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TMI Blog1993 (9) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... e in all the four cases. It is a limited company. It is engaged in the business of manufacture of coir mats and mattings. We are concerned with the assessment years 1977-78 and 1978-79. In the course of the accounting year, the assessee had exported a large portion of their production. In respect of the expenses connected with export, the assessee had claimed weighted deduction under section 35B of the Income-tax Act. One of the items on which such weighted deduction claimed was the premia paid to the Export Credit Guarantee Corporation. In the accounting year relevant to the assessment year 1977-78, the assessee-company had paid premia of Rs. 7,204. An amount of Rs. 11,078 was also paid through the bank. For the assessment year 1978-79, the amount paid was Rs. 34,344. The Income-tax Officer did not allow the claim for both the years. In appeal, the Commissioner of Income-tax (Appeals) took the view that ECGC premium was paid in part for guaranteeing the export credit given by the assessee to the various purchasers. The payment was not exclusively for obtaining information regarding the creditworthiness of the buyers. He held that 50 per cent. of the amount should be treated as eli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on appellate order dated September 2, 1983, in disposing of the four appeals for the two years 1977-78 and 1978-79. We heard counsel for the Revenue, standing counsel for the Government of India (Taxes), Mr. P.K.R. Menon, as also counsel for the respondent/assessee, Mr. P.R. Raman. Counsel for the Revenue contended that, ordinarily, the exporters obtained information about the creditworthiness of the particular foreign buyers through their foreign agents and in this case the charges paid by the assessee to the Export Credit Guarantee Corporation to obtain information about the creditworthiness of the foreign buyer is an additional expenditure which was not authorised. Such services are usually rendered by the foreign agents for which necessary commission is paid. It was unnecessary and uncalled for to have availed of the services of the Export Credit Guarantee Corporation to obtain information about the creditworthiness of particular foreign buyers, their reputation, etc. Counsel referred to the decision of this court in CIT v. Kerala Nut Food Co. [1991] 192 ITR 585 to contend that the payment made to the Export Credit Guarantee Corporation should not have been allowed as eligi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure incurred by the assessee in presenting curios to the foreign buyers and expenses incurred for providing lodging facilities to them is an entertainment expenditure for the purpose of section 37(2) of the Act and so not allowable. The above aspects were considered by the Income-tax Appellate Tribunal in paragraphs 4 and 13 of the common order dated September 2, 1983. They are as follows : "4. The next item to be considered is the expenditure incurred in paying the premium to the Export Credit Guarantee Corporation. The assessee has paid Rs. 7,204 for the assessment year 1977-78 and Rs. 34,344 for the assessment year 1978-79. The claim was rejected by the Income-tax Officer, but the Commissioner of Income-tax (Appeals) had accepted that half of this expenditure is eligible for deduction. So this issue figures both in the departmental appeals as well as the assessee's appeals. The point at issue has been considered by another Special Bench (Bombay Bench 'C') in Income-tax Appeals Nos. 3247/(Bom) of 1976 and 68/(Bom) of 1977-78 dated June 23, 1978. This is reported in selected orders of ITAT Volume I, page 142. According to the findings of the Special Bench, the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bruary, 1968, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in clause (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year : .... (b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on- . . . (ii) obtaining information regarding markets outside India for such goods, services or facilities." The Revenue has no case that the assessee did not pay the charges to the Export Credit Guarantee Corporation nor was the information obtained from the said Corporation. The only plea was that such information was usually obtained through a foreign agent. It may be so in some cases. In this case, since factually the assessee has obtained the pertinent information about the creditworthiness of particular foreign buyers, their reputation, etc., through the Export Credit Guarantee Corporation, the premium paid to them is certainly eligible for weighted deduction under sub-clause (ii) of section 35B(1)(b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " under section 37(2) of the Income-tax Act. According to the Revenue, the broad observations of the Full Bench decision of this court in CIT v. Veeriah Reddiar [1977] 106 ITR 610, at p. 617, as also the decision of the Bombay High Court in ACC-Vickers Babcock Ltd. v. CIT [1976] 103 ITR 321, at p. 358, should govern the issue and the expenses incurred for presenting curios to the foreign buyers and for providing lodging facilities to them is entertainment expenditure for the purpose of section 37(2) of the Act. On the other hand, counsel for the assessee pressed for acceptance the decision of the Andhra Pradesh High Court in Maddi Venkataratnam and Co.'s case [1979] 119 ITR 514 which is in point and submitted that the ratio of the Full Bench in Veeriah Reddiar's case [1977] 106 ITR 610 (Ker) should be confined to the expenses incurred in connection with the supply of cigarettes, coffee and meals to their customers and not to other items or other expenses. In evaluating the above rival pleas, we have to bear in mind section 37(2A) and also the newly inserted Explanation 2 to section 37(2A) by the Finance Act of 1983 with retrospective effect from April 1, 1976 (by way of amendme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of section 37(2), 37(2A) along with Explanation 2, though the amendment to the Finance Act, 1983, which had retrospective effect from April 1, 1976, had come into force when the Appellate Tribunal decided the appeals on September 2, 1983. The order of the Appellate Tribunal on this aspect is of a very general nature and without reference to the relevant provisions of the statute, and in particular, Explanation 2 to section 37(2A), which was introduced by the Finance Act, 1983, with retrospective effect from April 1, 1976. Non-advertence to the above statutory provision had led to the error committed by the Appellate Tribunal in holding that in making presents to the foreign guests or providing lodging facilities to them, the assessee cannot be said to have incurred any "entertainment expenditure". The conclusion of the Appellate Tribunal is a clear error in law. The decisions in ACC-Vickers Babcock Ltd. v. CIT [1976] 103 ITR 321 (Bom) and Addl. CIT v. Maddi Venkataratnam and Co. Ltd. [1979] 119 ITR 514 (AP) were rendered before the amendment and so inapplicable to the instant situation. We, therefore, hold that the expenses incurred for presenting curios to the foreign buyers ..... X X X X Extracts X X X X X X X X Extracts X X X X
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