1992 (4) TMI 77 - AT - Income Tax

Deduction In Respect, Development Allowance, Expenditure Incurred, Foreign Project, Weighted Deduction, Wholly And Exclusively

Summary

Issues Involved:
1. Assessee's claim for weighted deduction under section 35B of the Income-tax Act, 1961.
2. Applicability of section 80-0 and section 80HHB of the Income-tax Act, 1961.
3. Interpretation of "sale" in the context of section 35B.

Detailed Analysis:

1. Assessee's Claim for Weighted Deduction under Section 35B:
The assessee, a civil contractor executing projects in foreign countries, claimed a weighted deduction under section 35B of the Income-tax Act, 1961. Initially, the assessee did not claim this deduction before the Assessing Officer, as it was claiming its entire income as exempt under section 80-0. Upon rejection of the section 80-0 claim, the assessee sought relief under section 35B. The CIT (Appeals) upheld the Assessing Officer's decision, stating that the assessee was not entitled to exemption under section 80-0 but could be entitled to some relief under section 80HHB. The matter was restored to the Assessing Officer for further examination. The Assessing Officer, upon re-examination, rejected the claim, stating that the expenditure was not for the promotion of sales of goods but rather for executing foreign projects, referencing the Supreme Court's decision in the case of State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., AIR 1958 SC 560.

2. Applicability of Section 80-0 and Section 80HHB:
The CIT (Appeals) upheld the Assessing Officer's finding that the assessee was not entitled to exemption under section 80-0 of the Act. However, it was held that the assessee could be entitled to some relief under section 80HHB, which deals with income derived from the business of executing foreign projects. The matter was restored to the Assessing Officer to examine whether the assessee deserved any relief under section 80HHB.

3. Interpretation of "Sale" in the Context of Section 35B:
Section 35B allows an extra deduction for certain expenditures incurred by an assessee for the development of export markets. The relevant sub-clauses of section 35B(1)(b) were examined. The CIT (Appeals) and the Assessing Officer concluded that the execution of foreign projects did not involve the export of goods or services as envisaged under section 35B. The Supreme Court's decision in the Gannon Dunkerley case was cited, which held that the execution of a works contract does not constitute a sale of goods. The assessee argued that the judgment in Gannon Dunkerley was not relevant as it dealt with the sale of goods under the Madras General Sales-tax Act, whereas section 35B pertains to the sale of goods, services, or facilities outside India.

Tribunal's Findings:
The Tribunal held that section 35B provides relief to assessees engaged in the sale of goods, rendering services, or providing facilities. The word "sale" used in section 35B includes rendering services or providing facilities. Therefore, relief under section 35B would be available even if there is no sale of goods but only rendering of services or provision of facilities. However, the Tribunal agreed with the authorities below that the assessee was not entitled to weighted deduction under section 35B for the expenditure incurred on offices and traveling related to the execution of foreign projects, as these were not for the promotion of sales but for executing already secured contracts. The Tribunal emphasized that section 35B must be interpreted realistically, and the expenditure must be incurred wholly and exclusively for the specified purposes to qualify for the weighted deduction.

Conclusion:
The Tribunal upheld the findings of the CIT (Appeals) and the Assessing Officer, rejecting the assessee's claim for weighted deduction under section 35B for the expenditure related to the execution of foreign projects. The appeal was dismissed on the grounds that the expenditure was not for the promotion of sales outside India but for the execution of already secured contracts.