1986 (9) TMI 134 - AT - Income Tax

Issues Involved:
1. Rejection of the claim for weighted deduction under section 35B of the Income-tax Act, 1961.
2. Examination of claims under sub-clauses (i), (iv), (vii), and (ix) of section 35B(1)(b).
3. Relevance of clause (c) of rule 6AA of the Income-tax Rules, 1962.
4. Applicability of precedent cases cited by the assessee.
5. Entitlement to weighted deduction for maintenance of a branch office outside India.
6. Eligibility for weighted deduction on labour wages and travelling expenses.

Detailed Analysis:

1. Rejection of the claim for weighted deduction under section 35B of the Income-tax Act, 1961:
The assessee, an individual, appealed against the order of the Commissioner (Appeals), Visakhapatnam, which rejected the claim for weighted deduction under section 35B of the Income-tax Act, 1961. The assessee's proprietary concern provided labour force for construction works in Iraq under a sub-contract with Engineering Products India Ltd., Delhi.

2. Examination of claims under sub-clauses (i), (iv), (vii), and (ix) of section 35B(1)(b):
- Sub-clause (i): The ITO held that the assessee's contention that successful execution of the contract outside India amounted to publicity did not qualify as "expenditure incurred on advertisement and publicity outside India." The ITO emphasized that only actual expenditure on advertisement and publicity outside India is allowable.
- Sub-clause (iv): The ITO noted that mere incurring of expenditure on a branch office outside India does not entitle the assessee to claim weighted deduction. It must be proved that the branch office was maintained for the promotion of sale outside India of the goods or services provided by the assessee.
- Sub-clause (vii): The ITO concluded that the expenditure on travelling outside India was incurred to complete the sub-contractor's work and not for the sale of goods or services outside India.
- Sub-clause (ix): The ITO noted that the clause speaks of expenditure on the maintenance of a laboratory or facilities for quality control, which did not apply to the assessee's case.

3. Relevance of clause (c) of rule 6AA of the Income-tax Rules, 1962:
The ITO held that clause (c) of rule 6AA, which pertains to the maintenance of a laboratory or facilities for quality control, was not applicable to the assessee's case. The assessee's engagement of engineers for inspection did not equate to maintaining a laboratory for quality control.

4. Applicability of precedent cases cited by the assessee:
The ITO found the cases cited by the assessee, including V.D. Swami & Co. (P.) Ltd. v. CIT and CIT v. C. R. Narayana Rao, to be irrelevant. These cases dealt with provisions of section 35B(1)(b) prior to its amendment on 1-4-1981, and thus, could not assist the assessee's claim.

5. Entitlement to weighted deduction for maintenance of a branch office outside India:
The Tribunal held that the assessee is entitled to weighted deduction on expenses incurred for maintaining a branch office at Bagdad under section 35B(1)(b)(iv). The Tribunal found that the branch office's expenses, including staff salaries, office expenses, and advertisements, were eligible for weighted deduction.

6. Eligibility for weighted deduction on labour wages and travelling expenses:
The Tribunal concluded that the assessee is not entitled to weighted deduction on labour wages and travelling expenses from India to Bagdad. This decision was based on the Special Bench decision in J.H. & Co.'s case and the Third Member decision in Ramji Dayawalla & Sons' case, which held that such expenses form part of the cost of procurement of services and are not eligible for weighted deduction.

Conclusion:
The appeal was partly allowed. The Tribunal granted weighted deduction for the maintenance of the branch office at Bagdad but denied the claim for labour wages and travelling expenses.

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