Punjab & Haryana H.C : the Tribunal was right in allowing weighted deduction under s. 35B to the assessee on a part of establishment and other expenses

High Court Of Punjab & Haryana

CIT vs. Victor Tools Corporation

Section 35B

Asst. Year 1977-78, 1978-79

G.C. Garg & N.K. Agrawal, JJ.

IT Ref. Nos. 60 & 131 of 1982

23rd January, 1998

Counsel Appeared

R.P. Sawhney with Rajesh Bindal, for the Petitioner : A.K. Mittal, for the Respondent

JUDGMENT

N.K. AGRAWAL, J. :

Since in these two reference matters relating to the same assessee for two assessment years common questions arise, both these references are being decided by this common order. The following questions have been referred by the Tribunal at the instance of the Department under s. 256(2) of the IT Act, 1961 (for short, “the Act”) :

(i) For the asst. yr. 1977-78 :

” Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing weighted deduction under s. 35B to the assessee on a part of establishment and other expenses as detailed below :

“Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that weighted deduction was allowable on : Participation and exhibition charges. Expenses on subscription to foreign magazines. Expenses for obtaining photocopy of various documents. Service charges to representative at Bombay. A portion of common expenses on postage, telegram, printing, stationery, telephones and travelling expenses.A proportion of export establishment expenses.”

2. The AO, during the course of assessment relating to the asst. yr. 1977-78, did not allow deduction under s. 35B of the Act on certain expenditures on the ground that those expenditures did not fall under any of the sub-clauses of s. 35B(1)(b) of the Act. The assessee had claimed deduction under s. 35B in the original return of income on total expenditures amounting to Rs. 5,97,202. Revised returns were filed subsequently. In the latest revised return, deduction was claimed for the purposes of s. 35B on a total amount of Rs. 6,27,147. Total sales in the previous year relating to the asst. yr. 1977-78 were to the tune of Rs. 75,30,059. Ninety-five per cent of the sales were by way of exports outside India. The assessee, as a partnership firm, was engaged in the manufacture and sale of hand-tools at Jalandhar. In the previous year relating to the asst. yr. 1978-79, the assessee had disclosed total turnover at Rs. 98,90,665. Eighty-five per cent of the sales related to exports outside India. The assessee had claimed deduction in the original return of income under s. 35B of the Act on expenditures totalling Rs. 1,08,324. In the revised return, such deduction was claimed on Rs. 4,51,185 subject to further claim on expenditure on Rs. 4,27,976. The assessee further raised his claim for deduction under s. 35B in respect of ocean freight on Rs. 11,55,460 and inland transport charges (from Jalandhar to Bombay Port) on Rs. 4,10,082. The AO in the assessment relating to the asst. yr. 1977-78 allowed deduction under s. 35B of the Act on foreign travelling expenses (Rs. 46,009), foreign commission (Rs. 2,29,243), air freight for sending samples (Rs. 15,816), cost of samples (Rs. 2,676 and printing of foreign catalogue (Rs. 10,340). Thus, deduction under s. 35B was allowed by the AO on total expenditure of Rs. 3,07,644. For the asst. yr. 1978-79, the AO, after looking into the details furnished by the assessee, allowed deduction under s. 35B on Rs. 3,48,395 in respect of foreign travelling expenses (Rs. 1,08,325), export expenses (Rs. 10,826), foreign commissions (Rs. 2,03,001), air freight for sending samples (Rs. 21,373) and cost of samples (Rs. 4,870). Other items of expenditure for which deduction was claimed were declared by the AO to be not eligible on the ground that those expenses did not fall under any of the sub-clauses of s. 35B(1)(b) of the Act. I.

Establishment expenses :

3. Deduction on salary to stenographer and assistant (Rs. 11,932) under the head “Establishment expenses” was not allowed by the AO in the asst. yr. 1977-78 on the ground that no particular evidence was produced by the assessee to show that the stenographer was dealing with exports or was engaged in obtaining informationregarding markets outside India, preparation and submission of tenders for exporters and furnishing of samples or technical information for promotion of exports, as claimed by the assessee. The AO noticed that the main object of the services of the stenographer was the handling of correspondence relating to exports. In the next assessment year, the assessee had shown expenditure on export establishment at Rs. 15,211 for purposes of claiming deduction under s. 35B of the Act. The AO did not allow deduction in this year also. In appeal, for both the assessment years, the CIT(A) allowed 50 per cent of the expenditure incurred on export establishment on the ground that these expenditures had been incurred in connection with the promotion and development of the export market. In further appeal, the Tribunal increased the proportionate deduction from 50 per cent to 60 per cent of the total expenditure on export establishment. The Tribunal took the view that such expenditure had been rightly allowed by the CIT(A) inasmuch as the expenditure had been incurred for obtaining information, developing foreign market and facilitating the sending of samples and tenders outside India.

4. Shri R.P. Sawhney, learned senior counsel for the Department, has argued that no expenditure could be treated as eligible for deduction under s. 35B unless it fulfilled the conditions laid down in the said section. It was necessary for the assessee to show that expenditure had been incurred wholly and exclusively on the development of the export market. Such an expenditure should not be in the nature of capital expenditure or personal expenses of the assessee. It is further necessary that the expenditure should be incurred on any of the items or for any of the purposes specified in sub-cls. (i) to (ix) of cl. (b) of s. 35B(1) of the Act. It is also to be seen that the expenditure was not in the nature of purchasing and manufacturing expenses ordinarily debitable to the trading or manufacturing account. Shri Sawhney has thus argued that expenditure incurred by the assessee on export establishment would not qualify for deduction inasmuch as none of the sub-clauses was attracted.

5. Sec. 35B of the Act reads as under at the relevant time (as on 1st April, 1978): “Sec. 35B.—Export market development allowance.—(1)(a) Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th day of Feb., 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 : Provided that, in respect of the expenditure incurred after the 28th day of Feb., 1973, but before the 1st day of April, 1978 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 cl. (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, where such expenditure is incurred before the 1st day of April, 1978; (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, where such expenditure is incurred before the 1st day of April, 1978; (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.

Explanation 1.— In this section, “domestic company” shall have the meaning assigned to it in cl. (2) of s. 80B.

Explanation 2.— For the purposes of sub-cl. (iii) and sub-cl. (viii) of cl. (b), expenditure incurred by an assessee engaged in the business of— (i) operation of any ship or other vessel, aircraft or vehicle, or (ii) carriage of, or making arrangements for carriage of, passengers, livestock, mail or goods, on or in relation to such operation or carriage or arrangements for carriage (including in each case expenditure incurred on the provision of any benefit, amenity or facility to the crew, passengers or livestock) shall not be regarded as expenditure incurred by the assessee on the supply outside India of services or facilities. (1A) *** *** *** (2) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to in sub-s. (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year.” Sec. 35B was introduced w.e.f. 1st April, 1968 to allow weighted deduction in respect of any expenditure under specific heads to promote the sale of any goods outside India. Such deduction was allowed as export markets development allowance and consisted of a weighted deduction in an amount equal to one and one- third times the amount of the qualifying expenditure. The primary condition to make any expenditure eligible for such deduction was that it should be incurred by the taxpayer wholly and exclusively on any of the activities specified in any of the sub-clauses. Thus, weighted deduction was admissible only with reference to the qualifying expenditure incurred by the assessee. It would thus be seen that deduction under s. 35B would not be admissible simply on a claim that the assessee had incurred the expenditure for developing the export market. The assessee is also required to show that the expenditure was incurred wholly and exclusively on an activity specified in any of the sub-clauses. An expenditure will qualify for the weighted deduction if it is incurred on activities exercised outside India for the development of export markets for Indian goods. The provision in s. 35B is not intended to cover expenditure which the assessee incurs on activities inside India for his export business where those are incidental to the activities outside India. Preparation and submission of tenders referred to in sub-cl. (v) or furnishing of samples or technical information referred to in sub-cl. (vi) shall qualify for weighted deduction, because these activities are incidental to the activities outside India.

6. Shri Ajay Mittal, learned counsel for the assessee, has argued that the assessee’s exports outside India were about 85 per cent of the total sales and, therefore, the assessee had rightly claimed deductions on several expenditures. The CIT(A) as well as the Tribunal gave a clear finding of fact that expenditures, incurred on various activities, were in respect of the development of the export market. Shri Mittal has explained that expenditure on export establishment specifically related to the activities of collecting information about the export market, sending the samples and preparation of tenders. The export establishment engaged itself in the various activities specified in sub-cls. (i) to (ix) of s. 35B(1)(b) of the Act. Shri Mittal has referred to a decision of the Bombay High Court in CIT vs. Eldee Wire Ropes Ltd. 1978 CTR (Bom) 296 : (1978) 114 ITR 485 (Bom) : TC 15R.471, wherein a question relating to deduction under s. 35B of the Act was under consideration and the Court declined to call for the question from the Tribunal. It was noticed that the Tribunal had allowed assessee’s claim for weighted deduction under s. 35B of the Act. The plea raised by the Department was that the claim was not admissible as the expenses were incurred in India. The claim in respect of export duty was held to be not eligible but, since the amount of export duty was Rs. 1,437, it was said to be a very small amount and, therefore, a reference was not invited from the Tribunal. The following observation is, however, relevant : “It would appear that where the legislature desired to exclude the expenditure incurred in India for the purposes of giving benefit of weighted deduction to the assessee, it expressly did so by specifically mentioning such exclusion in the subclause, for example, in sub-cl. (iii). It must follow that where this was not done, the expenditure can be incurred by the assessee either outside India or in India, but it must pertain to the purposes mentioned in the various sub-clauses, which purposes are indicated as pertaining to various activities outside India. If then, an assessee under this clause claims the benefit of weighted deduction, he will have to satisfy the Revenue authorities that the purpose is one which is satisfied by reference to the language of the section; and in such a case where the assessee is able to discharge this burden, he would be entitled to a weighted deduction irrespective of whether the expenditure is incurred within or without India.” Reliance is also placed by Shri Ajay Mittal, learned counsel for the assessee, on the decision of the Allahabad High Court in CIT vs. Novelty Trading Corpn. & Ors. (1984) 150 ITR 453 (All) : TC 54R.987. The dispute in that case related to the weighted deduction in respect of salary and other expenses under s. 35B of the Act. The Tribunal had allowed the claim of the assessee to the extent of 75 per cent following the decision of the Special Bench of the Tribunal in the case of J. Hemchand & Co. vs. ITO ITA No. 3255 of 1976-77 dt. 17th June, 1978. It was noticed that the Department had only objected to the apportionment of the claim at 75 per cent. The Court took the view that there was no need to interfere in regard to the claim at 75 per cent because the Revenue did not dispute the allowability of the claim of weighted deduction in respect of salary expenses. Shri Mittal has thus argued, on the strength of the aforesaid decision, that the deduction under s. 35B may be allowed in respect of expenditure on export establishment incurred by the assessee. Reliance has also been placed by Shri Ajay Mittal on a decision of the Delhi High Court in CIT vs. Raunaq International Ltd. (1986) 158 ITR 701 (Del) : TC 15R.445. The assessee had claimed deduction under s. 35B in relation to certain items of general expenditure. The Tribunal allowed such deduction for the asst. yr. 1973-74 in respect of 75 per cent of the repairs and renewals, director’s remuneration and electricity and power and 100 per cent of expenditure on foreign customers. The Tribunal, for the asst. yr. 1976-77, held that the assessee was entitled to deduction in respect of 50 per cent of rent and printing and stationery and 75 per cent of the publication of pamphlets for distribution outside India, director’s remuneration, water and electricity charges and repairs and renewals. It was held by the Court that the assessee was entitled to weighted deduction under s. 35B even on broad heads of expenditure or general expenditure, provided co-relation is established between the items of expenditure and the heads referred to in the various sub-clauses of s. 35B. It was, therefore, held that the appointment was a question of fact. Application filed under s. 256(2) of the Act was, therefore, rejected.

7. Shri R.P. Sawhney, learned senior counsel for the Department, has, on the other hand, drawn our attention to the decision of the Supreme Court in CIT vs. Stepwell Industries Ltd. & Ors. (1997) 142 CTR (SC) 345 : (1997)228 ITR 171 (SC). The Supreme Court, while examining various appeals, held that weighted deduction is to be allowed for activities carried out wholly and exclusively for the various purposes set out in sub-cl. (i), (ii), (v), (vii), (viii) and (ix) of s. 35B(1) (b). It was observed that “in order to get this kind of deduction, the onus lies heavily on the assessee to prove that expenditure falls within any of the purposes set out in the various sub-clauses of cl. (b) of s. 35B(1). Merely because some activities took place outside India, that will not qualify the expenditure for the deductions mentioned in s. 35B.” The Supreme Court in the aforesaid case, while dealing with a claim of an assessee in respect of deduction under s. 35B on the amount of commission paid by the assessee to the State Trading Corporation of India Ltd., held that the assessee was not entitled to deduction unless he could establish that the advertisement or publicity was being done outside India for and on behalf of the assessee and in respect of the goods of the assessee. If the State Trading Corporation maintains a branch, office or agency for the promotion of sale outside India, the assessee cannot claim any deduction on account of maintenance of such branch, office or agency. If such branch, office or agency is maintained by the assessee himself for the promotion of sale outside India, then the assessee will be entitled to a deduction under s. 35B. While dealing with appeals (Civil Appeal Nos. 8044-8045 of 1995) in Stepwell Industries’ case (supra) in which claim for deduction under s.

35B had been allowed to the assessee by the Tribunal in respect of customs duty, repairs and reassembly, clearing and storage, and expenditure which were general in nature, the Supreme Court disallowed the claim. Similarly, in Civil Appeal No. 8482 of 1995, it was held that weighted deduction could not be allowed without examining the claim. It was noticed that the assessee had failed to adduce proper evidence and make out a proper case under cl. (b) of s. 35B(1). Deduction under s. 35B had been allowed by the Tribunal in respect of travelling expenses, service charges, commission to various agencies, expenditure on foreign delegation to India, bank interest on packing credit, subscription, commission, brokerage, proportionate salary, telex, telephone, telegram, postage, printing, stationery, electricity, Jamnagar office expenses, bank charges, etc. Shri Ajay Mittal, learned counsel for the assessee, has argued that, while considering certain other appeals in the aforesaid case, the Supreme Court remanded certain matters where the details of expenditure had not been properly examined by the Tribunal. He has, therefore, put forward a plea that, in the absence of a clear finding by the CIT or the Tribunal, the matter may be remanded to the Tribunal for further examination.

As has been seen, establishment expenditure was not allowed by the AO for the purposes of deduction under s.

35B of the Act after noticing that it related to the salary paid to the stenographer and the assistant. The AO has specifically noticed in his order that no particular evidence was produced to show that the stenographer was dealing with exports or was engaged in the obtaining of information regarding markets outside India or in the preparation and submission of tenders. We are, therefore, of the view that expenditure on export establishment in both the assessment years was not eligible for the purposes of deduction under s. 35B of the Act. There appears no necessity to further call for details from the assessee when the nature of expenditure has been looked into by the AO and the assessee has failed to adduce any evidence so as to bring the expenditure under any of the sub-clauses of cl. (b) of s. 35B(1) of the Act. The Supreme Court in Stepwell Industries’ case (supra) has, while dealing with Civil Appeal No. 3280 of 1995, observed as under : “When a claim for weighted deduction is made, it is for the assessee to satisfy the ITO that the expenditure falls in any of the sub-clauses of cl. (b) of s. 35B(1). The onus is on the assessee to prove that he is entitled to the 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.” While examining Civil Appeal Nos. 2324-2346 of 1995, the Supreme Court again observed that “the onus is on the assessee to prove that he was entitled to the expenditure by reference to the various sub-clauses of s. 35B(1)(b). The expenditures cannot generally be allowed as claimed.”

While examining a similar question in Civil Appeal No. 3975 of 1995, Stepwell Industries’ case (supra), the Supreme Court further observed as under : “The Tribunal was wrong in allowing the claim of the assessee for weighted deduction under s. 35B without going into the facts of the case. The claim was not made before the ITO or the AAC. No particulars of the expenditure were furnished to them. The particulars should have been placed before the ITO or the AAC for examination. The onus of proving the facts and getting the benefit of the deduction lies on the assessee. The assessee not having proved anything either before the ITO or the AAC cannot get this deduction. The Tribunal cannot allow the claim on assumption of facts.” It would be thus clear that a claim for deduction under s. 35B of the Act cannot be allowed unless and until it is shown that it related to any of the activities specified in the sub-clauses of s. 35B(1) (b) of the Act. In such a situation, the claim in respect of export establishment in the case in hand cannot be said to be eligible for deduction under s. 35B. II. Travelling expenses and expenses on postage, telex, telegram, telephone, printing and stationery :

10. In the asst. yr. 1977-78, the assessee had claimed deduction under s. 35B in respect of travelling expenditure (Rs. 18,893 and in respect of postage, telegram, telephone, printing, stationery, etc. (Rs. 18,052). In the next assessment year, deduction was claimed on postage, telex, telegram, telephone, printing and stationery and travelling (Rs. 1,45,658). The CIT(A), in the asst. yr. 1977-78, held 50 per cent of the travelling expenditure as eligible for deduction under s. 35B of the Act. It was raised to 60 per cent by the Tribunal. The CIT(A) had allowed 50 per cent of 25 per cent of the total expenditure on postage, telex, telegram, telephone, printing, stationery, etc. The Tribunal raised it to 60 per cent. In the asst. yr. 1978-79, the CIT(A) similarly allowed deduction at 50 per cent of 25 per cent of Rs. 1,45,658 in respect of postage, telex, telegram, telephone, printing, stationery and travelling. The Tribunal, however, raised the deduction to 33 per cent of total expenditure on these items. It has already been seen that an expenditure, in order to qualify for weighted deduction under s. 35B of the Act, must fall specifically under any of the sub-clauses of s. 35B(1)(b) of the Act. Part of the expenditure incurred on postage, telex, telegram, telephone, printing, stationery and travelling has been allowed by the CIT(A) as well as the Tribunal simply on the assumption that these expenditures were incurred for developing foreign market and to facilitate the sending of samples and tenders outside India. It has already been noticed that the AO, in the asst. yr. 1977-78, allowed deduction under s. 35B on foreign travelling expenses as well as air freight for sending samples. In addition, costs of samples and printing of foreign catalogue were also allowed for deduction under s.

35B of the Act. When deductions have already been allowed specifically on foreign travelling and on the cost of samples as well as the freight incurred on sending samples outside India, there appeared no justification for raising a presumption that other expenditure incurred on travelling, postage, telex, telegram, telephone, printing and stationery were also incurred in connection with the sending of samples or furnishing of tenders outside India. There seems, therefore, no justification to allow expenditures on postage, telex, telegram, telephone, printing, stationery and travelling.

In the next asst. yr. (1978-79) also, the AO had already allowed deduction under s. 35B on foreign travelling expenses, export expenses, air freight for sending samples and the cost of samples. In this assessment year, no further presumption was required to be raised, as done by the CIT(A) and the Tribunal, that the assessee was entitled to claim deduction under s. 35B of the Act in respect of the other expenditures also relating to postage, telex, telegram, telephone, printing, stationery and travelling. Deduction cannot be allowed twice. In CIT vs. Hero Cycles Pvt. Ltd. & Ors. (1997) 142 CTR (SC) 122 : (1997) 228 ITR 463 (SC), the Supreme Court, while considering the assessee’s claim under s. 35B in Civil Appeal No. 3120 of 1995, observed as under : “There is other expenditure in regard to salary, director’s remuneration, rent, printing and stationery, postage and telegrams, etc., which have not been proved to be wholly or exclusively incurred for the purposes of any of the sub-clauses mentioned in cl. (b) of s. 35B(1). These will have to be disallowed. The order of the Tribunal to this extent is erroneous.” The assessee’s claim for the asst. yrs. 1977-78 and 1978-79 under s. 35B is found to be not allowable in respect of postage, telex, telegram, telephone, printing, stationery and travelling. III. General expenses :

11. In the asst. yr. 1977-78, the assessee had claimed deduction under s. 35B on general expenses of Rs. 3,176. The AO disallowed it whereas the CIT allowed deduction on 50 per cent of this expenditure which was raised to

60 per cent by the Tribunal in further appeal. As has already been seen, the AO had allowed deduction under s.

35B on specific expenditures, total Rs. 3,07,644. Deduction on general expenditure was disallowed by the AO after noticing that this expenditure had been incurred on the purchase of greeting cards, books on export procedure and for obtaining photostat copies of the documents. Looking to the nature of the expenditure, it cannot be said that general expenditure of Rs. 3,176 was eligible for deduction under any of the sub-clauses of s. 35B (1)(b) of the Act. There is no reason to remand the matter for further examination of the details inasmuch as the AO has gone into the nature of the expenditure and has given the details in his order. In Hero Cycles’ case (supra), the Supreme Court, while examining the assessee’s claim under s. 35B in SLP(C) No. 10982 of 1997, observed as under : “It appears that the Tribunal was totally unmindful of the various sub-clauses of s. 35B(1)(b). Expenses can only be allowed if they are wholly and exclusively incurred for any of the purposes mentioned in these sub- clauses. 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 assessee’s duty to prove 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 allowed the deduction without verifying or examining the sub-clauses under which this could be allowed.” Therefore, general expenditure of Rs. 3,176 is found to be not eligible for deduction under s. 35B of the Act. IV. Advertisement :

12. In the asst. yr. 1977-78, expenditure on advertisement (Rs. 2,585), was not allowed under s. 35B of the Act by the AO after finding that this expenditure related to the purchase of blocks, diaries and trade publicity and not on any advertisement abroad. The CIT(A), however, allowed 50 per cent of this expenditure and the Tribunal raised if to 60 per cent in further appeal. Looking to the nature of the expenditure as noticed by the AO, this expenditure is again found to be not eligible for deduction under s. 35B of the Act. It would serve no purpose to remand the case to the Tribunal for further examination inasmuch as the details have already been recorded by the AO. V. Participation and Exhibition charges :

13. In the asst. yr. 1978-79, the assessee had claimed deduction under s. 35B of the Act on Rs. 28,750. It was disallowed by the AO but allowed by the CIT(A) as well as the Tribunal. It is not clear from the assessment order nor has it been looked into by the CIT(A) or the Tribunal, if this expenditure related to advertisement or publicity by way of participation in exhibition outside India. It would, therefore, be necessary to look into the nature of expenditure. If this expenditure related to participation in an exhibition outside India, it would attract sub-cl. (i) which permits expenditure on advertisement or publicity outside India. The matter is, therefore, remitted back to the Tribunal for looking into the nature of expenditure and thereafter giving a finding whether this expenditure did qualify for deduction under s. 35B of the Act. VI. Subscription to foreign magazines :

14. In the asst. yr. 1978-79, deduction on expenditure on “subscription for various magazines and publications and on advertisements” was claimed by the assessee at Rs. 10,475. The AO did not allow deduction on thisexpenditure on the ground that it did not fall under any of the sub-clauses of s. 35B(1)(b). There is no further detail in the record to show that subscriptions had been paid by the assessee for getting “foreign magazines”. It, therefore, needs magazines so as to obtain information regarding markets outside India. If the purpose behind such expenditure was to obtain such information, it would attract sub-cl. (ii) of s. 35B(1)(b) of the Act. The matter is, therefore, remitted back to the Tribunal to look into the actual nature of the expenditure of Rs. 10,475 (on subscription for various magazines and publications and on advertisement). VII. Expenditure on obtaining photostat copies of various documents :

15. In the asst. yr. 1978-79, deduction under s. 35B of the Act was claimed on Rs. 4,318. The AO declined to allow the deduction but the CIT(A) as well as the Tribunal allowed it. It is again not clear if the assessee incurred the expenditure for obtaining information regarding markets outside India. In this absence of true nature of expenditure on record, it would be difficult to accept the assessee’s claim that this expenditure was allowable under sub-cl. (ii) of s. 35B(1)(b) of the Act. In Hero Cycles’ case (supra), it has been further observed by the Supreme Court at p. 473 as under : “We are of the opinion that the Tribunal cannot allow any weighted deduction without linking the expenditure to one or more of the activities referred to in various sub-clauses of s. 35B(1)(b).” This matter is also, therefore, remitted back to the Tribunal for verifying and ascertaining the correct nature of the expenditure and thereafter to decide if sub-cl. (ii) could be invoked so as to allow this expenditure. VIII. Service charges :

16. In the asst. yr. 1978-79, the assessee claimed deduction under s. 35B on service charges (Rs. 10,000) paid to its representative at Bombay. The AO declined to allow deduction. It was allowed by the CIT(A) as well as the Tribunal without any discussion as to which sub-clause was attracted so as to allow this expenditure. The nature of the expenditure is, however, clear and does not call for any further details. In Stepwell Industries’ case (supra), the Supreme Court, while considering a similar claim of the assessee regarding payment of commission to the State Trading Corporation of India, declined to allow deduction under s. 35B. In Civil Appeal Nos. 1624-1625 of 1988, the question relating to commission paid in India to a middleman was examined and it was held that the commission to the middleman, who approached the assessee for the purchase of assessee’s goods for and on behalf of a foreign buyer, was not eligible for deduction under sub-s. (ii) of s. 35B (1)(b) of the Act. In these circumstances, service charges paid to the assessee’s representative at Bombay do not qualify for deduction under s. 35B of the Act inasmuch as none of the sub-clauses of s. 35B(1)(b) is attracted. Both the references (IT Ref. Nos. 60 and 131 of 1982) stand disposed of in the above terms.

[Citation : 237 ITR 640]

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