Exportos India v. Commissioner Of Income-tax, Delhi

D.K. JAIN, J.

(1) THESE are three references, two at the instance of the assessee (arising out of RA Nos. 931/del. /85 and 932/85, pertaining respectively to the assessment years 1979-80 and 1980-81 and one at the instance of the Revenue (arising out of RA Nos. 931/del. /85, pertaining to the assessment year 1979-80) under Section 256 (1) of the Income-tax Act, 1961 (for short the Act) seeking opinion of this Court on the following questions: - RA Nos. 931/del. /85 (By the Assessee)

1. "whether on the facts and in the. circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the proceedings u/s 263 were validly initiated by the Commissioner of Income-tax in respect of assessment year 1979-80 2. Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal erred in law in holding that interest on foreign bills, bank charges on foreign bills and difference in foreign exchange did not constitute expenditure on the performance of services outside India in connection with or incidental to the execution of the contract for supply of such goods outside India within the meaning of clauses (iii) and (viii) of Section 35b (1) (b) of the Income-tax Act. 1961 3. Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount paid to Shri Deepak Kumar during his stay at USA was salary or remuneration disallowable u/s 40 (b) of the Act and as such weighted deduction u/s 35 (1) (b) of the Act could not be allowed in respect of it"

(2) RA No. 932/del. /85 (By the Assessee)

1. "whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal erred in law in holding that interest on foreign bills, bank charges on foreign bills and differences in foreign exchange did not constitute expenditure on the performance of service outside India in connection with or incidental to the execution of the contract for supply outside India or such goods within the meaning of clauses (iii) and (viii) of Section 35 (1) (b) of the Income-tax Act, 1961. "

(3) RA No. 913/del. /85 (By the Revenue)

"whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the discounts were expenses incurred outside India in connection with supply of goods outside India and were thus covered by provisions of sub-clause (iii) of clause (1) (b) of Section 35 and that therefore, they were eligible for weighted deduction"

(4) SINCE the main controversy in all the reference revolves around the claim of weighted deduction under Section 35b of the Act, all the reference can be conveniently disposed of by this common judgment.

(5) THE reference relate to the assessment years 1979-80 and 1980-81, for which the relevant previous years ended on 30th June, 1978 and 30th June, 1979 respectively. The assessee, assessed in the status of a registered firm, is engaged in the business of manufacture and export of various types of garments, hi respect of assessment year 1979-80, the Commissioner of Income-tax took action against the assessee under Section 263 of the Act on the ground that the Income-tax Officer had allowed certain expenses, which were not allowable. The assessee contested before the Tribunal the correctness of the said order mainly on the ground that action under Section 147 in respect of assessment year 1979-80 having been once initiated against them, though ultimately dropped, Section 263 could not be invoked in respect of the same assessment year. The Tribunal, however, did not accept the said stand of the assessee. The Tribunal felt that the Assessing Officer having accepted the plea of the assessee that there was no valid reason for re-opening the completed assessment and dropped the proceedings initiated under Section 147 of the Act, it could not be said that action under Section 147 had been concluded in the assessees case in respect of assessment year 1979-80. The Tribunal, accordingly, upheld the validity of the action taken by the Commissioner under Section 263 of the Act.

(6) THE assessee, had claimed weighted deduction under Section 35b of the Act in respect of the following items:-

A. Y. 79-80 A. Y. 80-81 (a) Interest on foreign bill 4,23,949 5,58,841 (b) Bank charges on foreign bills 98,817 86,683 (c) Excess payment made due to fluctuations in the foreign exchange rate of currency 20,170 21,456 (d) Incentive granted to the dealers in USA for increase in turnover $18,134 NIL (e) Reimbursement on expenditure incurred in USA by the resident partner Shri Deepak Jain $2,937 NIL

(7) ACCORDING to the assessee the first three payments were covered under sub-clause (viii) of Clause (1) (b) of Section 35b of the Act and the 4th item was covered by sub-Clauses (iii) and (viii) of the said sub-section. With regard to the last item, the stand of the assessee was that it had opened a branch in USA in the year 1977 which was looked after by its partner Deepak Kumar Jain, who was designated as the resident partner. The Reserve Bank of India, on request by the assessee, had permitted reimbursement of expenses with the sealing of US$ 600 per month in 1977 and US$ 2000 per month in 1978-79 to 1981 though under the RBI Rules a resident partner was entitled to an allowance of US$ 120 per day lor his stay abroad on the business of the firm. The plea of the assessee was that payment made to Deepak Kumar Jain was an expense incurred for maintenance outside India of a branch office for the promotion of sale of goods outside India and, therefore, it was eligible for weighted deduction under sub-Clause (iv) of Clause (1) (b) of Section 35b.

(8) IT was explained that interest on foreign bills was paid because the bank had given credit to the assessee firm of the amount equal to the bills raised against foreign buyers on their presentation to the bank, but it look some time for the bank to send the bills to the foreign country for collection from the foreign party and during this intervening period it was banks money which was being utilised by the assessee for which the bank charged interest. It was claimed that these charges were incidental expenses realised by the bank for collection of the foreign bills and for providing related facilities and service to the assessee.

(9) THE excess payment made due to fluctuation in the foreign exchange rate of currency was stated to be on account of difference in the exchange rate on the date of the presentation of the bill to the bank when it give credit to the assessee and on the date the bill was presented to the foreign buyer. If the latter rate of exchange was less than the rate at which the credit was given to the assessee by the bank at the time of presentation of the bill, the excess amount was adjusted. According to the assessee all these items of expense were covered by sub-Clause (viii) of Clause (1) (b) of Section 35b of the Act.

(10) THE Tribunal did not accept the said stand of the assessee. It held that the payments made to the bank were for providing credit facilities to the assessee and for collecting payments against the foreign bills and, therefore, did not qualify for weighted deduction. While holding so, the Tribunal observed that the bills became payable only after the contract for supply of goods had been executed and collection of a bill for completed contract could not be regarded as performance of service outside India in connection with execution of contract for supply of goods. The Tribunal took the same view in respect of payments made due to fluctuation in the exchange rate of currency. Regarding the incentives granted to the dealers in USA for alleged increase in turnover, the Tribunal held that the amount so paid qualified for weighted deduction because the same had been paid to the foreign buyers by way of incentive bonus with a view to promote export sales.

(11) INSOFAR as the claim of the assessee regarding weighted deduction in respect of the amount paid to the partner was concerned, while rejecting the claim, the Tribunal observed that the amount in question cannot be treated as firms business expenditure because it has been paid to the partner to enable him to meet his personal expenses, even though the partner had gone to the United States in connection with the business of the firm as the business of the firm is in fact the business of the partner himself and no individual can claim his personal expenses incurred by him on his foreign visits as his business expenses merely because he has gone to the foreign countries in connection with his personal business. The Tribunal thus held that the expenditure incurred was clearly of personal nature and would, therefore, be hit by the provisions of clause (b) of Section 40 and/or of Section 37 (1) of the Act.

(12) AGGRIEVED, both the assessee and the Revenue sought reference on the issues decided against them. Hence, the present references. .

(13) WE have heard Mr. C. S. Aggarwal, learned counsel for the assessee and Mr. Sanjiv Khanna, learned counsel for the Revenue. We shall first take up the reference made at the instance of the assessee.

(14) INSOFAR as question No. 1, arising out of RA No. 931/del. /85, is concerned, it is fairly conceded by learned counsel for the assessee that in view of the decision of the Supreme Court in Commissioner of Income-tax v. Sun Engineering Works P. Ltd. (1992) 198 ITR 297 [LQ/SC/1992/634] the question has to be answered against the assessee. We opine accordingly.

(15) THE second question in RA No. 931/85 and the questions in the other two references relate to assessees claim for weighted deduction in respect of expenses, noted above. Weighted deduction under Section 35b of the Act can be claimed only in respect of the expenses, which specifically fall within the ambit of any one of the sub-Clause from (i) to (ix) of Section 35b of the Act. The onus is on the assessee to prove that the expenditure falls within any one of the sub-Clause. 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 any one of the purposes set out in any one of the sub-clauses of clause (b) of Section 35b (1). (See Commissioner of Income-tax v. Stepwell Industries Ltd. and Ors. , (1997) 228 ITR 171 (SC) [LQ/SC/1997/1157] and CIT v. Hero Cycles Pvt. Ltd. , (1997) 228 ITR 463 (SC). In the instant case, according to the assessee, its claim for weighted deduction in respect of items (a) to (d) above falls either under sub-clause (iii) or (viii) and expenses by way of reimbursement of the amount spent by resident partner in USA qualify for weighted deduction under sub-clause (iv). The relevant provisions of Section 35b read as follows:-

"35b. (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 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 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 xxxxxxx (a) the expenditure referred to in clause (b) is that incurred wholly and exclusively on - (i) xxxxxxxxxxxxxxxxx (ii) xxxxxxxxxxxxxxxxx (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 in 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) xxxxxxxxxxxxxxxxxxxx (vi) xxxxxxxxxxxxxxxxxxx (vii) xxxxxxxxxxxxxxxxxxx (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. xxxxxxxxxxxxxx

(16) FROM a plain reading of the afore-extracted provisions of law it is evident that the expenditure which qualifies for weighted deduction under sub-clause (iv) will have to be an expenditure incurred outside India in connection with distribution, supply and/or provision outside India of such goods, services or facilities. Similarly, in order to qualify for weighted deduction under sub-clause (viii), the expenditure must be incurred on 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. It is clear that not only the performance of service 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.

(17) BEARING in mind these clear principles, we shall examine the claims made by the assessee item-wise:

(A) and (B) Interest and bank charges on foreign bills: It is submitted by Mr. Aggarwal, learned counsel for the assessee, that under the supply contract the interest charges payable to the bank were to be borne by the assessee and, therefore, but for the payment the assessee would not have been able to procure the export order. According to the learned counsel the expenditure having been necessarily incurred in connection with the export business it qualifies for weighted deduction. We do not agree. As rightly observed by the Tribunal the payment by way of interest was made to the bank for availing credit facilities and for collection of bilk raised against the foreign buyers after the contract of supply of goods had been executed. Neither the credit facilities provided by the bank on the bills raised nor the collection of proceeds against such bills for completed contracts could be regarded as performance of services outside India in connection with the execution of contract of supply of goods. The interest charged by the bank was nothing but charges for the credit facilities provided to the assessee. The expenditure incurred by the assessee being posterior to the activity of export had nothing to do with the performance of services outside India. It was incurred for early realisation of the price of goods exported or for the services rendered by the bank for collection of the bills. To the similar effect is the decision of the Calcutta High Court in Brooke Bond India Limited v. CIT, (1992) 193 ITR 390 wherein it was held that the bank commission paid for availing discount facilities on the bills raised for the exports had no connection with the fact of development of export market nor was such expenditure incurred wholly or exclusively in performance of services outside India in connection or incidental to execution of such contracts for supply of goods outside India. As a matter of fact it was fairly conceded by Mr. Aggarwal, learned counsel for the assessee, that in the light of the decision in Brooke Bond India Limiteds case (supra) and in Gedore Tools (India) Private Limited v. CIT, (1998) 233 ITR 712 [LQ/DelHC/1998/229] , weighted deduction on bank charges cannot be allowed. . (C) Excess payment made due to fluctuation in foreign exchange rates

(18) IN view of the decision of this Court in Gedore Tools (India) Private Limiteds case (supra) this expenditure is not eligible for weighted deduction. In that case, following the decision of the Bombay High Court in Walchandnagar Industries Limited v. Commissioner of Income-tax, (1994) 206 ITR 328 [LQ/BomHC/1993/852] , it was held that payment on account of exchange rate differences was not eligible to weighted deduction as the export had already taken place and it was merely on account of fluctuation in exchange rates that the assessee was required to pay the differences. We are in respectful agreement with the said decision.

(D) Incentive granted to dealers in USA: (Revenues reference): While disallowing the claim of the assessee on this account, the Commissioner of Income-tax had inter-alia observed that in the audited accounts of the assessee this having been reduced from the amount of gross sales, it was not paid out of the coffers of the assessee after the sale proceeds had been received. He held that reduction in sale price could not be considered as an expenditure within the meaning of Section 35b or otherwise. The Tribunal however felt that this amount paid to the foreign buyers by way of incentive bonus with a view to promote export sales was eligible for weighted deduction because these discounts, given under an incentive scheme for achieving certain targets, were expenses incurred outside India in connection with supply of goods outside India and, thus covered by the provisions of sub- Clause (iii) of Clause (1) (b) of Section 35b of the Act.

(19) IT is vehemently submitted by Mr. Khanna, learned counsel for the Revenue, that the so-called "incentive" is in fact in the nature of trade discount or rebate on the price of goods sold to a particular buyer and cannot, therefore, be termed as "expenditure" within the meaning. of Section 35b. In support, reliance has been placed on a decision of Kerala. High Court in Commissioner of Income-tax, Kerala-I Emakulam v. Quilon Marine Produce Company, (1986) 157 ITR 448 wherein it has been observed that trade discount is not an expenditure within the meaning of Section 35b.

(20) ON the other hand, Mr. Aggarwal, learned counsel for the assessee, has been at pains to explain that the finding recorded by the Tribunal is that it was. an incentive given to the buyers to achieve a particular target of sales and it was not in the nature of discount as is sought to be contended by learned counsel for the Revenue. It is submitted that this finding having not been challenged by the Revenue by means of a specific question,, it is estopped from urging that the expenditure was in the nature of discount, which, in common parlance, means reducing the value of the goods. It is asserted that this was an expenditure incurred for supply of goods and, therefore, it qualified for weighted deduction under sub-Clause (iii). In the alternative it is submitted that if the expenditure does not fall under sub-Clause (iii) it definitely falls under sub-Clause (viii) of Clause (1) (b) of Section 35b. We are unable to persuade ourselves to agree with learned counsel for the assessee.

(21) THE primary meaning of the expression "expenditure" is spending or payment of money; the act of expending, disbursing or laying out of money; payment (see Blacks Law Dictionary). In common parlance the term "expenditure" connotes something that comes out to the pocket and spent, though it may have a wider meaning in the context of its use in a particular Section in the Act. In fact certain types of expenditure have been separately dealt with in different Sections in the Statute. Insofar as Section 35b of the Act is concerned, keeping in view the object of the provision, the word "expenditure" has to be construed in the ordinary sense of the word. The Section not only postulates actual spending by the assessee, it also requires the assessee to establish that the expenditure for which deduction under the Section is being claimed had been incurred outside India for the specified purpose. Mere selling of goods to foreign buyers is not sufficient for claiming the benefit of weighted deduction. "incentive" or "discount" to foreign buyer to achieve a particular target of sales, is nothing but a rebate allowed on the price of goods sold to the purchaser, which cannot be said to be an "expenditure" as complemented in Section 35b of the Act. Support to this view is lent by the decision of the Kerala High Court in Quilon Marine Produce Companys case (supra) and of the Bombay High Court in Colour Own. Ltd. v. CIT, (1997) 225 ITR 164. [LQ/BomHC/1995/643] We are, therefore, of the opinion that the Tribunal was not correct in law in holding that incentive granted to foreign buyer for increase in turnover qualified for weighted deduction under Section 35b of the Act. This disposes of question No. 2 in RA No. 931/85 and RA No. 932/85 and Revenues RA No. 913/85. This brings us to the third question in RA No. 931/85.

(22) AS noted above, while holding that the assessee was not entitled to weighted deduction on the amount paid by it to one of its partners during his stay in USA, the Tribunal has recorded that the expenditure incurred was personal in nature and would, therefore, be hit by the provisions of Section 40 (b) and alternatively by the provisions of Section 37 (1) of the Act. We find that the Tribunal has also observed that even if the amount be not treated as salary, the same cannot be treated as firms business expenditure because it has been paid to the partner to enable him to meet his personal expenses. Both the said findings have not been challenged by the assessee in the question proposed and referred at its instance. In our view, in the absence of challenge to the aforenoted findings by means of a specific question, the answer to the question is self-evident. If a particular expenditure cannot be allowed as business expenditure, there is no question of weighted deduction being allowed on the same expenditure. In the light of the said finding, no fault can be found with the view taken by the Tribunal on the issue involved.

(23) IN view of the foregoing discussion, all the questions referred in RA Nos. 931/85 and 932/85 are answered in the affirmative i. e. in favour of the Revenue and against the assessee and the question referred in RA No. 913/95 is answered in the negative i. e. in favour of the Revenue and against the assessee.