Avon Cycles (P) Ltd. vs Commissioner Of Income-Tax on 2 December, 1998

JUDGMENT

N.K. Agrawal, J.

1. This is a reference under s. 256(1) of the IT Act, 1961 (for short, the ‘Act’), by the Tribunal, Chandigarh, at the instance of the assessee, relating to the asst. yr. 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 s. 35B of the IT 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 dealersd        410"  
 
 

2. 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 s. 35B of the Act were claimed by the assessee on various expenditures incurred in its export section. The AO allowed such deduction only on the amount of commission paid to foreign dealers. In appeal, the CIT(A) allowed deductions in respect of certain other expenditures also but declined to allow such deductions on many items of expenditure claimed by the assessee. Both the assessee and the Revenue filed appeals before the Tribunal, which partly allowed the assessee’s appeal granting further deductions under s. 35B on more items of expenditure and dismissed the Revenue’s appeal.

3. The assessee claimed deduction in respect of bank commission and interest paid to the bank on foreign bills. Any deduction under s. 35B has to be allowed if the expenditure has been incurred wholly and exclusively for any of the purposes set out in sub-cls. (i) to (ix) of cl. (b) of s. 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.

4. The Supreme Court in CIT vs. Stepwell Industries Ltd. & Ors. (1997) 228 ITR 171 (SC) : TC S15.1492, has held as under :

“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 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.”

xxxxx xxxxx xxxxx

“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 sub-clauses and the facts provided by the assessee.”

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 cl. (b) of s. 35B(1) of the Act.

5. Transit insurance charges and carriage outward expenses are also not eligible for deduction under s. 35B of the Act in view of the specific prohibition in this regard in sub-cl. (iii) of cl. (b) of s. 35B(1) of the Act. Sub-cl. (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-cl. (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 sub-clauses of cl. (b) of s. 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.

6. The AO 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. Ltd. vs. CIT (1998) 231 ITR 726 (P&H) : TC S18.1996. That was a case where the assessee had incurred certain expenditures 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 Expln. 2 below sub-s. (2A) of s. 37 of the Act, disallowance of Rs. 20,000 was upheld. This judgment, therefore, does not help the assessee.

7. Sub-s. (2A) of s. 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-s. (3A) of that section permits expenditures incurred by an assessee on advertisement, publicity and sales promotion in India. In this sub-section also, the maximum amounts in respect of such expenditures have been specified. Expenditures in respect of the hotel bills for dealers and on providing dinner to foreign dealers do not appear to be in connection with advertisement, publicity and sales promotion, sub-s. (3A) of s. 37 is not attracted. Therefore, these expenditures would attract sub-s. (2A) of s. 37 of the Act. Similarly, money paid to the Diners Club would also not qualify for deduction, because, it would also fall under sub-s. (2A) of s. 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.