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TMI Blog1996 (8) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... s to import against the export as capital receipt immune from taxation, cannot be admitted ? 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the provisions of section 144B of the Income-tax Act, 1961, introduced with effect from January 1, 1976, have rightly been applied and the assessment made was not barred by limitation ? 3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the expenditure of Rs. 10,000 and Rs. 6,000 incurred on food and light refreshment served to the trainees and engineers under the heads 'Dealers conference expenses' and 'sales promotion expenses', respectively, can be termed as entertainment within the meaning of section 37(2A) of the Income-tax Act ? 4. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the claims of the appellant-company are not eligible for weighted deduction under section 35B in respect of the following expenses : (Rs.) (i) Freight on export 2,91,003 (ii) Handling charges on export consignment 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claims of the appellant-company are not eligible for weighted deduction under section 35B in respect of the following expenses: (Rs.) (i) Handling charges for export consignment 42,162 (ii) Expenses on certificate of origin 565 (iii) Bank guarantee charges 7,187 (iv) Bank charges for export 51,853 (v) Freight under CIF and C F Contract 3,76,310 (vi) Interest paid for export 1,42,467 (vii) Cost of packing expenses 2,79,606." Questions of law referred at the instance of the Commissioner of Income-tax : For the assessment year 1975-76 : "1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing weighted deduction on miscellaneous expenses of Rs. 3,76,715 which included salary and other establishment expenses ? 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing weighted deduction of Rs. 26,007 being commission paid to Project and Equipment Corporation of India Ltd., New Delhi ? " For the assessment year 1976-77 : "1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1976-77, expenditure under the head "Sales promotion expenses" had been shown by the assessee at Rs. 37,041. Disallowance in this year was made by the Assessing Officer at Rs. 15,000 but it came to be reduced to Rs. 12,000 by the Tribunal. In the assessment year 1977-78, expenditure under the head "Sales promotion expenses" had been shown at Rs. 59,687 out of which, the expenditure of Rs. 15,000 was disallowed by the Assessing Officer but ultimately this disallowance was reduced to Rs. 8,000 by the Tribunal. The question for determination in all the three years relates to the nature of expenditure. The assessee-company manufactured electric switch-gears. The plea of the assessee was that seminars and conferences were arranged by the company from time to time, wherein trainees and engineers working with the purchasing dealers were invited so that the items manufactured by the assessee-company could be made known and explained to them. Therefore, the main purpose for organising the conferences was advertisement and publicity and whatever expenditure had been incurred in providing food and light refreshment to the invitees, was not at all in the nature of entertainment expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted part of the expenses incurred for the purposes of business. The High Court endorsed the view taken by the Tribunal that an expenditure incurred albeit for the purposes of serving food, refreshments drinks, etc., at the business meetings would be in the nature of administrative or business expenditure and would have no taint of expenditure in the nature of entertainment. The Bombay High Court had also an occasion to examine a question about entertainment expenditure in CIT v. Kirloskar Oil Engines Ltd. [1986] 157 ITR 762, wherein the assessee-company was engaged in the business of manufacture and export of oil engines. It had arranged a seminar of the foreign and local distributors with a view to boosting sales, particularly in the foreign market. Since the assessee's guest house was small, accommodation was arranged in hotels and clubs. The assessee claimed the expenditure as business expenditure but that was declined by the Assessing Officer treating the same as entertainment expenditure. The assessee's contention was, however, accepted in appeal on the ground that it was a customary practice to make arrangement for the stay of the distributors and also to give them presenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness and not for entertainment within the meaning of section 37(2A) of the Act. The Revenue's plea is based on the proposition that the provisions of sub-sections (2) and (2A) of the Act do not permit an expenditure if it has been incurred on food and refreshment. All hospitality, whether lavish or frugal, comes within the ambit of the phrase "in the nature of entertainment expenditure". The Full Bench of this court in CIT v. Khem Chand Bahadur Chand [1981] 131 ITR 336, examined the scope of section 37(2A) of the Act and observed that any lavish hospitality expended for business purposes would amount to "entertainment expenditure". Under sub-section (1) of section 37 of the Act, an expenditure wholly and exclusively incurred for the purposes of the business, including entertainment at a lavish, modest or even a frugal level, would come within the wide language thereof. The term "entertainment" has also been examined by the Gujarat High Court in CIT V. Patel Brothers and Co. Ltd. [1977] 106 ITR 424, it was observed that the term "entertainment" in the context of section 37(2A) and (2B) of the Act on a true construction and meaning would include the acts or practice of receiving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tainment' cannot include hospitality. For this reason, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity, would not be 'entertainment expenditure' without the aid of the enlarged meaning given to the words by Explanation 2 inserted with effect from April 1, 1976. The definition in Explanation 2 is not the ordinary meaning of the words 'entertainment expenditure', but the enlarged meaning given for the purposes of the Act with effect from April 1, 1976. The object of sub-section (2A) is to disallow any lavish expenditure in the form of business expenditure." It is clear from the nature of expenditure in all the three assessment years in the present case that food and light refreshment had been served to the trainees and engineers attending the dealers' conference organized by the assessee. These expenditures cannot, therefore, be treated to be in the nature of entertainment but on account of business necessity and expediency. The assessee had shown these expenditures under two heads, namely, "Dealers' conference expenditure" and "Sales promotion expenditure" in the assessment year 1975-76 and under the second head, as afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation outside India and on the insurance of such goods while in transit. The question about the deductibility went up to the Tribunal but the assessee did not succeed. The expenditure which qualifies for weighted deduction is that which is incurred on the activities exercised outside India for the development of the export market for Indian goods on long-term basis. This provision is not intended to cover expenditure which the taxpayer incurs on activities inside India for his export business except where these are incidental to the activities outside India. The weighted deduction is admissible with reference to the qualifying expenditure only. Expenditure of a capital nature and personal expenses do not qualify for such a deduction. The expenditure to be allowed as deduction under section 35B is an amount equal to one and one-third times the amount of the qualifying expenditure so incurred. The expenditure must be incurred wholly and exclusively for the purposes of the business and on certain specified items in relation to the export business. Eligibility of an expenditure is, therefore, to be tested with reference to sub-clauses (i) to (ix) of clause (b) of section 35B(1) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally excluded." Mr. B. S. Gupta, senior advocate, learned counsel for the assessee, has contended that the S. L. P. No. 2292 of 1994 filed by the Commissioner of Income-tax against the said decision has been rejected by the Supreme Court, vide order dated February 26, 1996. The matter, therefore, stands concluded even though the Supreme Court rejected the special leave petition without detailed discussion. Learned counsel for the assessee has pointed out that the distinction between sub-clause (iii) and sub-clause (viii) is subtle and, since the sub-clauses are distinct and independent of each other, the admissibility of expenditure can and should be examined under each sub-clause and, if, after such examination, expenditures of sea freight and insurances are found to be covered under sub-clause (viii), then sub-clause (iii) should not be treated as a hurdle. Mr. R. P. Sawhney, senior advocate, learned counsel for the Department, has put forward the contention that both the expenditures, namely, sea freight and insurance charges, had been incurred by the assessee in India solely in connection with the activities mentioned in sub-clause (iii) and, therefore, it was not admissibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not pressed the assessee's point of view on those expenditures. Two questions each have been referred to this court for opinion in the assessment years 1975-76 and 1976-77 at the instance of the Department on the deductibility of miscellaneous expenses and commission paid to the agents. In the assessment year 1975-76, the assessee had claimed weighted deduction of miscellaneous expenses including salary and establishment expenses at Rs. 3,76,715 and in the next assessment year at Rs. 2,86,978. The Assessing Officer did not allow deduction of the miscellaneous expenses under section 35B of the Act, taking the view that such expenses were not at all covered under any of the nine sub-clauses of clause (b) of section 35B(1) of the Act. The Tribunal noticed that the establishment expenses incurred on the development and export wing should be allowed for the purposes of weighted deduction. The export sales of the assessee constituted 43.4 per cent. of the total sales in the assessment year 1975-76 and 51 per cent. in the next assessment year. In that light, establishment expenses were eligible for purposes of deduction on the basis of the same percentage. It was indeed correct that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se it was paid for the services rendered by the agents outside India. Mr. R. P. Sawhney, senior advocate, learned counsel for the Department, has placed reliance on a decision of this court in HMM Ltd. v. CIT [1990] 184 ITR 236. That was a case where expenditures incurred on inspection and supervision charges, bank charges, cost of excise revenue stamps and miscellaneous expenses had been claimed as eligible for weighted deduction. It was held that the assessee was not entitled to weighted deduction on such expenses in the light of sub-clause (iii) of clause (b) of section 35B(1) of the Act. Reliance is also placed on a decision of the Kerala High Court in CIT v. Bakul Cashew Company [1992] 197 ITR 135. That was a case where deduction in respect of 75 per cent. of the salary paid to the clerical staff was held to be eligible under section 35B of the Act. The High Court took the view that the estimate made was purely arbitrary and, therefore, remitted the question back for verification. The assessee's case is that miscellaneous expenditure including expenditure on salary and establishment was eligible for weighted deduction if a co-relation was established between the items of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parameters drawn in section 35B, in so far as the circular contained a provision beneficial to the assessee, the circular had to be given effect to. Since the agents had rendered positive and specific services for the marketing of the assessee's goods outside India, the commission payments were entitled to the weighted deduction. The Calcutta High Court has also examined the question of deduction of commission paid to the agent. In CIT v. Hukumchand Jute and Industries Ltd. [1994] 208 ITR 257 (Cal), it has been held that, where the manufacturer of the export goods paid commission to an agent because the goods had been exported through that agent to the buyers abroad, the manufacturer was entitled to weighted deduction on such commission. The claim of the assessee regarding weighted deduction on the miscellaneous expenses and commission paid to the agents is held to be acceptable. As we have already noticed, the Tribunal allowed deduction of 20 per cent. of the miscellaneous expenses (establishment expenses and salary). Therefore, it is only the proportionate expenditure which has been allowed keeping in view the percentage of export business of the assessee. As regards the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of infraction of any law, the expenditure is allowable as a deduction on the ground of commercial expediency. A question about such deductibility also came up for examination before this court in CIT v. Murari Lal Ahuja and Sons [1989] 177 ITR 228. That was a case where the assessee, who carried on the business of sale of cotton, was unable to fulfil a contract of supplying cotton to the mills and, therefore, settled the dispute by paying them a sum of Rs. 48,158. The Income-tax Officer disallowed the payment holding it to be a speculative transaction in terms of section 43(5) of the Act. The Tribunal, however, took the view that payment had been made due to abnormal circumstances for the reason that the assessee had flouted the agreement of sale to save himself from a ruinous situation and, therefore, the compensation paid in the shape of settlement for breach of contract was an allowable deduction. It was held by this court that the transaction did not amount to a speculative transaction and compensation was paid by the assessee for breach of contract. Therefore, the payment made was an allowable deduction. Similar view has been taken by the Madhya Pradesh High Court in C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . v. CIT [1993] 201 ITR 684 (SC), the assessee carried on business in the manufacture of textile goods. Certain amount paid by way of interest and damages for delayed payment of sales-tax under the Bombay Sales Tax Act and for delayed payment of contribution under the Employees State Insurance Act was claimed as a revenue expenditure under section 37(1) of the Act. It was observed by the Supreme Court that the Income-tax Officer and the appellate authorities had refused to allow the claims made by the assessee under section 37(1) without any examination of the scheme of the provisions of the Bombay Sales Tax Act to find whether impost of the interest paid by the assessee for delayed payments of sales-tax was compensatory in nature as would entitle it for deduction under section 37(1) of the Act. The same was the position as regards the impost of damages paid by the assessee under the Employees' State insurance Act, 1948, for delayed payment of contribution thereunder. The question was, therefore, remitted back to the Tribunal for deciding the assessee's claims for deduction of interest and damages under section 37(1) of the Act. In the second case, the Supreme Court again examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e earlier assessment years 1968-69 and 1969-70. Since assessments had been reopened for the earlier two years, the assessee found it appropriate to reverse the entries regarding the two amounts which were considered as refundable earlier. These two amounts were treated as refundable in respect of the assessments for the assessment years 1970-71 to 1973-74. The Assessing Officer did not accept the reverse entry made by the assessee on March 31, 1977, and treated the entry made on November 1, 1976, as the entry evidencing the extinguishment of the sales-tax liability. Addition was, therefore, made under section 41(1) of the Act. The assessee succeeded in appeal before the Commissioner of Income-tax (Appeals). The Tribunal affirmed the view taken by the first appellate authority. Shri R. P. Sawhney, senior advocate, learned counsel for the Department, has put forward the plea that if the amount of sales-tax claimed in the earlier years as deduction had become refundable to the assessee, it constituted a trading receipt. Since the tax liability had been extinguished and deduction had been claimed in the earlier years, it was but reasonable and within law to treat it as a case of exti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t High Court in CIT v. Rashmi Trading [1976] 103 ITR 312. The word "obtained" occurring in section 41(1) of the Act was examined and it was held that it would mean actually obtained or obtainable. In that case, the assessee had taken the matter against the levy of sales-tax to the High Court and the High Court had pronounced its decision on December 5, 1962, in the assessee's favour. It was found that though the assessee became entitled to claim refund of the sales-tax amount paid in the past by virtue of the judgment of the High Court dated December 5, 1962, but he received the refund order on August 19, 1965, only. Therefore, the amount was assessable in the previous year relevant to the assessment year 1966-67 and not in the earlier year. The Gujarat High Court has again examined a similar matter about the claim for refund in CIT v. Bharat Iron and Steel Industries [1993] 199 ITR 67 [FB]. It was observed that, for considering the taxability of an amount coming within the mischief of section 41(1) of the Act, the system of accounting followed by the assessee was of no relevance or consequence. A certain amount had been refunded to the assessee during the pendency of the review ..... X X X X Extracts X X X X X X X X Extracts X X X X
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