Case: The Commissioner Of Income Tax(Cntl), Ludhiana Vs. M/S Hero Cycles Pvt. Ltd. Ludhiana

Civil Appeal No. 7665 of 1996 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 35B of the Income-tax Act, 1961, the Appellate Tribunal was right in law in allowing the assessees 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, 1961C. A. Nos. 7666-7667 of 1996, S. L. P. (C) No. 7485 of 1986, 4588-89 of 1989Leave granted in special leave petitionsThe following questions of law were 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 Income-tax Officer ?(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 tendered 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 ? " *S. L. P. (C) No. 10982 of 1997S. L. P. (C) Nos. 4663-65 of 1989The claim of the assessee is in respect of relief under section 35B in respect of certain expenditure incurred by the assesseeS. L. P. (C) No. 8620 of 1995In this case two questions are involvedS. L. P. (C) No. 10949 of 1995This 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(1)S. L. P. (C) No. 9065 of 1994 and C. A. Nos. 1494-96 of 1988 and 5567 of 1990Leave granted in special leave petitionThe question in this case relates to the scope of section 44 of the Income-tax Act, 1961. The section states" Section 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. " *C. A. No. 7763 of 1995The 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 Income-tax Appellate Tribunal is right in law in allowing weighted deduction under section 35B of the Income-tax Act, on car maintenance at Rs. 49, 939, motor cycle at Rs. 3, 697 and generator expenses at Rs. 4, 639 without linking the expenditure to one or more of the activities referred to in various sub-clauses of section 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 March 31, 1978 ?2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal 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 per cent. of the expenditure on various items, aggregating to Rs. 4, 24, 773 and 50 per cent. of the expenditure on various items, aggregating to Rs. 9, 89, 950 without linking the expenditure to one or more of the activities referred to in various sub-clauses of section 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 March 31, 1978 ? "The High Court dismissed the reference application under section 256(2)C. A. No. 7045 of 1995The 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(1)(b)C. A. No. 6942 of 1995The 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 stationeryC. A. No. 7847 of 1995The 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 foreign sales commission, E.C.G.C. charges and expenditure on articles of presentation ?" (sic)The question relates to expenditure for which relief was claimed under section 35B. The Tribunal allowed the expenditure without specifically deciding under which clause (b) of section 35B(1), the expenditure fallsC. A. No. 3120 of 1995The dispute in this case is about the allowability of weighted deduction under section 35B of the Income-tax Act. The dispute relates to various expenditure including commissions paid to STC, HHEC and ECGC. There is other expenditure in regard to salary, directors 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 clause (b) of section 35B(1).

Reasoning:
It appears that the claim for deduction under section 35B was not originally allowed at all. Thereafter, on the assessees 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 assessees claim under section 35BThe Income-tax Officer thereafter entertained the assessees prayer for rectification of the order and allowed the assessees 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 a glaring mistake of fact or law 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 with as a mistake apparent on the record. The dispute raised a mixed question of fact and lawThe Tribunal was in error in upholding the assessees claim for weighted deductionsThere is no point in sending the matter to the High Court to deal with the question raised at this stageThe 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 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. 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 clause (b) of section 35B(1)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 the Central Board of Direct Taxes, New Delhi, which should conclude the matter. A copy of the so-called circular dated April 9, 1981/April 13, 1981, has been handed over in court. It does not appear that the document handed over in court is a copy of the circular at all. It is a letter written to one Shri DSouza with a reference to a letter written by his predecessorMoreover, 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 finding of fact. The assessee had not made his claim before the Income-tax Officer by relying on this circularSo far as section 40(c) 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(1). If the assessees case comes specifically within any of these sub-clauses it has to be allowed, otherwise notIf the assessees case come specifically within any of these sub-clauses it has to be allowed, otherwise notWe 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 sections 30 to 43CMoreover, 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 that rule and not any other rule. We are unable to accept the contention of Mrs. Ramachandran that the benefit of section 35B should also be given to any insurance companyWe 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 35B(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 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 deductionThese 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 assessee to prove the facts which will enable him to claim weighted deduction.