1978 (12) TMI 56 - AT - Income Tax

Issues Involved:
1. Disallowance of export market development allowance under Section 35B for entertainment expenses.
2. Eligibility of Madras office expenses for weighted deduction under Section 35B.
3. Eligibility of travelling expenses of the director for weighted deduction under Section 35B.
4. Eligibility of presentation expenses to foreign buyers for weighted deduction under Section 35B.
5. Eligibility of payments made to M/s. Jay Prestressed Products Ltd. for weighted deduction under Section 35B.
6. Relief under Section 80G before setting off earlier years' losses.

Detailed Analysis:

1. Disallowance of Export Market Development Allowance under Section 35B for Entertainment Expenses:

The assessee argued that entertainment expenses incurred for foreign buyers should qualify for weighted deduction under Section 35B. The Tribunal referenced the Bombay Bench decision in ITO vs. M/s. B. Bombay, which held that entertainment expenditure for overseas visitors qualifies for weighted deduction under Section 35B, as Sections 37 and 37(2A) do not apply to such expenses. The Tribunal concluded that the entertainment expenses of Rs. 5,916 incurred by foreign customers qualify for weighted deduction under Section 35B.

2. Eligibility of Madras Office Expenses for Weighted Deduction under Section 35B:

The assessee claimed that the Madras office expenses were not only for the inspection of shipments but also for obtaining information regarding markets outside India. The Tribunal referenced the Bombay Bench decision in M/s L.M.N. Bombay, which allowed 50% of the rent for maintaining an office for obtaining market information outside India. The Tribunal decided that 1/3rd of the Madras office expenses, both for rent and staff, pertained to obtaining information regarding markets outside India and thus qualified for weighted deduction under Section 35B.

3. Eligibility of Travelling Expenses of the Director for Weighted Deduction under Section 35B:

The ITO allowed weighted deduction for 1/3rd of the director's travelling expenses, while the AAC allowed 50%. The Special Bench of the Tribunal ruled that only expenditure on travelling outside India qualifies under sub-clause (vii) of Section 35B. Consequently, the Tribunal concluded that the assessee was not entitled to any weighted deduction for the director's travelling expenses within India, setting aside the AAC's enhancement and restoring the ITO's order.

4. Eligibility of Presentation Expenses to Foreign Buyers for Weighted Deduction under Section 35B:

The AAC initially allowed weighted deduction for presentation expenses but later upheld disallowance under Rule 6-B. The Tribunal referenced the Special Bench's decision, which equated presentation expenses with entertainment expenses for foreign buyers. The Tribunal concluded that presentation expenses aimed at soliciting business from foreign customers qualify for weighted deduction under Section 35B, aligning with the AAC's initial view.

5. Eligibility of Payments Made to M/s. Jay Prestressed Products Ltd. for Weighted Deduction under Section 35B:

The ITO allowed weighted deduction for 50% of the expenses paid to M/s. Jay Prestressed Products Ltd., while the AAC allowed the full amount. The Tribunal held that entertaining foreign buyers is as much entitled to weighted relief as negotiating sales. Since the AAC found that the assessee's Delhi office was solely engaged in export market development, the Tribunal upheld the AAC's decision to allow the entire expenses for weighted deduction under Section 35B.

6. Relief under Section 80G Before Setting Off Earlier Years' Losses:

The AAC followed a previous Tribunal order in M/s. K.L. Poddar & Sons (P) Ltd., Bangalore, which allowed relief under Section 80E before setting off earlier years' losses. The Tribunal upheld the AAC's decision, noting that the same principle applies to Section 80G. Therefore, the relief under Section 80G should be allowed before setting off earlier years' losses.

Conclusion:

Both the assessee's and the Department's appeals were partly allowed. The Tribunal ruled in favor of the assessee for entertainment expenses, Madras office expenses, and presentation expenses, while restoring the ITO's order regarding the director's travelling expenses. The Tribunal also upheld the AAC's decision for full weighted deduction on payments to M/s. Jay Prestressed Products Ltd. and relief under Section 80G before setting off earlier years' losses.

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