High Court Of Madras
CIT vs. South India Corporation (Agencies) Ltd.
Sections 35B, 40A(8)
Asst. Year 1978-79
Janarthanam & Mrs. A. Subbulakshmy, JJ.
Tax Case No. 385 of 1988
28th April, 1998
R. Sivaraman for C.V. Rajan, for the Applicant : Mrs. Asha Vijayaraghavan of Subbaraya Aiyar, Padmanabhan & Ramamani, for the Respondent
JANARTHANAM, J. :
The assessee, M/s South India Corporation (Agencies) Ltd., Madras, is a private limited company carrying on business in various types of goods, such as, iron, hardware, pipes, electrical goods etc. It also acts as clearing agents and shipping agents, besides owning an engineering works. The assessment year involved is 1978-79, for which the previous year ended on 31st March, 1978. (a). In the course of the assessment proceedings, the assessee had claimed weighted deduction amounting to Rs. 2,96,329, which was subsequently revised by the assesseeâs letter dt. 23rd March, 1981 to Rs. 2,93,894, as allowable under s. 35B of the IT Act, 1961 (Act No. 43 of 1961â for short âIT Actâ), in respect of its chartering business carried on by it in its offices at Madras, Bombay and Delhi. (b)(i) The ITO rejected such a claim made by the assessee for the assessment year in question holding that it will not fall under any of the sub-cls. (i) to (ix) of cl. (b) of sub-s. (1) of s. 35B of IT Act. (ii) The CIT(A) was of the view that the expenditure incurred by the assessee on its goodwill, the chartering business may fall under anyone of the nine sub-clauses of cl. (b) of sub-s. (1) of s. 35B. (iii) On further appeal, the Tribunal also held the view that such expenditure may fall under anyone of the four sub-clauses, namely, (i), (ii), (vi) and (vii) of cl. (b) of sub-s. (1) of s. 35B of IT Act and directed the ITO to verify under which of those four sub-clauses, the expenditure incurred by the assessee would fall and give the necessary relief. (c)(i) The assessee also claimed, in the course of assessment proceedings, disallowance of interest claimed under s. 40A(8) of IT Act on net interest. (ii) The ITO rejected such a claim and he held that if at all any disallowance is to be made under s. 40A(8), it should be on gross interest amount. (iii) CIT took a contrary view and held that for the purpose of disallowance under s. 40A(8), the same should be on the basis of net interest. (iv) The Tribunal, on further appeal, confirmed the order of CIT on this aspect of the matter.
4. It is on these facts, the Tribunal, at the instance of the CIT, Central-II, Madras made a reference on the questions of law, as below, for the opinion of this Court:
“(1) Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to weighted deduction under s. 35B of the IT Act, 1961 in respect of the expenditure incurred by it on its goodwill chartering business in the asst. yr. 1978-79?
(2) Whether the Tribunal was correct in law in holding that the interest received by the assessee should bededucted from the gross interest paid by the assessee, while calculating the disallowance under s. 40A(8) of the IT Act, 1961?” Arguments of Mr. R. Sivaraman, learned counsel representing Mr. C.V. Rajan, learned Junior Standing Counsel for the Revenue and of Mrs. Asha Vijayaraghavan, of M/s Subbaraya Aiyar, Padmanabhan andRamamani, learned counsel appearing for the assessee were heard. Sec. 35B deals with export markets developmentallowance. (i) Clause (a) of sub-s. (1) of s. 35B prescribes, “Where an assessee being a domestic company or a person (other than a company), who is a resident in India, has incurred after 29th day of February, 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 cl. (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. (ii) The expenditure referred to in cl. (a) is catalogued in cl. (b) and the expenditure so catalogued must have to be incurred wholly and exclusively for the purposes mentioned in any of the sub-cls. (i) to (ix) of cl. (b). (iii) The expenditure catalogued in the nine sub-clauses reflects as under: “(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 promotion of the sale outside India of such goods, services or facilities; (v) preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto; (vi) furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities; (vii) travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from, and return to, India; (viii) performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities; (ix) such other activities for the promotion of the sale outside India of such goods, services or facilities, as may be prescribed.”
7. Rule 6AA of the IT Rules, 1962 (for short “IT Rules”) is relatable to prescribed activities for export markets development allowance. The said rule reads as under: “For the purposes of sub-cl. (ix) of cl. (b) of sub-s. (1) of s. 35B, other activities for the promotion of the sale outside India of the goods, services or facilities, which the assessee deals in or provides in the course of his business shall be as follows, namely : (a) conducting or pre- investment surveys or the preparation of feasibility studies or project reports: Provided that the pre-investment surveys are conducted or the feasibility studies are made or the project reports are prepared on the request in writing made by the Central Government or a foreign party to whom such goods, services or facilities are likely to be sold or provided by the assessee; (b) maintenance outside India of a warehouse for the promotion of the sale outside India of such goods; (c) maintenance of a laboratory or other facilities for quality control or inspection of such goods; Provided that in a case where only part of the sales is made outside India, the amount of expenditure incurred on the maintenance of such laboratory or other facilities which shall qualify for deduction under cl. (a) of sub-s. (1) of s. 35B shall not exceed the amount which bears the same proportion as the value of the turnover in respect of such exports bears to the turnover of the business in respect of which the laboratory or other facilities are maintained; (d) purchase of foreign trade periodicals or journals related to the business of the assessee; (e) litigation outside India for the purposes of the protection of the businessâ interests of the assessee or of trading activities relating to the goods, services or facilities which the assessee deals in or provides in the course of his business”.
8. There is no pale of controversy that the assessee-company, in the course of its business of chartering cargo to the foreign shippers has incurred expenditure on its own staff and maintenance of offices at Madras, Bombay and Delhi and that sort of an expenditure was sought to be claimed as a weighted deduction under s. 35B of IT Act. This sort of an expenditure as alleged to have been incurred by the assessee-company, can, by no stretch of imagination, be stated to fall under anyone of the sub-clauses of cl. (b) of sub-s. (1) of s. 35B of IT Act, if a cursory glance or glimpse or look of the aforesaid various sub-clauses or cls. (a) to (e) of r. 6AA of IT Rules. To put it aptly and pithily, we may say, the nature and character of the expenditure incurred by the assessee is such, as is not falling under anyone of the nine sub-clauses of cl. (b) of sub-s. (1) of s. 35B or any of the cls. (a) to (e) of r. 6AA of the IT Rules.
11. At this juncture, we may profitably refer to what the Supreme Court said in the two recent decisions, as relatable to the claim for weighted deduction under s. 35B of IT Act. (i) In CIT vs. Stepwell Industries Ltd. (1997) 142 CTR (SC) 345 : (1997) 228 ITR 171 (SC), Their Lordships said that when a claim for weighted deduction is made, it is for the assessee to satisfy the ITO that the expenditure falls under any of the sub-clauses of cl. (b) of sub-s. 35B(1) of the IT Act. The onus is on the assessee to prove that he is entitled to weighted deduction allowed under s. 35B. In order to get this deduction, the assessee will have to prove that the expenditure was incurred during the previous year wholly and exclusively for the purposes set out in cl. (b) of s. 35B(1). There cannot be any blanket allowance of the expenditure; nor can there be any blanket disallowance. Every case has to be discussed specifically and the expenditure must be found to be of the nature mentioned in any one of the sub-clauses. If the expenditure does not fall in any of these categories, it cannot be allowed as a deduction. Some of the sub-clauses provide that if the expenditure is incurred in India, it cannot be allowed, but in some of the sub-clauses, this requirement is not there. In such cases, the expenditure may or may not be incurred in India. Every case will have to be examined in the light of the provisions of the sub-clauses and the facts proved by the assessee. (ii) In CIT vs. Hero Cycles Pvt. Ltd. (1997) 142 CTR (SC) 122 : (1997) 228 ITR 463 (SC), Their Lordships of the Supreme Court said that expenses can be allowed under s. 35B of IT Act, only if they are wholly and exclusively incurred for any of the purposes mentioned in the sub-clauses of s. 35B(1)(b). The section is quite clear and categorical. There is no way that any other expenditure can be given weighted deduction, under s. 35B. It is the assesseeâs duty to prove the facts which will bring the case within any of these sub-clauses. Unless that is done, the assessee will not be entitled to get this deduction. The Tribunal has also to give a finding as to the entitlement of the assessee with reference to the particular sub-clause of s. 35B(1)(b). The facts have to be found out and the law has to be applied to those facts. What the apex Court said, as above, in the two decisions, squarely applies to the facts of the instant case, in the sense of the assessee-company not discharging the onus sliding on its shoulders of proving the factual matrix relatable to a particular specified expenditure falling under anyone of the sub-cls. (i) to (ix) of cl. (b) of sub- s. (1) of s. 35B of IT Act or of any of the cls. (a) to (e) of r. 6AA of IT Rules.
We may also state, by way of reiteration, for the sake of emphasis, that the character of the expenditure incurred by the assessee, as already stated, would indicate, in a crystal clear fashion, that such sort of an expenditure is not at all falling under anyone of the nine sub-clauses of cl. (b) of sub-s. (1) of s. 35B of IT Act or anyone of cls. (a) to (e) of r. 6AA of IT Rules. For the reasons, as above, we are of the view that the Tribunal was not right in law in holding that the assessee is entitled to weighted deduction under s. 35B of IT Act in respect of the expenditure incurred by it on its goodwill chartering business in the asst. yr. 1978-79 and we answer this question accordingly. Question No. (2): as framed, we rather feel, is not reflecting the view, as held by the Tribunal. The Tribunalâs view is reflected in the following terms : “In our view, it stands to reason, justice and fairplay that both the accounts should be considered together and only the net interest payment should be considered for purposes of disallowance under s. 40A(8) of the Act.” Such being the case, Question No. (2), as framed, requires to be reframed and the reframed question reads as under: “Whether the Tribunal was correct in law in holding that the net interestpayment alone should be considered for the purpose of calculating disallowance under s. 40A(8) of IT Act?” Sec. 40A(8) of IT Act provides that where the assessee, being a company (other than a banking company or a financial company), incurs any expenditure by way of interest in respect of any deposit received by it, fifteen per cent of such expenditure shall not be allowed as deduction.
The moot question or issue covered by Question No. (2) is relatable to interpretation of the expression or phraseology, “incurs any expenditure by way of interest”. (emphasis italicised in print, supplied). Whether the term âinterestâ referred to therein is relatable to ânet interestâ or âgross interestâ is the question, before ever fifteen per cent deduction is not to be allowed. It is not as if such a question did not arise for consideration before and the plain fact is that such a question did arise for consideration, before a Division Bench of this Court in the case of Andhra Prabha (P) Ltd. vs. CIT (1998) 144 CTR (Mad) 12, wherein a Division Bench of this Court said that there is no scope, taking into account the interest income of the assessee and setting off the same against the expenditure by way of interest, before applying s. 40A(8).This is because, the section itself does not use the word ânet interestâ. The assessee is not entitled to refer to the net expenditure after setting off the interest income. (a) While so holding, the Division Bench distinguished the decision in Keshavji Ravji & Co. vs. CIT (1990) 82 CTR (SC) 123 : (1990) 183 ITR 1 (SC) : TC 33R.336. (b) It is worthwhile to extract the weighty observations, as relatable to the interpretation of a statutory language of the Supreme Court in the case of Keshavji Ravji & Co. (supra) and it reads as under : “As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible. The supposed intention of the legislature cannot then be appealed to whittle down the statutory language which is otherwise unambiguous. If the intendment is not in the words, it is nowhere else. The need for interpretation arises when the words used in the statute are, on their own terms, ambivalent and do not manifest the intention of the legislature”. For the reasons, as above, we are of the view that the Tribunal is not correct in law in holding that the net interest payment alone should be considered for the purposes of calculating disallowance under s. 40A(8) of IT Act. The question is answered accordingly. This tax case (Reference) is thus disposed of. There shall, however, be no order as to costs, on the facts and in the circumstances of the case.
[Citation : 246 ITR 581]