1997 (8) TMI 6 - SC - Income Tax

Weighted deduction - Burden Of Proof - Rectification Of Mistakes - dispute relates to various expenditure including commissions paid to STC, HHEC and ECGC - it is the assessee's duty to prove that expenses are wholly and exclusively incurred for any of the purposes mentioned in clause (b) of section 35B(1) - if assessee prove the same deduction will be allowed - ITO was justified in entertaining assessee's prayer for rectification of the order and allowing the assessee's claim

Summary

Issues Involved:

1. Interpretation of Section 35B of the Income-tax Act, 1961
2. Allowability of weighted deduction under Section 35B for various expenses
3. Scope of Section 44 of the Income-tax Act, 1961

Issue-wise Detailed Analysis:

1. Interpretation of Section 35B of the Income-tax Act, 1961:

The primary question addressed was whether the Appellate Tribunal correctly allowed the assessee's claim for weighted deduction under Section 35B for expenses like 'export sales commission,' 'E.C.G.C. charges,' and 'foreign dealers visiting expenses.' The Tribunal's decision was challenged on the grounds that rectification under Section 154 is only permissible when a glaring mistake of fact or law is apparent from the record, not when the question is debatable. The Tribunal was found to be in error in upholding the assessee's claim for weighted deductions without proper examination of the facts and law. The Supreme Court treated the question as referred to it and answered in the negative, in favor of the Revenue, allowing the appeal.

2. Allowability of weighted deduction under Section 35B for various expenses:

Several appeals dealt with the allowability of weighted deductions under Section 35B for different expenses. The Supreme Court consistently emphasized that deductions under Section 35B are permissible only if the expenditure is laid out wholly and exclusively for the purposes mentioned in clause (b) of Section 35B(1). It was for the assessee to prove that the entire expenditure involved was exclusively for the purposes mentioned in clause (b). The Tribunal was directed to re-examine the facts and apply the law accordingly. Specific cases included:

- Civil Appeal Nos. 7666-7667 of 1996: Tribunal's order was set aside, and the matter was remanded for fresh examination of facts and application of law under Section 35B.
- S.L.P. (C) No. 10982 of 1997: Tribunal's order was set aside for failing to consider sub-clauses of Section 35B(1)(b). The Tribunal was directed to re-examine the claims.
- S.L.P. (C) Nos. 4663-65 of 1989: Tribunal's order was set aside, and the matter was remanded for the assessee to prove the facts supporting the claim under Section 35B.
- S.L.P. (C) No. 8620 of 1995: Tribunal was directed to re-examine the claim for weighted deduction under Section 35B.
- S.L.P. (C) No. 10949 of 1995: Tribunal's order was set aside, and the matter was remanded for re-examination of the claim under Section 35B.
- C.A. Nos. 5620-21 of 1995: Tribunal's order was set aside, and the matter was remanded for examination under Section 35B(1)(b).
- C.A. No. 6942 of 1995: Tribunal was directed to re-examine the claim for weighted deduction for payments to HHEC and ECGC.
- C.A. No. 3120 of 1995: Tribunal's order was set aside, and the matter was remanded for re-examination of commission payments to STC, HHEC, and ECGC.

3. Scope of Section 44 of the Income-tax Act, 1961:

In cases involving insurance companies, the Supreme Court clarified the scope of Section 44, which states that profits and gains of any business of insurance must be computed in accordance with the rules contained in the First Schedule, notwithstanding other provisions of the Act. The contention that Section 35B benefits should also apply to insurance companies was rejected. The Court held that Section 44's non obstante clause means that insurance business profits must be computed as per the First Schedule rules, excluding benefits under Section 35B. Specific cases included:

- S.L.P. (C) No. 9065 of 1994 and C.A. Nos. 1494-96 of 1988 and 5567 of 1990: The Court upheld the High Court's order, dismissing the appeals and rejecting the application of Section 35B to insurance companies.

In conclusion, the Supreme Court's judgment clarified the interpretation and application of Section 35B, emphasizing the need for specific and exclusive expenditure for the purposes mentioned in the section. The Tribunal was directed to re-examine the claims in light of these principles, ensuring proper application of the law and verification of facts. The scope of Section 44 was also clarified, excluding insurance companies from the benefits of Section 35B.