D.K.Jain,J.

1. At the instance of the Revenue, the Income Tax Appellate Tribunal (for short the Tribunal) has stated the case and referred the following questions of law under Section 256(1) of the Income Tax Act, 1961 (for short the), for the opinion of this Court:

"1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in upholding the deletion of the disallowance of Rs. 7,65,21,000 on account of additional liability on the change of Rupee-Rouble parity ratio.

2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in confirming the order of the CIT(A) holding that the asssseewas entitled to weighted deduction u/Sec. 35B (1)(b)(viii) of the I.T. Act, 1961 in respect of the following expenditures:

Site ExpensesAmountPercentage

(a) Malaysia1,12,16,647100%

(b) BRTW (Libya) 39,60,903100%

(c) Erection sub- contracts expenses on civil, mechanical& electrical job (OPD)32,36,32,647100%





2. The assessee, M/s. Bharat Heavy Electricals Limited, is a Government owned Corporation. The assessment year involved is 1979-80. During the previous year, ended on31st March, 1979, relevant to the said assessment year, the assessment charged to its Profit and Loss Account Rs. 7,65,21,000 by way of additional liability accrued on account of variation in the exchange rates of the new Rupee-Rouble parity agreed to under the protocol agreement signed between the Government of India and the Government of the USSR on 25th November, 1978. The said protocol agreement fixed exchange rate of Rs.10 per Rouble with effect from the date of signing of the agreement. This rate was to apply for the settlement of existing and future credit agreement (deferred payment contracts) and commercial transactions between the USSR and the Government of India.

3. While computing total income for the relevant assessment year, the inspecting Assistant Commissioner (Assessment) disallowed the said claim on the ground that even if the money was originally related to raw material imported from the USSR, it changed its character when it was blocked in the deferred payment account, giving an enduring advantage to the assessee and further any later increase in its value owing to alteration of the parity ratio between Rupee-Rouble cannot be related back to the purchase of raw material made much earlier. Aggrieved the assessee preferred an appeal to the Commis,sionerofIncome Tax (Appeals). Following decision of the Calcutta High Court in Commissioner of Income Taxv. International Combustion (I) Pvt. Ltd., (1982) 137 ITR 184 [LQ/CalHC/1982/105] , the Commissioner held that the said additional expenditure, which accrued on the date of signing of the protocol, was an additional trading liability of the assessee arising on the date of the devaluation and was, therefore, allowable in the hands of the assessee. He, accordingly, allowed the relief claimed by the assessee.

4. Being dissatisfied with the decision of the Commissioner, the Revenue took the matter in further appeal to the Tribunal. Taking into consideration the annual report for the assessment year 1978-79, the Tribunal found that the liability in question arose on account of purchase of goods and remained to be trading liability even subsequently. Thus, the Tribunal concurred with the view taken by the Commissioner.

5. The second question relates to the weighted deduction claimed by the assessee. The assessee had claimed weighted deduction by way of export market development allowance in terms of Section 35B(1)(b)(viii) of theon various expenses incurred by it including the following:

S.No.Nature ofAmountPercentage

expenditureexpenditureallowance

(I)Site expenses at

(i)Malaysia1,12,16,647100%

(ii)BRTW (Libya)39,60,903100%

(iii)Erection sub-contracts expenseson civil, mechanicaland electrical job (OPD)"32,36,32,647100%





6. The claim of the assessee was turned down by the Assessing Officer on the ground that these expenses had no direct relation with the basic object of development of export market. In appeal, by the assessee, the Commissioner held that the expenses incurred on the maintenance of site offices in Malaysia and Libya were admissible forallowance of weighted deduction. Revenues appeal to the Tribunal was unsuccessful. As noticed above, on the application thereafter of the Revenue, the questions, reproduced above, were referred.

7. We have heard Mr. Sanjiv Khanna, learned Senior Standing Counsel for the Income Tax Department and Mr. K.P. Bhatnagar, learned Counsel for the assessee.

8. The question whether a particular expenditure is capital or revenue in nature has often presented difficulties in solution in spite of the fact that attempts have been made time and again to enunciate various principles to distinguish a capital expenditure fromrevenue expenditure but it has not been possible to lay down any exhaustive test to determine the question. However, we feel that in the present case the question posed can be conveniently answered by applying the principle of law enunciated in Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax, West Bengal, (1979) 116 ITR 1 [LQ/SC/1978/278] , as we find that factsof that case are very close to the facts in hand. In that case the assessee suffered loss on the remittance of Rs. 25 lakhs and Rs.12.50 lakhs in Pakistani currency from Pakistan. The said amounts were included in the assessment of the assessee as part of Pakistani profits. By the time these two amounts came to be repatriated to India, the rate of exchange had undergone change on account of devolution of Pakistani rupee and, therefore, on repatriation, the assessee received only Rs. 25 lakhs and Rs.12.5 lakhs in Indian currency and lost Rs. 11 lakhs in one case and Rs. 5.5 lakhs in the other in the process of conversion of Pakistani currency into Indian currency. The question arose whether the said loss suffered by the assessee was a trading loss. While remanding the matter back to the Tribunal to determine whether the said amounts of Rs. 25 lakhs and Rs.12.5 lakhs were held by the assessee in West Pakistan as capital asset or trading asset, the Apex Court laid down a broad test that if the loss was in respect of a trading asset, it would be a trading loss and if it was in respect of a capital asset, it will be a capital loss. The Court further observed that if there is a loss in a trading asset, it would be a trading loss whatever be its cause because it would be the loss in the course of carrying on the business.

9. Thus, answer to the first question whether the additional liability which the assessee had incurred on account of change in Rupee-Rouble parity ratio would necessarily depend on answer to the question whether the additional liability pertains to the trading asset or capital asset. In the statement of the case, the Tribunal has stated that the fact that the claim in question related to the increase in the existing liabilities outstanding against the assessee in respect of the supply of material made by the USSR on deferred credit facility basis was not disputed. As noticed above, even the stand of the Assessing Officer was that even if the money was originally related to raw material inputs from the USSR but it changed its character when it was blocked under the deferred payment account, giving also an enduring advantage to the assessee. We find that the said findings, which are pure findings of fact, are not sought to be challenged as perverse in the proposed question. Therefore, in the present case, admittedly the initial liability arose on account of purchase of new material, a trading debt, and after it had arisen, nothing happened to divest it of the character of a trading debt. In this view of the matter, applying the principles of law adumbrated in Sutlej Cotton Mills (supra),, we are of the opinion that the Tribunal came to the correct conclusion that the additional liability incurred by the assessee on the change of Rupee-Rouble parity ratio was allowable as a trading liability.

10. This brings us to the second question relating to the weighted deduction, claimed by the assessee.

11. Weighted deduction under the law can be claimed only in respect of the expenditure which specifically falls within the ambit of any one of the sub-clauses from (i) to (ix) of Section 35B(1) of the. In the instant case, according to the assessee, its claim for weighted deduction falls under Sub-clause (viii). The relevant provisions of Section 35B read as under:

35B(1)(a).Export markets development allowance : 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 February, 1968 but before the 1st day of March, 1983, 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:

Provided that in respect of the expenditure incurred after the 28th day of February, 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 Clause (a) is that incurred wholly and exclusively on:

(i) xxxxxxxxxx

(ii) xxxxxxxxxx

(iii) xxxxxxxxxx

(iv) xxxxxxxxxx

(v) xxxxxxxxxx

(vi) xxxxxxxxxx

(vii) xxxxxxxxxx

(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 for facilities.

(ix) xxxxxxxxx

Explanation (1): xxxxxxxxxx

Explanation (2): For the removal of doubts, it is hereby declared that nothing in Clause (b) shall be construed to include any expenditure which is in the nature of purchasing and manufacturing expenses ordinarily debitable to the trading or manufacturing account and not to the profit and loss account.

12. From a plain reading of the aforenoted provisions of law, it is evident that the expenditure which qualifies for weighted deduction under Sub-clause (viii) must be incurred on performance of services outside India in connection with or incidental to the execution of any contract forthe supply outside India of such goods services or facilities. It is clear that not only the performance of services has to be outside India, only that expenditure will qualify for weighted deduction which has been incurred for 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. The execution of any contract forthe supply outside India of such goods, services or facilities has to be in relation to performances of services outside India.

13. Relying on some observations in the assessment order to the effect that the expenditure on which weighted deduction had been claimed by the assessee included, production and manufacturing expenses, the only objection of Mr. Khanna, learned Counsel for the Revenue, to the allowability of weighted deduction on the expenses in question is that these include manufacturing expenses incurred and the same being in the nature of pre-marketing expenses are not eligible for weighted deduction under the said sub-clause. In support, reliance is placed on a decision ofthe Madras High Court inM/s. Hamosons, Madras v.Commissioner of Income Tax,Madras, 1998 Tax. LR 571. Learned Counsel has also pressed into service the afore-extracted Explanation-2 toSection 35B, which was inserted by Finance (No. 2) Act, 1980 w.e.f. 18 April, 1981 and submits that since the manufacturing expenses were directly debitable to trading and manufacturing account, these do not qualify for weighted deduction in terms of the said explanation. It is urged that Explanation-2 being clarificatory in nature, it will have retrospective effect and would apply to the present case also.

14. On the other hand, Mr. K.P. Bhatnagar, learned Counsel for the assessee, while asserting that Explanation-2 will not apply in relation to the assessment year 1979-80, has stated at the Bar that the expenses in question did not include any manufacturing expenses debitable to a trading or manufacturing account. It is pointed out that insofar as expenses at Sr. Nos. 1 (i) and (ii) are concerned these were incurred at site in Malaysia and Libya and directly related to the services rendered consequent to the contractual obligations of the assessee. Regarding expenses mentioned at Sr. No. 1 (iii), it is submitted that these were the payments made to the sub-contractor outside India for erection activities, etc. and are again not debited to the trading and manufacturing account. In support of the contention that the said Explanation is applicable only w.e.f. 1 April, 1981, i.e. assessment year 1981-82, Mr. Bhatnagar has invited our attention to Circular No. 281 dated 22 September, 1980, issued by the Central Board of Direct Taxes (1980) 124 ITR St. 64 explaining the substance of the provisions contained in Finance (No. 2) Act, 1980, whereby the said Explanation-2 was inserted to modify the provisions relating to the export markets development allowance u/Sec. 35B of the. Para 11.4 of the said Circular refers to the substitution of the said Explanation for earlier Explanation-2 below Clause (b) of Section 35B(1) and para 11.5 explains that the amendment will take effect from 1st April, 1981 and will accordingly, apply in relation to the assessment year 1981-82 and subsequent years. Though the Circular tends to take the sting out of Mr. Khannas argument but in view of the aforenoted statement of Mr. Bhatnagar, learned Counsel for it the assessee, we deem It unnecessary to go into this question in greater detail.

15. The question which now deserves consideration is whether the expenses in question have been incurred by the assessee on performance of services outside India in connection with or are incidental to the execution of the contract for the supply outside India of the goods, to be entitled to weighted deduction on these expenses. The question has necessarily to be answered in the light of the facts found by the Tribunal. The finding arrived at by the Tribunal on the basis of agreement entered into by the assessee company is that the assessee had entered into a contract for a turn-key project outside India which comprised design, manufacture, completion, testing, commissioning, operation and maintenance of the work so executed abroad. Thus, the Tribunal held that these expenses fall within the ambit of Sub-clause (viii) of Section 35B(1)(b), particularly when there was no factual dispute about their nature and quantum. It is explained by Mr. Bhatnagar, learned Counsel for the assessee, that the Tribunal has used the word manufacture in order to explain the nature of the contract and not that the assessee had claimed weighted deduction on the pre-marketing expenses incurred by it on the manufacture of equipment in India. Therefore, the findings of fact recorded by the Tribunal clearly indicate that the expenses in question incurred by the assessee were on performance of services outside India in connection with execution of the contract for a turn-key project, which included erection and maintenance, which necessitated maintenance of site office and award of sub-contracts. In the light of these findings, we are of the view that the Tribunal was correct in holding that the assessee was entitled to weighted deduction on these expenses.

16. For the foregoing reasons, both the questions are answered in the affirmative i.e. in favour of the assessee and against the Revenue. There will, however be no order as to costs.