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TMI Blog2002 (3) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... Division Bench and thus whether the Commissioner of Income-tax was not empowered to invoke the provisions of section 263 to rectify the mistake committed by the Income-tax Officer in not following the judgment of a Special Bench in deciding the matter of allowance of deduction under section 35B? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the materials which were not on record at the time of assessment and were made available afterwards cannot form part of the record of proceedings of the Income-tax Officer at the time he passed the order and thus cannot be taken into consideration by the Commissioner of Income-tax for the purpose of invoking the jurisdiction under section 263(1) of the Act?" The assessee is a firm which derived income from export of bamboos, imli and timber to Pakistan during the relevant assessment year 1978-79. Return for this assessment year was filed declaring a loss of Rs. 1,01,243. In the computation of income, the assessee had claimed deduction under section 35B of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), on various heads of expenditure as under: ------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) on the sale of export of angle iron 33,915 All these expenses except customers expenses of Rs. 2,728 and com mission to bank at Rs. 17,832 (which do not fit in properly for weighted deduction in any of the sub-clauses of section 35B(1)(b)), are entitled to weighted deduction as these have been incurred in connection with the export business which comprises entire sales to Pakistan of the various items mentioned above. Weighted deduction at 1-1/3 times of the expenditure is worked out as under: Total expenditure under the above head 8,54,338 Add: 1/3rd thereto 2,84,779 11,39,117 Less : Expenses already claimed in profit and loss account 8,54,338 Weighted deduction admissible 2,84,779" -------------------------------------------------------------------------------------- The Commissioner of Income-tax on examination of the assessment record was of the view that the aforesaid assessment order was erroneous in so far as it was prejudicial to the interests of the Revenue on the point of allowing weighted deduction of Rs. 2,84,779. Accordingly, he issued a notice to the assessee to show cause why the assessment be not revised in respect of deduction under section 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of J. Hem Chand and Company, Bombay, and the Tribunal has held vide order dated June 17, 1978, in I.T.A. Nos. 3255 of 1976-77 and 3330 of 1976-77: 'In the fact of the foregoing we have no doubt in our mind that the benefit of sub-clause (iii) cannot be made available at all to (i) expenditure incurred in India in connection with the distribution, supply or provision outside India of goods, services or facilities which the assessee deals in or provides in the course of his business, (ii) expenditure (wherever incurred) on the carriage of such goods to their destination outside India, and (iii) expenditure (wherever incurred) on the insurance of such goods while in transit.' The aforesaid decision of the Special Bench of the Income-tax Appellate Tribunal lays down the correct position in law in respect of the aforesaid sub-clause (iii) of clause (b) of sub-section (1) of section 35B. Accordingly, the aforesaid expenses incurred by the assessee by way of freight charges, clearing charges and inspection charges do not qualify for the allowance of the weighted deduction under section 35B. (iii) As regards the expenses in respect of salaries, bonus, rent and stationery mentioned at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vities mentioned in the various sub-clauses of clause (b) of sub-section (1) of section 35B. On scrutinising the details of these expenses as furnished in the course of the assessment proceedings before the Income-tax Officer it is noticed that none of these expenses can be said to have been incurred wholly and exclusively on any of the activities mentioned in the various sub-clauses of clause (b) of sub-section (1) of section 35B. The mere fact that the goods of the assessee are sold entirely outside India and there are no local sales does not mean and warrant a view that these expenses have been incurred wholly and exclusively on one or the other activities mentioned in the sub-clauses of clause (b) of sub-section (1) of section 35B. (v) As regards the expenses on advertisement mentioned at item No. 11 of the statement in para. 1 ante, the assessee has claimed that these expenses fall under sub-clause (i) of clause (b) of section 35B(1). The Income-tax Officer allowed the weighted deduction in respect of this expenditure accepting this claim of the assessee. However, the details of the expenditure furnished by the assessee in the course of the assessment proceedings before the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal before the Tribunal. The members of the Tribunal had a difference of opinion. The accountant member upheld the action of the Commissioner and dismissed the appeal of the assessee. According to him, the Income-tax Officer had committed an error prejudicial to the interests of the Revenue in allowing deduction under section 35B on freight, clearing charges and inspection charges inasmuch as he had failed to notice the decision of the Special Bench of the Tribunal in the case of J. Hemchand and Company delivered in June, 1978, which was prior to the passing of the assessment order in November, 1978. He was of the view that taking note of a ruling or a judicial decision of the competent authority was not dependent on filing of those orders before the Income-tax Officer because he is expected to be aware of the law on the point irrespective of the fact whether the assessee files copies of any decision or not. He further observed that ignorance of the decision of the larger Bench of the Tribunal in the case of J. Hemchand and Company had resulted in an error on the part of the Income-tax Officer which justified the action of the Commissioner under section 263. The Accountant Member ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it could have the same effect on the Income-tax Officer. He further observed that if both--a Division Bench view and a Special Bench decision--were available to the Income-tax Officer, he should normally follow the view expressed by the Special Bench unless he was able to point out some glaring omissions or was able to show that it was per incuriam. He referred to the common practice prevalent in the Department about the Income-tax Officer not following the orders of the Tribunals on the ground that a reference application has been filed and that sometimes the Income-tax Officers even do not follow a judgment of the High Court by observing that appeal has been filed in the Supreme Court. Without commenting on how far the approach of the Income-tax Officer was justified, his conclusion was that when the Income-tax Officer feels free not to follow an order of the Tribunal, he cannot be expected to follow the order passed by a Special Bench of the Tribunal, more so, when it has not been brought to his notice. Accordingly, he held that the Income-tax Officer had committed no error in following the order of the Division Bench of the Tribunal. The Senior Vice-President also dealt w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year: Provided that in respect of the expenditure incurred after the 28th day of February, 1973, by a domestic company, being a company in which the public are substantially interested, the provisions of this clause shall have effect as if for the words 'one and one-third times', the words 'one and one-half times' had been substituted. (b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on- (i) advertisement or publicity outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business; (ii) obtaining information regarding markets outside India for such goods, services or facilities; (iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit; (iv) maintenance outside India of a branch, office or agency for the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty to justify how it was covered by any of the aforesaid sub-clauses. The claim in respect of commission to SAIL, postage and telegrams and commission to Promotion Council had not been related to any of the sub-clauses at all. The deduction on advertisement had been claimed under sub-clause (i) of clause (b) of section 35B(1). In respect of these items, the Commissioner while ordering a fresh assessment, has directed that in the interests of justice the assessee be given opportunity to furnish the details and lead evidence to show that the expenditure incurred fell specifically within the ambit of any of the sub clauses of section 35B(1)(b). A further perusal of the grounds on which the Commissioner of Income-tax had sought to assume jurisdiction under section 263, which have already been reproduced in the earlier part of this judgment, shows that in para. (i) it has been observed that having regard to the details furnished by the assessee in respect of the expenses on which deduction under section 35B had been claimed, it could not be said that the same had been incurred wholly and exclusively on the activities specified in clause (b) of section 35B(1). It is also observed that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very case will have to be examined in the light of the provisions of the sub-clauses and the facts proved by the assessee." The Supreme Court considered the facts of that case in the light of the legal position set out above and observed: "It appears that the Tribunal did not examine the claim of the assessee by reference to any of the sub-clauses of section 35B(1)(b). No expenditure can be allowed under section 35B generally. The assessee must be able to establish the facts to prove that the expenditure falls within the ambit of sub-clauses (i) to (ix) of clause (b) of section 35B(1). This has not been done..." In view of the above finding, the Supreme Court set aside the order of the High Court as also the Tribunal and remanded the case back to the Tribunal with the following direction: "We are of the view that the appellate order of the Tribunal has to be set aside. We set aside the order of the High Court as also the appellate order of the Tribunal and remand the case back to the Tribunal. The assessee will have an opportunity of proving the nature of the expenditure and establishing that the expenditure falls within any one of the sub-clauses of section 35B(1)(b). It has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect and prayed for more time to furnish the necessary evidence in the matter. Thus, it is evident that the claim of the assessee under section 35B had been allowed by the Income-tax Officer without the assessee placing any material on record to show that the expenditure related to the activities mentioned in various sub-clauses of section 35B(1)(b). The question of applicability of any decision of a Bench of the Tribunal could have arisen only after the factual position had been ascertained by the Assessing Officer. This had not been done. Mere filing of details of expenditure running into 40 pages along with copies of the orders of some Benches of the Tribunal was of no consequence without placing evidence to show that the said expenditure had been incurred on the activities specified in various sub-clauses of section 35B(1)(b). This being the position, there can be no doubt that the order of assessment was erroneous to that extent causing prejudice to the interests of the Revenue. The learned Accountant Member had correctly appreciated this position in paras. 12 and 12.1 of his order. The Madras High Court in Indian Textiles v. CIT [1986] 157 ITR 112, upheld the action of the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of expenditure should have been remanded back for fresh determination by the Income-tax Officer and the Commissioner should not have straightaway disallowed the claim for deduction of freight, clearing charges and inspection charges. We were inclined to issue such a direction and modify the order of the Commissioner accordingly. We, however, find that such a direction will not serve any useful purpose as the assessee is not entitled to this deduction in view of the clear provisions of law as also the law laid down by their Lordships of the Supreme Court in the case of Stepwell Industries Ltd. [1997] 228 ITR 171. The assessee is claiming deduction on the three aforesaid items of expenditure under sub-clause (iii) of section 35B(1)(b). The expenditure has, admittedly, been incurred in India and, therefore, does not qualify for deduction. This position stands settled by the Supreme Court in the case of Stepwell Industries Ltd. [1997] 228 ITR 171. At page 176 of the report, their Lordships have observed as under: "The expenditure which qualifies for deduction under section 35B(1)(b)(iii) will have to be expenditure incurred outside India in connection with distribution, supply or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected the contention raised on behalf of the assessee that since the matter was debatable, the exercise of jurisdiction under section 263 was barred. Before concluding, we may refer to the judgment of the Calcutta High Court in Russell Properties Pvt. Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229, on which the learned Judicial Member as well as the Senior Vice President have placed heavy reliance. In that case, the Income-tax Officer while framing the assessment for the assessment years 1967-68 to 1969-70 had followed the decision of the Tribunal in the assessee's own case on the same issue for the assessment year 1966-67. Such is not the position in the case in hand. There is no earlier appellate decision in the assessee's own case regarding deduction under section 35B. In view of our answer to question No. 1 as above, question No. 2 is only of academic interest and is returned unanswered. Even question No. 3 is also of academic interest only. However, the matter now stands concluded by the judgment of the apex court in CIT v. Shree Manjunathesware Packing Products and. Camphor Works [1998] 231 ITR 53, in which it has been held that the expression "record" in section 263 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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