1998-VIL-354-P&H-DT
Equivalent Citation: [1999] 238 ITR 85, 157 CTR 221, 109 TAXMANN 156
PUNJAB AND HARYANA HIGH COURT
Date: 02.12.1998
AVON CYCLES PRIVATE LIMITED
Vs
COMMISSIONER OF INCOME-TAX
BENCH
Judge(s) : G. C. GARG., N. K. AGRAWAL
JUDGMENT
The Judgement of the court was delivered by
N. K. Agrawal J. -This is a reference under section 256(1) of the Income-tax Act, 1961 (for short the "Act"), by the Income-tax Appellate Tribunal, Chandigarh Bench (the "Tribunal"), at the instance of the assessee, relating to the assessment year 1975-76, seeking opinion of this court on the following questions of law :
"1. Whether, on the facts and in the circumstances of the case, the assessee was entitled to the export markets development allowance by way of weighted deduction in terms of section 35B of the Income-tax Act, 1961, in respect of the following expenditure :
Rs. (a) Bank commission of foreign bills 19,578 (b) Interest paid to bank on foreign bills 3,66,032 (c) Transit insurance charges 95,947 (d) Clearing and forwarding charges 18,59,050 (e) Carriage outward expenses 2,97,532
2. Whether on the facts and in the circumstances of the case, the expenditure of Rs. 7,095 as under spent by way of business expenditure is in the nature of entertainment expenditure so as to call for disallowance:
Rs.
(i) Hotel bill for dealers 5,359
(ii) Amount paid to diners club 1,326
(iii) Amount spent on dinner to Tanzanian dealers 410"
The assessee deals in the manufacture and sale of bicycles and its parts. It also makes exports. Deductions by way of export markets development allowance under section 35B of the Act were claimed by the assessee on various expenditures incurred in its export section. The Assessing Officer allowed such deduction only on the amount of commission paid to foreign dealers. In appeal, the Commissioner of Income-tax (Appeals) allowed deductions in respect of certain other expenditures also but declined to allow such deductions on many items of expenditure claimed by the asses-see. Both the assessee and the Revenue filed appeals before the Tribunal, which partly allowed the assessee's appeal granting further deductions under section 35B on more items of expenditure and dismissed the Revenue's appeal.
The assessee claimed deduction in respect of bank commission and interest paid to the bank on foreign bills. Any deduction under section 35B has to be allowed if the expenditure has been incurred wholly and exclusively for any of the purposes set out in sub-clauses (i) to (ix) of clause (b) of section 35B(1) of the Act. It was necessary for the assessee to show and prove that commission as well as interest paid to the bank on foreign bills fell under any of the aforesaid sub-clauses.
The Supreme Court in CIT v. Stepwell Industries Ltd. [1997] 228 ITR 171, has held as under (page 174) :
"In order to get this kind of deduction, the onus lies heavily on the assessee to prove that the expenditure falls within any of the purposes set out in the various sub-clauses of clause (b) of section 35B(1). Merely because some activities took place outside India that will not qualify the expenditure for the deductions mentioned in section 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 clause (b) of section 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." (page 175)
In view of the above, the payment of commission and interest to the bank on foreign bills does not qualify for deduction inasmuch as it does not fall under any of the sub-clauses of clause (b) of section 35B(1) of the Act.
Transit insurance charges and carriage outward expenses are also not eligible for deduction under section 35B of the Act in view of the specific prohibition in this regard in sub-clause (iii) of clause (b) of section 35B(1) of the Act. Sub clause (iii) reads as under :
"(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."
In the light of the specific bar contained in sub-clause (iii), expenditure incurred on the carriage of goods to their destination or on the insurance of such goods while in transit, is not qualified for deduction.
Clearing and forwarding charges are also not covered under any of the sub-clauses of clause (b) of section 35B(1) of the Act.
Learned counsel for the assessee has not been able to show as to which sub-clause would be attracted for the purpose of allowing deduction.
In view of the above, question No. 1 is answered in the negative, i.e., against the assessee and in favour of the Revenue.
The Assessing Officer disallowed expenditures incurred by the assessee on hotel bills and on payment to the Diners Club as well as money spent on dinner to foreign dealers.
Shri S. S. Mahajan, learned counsel for the assessee, has argued that the amount spent on the hotel bills for the dealers and on dinner to the foreign dealers was in the nature of expenditure on sales promotion. In support of his contention, he has placed reliance on a decision of this court in H. M. M. Limited v. CIT [1998] 231 ITR 726. That was a case where the assessee had incurred certain expenditure on dinner, liquor and snacks during a conference held by the assessee-company in Goa. It was also noticed by this court that out of the total expenditure amounting to Rs. 44,270 a sum of Rs. 20,000 only had been disallowed. In the light of Explanation 2 below sub-section (2A) of section 37 of the Act, disallowance of Rs. 20,000 was upheld. This judgment, therefore, does not help the assessee.
Sub-section (2A) of section 37 prohibits any allowance in respect of any expenditure in the nature of entertainment expenditure incurred by an assessee if it is in excess of the aggregate amount specified in that sub-section. Sub-section (3A) of that section permits expenditure incurred by an assessee on advertisement, publicity and sales promotion in India. In this sub-section also, the maximum amounts in respect of such expenditure have been specified. Expenditure in respect of the hotel bills for dealers and on providing dinner to foreign dealers does not appear to be in connection with advertisement, publicity and sales promotion in India. In the absence of such expenditure having been incurred in connection with advertisement, publicity and sales promotion, sub-section (3A) of section 37 is not attracted. Therefore, these expenditures would attract sub-section (2A) of section 37 of the Act. Similarly, money paid to the Diners Club would also not qualify for deduction, because it would also fall under sub-section (2A) of section 37. Any expenditure, which is in the nature of entertainment expenditure, would be subjected to disallowance keeping in view the maximum aggregate amount spent by the assessee.
Question No. 2 is answered in the affirmative, i.e., against the assessee and in favour of the Revenue.
The reference stands disposed of No order as to costs.
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