Madras H.C : Whether the Tribunal was right in holding that the relief under s. 35B is not available on export inspection agency for fee, premium to Export Credit Guarantee Corporation and export pre-shipment advance interest?

Counsel Appeared

P.P.S. Janarthana Raja, for the Assessee : S.V. Subramanian, for the Revenue

THANIKKACHALAM, J.:

At the instance of the assessee and the Department, the Tribunal referred the following questions for the opinion of this Court, for the asst. yr. 1974-75, under s. 256(1) of the IT Act, 1961, hereinafter referred to as the Act.

By the assessee :

“1. Whether the Tribunal was right in holding that the relief under s. 35B is not available on export inspection agency for fee, premium to Export Credit Guarantee Corporation and export pre-shipment advance interest?

Whether the Tribunal was right in holding that the expenditure incurred for increasing the capital is not in the nature of the revenue expenditure?

Whether the Tribunal was right in holding that the surtax paid is not an allowable deduction?”

By the Department :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is a company in which the public are substantially interested within the meaning of s. 2(18)(b)?”

2. Insofar as question number 1 is concerned, the ITO had disallowed the assessee’s claim for weighted deduction under s. 35B of the following items : Export inspection agency fee Rs. 826 Export Credit and Guarantee Corporation Rs. 315 Export pre-shipment advance interest Rs. 16,511 On appeal by the assessee, the CIT(A) held that item No. 1 was an obligatory item in all exports, since without such inspection, the goods could not be exported and that it was hence expenditure on the distribution of the goods within the meaning of the first part of s. 35B(1)(b)(iii). Regarding item 2, this sum, according to the CIT was paid by way of premium partly for covering risk during the transit of goods and partly for the Corporation’s standing guarantors to the assessee in respect of the goods exported for the purpose of the recovery of the value of the goods. The CIT held that Rs. 150 out of the above sum could be taken as relating to the coverage of risk in transit and is entitled to weighted deduction, but not the balance relating to the recovery of the invoice amounts, which was after the export of the goods. Regarding item 3, the CIT held that this item being expenditure incurred in India for the distribution, supply or provision outside India of such goods will be hit by the first part of s. 35B(1)(b)(iii). On the assessee’s appeal on this point, the Tribunal upheld the CIT(A)’s finding regarding items 1 and 2. Regarding the third item also the Tribunal agreed with the CIT, but for a different reason that this payment related to the realisation of export price and was hence not expenditure incurred as such on the distribution of goods. The CIT(A) had also upheld the ITO’s disallowance of the assessee’s claim for deduction of the registration fees of Rs. 33,900 paid for increasing the capital as capital expenditure being incurred towards the capital structure of the company, relying on Mohan Meakin Breweries Ltd. vs. CIT (1979) 11 CTR (HP) 49 : (1979) 117 ITR 505 (HP) : TC 17R.468. The Tribunal, on appeal by the assessee, upheld the order of the CIT, relying upon the Calcutta High Court’s decision in Hindustan Gas Industries Ltd. vs. CIT (1979) 117 ITR 549 (Cal) : TC 16R.869. The Tribunal, thus, dismissed the assessee’s appeal. The assessee in its appeal before the Tribunal had raised a further contention that surtax liability of Rs. 2,17,094 was an admissible deduction. The CIT(A) held that the ITO’s disallowance of the assessee’s claim is in order. On further appeal, the Tribunal upheld the CIT(A)’s view, following the decision of the Special Bench (Bombay) of the Tribunal, dt. 1st Dec., 1977, in the case of Amar Dye Chem. Ltd., in which it was held that the surtax liability is not deductible in computing the assessee’s income from business under s. 28 and/or ss. 29 to 43A of the Act.

Insofar as the question suggested by the Revenue, is concerned the contention was that the assessee should not be treated as a company in which the public were substantially interested, as held by the CIT(A). The CIT(A), on the assessee’s appeal, had reversed the ITO’s finding on this point against the assessee, following an earlier order of the Tribunal, in the assessee’s own case, for the asst. yrs. 1967-68 to 1972-73. Thus the Tribunal upheld the CIT’s view on this aspect.

Insofar as question number 1 is concerned, export inspection agency fee of Rs. 826 was paid, since it is obligatory on the part of the assessee in all exports and was done before the export. Without such inspection, the goods could not be exported. The Tribunal agreed with the view taken by the CIT(A) that this would be part the expenditure of the distribution of the goods exported and would come under the first part of sub-cl. (iii) of cl. (b) of s. 35B(1).

The assessee claimed weighted deduction on the fees paid for export inspection agency. The admitted position is that the expenditure mentioned in the above referred question were incurred by the assessee in India, though in connection with carriage of goods to the destination outside India. Since this expenditure was incurred in India, the assessee is not entitled to weighted deduction on the export inspection agency fees. This was the view taken by the Bombay High Court in Forbes Forbes Campbell & Co. Ltd. vs. CIT (1994) 119 CTR (Bom) 319 : (1994) 206 ITR 495 (Bom): TC 15R.512. A similar view was taken by the Bombay High Court in Carona Sahu Co. Ltd. vs. CIT (1995) 123 CTR (Bom) 497 : (1995) 213 ITR 106 (Bom) : TC 15PS.16. A similar view was also taken by the Gujarat High Court in Shri Ambica Mills Ltd. vs. CIT (1992) 106 CTR (Guj) 37 : (1992) 198 ITR 94 (Guj) : TC 15R.483. However the Calcutta High Court in Union Carbide India Ltd. vs. CIT (1986) 56 CTR (Cal) 146 : (1987) 165 ITR 558 (Cal) : TC 15R.455 held that the export agency inspection fee paid by the assessee for the purpose of obtaining the certificate, which was a necessary requirement for the export of goods, amounted to expenditure incurred for furnishing to a person outside India technical information for the promotion of sales of such goods within the meaning of s. 35B(1)(b) (vi) and that the assessee was entitled to weighted deduction on such expenditure. If this item of expenditure falls under s. 35B(1)(b)(vi), this expenditure is entitled to weighted deduction. The qualification for deduction under this provision is furnishing of technical information for the promotion of export sales. According to the assessee unless this inspection was done and certificate is obtained, goods cannot be exported to foreign countries. It was submitted that this certificate would furnish the technical information with regard to the goods to be exported to the foreign countries. We agree with the assessee that this item of expenditure is entitled to weighted deduction, since the certificate issued by the Export Inspection Agency would amount to furnishing technical information with regard to the goods to be exported. Even though this was not the case put forward before the Tribunal, inasmuch as this line of argument was advanced before us, which we would prefer to accept on the basis of the decision of the Calcutta High Court cited supra. Next item in Question No. 1 relates to premium paid to Export Credit & Guarantee Corporation. This sum was paid by way of premium partly for covering risk during the transit of goods and partly for the Corporation’s standing guarantors to the assessee in respect of the goods exported for the purpose of recovery of the value of the goods. The CIT(A) held that Rs. 150 out of the above sum of Rs. 315 could be taken as relating to the coverage of risk in transit and is entitled to weighted deduction, but not on the balance relating to the recovery of the invoice amount which was after the export of the goods. Having regard to the nature of the service rendered by the above, the Tribunal agreed with the finding of the CIT(A). In CIT vs. Navabharat Enterprises (P) Ltd. (1988) 170 ITR 320 (AP) : TC 15R.430, the Andhra Pradesh High Court held that the payment made to the Export Credit Guarantee Corporation to ensure the financial capacity of the foreign buyer to fulfil the commitment of deferred payment and insulate the assessee against the risk of non-recovery from the foreign buyer was covered by sub-cl. (viii) of s. 35B(1)(b). The assessee is, therefore, entitled to weighted deduction under s. 35B in respect of the abovesaid expenditure. This was the view taken by the Karnataka High Court in CIT vs. J.B. Advani & Co. (P) Ltd. (1987) 60 CTR (Kar) 127 : (1987) 163 ITR 638 (Kar) : TC 15R.463. This was also the view taken by Kerala High Court in CIT vs. Alleppey Co. Ltd. (1994) 116 CTR (Ker) 15 : (1994) 207 ITR 598 (Ker) : TC 15R.498. Same view was taken by the Kerala High Court again in CIT vs. N.C. John & Sons Ltd. (1994) 119 CTR (Ker) 461 : (1994) 208 ITR 57 (Ker) : TC 15R.426.

The next item in Question No. 1 is, export pre-shipment advance interest of Rs. 16,511. The CIT (A) upheld the disallowance of this claim on the ground that it is expenditure incurred in India for the distribution, supply or provision outside India of such goods and hence would be hit by the first part of sub-cl. (iii) of s. 35B(1)(b). On appeal, the Tribunal upheld the CIT(A)’s view, though for a different reason that this payment relates to the realisation of the export price and is not an expenditure incurred as such on the distribution of the goods. In CIT vs. Vippy Solve Product (P) Ltd. (1985) 47 CTR (MP) 44 : (1986) 159 ITR 487 (MP) : TC 15R.529 the Madhya Pradesh High Court held that this item of expenditure was incurred by the assessee in connection with the execution of a contract for the supply of goods outside India. Therefore, the assessee is entitled to weighted deduction.

In Brooke Bond India Ltd. vs. CIT (1991) 95 CTR (Cal) 89 : (1992) 193 ITR 390 (Cal) : TC 15R.507 the Calcutta High Court held that the goods were shipped and, before shipment, the goods had to be properly insured and the freight had to be paid. Therefore, it would not be for performance of services outside India. Therefore, the assessee is not entitled to weighted deduction on this expenditure. The Gujarat High Court in Isabgul Export Corporation vs. CIT (1994) 205 ITR 227 (Guj) : TC 15R.473 also held that so far as the expenditure incurred on payment of interest to the bank and bank charges were concerned, it does not fall under any of the sub-clauses of cl. (b) of s. 35B(1).

In Testeels Ltd. vs. CIT (1993) 110 CTR (Guj) 320 : (1994) 205 ITR 230 (Guj) : TC 15R.474 the Gujarat High Court dissenting from the view on this aspect taken by the Madhya Pradesh High Court in (1985) 47 CTR (MP) 44 : (1986) 159 ITR 487 (MP): TC 15R.529 cited supra, held that interest on pre-shipment advance would not be entitled to weighted deduction under s. 35B of the Act.

In T.C. No. 902 of 1982 in the assessee’s own case this Court held that the assessee is not entitled to weighted deduction on the expenditure incurred by way of interest paid on export pre-shipment advance. Therefore, we are not accepting the order passed by the Tribunal in respect of the first two items as mentioned in question No. 1 and in so far as the third item is concerned, we agree with the order passed by the Tribunal. Accordingly in respect of the first two items we answer the question referred to us in the negative and in favour of the assessee and in so far as the third item is concerned, we answer the question in the affirmative and against the assessee.

Insofar as Question No. 2 is concerned, it relates to whether the expenditure incurred would go for increasing the capital. The CIT(A) upheld the ITO’s disallowance of the assessee’s claim for deduction of the registration fees of Rs. 33,900 for increasing the capital, as capital expenditure being incurred towards the capital structure of the company, relying on Mohan Meakin Breweries Ltd. vs. CIT (supra). On assessee’s appeal, the Tribunal upheld the finding of CIT on this point, relying upon the decision of the Calcutta High Court in Hindustan Gas and Industries Ltd. vs. CIT (supra). The point whether the registration fees paid would go to increase the capital base or not, came up for consideration before this Court in CIT vs. Kisenchand Chellaram (India) (P) Ltd. (1980) 16 CTR (Mad) 248 : (1981) 130 ITR 385 (Mad) : TC 16R.1125, wherein this Court held that without capital a company cannot carry on its business and hence the expenses incurred for increasing the capital was bound up with the functioning the financing of the business. Accordingly the expenditure incurred by way of registration fees paid to the Registrar of Companies for registration, would amount to expenditure laid out wholly and exclusively for the purpose of the business and therefore allowable as revenue expenditure.

The question as framed and suggested by the Tribunal on this as on this aspect is not satisfactory. Accordingly, we reframe the same as under : “Whether the registration fees paid to the Registrar of Companies would be allowable as revenue expenditure ?”

We are not agreeable with the order passed by the Tribunal in holding that the registration fees paid would amount to capital expenditure. In that view of the matter, we answer the question referred to us in the affirmative and in favour of the assessee.

The third question relates to whether surtax paid is allowable as deduction in the assessment under the Act. This question is also directly covered by a decision of this Court in Sundaram Industries Ltd. vs. CIT (1986) 53 CTR (Mad) 51 : (1986) 159 ITR 646 (Mad) : TC 17R.806 against the assessee. Accordingly, we answer this question referred to us in favour of the Department and against the assessee.

At the instance of the Department, one question was referred by the Tribunal. It relates to whether the public are substantially interested in the assessee-company within the meaning of s. 2 (18)(b) of the Act. This point is also covered against the assessee by a decision of this Court in CIT vs. Lucas T.V.S. Ltd. (1995) 128 CTR (Mad) 210 : (1995) 214 ITR 700 (Mad) wherein this Court held that the public are not substantially interested within the meaning of s. 2(18)(b) of the Act. Accordingly, we hold that the assessee is not a company in which the public are substantially interested in the assessment year under consideration. In that view of the matter, we answer the question in the negative and in favour of the Department.

In the result, items 1 and 2 in question No. 1 are held in favour of the assessee and item 3 in question No. 1 is answered in favour of the Department. Insofar as Question No. 2 is concerned, it is answered in favour of the assessee. Insofar as Question No. 3 is concerned, it is answered against the assessee. Insofar as the question referred on behalf of the Department is concerned, it is answered in favour of the Department and against the assessee.

No costs.

[Citation : 224 ITR 282]