tribunal is set aside. There
will be no order as to costs.
Civil
Appeal No. 7965/96 The amount involved is Rs. 10,000/-only and the case being
23 year old we do not feel inclined to go into the question raised. However, we
make it clear that we are not expressing any opinion on the correctness of the
decision referred by the Tribunal. The appeal is dismissed. There will be no
order as to costs.
SLP(C)
No. 9027/87 The Special Leave Petition is dismissed.
SLP
(C) No.10982/97 Leave granted In this case large number of questions were
sought to be raised. We shall deal with only the question relating to Section
35B. It appears that the Tribunal was totally unmindful of the various
sub-clauses of Section 35B(b).
Expenses
can only be allowed if they are wholly and exclusively incurred for any of the
purposes mentioned in these sub-clauses. The section is quite clear and
categorical. There is no way that any other Section 35B.
It is
the assessee's duly to prove acts which will bring the case within any of these
sb-clauses. Unless that is done the assessee will not be entitled to get this
deduction.
The
Tribunal has allowed the deduction without verifying or examining the
sub-clauses under which this could be allowed.
We
have passed similar orders in a large number of cases but in this case on
behalf of the assessee it has been contended that there is a circular issued by
Central Board of Direct Taxes, New Delhi
which should conclude the matter.
A copy
of the so-called circular dated 9th April, 1981/13th April, 1981 has been handed over in Court. It does not
appear that the document handed over in Court is a copy of Circular at all. It
is a letter written to one Shri D'Souza with reference to a letter written by
his predecessor.
Moreover,
it is well-settled that circulars can bind the Income Tax Officer but will not
bind the appellate authority or the Tribunal or the Court or even the assessee.
There is nothing in the alleged circular which supports the contention of the assessee.
It merely says that each case has to be examined and the issue would be
basically a find of fact. The assessee had not made his claim before the Income
Tax Officer by relying on this Circular.
We set
aside the order of the High Court. We also set aside the appellate order of the
Tribunal. The Tribunal must examine the question of Section 35B with reference
to the various sub-sections of clause (b) of that section. The Tribunal will
examine the facts of each claim made by the assessee and find out whether the
claim can be allowed having regard to the facts and also the sub-sections of
Section 35B(b). The case is sent back to the Tribunal for fresh disposal in the
light of the above direction. The assessee must pay cost of this appeal
assessed at Rs. 5,000/- SLP (C) Nos. 4663-645/89 Leave granted.
The
claim of the assessee is in respect of relief under Section 35B in respect of
certain expenditures incurred by the assessee. The order under challenge passed
by the High Court is set aside. The appellate order of the Tribunal is also set
aside. The matter should go back to the Tribunal.
The
Tribunal will examine the case. The assessee must prove before the Tribunal the
facts in respect of his claim. The Tribunal will examine the facts and consider
the various sub-clauses, sub-sections (b) of section 35B and will decide
whether the assessee is entitled to exemption in any of these sub-clauses in
respect of expenses incurred. The appeals are disposed of. There will be no
order as to costs.
SLP
(C) No. 8620/95 Leave granted.
In
this case two questions are involved. So far as Section 40C is concerned, the
appeal will have to be dismissed. So far as Section 35B is concerned, the
weighted deduction must be examined by the Tribunal on the basis of the facts
proved by the assessee and having reference to the various sub-clauses of
clause (b) of Section 35B. If the assessee's case comes specifically within any
of these sub- clauses it has to be allowed otherwise not. The order of the High
Court is wet otherwise not. The order of the High Court is set aside. The case
is sent back to the Tribunal for re-examination of the case in the light of the
above direction. No order as to costs.
SLP
(C) No. 10949/95 Leave granted.
This
case is only concerned with Section 35B. The weighted deduction must be
examined by the Tribunal on the basis of the facts proved by the assessee and
having reference to the various sub-clauses of clause (b) of Section 35B. If
the assessee's case comes specifically within any of these sub-clauses it has
to be allowed otherwise not. The order of the High Court is set aside.
The
appellate order of the Tribunal is also set aside. The case sent back to the
Tribunal for re-examination of the case in the light of the above direction. No
order as to costs.
SLP
(C) No.9065/94 & C.A.Nos. 1494-96/88 and 5567/90 Leave granted in Special
Leave Petition.
The
question in this case relates to scope o Section 44 of the Income Tax Act,
1961. The Section states:
"Sec.
44. Notwithstanding anything to the contrary contained in the provisions of
this Act relating to the computation of income chargeable under the head
"Interest on securities", "income from house property",
"Capital gains" or "Income from other sources", or in
Section 199 or in Sections 28 to 43B, the profits and gains of any business of
insurance, including any such business carried on by a mutual insurance company
or by a co-operative society, shall be computed in accordance with the rules
contained in the First Schedule." The plain reading of the section will go
to show that notwithstanding the other provisions of the Income Tax Act, in
particular provisions of Sections 28 to 43B, the profits and gains of any
business of insurance shall be computed in accordance with the rules contained
in the First Schedule.
This
is a non-obstante clause and rules have been specially made for computation of
profits and gains of insurance business. The rules are contained in the First
Schedule of the Act. There is a rule for computation of profits of Life
Insurance Business (Rule 2). Another rule has been framed (Rule 5) for
computation of profits and gains of other insurance business. This means that
profits and gains of other insurance business. This means that profits and
gains of insurance business (whether the Life Insurance or General insurance)
can only be assessed in the manner laid down in the rules contained in the
First Schedule and not in any other manner.
Ms. Ramachandran,
learned counsel appearing for the assessee, has contended that Section 44
speaks of "Section 28 to Section 43B". It does not specifically
mention Section 35B. Therefore, the assessee was entitled to the benefit of
Section 35B. Section 35B was inserted in the Act by way of amendment. When the
original Act was passed Section 35B was not in the Statute Book. The contention
of Ms. Ramachandran is that when Section 35B was inserted, it was not
specifically mentioned that Section 35B will not apply to Insurance Company.
Therefore, the benefit of section 35B will have to be given to the Insurance
Company.
We are
unable to accept this contention for two reasons. First, when the Act speaks of
Section 28 to Section 43B then each one of the sections from Section 28 to
Section 43B will be included. The newly inserted Section 35B was not
specifically mentioned because it was not necessary to do so just as it was not
necessary to specifically mention Section 35B in Section 29 which lays down
that computation of profits and gains of business or profession shall be
computed in accordance with the provisions contained in Section 30 to 43C.
Moreover,
when the Act specifically says that profits and gains of insurance business
shall be computed in accordance with the rules contained in the First Schedule
then such computation has to be made according to the rule and not any other
rule. We are unable to accept the contention of Ms. Ramachandran that the
benefit of Section 35B should also be given to any insurance Company.
There
are certain other questions, apart from Section 35B, involved in this case
arising out of the decision of the High Court. Those points are not before us.
We do not express any opinion on them. The argument was confined only to
Section 35B.
In
that view of the matter, we uphold the order of the High Court and dismiss
these appeals. There will be no order as to costs.
S.L.P.
No. 4671/88 & C.A.Nos. 5755/95 and 4043/84 Leave granted in S.L.P.
In
view of the decision of this Court in Commissioner of Income Tax, Tamil Nadu
vs. M/s National Palayacot Company, Kurinjipadi - [Civil Appeal Nos. 16-17 of
1985], these appeals are dismissed. There will be no order as to costs.
C.A.No.7763/95
The following two questions of law have been sought to be raised in this Court:
1.
"Whether on the facts and in the circumstances of the case, the ITAT is
right in law in allowing weighted deduction under section 35B of the I.T. Act
on car maintenance at Rs. 49,939/-, Motor Cycle at Rs. 3697/- and Generator
Expenses at Rs. 4639/- without linking the expenditure to one or more the
activities referred to in various sub-clauses of 35B(1)(b) and also ignoring
the prohibition contained in sub-clause (iii) ibid regarding expenditure on
distribution, supply or provision outside India of Goods etc.
Incurred
after 31.3.1978?
2.
Whether on the facts and in the circumstances of the case, the ITAT is right in
law in holding that the assessee was entitled to weighted deduction under
section 35B on entire expenditure of Rs.4,24,773/- and 50% of the expenditure
on various items, aggregating to Rs.4,24.773/- and 50% of the expenditure on
various items, aggregating to Rs.9,89,9509/- without linking the expenditure to
one or more of the activities referred to in various sub-clauses of Section
35-B (1)(b) and also ignoring the prohibition contained on sub-clause (iii)
ibid regarding expenditure on distribution, supply or provision outside India
of goods etc. incurred after 31.3.1978?" The High Court dismissed the
reference application under Section 256 (2).
We are
of the opinion that the Tribunal cannot allow any weighted deduction without
linking the expenditure to one or more of the activities referred to in various
sub- clauses of Section 35(1)(b). Therefore, in our opinion, the question must
be answered in the negative and in favour of the Revenue. The Tribunal will now
decide the case afresh after examining the nature of the expenditure and the
purposes for which it was spent having regard to the various sub-clauses of
Section 35B (1)(b). The order of the High Court is set aside. The appellate
order of the Tribunal is also set aside. The appeal is allowed. There will be
no order as to costs.
C.A.No.7045/95
The dispute in this case relates to an amount of Rs.1,52,694/- (Spindle Fee)
paid to the Indian Cotton Mills Federation for Export Promotion Funds. The
contribution to the Indian Cotton Mills Federation does not fall within any of
the sub-clauses of Section 35B(b). The contribution may be for the promotion of
export generally but this sort of contribution to a general body or Chamber of
Commerce cannot qualify for weighted deduction. The appeal is allowed. The order
of the High Courts well as the appellate order of the Tribunal are set aside.
There will be no order as to costs.
C.A.No.12419/96
In view of the observations made in SLP No.10982/87, the appeal is allowed.
There will be no order as to costs.
C.A.
Nos. 5620-21/95 In view of the observations made earlier these cases are
remanded back to the Tribunal. The Tribunal will examine the cases in the light
of the various sub-clauses of Section 35B and will also examine the facts to
find out whether the expenditures come within any of the categories mentioned
in sub-clause (b) of Section 35B. The order of the High Court is set aside. The
appellate order of the Tribunal is also set aside. The Tribunal will decide the
cases in view of the directions given hereinabove. There will be no order as to
costs.
C.A.
No.6942/95 The dispute in this case is about the allowances under Section 35B.
The allowances in this case relate to (a) payment to Hosiery Exporters
Association, (b) Payment to HHEC, (c) Contribution to Hosiery Exporters
Association, and (d) Charges paid to ECGC: are also expenditure on (e)
Establishment, (f) Bonus (g) leave with wages, (h) Salary to Directors, (i)
Postage telephone and telegram, and (j) printing and stationary.
The
only question in whether payment of HHEC and ECGC qualify for special allowance
under Section 35B. The other expenditures are not allowable. The order of the
High Court is set aside. The appellate order of the Tribunal is also set aside.
The matter is remanded back to the Tribunal only to consider whether the
payment of HHEC will qualify for the special exemption given under Section 35B.
The Tribunal will examine the facts and find out whether the payment was for
any of the activities mentioned in sub-clause (b) of Section 35B. If the
expenditure was wholly and exclusively incurred for any of these purposes, the
expenditure will qualify for deduction under Section 35B. The Tribunal will
examine the case afresh with regard to payments to HHEC and also to ECGC. The
other items mentioned in the appellate order of the Tribunal will stand
disallowed. The case is remanded back to the Tribunal for fresh disposal. The
appeal is allowed. There will be no order as to costs.
C.A.No.387
of 1985 The appeal is dismissed. There will be no order as to costs.
C.A.
Nos.786-88 of 1995 The appeals are dismissed.
C.A.No.7847
of 1995 The following question of law was referred to the High Court:
"Whether
on the facts and in the circumstances of the case, on a proper interpretation
of Section 35B, the Appellate Tribunal was right in law in allowing in respect
of foreign claim for weighted deduction in respect of region sales commission,
E.C.G.C. charges and expenditure on articles of presentation?" The
question relates to expenditure for which relief was claimed under Section 35B.
The Tribunal allowed the expenditure without specifically deciding under which
sub- clause (b) of Section 35B the expenditure falls. The case is remanded back
to the Tribunal, The Tribunal will re- examine the case having regard to the
nature of the expenditure and will try to find out whether such an expenditure
qualifies for weighted deduction under Section 35B. The order of the High Court
is set aside. The appellate order of the Tribunal is also set aside. The
Tribunal will now examine the facts of the case and find out whether the
expenditures are allowable under any of the sub- clauses of Section 35B(b). The
appeal is allowed. No order as to costs.
C.A.Nos.
2230-31 of 1995 The appeals are dismissed. There will be no order as to costs. C.A.Nos.3120
of 1995 The dispute in this case is about the allowability of weighted
deduction under Section 35B of the Income Tax Act.
The
dispute relates to various expenditures including commissions paid to STC, HHEC
and ECGC. There are other expenditures in regard to salary, Director's
remuneration, rent, printing and stationery, postage and telegrams etc.
Which
have not been proved to be wholly or exclusively incurred for the purposes of
any of the sub-clauses mentioned in sub-clause (b) of Section 35B. These will
have to be disallowed. The order of the Tribunal to this extent is erroneous. so
far as commission payable to STC, HHEC and ECGC is concerned, this will have to
be examined by the Tribunal afresh. The onus is on the assesee to prove the
facts which will enable him to claim weighted deduction.
The
Tribunal will examine the claim of the assessee and will find out whether the
claim is allowable having regard to any of the sub-clauses of Section 35B(b).
The judgment of the High Court under appeal is set aside. The appellate order
of the Tribunal is also set aside. The Tribunal will now re-hear the case on
the points relating to commission paid to STC, HHEC, ECGC only. The appeal is
allowed. There will be no order as to costs.
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