JUDGMENT
S.H. Kapadia, J.
At the instance of the department, the following two questions have been referred to us for our opinion under section 256(1) of the Income Tax Act concerning assessment year 1972-73.
2. For the sake of convenience, question No. 2 is required to be answered in the first instance :
“2. Whether the assessee was entitled to weighted deduction under section 35B(1)(b)(viii) of the Income Tax Act in connection with expenditure incurred for performance of service outside India ?”
Facts
3. Assessee – M/s. Shapoorji Pallonji & Co., have been carrying on business in building construction. In 1970, assessee submitted a tender for constructing a Palace at Muscat for His Majesty, the Sultan of Oman. For assessment year in question, the assessee submitted his claim for weighted deduction under section 35B of the Income Tax Act. The deduction claimed by the assessee was for expenses relating to commission paid to National & Grindlays bank Limited, which executed Performance Bond of Rs. 37 lakhs in favour of Sultanate of Oman in connection with execution of the contract for building the Palace; commission paid to New India Assurance Company Limited for giving counter guarantee; commission paid to National & Grindlays Bank Limited for giving guarantee against over draft facility and commission paid to New India Assurance for counter guarantee. According to the department, the assessee was not entitled to weighted deduction under section 35B(b)(viii) because the expenses were incurred by the assessee in India and not outside India though that expenditure was incurred for performance of service outside India in connection with execution of contract for the supply out of India goods, services or facilities. This argument of the department was not accepted by the assessing officer. It was not accepted by the First Appellate Authority and it was not accepted by the Tribunal. Hence this Reference at the instance of the department.
Arguments
4. Mr. R.V. Desai, learned senior counsel appearing on behalf of the department contended that in order to attract provisions of sub-clause (viii), two conditions were required to be satisfied viz. that the expenditure should have incurred wholly and exclusively on performance of service outside India in connection with execution of contract outside India and secondly, the expenditure should also be incurred outside India. It was contended that both the conditions were required to be satisfied. It was argued that in the present case, the expenditure was incurred in India and not outside India and, therefore, section 35B(b)(viii) was not attracted.
Findings
5. Before we deal with the contentions advanced on behalf of the department, we may point out that in this reference we are concerned with assessment year 1972-73. Section 35B deals with export market development allowance. Under section 35B(1)(a), it is, inter alia, provided that where an assessee, who is a resident in India, has incurred directly or in association with any other person, any expenditure referred to in clause (b) of that section he shall be allowed deduction of a stipulated sum (hereinafter referred to, for the sake of brevity, as “weighted deduction”). Clause (b) of section 35B has nine sub-clauses. In this matter we are concerned with sub-clause (viii) which reads as under:
“(viii) [expenditure on] performances of services outside India in connection with the execution of contract for supply of goods/ services outside India.”
In the case of CIT v. Stepwell Industries Ltd. (1997) 228 ITR 171 (SC), it has been held that when a claim for weighted deduction is made, it is for the assessee to satisfy the Income Tax Officer that the expenditure falls under one of the sub-clauses of clause (b) of section 35B(1) of the Income Tax Act. That, in order to get the deduction, the assessee has 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). That section 35B(1)(b)(viii) and section 35B(1)(b)(iii) came for discussion before the Bombay High Court in the case of Forbes Forbes Campbell & Co. Ltd v. CIT (1994) 206 ITR 495 (Bom) in which it was held that sub-clause (iii) of clause (b) of sub-section (1) of section 35B contains a specific prohibition on allowance of weighted deduction on expenditure incurred on carriage of goods to their destination outside India. That, sub-clause (iii) expressly prohibited allowance of weighted deduction on expenditure on distribution, supply or provision outside India of such goods /services if incurred in India. That, sub-clause (iii) is a specific prohibition and it has not to be confused with general provision enshrined in sub-clause (viii) of clause (b) of sub-section (1) of section 35B of the Income Tax Act. In this case, we are concerned with sub-clause (viii), which is a general provision and in which there is no prohibition on weighted deduction as is provided for in sub-clause (iii). Sub-clause (viii) merely states that where expenditure is incurred wholly and exclusively on performance of service outside India in connection with execution of contract for supply of goods/ services outside India, the assessee would be entitled to weighted deduction. In sub-clause (viii), there is no prohibition as is contemplated in sub-clause (iii) of an expenditure not being allowed as weighted deduction if incurred in India. In the case of CIT v. Walchandnagar Industries Ltd. (2003) 128 Taxman 649, this court has construed section 35B(1)(b)(i)/(ii) vis-a-vis section 35B(1)(b)(iii) and this court took the view that the assessee was entitled to weighted deduction under section 35B(1)(b)(i)l(ii) in respect of commission paid to a party for negotiating an overseas business deal for the assessee in which case, there was no requirement that the expenditure must be incurred outside India. The content of sub-section (iii) and sub-section (viii) are quite different and distinct. It is for this reason that the Supreme Court has held in the case of Stepwell Industries Ltd. (supra), that when a claim for weighted deduction is made, it is for the assessee to satisfy that the expenditure falls under any of the sub-clauses of clause (b) of section 35B(1) of the Income Tax Act.
In the circumstances, we answer the above question No. 2 in the affirmative i.e. in favour of the assessee and against the department.
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was obliged to adjudication on the allowance of an expenditure being weighted deduction in respect of guarantee commission of Rs. 2,37,343 in terms of sub-clause (viii) of section 35B(1)(b) of the Income Tax Act, 1961, for the assessment year 1972-73 which the Income Tax Officer allowed in his assessment order but the Appellate Assistant Commissioner on being requested by the Income Tax Officer at the appellate stage to disallow did not disallow ?”
6. As far as question No. 1 is concerned, in view of our answer to question No. 2, this question has become academic. It need not be answered.
7. Accordingly, we hold that the assessee was entitled to the allowance of weighted deduction for the aforestated items of expenditure under section 35B(1)(b)(viii).
8. Accordingly, the Reference is disposed of. No order as to costs.