Interpretation of Sec.35B. - Income Tax - 1441/CBDT

INSTRUCTION NO. 1441/CBDT Dated: January 29, 1980 Attention is drawn to the Board's Instructions No.1302 dated 29-1-80. It was clarified there in that the sole question to be determined in considering the admissibility of weighted deduction is whether the expenditure in question is one covered by any of the sub-clauses of clause(b). The board also accepted that in case there is composite expenditure a part of which may relate to any of the purposes mentioned in sub-clauses, the claim can be allowed in respect of and to the extent the expenditure can be said to be incurred wholly and exclusively w.r.t. any of the items specified in clause b of sec 35 B(1). In particular the instruction referred to expenses claimed on export division and emphasised that after critical examination of the nature of such expenditure the extent to which such expenditure could be said to fall wholly and exclusively within the meaning of one or more sub-clauses b of sub-sec 1 can be determined. 2. Attention may also be drawn to the decision of the Bombay High court in the case of M/s.Eldee Wire ropes Ltd.(114 ITR 485) which had been accepted by the board. The High Court had held that except for items covered under clause (iii), there is no warrant for excluding expenditure incurred in India as is covered in any sub-clause of clause b. The court further held that the assessee will have to satisfy the ITO that the purpose for expenditure whether incurred outside India or in India is one which is satisfied by reference to the language of the section. The court further held that the assessee will have to satisfy the ITO that the purpose for expenditure whether incurred outside India or in India is one which is satisfied by reference to the language of the section. The court further observed that where the legislature desired to exclude the expenditure incurred in India for the purpose of giving benefit of weighted deduction, it expressly did so by specifically mentioning such exclusion in sub-clause (iii). 3. Then came the decision of the special bench of the Tribunal at Bombay in the case of J.Hemchand co. which laid down the following propositions of law in paras 22 and 23 of its order dated 17-6-78. These are as under:- a) Except for the purpose of sub-clause (iii) the place where the expenditure is incurred is irrelevant and any expenditure satisfying the conditions laid down in sub clause iii, iv to viii will get the benefit to weighted deduction irrespective of the fact whether the same is incurred in or outside India. b) Under sub-clause (iii) though expenditure incurred wholly and exclusively on distribution, supply or provisions outside India of such goods, services or facilities would generally qualify for weighted deduction, the rule is however subject to the notable exceptions that expenditure incurred in India in connection with such distribution, supply or provision as also expenditure wherever incurred on the carriage of such goods to their destination outside India and on the insurance of such goods while in transit will not all the same get such benefit. c) wherever common expenses are incurred by an assessee that could properly and fairly be apportioned on any of the activities referred to in sub-clauses such a proportionate expense can be taken for the purpose of this section as wholly and exclusively on such activity. 4. It may be clarified that the board agrees with the above interpretation of the provisions of sec.35 B. The Tribunal has also correctly stated in the said order whether a particular claim made by an assessee falls under any one or more of the activities specified in those sub-clauses, can at best be judged only with reference to the facts of the particular case and the nature of the claim. The Tribunal thereafter examined the various items of expenses. It appears to the board that the decision of the Tribunal in respect of some items of expenses treating them admissible for weighted deduction wholly or proportionately may be controversial and not acceptable to the department. In particular its decision to allow 75% of salary of persons handling export business could still be a matter of dispute because though accepting that the assessees employees as part of their duty could not have avoided attending also to such work as falling within the excluded category in sub-clause (iii), it decided to apportion only 25% of the expenditure on salaries etc. attributable to excluded activities. But for upholding 75% thereof admissible to weighted deduction it did not at all discuss any nexus of such expenses with the purposes or activities specified in other sub-clauses. In other words the claim with regard to 75% of the salaries could not be proved to be falling under any one or more of the activities specified in other sub-clauses. 5. The board have also noticed subsequent decisions of different benches of the tribunal which while dealing with the claim of admissibility with regard to salaries paid to export departmental personnel are merely following the full bench decision and are apportioning 75% of the expense as admissible for weighted deduction. In some of the cases the Tribunal did mention that part of such expenses were attributable to preparation and submission of tenders for the supply outside India of goods, services etc. Even in such case, though on facts part of the activity may have nexus with sub-clause (v) but the question may still remain whether apportionment at 75% is reasonable or excessive. Such issue would be basically a finding of fact and can be further contested depending on the states of revenue involved by seeking reference to the High court by raising appropriate questions of law on the ground of perversity. Therefore each case should be considered in the light to whatever is stated above and framing of the question of law should be done carefully. 6. It may also be clarified that the Full Bench decision with regard to admissibility of weighted deduction in respect of insurance amount paid to export credit guarantee corporation is not correct. In fact on this issue a special leave petition had been filed in the supreme court in the case of CIT, Karnataka vs. Orient Goa P. Ltd. (F.NO.270/155/80-ITJ). 7. The above instructions may please be brought to the notice of all the officers working in your charge.