1. Since these are cross-appeals, they are disposed of by a common order, for the sake of convenience.
2. These appeals relate to the income-tax assessment of Bank of India, a nationalised bank, for the assessment year 1976-77, for which the previous year ended on 31-12-1975. We have heard Shri S.E. Dastur, the learned counsel for the assessee, and Shri S. Krishnan, the learned departmental representative and carefully considered their submissions in the light of the materials placed by them in support of the same.
3 to 12. [These paras are not reproduced here as they involve minor issues.] 13. This leaves us with ground Nos. 3 and 4 in the revenue's appeal, which are as follows: 3. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding that the assessee was entitled to relief under Section 35B of the Income-tax Act, 1961.
4. Without prejudice to ground No. 3, the learned Commissioner (Appeals) erred in holding that the assessee was entitled to relief under Section 35B to the extent of Rs. 1,50,04,362.
14. At this stage, it would be convenient for us to consider the assessee's appeal also, which raises only the following two grounds relating to the disallowance of a portion of the assessee's claim for weighted deduction under Section 35B of the Income-tax Act, 1961 ('the Act'): The learned Commissioner (Appeals) erred in holding that 'As regards law charges Rs. 2,49,815, auditor's fees Rs. 4,51,403, repairs Rs. 10,34,056, I would hold that though they are business expenses, yet they have no nexus with export market development expenses nor are they necessary wholly for maintenance of foreign office under Section 35B(1)(?v). No weighted deduction can be allowed on these'.
The learned Commissioner (Appeals) ought to have held that the expenses were entitled for weighted deduction under Section 35B(1)(iv).
15. Shri S. Krishnan, the learned departmental representative, submitted that rendering of routine banking services by the assessee could not be treated as export of services, that the branches of the assessee-bank in the foreign countries were separate units by themselves and that the assessee-bank had not exported its expertise in conducting banking services to any organisation abroad. He next submitted that the branches have been opened abroad by the assessee merely on an expansion of its existing banking facilities in those countries and it would not categorise these as export of banking services by the assessee. Shri Krishnan argued that the mere earning of foreign exchange by the assessee-bank would not be conclusive or decisive for holding that the assessee-bank would be entitled to weighted deduction contemplated by Section 35B.16. Shri Dastur, the learned counsel for the assessee, met these arguments of the revenue by relying on Section 35B(1)(b)(iv), which according to him, as an all-pervading clause applicable to the case of the assessee, besides the other clauses, viz., Clauses (i), (ii), (v), (vi), (vii) and (viii) of Section 35B(1)(&), Shri Dastur submitted that the word 'promotion' used in Sub-clause (iv) does not mean not starting a branch from scratch. He referred to the dictionary meaning of the word 'promotion' in Chambers Twentieth Century Dictionary, at page 876, 4th edition, which gives the meaning of the word 'promotion' as follows: to help forward; to further the progress of; to raise to a higher grade; The learned counsel submitted that the foreign branches help in the promotion of banking services or facilities outside India and that, therefore, the expenses on the maintenance of these foreign branches would qualify for weighted deduction under Section 35B. In this connection, Shri Dastur relied on the passage at pages 1098 and 1099 of Chaturvedi and Pithisaria's Income-tax Law (Third edition), Vol. I, wherein the learned authors have pointed out that the Supreme Court rejected the Special Leave Petition in the case of CIT v. India Hotels Ltd. on 14-9-1979, accepting the arguments on behalf of the company contending that actual export of goods was not a condition precedent for the allowance and that advertisement and publicity made outside India of goods and services in which the company deals is enough. He further relied on the decision of the Tribunal, in the case of Indian Overseas Bank, decided by Madras Bench 'D' [IT Appeal Nos. 519 to 521 and 587 to 589 (Mad.) of 1977-78, dated 31-5-1978], and contended that this decision of the Tribunal supported the case of the assessee for claiming weighted deduction under Section 35B. He pointed out that the assessee-bank was having branches located in Japan, Hongkong, UK, USA, France, Kenya and Singapore, while it had an office at Jakarta in Indonesia, Shri Dastur explained that the Jakarta office of the assessee-bank was doing regular export of services as it gathered information about the requirements of the parties in Indonesia, where there are joint ventures of Indian parties, who may require banking services or facilities outside Indonesia. Shri Dastur referred to the decision of the Bombay Special Bench of the Tribunal in the case of J.H. & Co. v. Second ITO [1982] 1 SOT 150 and pointed out that the Special Bench was not concerned with the provisions of Section 35B(1)(b)(iv) and, therefore, the observations of the Specialb Bench in paragraph 22 would not apply to rendering of services of provision of facilities through a branch outside India, since the case considered by the Special Bench was that of an exporter or a manufacturer. Hence, the said decision would not apply to a case, as the present one, where services were being provided outside India. He argued that the maintenance of a branch itself was for promotion of the sale of services and not for manufacture and that, therefore, the assessee would be entitled to weighted deduction under Section 35B(1)(b)(iv), as rightly held by the Commissioner (Appeals). In support of his submissions, the learned counsel relied on the decision of the Delhi High Court in Hadicrafts & Handloom Export Corpn. of India v. CIT [1983] 140 ITR 532, wherein the Delhi High Court held as follows: ... Similarly, expenses of administration but connected with the maintenance of the foreign branches of the assessee would fall under Sub-clause (iv) and not under Sub-clause (iii). Likewise administrative expenses in India attributable to advertisement or publicity outside India would certainly fall under Sub-clause (i).
Some of such administrative expenditure may have been classified, for example, as establishment expenditure. But if the staff in question attended to the above activities, a proportion of the establishment expenditure would be apportionable to these activities and thus eligible for relief under Sub-clause (i), (iv) or (v) and cannot be disallowed because of Sub-clause (iii)....
17. Shri Krishnan, the learned departmental representative, in his reply, relied on the following passage in CIT v. Kasturi Palayacat Co.
[1979] 120 ITR 827 (Mad.): ... If the assessee had made only local purchases abroad then there would be no scope for allowance of the weighted expenditure contemplated for allowance under Section 35B, as to that extent there were no exports from India. The assessee cannot get allowance for some one else's exports of Indian goods. But, so long as the assessee had exported goods from India, even though the assessee did not deal in those goods jn India, the assessee will be eligible for allowance, as there is nothing in the provision which requires the assessee to deal in those goods in India also before he can get the relief under Section 35B in respect of the expenses incurred abroad....
From this passage, Shri Krishnan argued that there must be export of banking services by the assessee-bank to the foreign countries. But in present case, these were no such export of banking services to justify the allowance of weighted deduction under Section 35B(1)(b)(iv).
18. From a perusal of the arguments urged on behalf of the revenue, it would be noticed that they reflect what the ITO had stated in paragraph 9 of his order to hold that the assessee is not entitled to any weighted deduction at all under Section 35B. On the contrary, in paragraph 7 of his appellate order, the Commissioner (Appeals) has accepted the assessee's contentions that in view of the services rendered by and through the foreign branches, the assessee earns foreign exchange and hence, qualifies for relief under Section 35B. He further held that the expenses for the foreign branches and also the head office attributable to foreign branches would be allowed weighted deduction under Section 35B(1)(b)(iv). In the opening sentence of this paragraph, the Commissioner (Appeals) accepts that the assessee's claim for weighted deduction is in respect of expenses incurred by foreign branches being establishment expenses. In other words, the Commissioner (Appeals) holds that by maintaining these branches or office outside India, the assessee-bank has promoted the sale outside India of its banking services within the meaning of Section 35B(1)(b)(iv).
18A. In our view, the stand taken by the revenue is clearly untenable in the light of the decision of the Supreme Court in the case of CIT v.India Hotels Ltd. [Special Leave Petition (Civil) No. 4177 of 1979 decided on 14-9-1979], discussed at pages 1098 and 1099 of Chaturvedi and Pithisaria's Income-tax Law, third edition, vol. I, referred to above, as well as the decision of the Delhi High Court in Handicrafts & Handloom Export Corpn. of India's case (supra). We are unable to agree with the revenue that there was no export of banking services by the assessee-bank to the foreign countries and that it was only mere rendering of routine banking services by the assessee-bank as in any other banking institutions. This argument of the revenue overlooks that by establishing these foreign branches and offices, the assessee-bank was, in fact, exporting its banking services and expertise in the field of banking as one of the big five banks of our country. In fact, the case of the assessee-bank is stronger than that of the case of India Hotels Ltd. (supra). The decision of the Tribunal, in the case of Indian Overseas Bank, also supports the assessee's case for claiming such deduction under Section 35B. We are unable to accept the contentions of the revenue that the assessee-bank is not entitled to any weighted deduction at all under Section 35B. Accordingly, we reject this extreme stand taken by the revenue in ground No. 3 in the revenue's appeal.
19. The next objection of the revenue and the assessee is to the quantum of relief allowed by the Commissioner (Appeals) to the assessee under Section 35B to the extent of Rs. 1,50,04,362. The computation of this relief allowed by the Commissioner (Appeals), contained in paragraph 8 of his order, is set out below:Total expenses incurred outside India 2,97,34,048Less: Law charges 2,49,815Auditor's fees 4,51,403Repairs 10,34,056 17,35,274 2,79,98,774Head Office expenses 13,44,975Entertainment expenses 30,000 2,93,73,74950 per cent thereof 1,46,86,875Add: 150 per cent of Rs. 2,11,658 3,17,487 1,50,04,362 In para 7 of his order, the Commissioner (Appeals) has set out the particulars of expenses within India, incurred outside India, total expenses under various heads and the relevant note number, with reference to each of the items of expenditure claimed by the assessee filed along with the return of income.
20. The Commissioner (Appeals) allowed weighted deduction on Rs. 2,97,34,048, as the assessee's claim was only for expenditure incurred outside India. He further allowed weighted deduction on entertainment expenditure of Rs. 30,000 allowed by the ITO. In respect of entertainment expenditure not allowed to the tune of Rs. 2,11,658, the Commissioner (Appeals) held that the same would qualify for weighted deduction by following the decision of the Tribunal, in IT Appeal No.3660 (Bom.) of 1974-75. Regarding the Head Office administrative expenditure pertaining to foreign branches amounting to Rs. 13,44,973, the Commissioner (Appeals) hsld that the assessee would be entitled to weighted deduction though they were incurred in India by following the principles laid down by the Special Bench in J.H. & Co.'s case (supra).
As regards the quantum of claim, the Commissioner (Appeals) observed that these expenses have been actually allowed as business expenses outside India. He further held that the expenses incurred by the assessee under the heads salaries, provident fund, rent of premises, taxes paid for premises, insurance of building, lighting, postage, telegram, stamps for stationery and printing advertisement, travelling in foreign branches were for maintenance of such office abroad. In regard to miscellaneous charges of Rs. 85,95,654, the Commissioner (Appeals) held that the total expenses under this head amounted to Rs. 92,43,285, out of which, donations amounting to Rs. 3,97,131 and provision of expenses of Rs. 2,50,500 had been excluded for Section 35B claim. He held that out of Rs. 85,95,654, the assessee's claim for weighted deduction in respect of expenses incurred outside India amounting to Rs. 17,92,716 was a fair claim and should be allowed. As regards law charges, auditor's fees and repairs, the Commissioner (Appeals) held that though they were business expenses, yet they had no nexus with the export market development expenses nor were they necessary wholly for maintenance of foreign office under Section 35B (\)(b)(iv). Accordingly, he excluded a sum of Rs. 17,35,274 under these three heads and directed the ITO to allow weighted deduction of Rs. 1,50,04,362 to the assessee under Section 35B.21. The argument on behalf of the revenue is that the Commissioner (Appeals) had not examined the various items of expenditure with a view to find out their exact nature for the purpose of allowing weighted deduction under Section 35B. Shri Krishnan argued that the expenses should have been bifurcated between those incurred for carrying on the business of banking by the foreign branches and those for the maintenance of the branch. He submitted that all the expenses under the various heads and also the entire amount of expenditure claimed under each of the heads would not qualify for weighted deduction under Section 35B (1)(b)(iv), since they could not have been entirely for the maintenance of the branch, as held by the Commissioner (Appeals). It was pointed out by Shri Krishnan, with reference to paragraph 7 of the order of the Commissioner (Appeals), that the Commissioner (Appeals) himself had observed in the first sentence that the expenses incurred and claimed by the assessee for purposes of weighted deduction were in the nature of establishment expenses, which meant they were incurred not merely for the purpose of promoting the sales of services in the foreign branches but also for running the branches from day to day.
Shri Krishnan argued that no details of the expenses of Jakarta office were furnished to find out whether any item of inadmissibles were included by the Commissioner (Appeals) while accepting the assessee's claim. He contended that what was crucial in such cases was whether the expenses incurred abroad on the branches were for 'promotion of the sale of services' or only for 'provision for services' in the ordinary course of the banking business. In this connection, the learned departmental representative drew our attention to paragraph 8 of the order of the Tribunal, Madras Bench 'D', in the case of Indian Overseas Bank, referred to above. He pointed out that the Tribunal had rejected the presumption on the part of the assessee that all the expenditure to keep the branch going should be considered as expenditure on the maintenance of the branch and held that there was a distinction between the terms 'wholly and exclusively' used in Section 35B and the said term used in Section 37 of the Act. He pointed out that the Tribunal had held that in the latter case, i.e., Section 37, the term has a wider import because even the expenditure incidental to the carrying on of the business would come under the terms, whereas under the term used in Section 35B(1)(&) one has to satisfy that the expenditure had been incurred wholly and exclusively on the terms provided thereunder and that, therefore, for each item under Section 35B(1)(6), one has to examine and apply the test whether such expenditure has been incurred wholly and exclusively on such items. He pointed out that the Tribunal had held that the law charges incurred for recovering loans and for other litigations, central office expenses, entertainment expenses, depreciation, loss on sale of asset and income-tax paid would not qualify for weighted deduction under Section 35B(1)(b)(iv). It was further argued that on the same parity of reasoning, the other items of expenses, such as provident fund, taxes, law charges, auditor's fees, repairs and miscellaneous charges, in the present case, would not qualify for weighted deduction, as they were not incurred wholly and exclusively on the maintenance of the foreign branch. Even in respect of the other expenditure, it was argued by the revenue that no attempt has been made by the assessee to make a fair apportionment of the expenditure to ascertain that what portion of the expenditure, which was incurred wholly and exclusively for the maintenance of the foreign branches, was for the promotion of sale of the services outside India, which alone would qualify for weighted deduction. It was further argued that since the ITO did not accept the assessee's claim for weighted deduction, he did not consider it necessary to examine in detail the various items of expenditure on which weighted deduction had been allowed by the Commissioner (Appeals) and, therefore, he had no opportunity to examine the same. In the interests of justice, it was pleaded that the ITO should be allowed an opportunity to examine these expenses to ascertain the true nature and their nexus for allowance of weighted deduction under Section 35B(1)(b)(iv), as claimed by the assessee.
22. Shri Dastur, the learned counsel for the assessee, while relying on the findings of the Commissioner (Appeals) submitted that the entire expenses on which the assessee had claimed weighted deduction was incurred wholly and exclusively for the maintenance of the foreign branches under Section 35B(1)(b)(iv), that the distinction sought to be drawn by the department between the promotion of the sale of services and provision of services was not justified because by providing the services, the bank was promoting the sale of its services. The learned counsel contended that in the nature of services rendered by banks, this sort of distinction sought to be drawn by the revenue was without any meaning because only by giving efficient services, the bank can promote the sale of the services in foreign countries particularly in these days of keen competition among the banks of the world. The learned counsel argued that there is no scope for any dichotomy of the expenses, as contended by the revenue, on a proportionate basis and that the Commissioner (Appeals) was right in accepting the assessee's contentions in respect of the entire expenditure. He further argued that the grievance of the asscssce-bank is that the Commissioner (Appeals) ought to have allowed weighted deduction in respect of the three items of expenditure amounting to Rs. 17,35,274, viz., law charges, auditor's fees and repairs, which ho had excluded for purposes of allowance of weighted deduction. Shri Dastur submitted that the law charges in question were incurred mainly for documents and opinions as required by the laws of the concerned country where the branches are located and the expenses on suits for recovery of the dues to the bank would not exceed 10 per cent of the total claim. He next submitted that the auditor's fees were incurred for complying with the legal requirements of the various countries. He pointed out that the assessee could not maintain a branch without carrying on the audit of its accounts and that it was a two-fold requirement as per the Companies Act, 1956, in India as per the laws of the foreign countries, which require that audited accounts should be filed with various central banking authorities. Shri Dastur submitted that the audited balance sheets are necessary for carrying on the normal banking services in foreign countries and that there are provisions laid down under Section 594 of the Companies Act and the corresponding provisions of the company law of the other foreign countries also. The learned counsel pointed out that the branch balance sheets are to be incorporated in the Indian head office accounts and unless the branch balance sheets are audited, they could not be so included in the head office's accounts in India. Shri Dastur further submitted that in order to command credit which the assessee requires in the normal course of its banking business all over the world for honouring its letters of credit, discounting of bills, etc., these audited balance sheets would also be required to prove the financial soundness of the assessee-bank to the foreign parties. Shri Dastur then pointed out that the expenditure on repairs was incurred for the maintenance of the foreign branches and that they would be allowable as revenue expenditure for proper maintenance of the foreign assets. He submitted that the Commissioner (Appeals) was not justified in disallowing weighted deduction in respect of these three items of expenditure. The learned counsel further proceeded to argue that the provident fund contributions made by the assessee to its employees' accounts in the foreign branches formed part of their salaries and would, therefore, qualify for weighted deduction. He next submitted that taxes referred to in the particulars in paragraph 7 of the order of the Commissioner (Appeals) represented municipal taxes in respect of foreign assets and vehicles and not income-tax paid to the local Governments in various countries. He further submitted that the expenses incurred on advertisement would qualify for weighted deduction under Section 35B(1)(b)(i), that expenses on travelling would qualify for weighted deduction under Section 35B(1)(b)(vii), that miscellaneous charges included computer hire and maintenance charges, which were necessary for promoting the business of the assessee-bank in the foreign countries and that similarly, the entertainment expenses incurred in the foreign countries would also qualify for weighted deduction, since Section 37(2A) read with Section 37(1) was no bar to Section 35B. He argued that Section 37 does not come into the picture at all, since the expenditure in question falls under Section 35B. In this connection, Shri Dastur relied on the paragraph 26 of the order of the Special Bench of the Tribunal, in J.H. & Co.'s case (supra). He also relied on the decision of the Delhi High Court in Handicrafts & Handloorn Export Corpn. of India's case (supra) and further pointed out that the decision of the Tribunal in the case of Indian Overseas Bank (supra), would not apply to the facts of the present case, since the assessee was not claiming weighted deduction either on depreciation or loss on sale of investments or the Central office expenses, as they did not arise in this case. He further pointed out that the law charges in the said case referred to litigation charges whereas in the present case, he had already explained that it was mainly for documents and opinions.
He submitted that all the expenses claimed by the assessee would qualify for weighted deduction under Section 35B(1)(b)(iv). He further argued that the decision of the Special Bench in J.H. & Co.'s case (supra) did not deal with a case of the maintenance of a branch outside India for the promotion of sale of goods, services or facilities.
Therefore, the observations in paragraph 22 of the Special Bench order would not apply to the facts of the present case.
23. Shri Krishnan, in his reply, relied on paragraph 23 of the Special Bench order and submitted that law charges and auditor's expenses represented post export charges and were for the recovery of the dues of the assessee-bank and, therefore, would not qualify for weighted deduction even under Section 35B(1)(b)(iv).
24. On a careful study of the arguments urged on both the sides on this aspect of the case, we are inclined to agree with the submissions made on behalf of the revenue. It is clear from the assessment order that the ITO did not go into the question of the allowability of weighted deduction in respect of each item of expenditure, in the light of Section 35B(1) (b), since he was of the view that the assessee-bank would not be entitled to any such allowance having regard to the nature of its business. On the contrary, the Commissioner (Appeals) accepted the assessee's claim for weighted deduction wholly in respect of its establishment expenses of foreign branches except for the three items excluded by him under the head law charges, auditor's fees and repairs against which the assessee has also come up in appeal. It is, therefore, apparent that there has been no detailed examination of the assessee's claims for weighted deduction in respect of each of the item of expenditure under the various heads specified in paragraph 7 of the appellate order of the Commissioner (Appeals). We are unable to agree with the contention urged on behalf of the assessee that the entire expenses incurred by the assessee-bank on its establishment in the foreign branches would qualify for weighted deduction under Section 35B(1)(b)(iv), since it cannot be disputed that a major portion of the expenditure under each of these heads would also relate to the day-to-day carrying on of the banking business by the foreign branches in providing services to the customers in those countries. We are supported in our view by the decision of the Madras Bench of the Tribunal, in the case of Indian Overseas Bank (supra) and also by the decision of the Delhi High Court in the case of Handicrafts & Hand-loom Export Corpn. of India (supra), which is also a public sector undertaking, it being a wholly owned subsidiary of the State Trading Corporation of India. In fact, in the passage quoted by us while setting out the arguments of the learned counsel for the assessee in paragraph 16 above, it is mentioned that there should be a fair apportionment of the expenses under various heads to ascertain under which of the sub-clauses of Section 35B(1)(6) they would fall to qualify for weighted deduction. In the present case, no such apportionment of the expenditure had been attempted either by the assessee or by the Commissioner (Appeals) when the matter was disposed by him. It cannot be contended that the entire establishment expenses incurred by the assessee-bank is only for the promotion of the sale of the banking services of the assessee-bank and not for the actual providing of the banking services or facilities in the ordinary course of its banking business. It cannot also be disputed that these foreign branches have been in existence for quite a long number of years, when similar establishment charges have been incurred by the assessee-bank.
Therefore, we are unable to accept the contention of the learned counsel for the assessee that there is no distinction between the establishment expenses incurred by the assessee-bank on which it claims weighted deduction, and the expenses incurred wholly and exclusively for the maintenance of a branch outside India for the promotion of the sale of the services outside India by the assessee. In our view, there is a clear distinction between two as has been brought out by the decision of the Tribunal in the case of Indian Overseas Bank (supra) and we respectfully agree with the same.
25. The assessee's grievance against the disallowance of its claim for weighted deduction in respect of three items further establishes the need for further examination of the nature of the expenses, since the assessee's learned counsel is trying to distinguish the facts of the present case from the decision in the case of Indian Overseas Bank (supra). No authority, either the ITO or the Commissioner (Appeals), seems to have looked into these facts, which are being pleaded before us for the first time. In the interests of justice, we consider it fair and proper to set aside the order of the Commissioner (Appeals) on this point and restore the matter to his file for fresh disposal in accordance with law after giving reasonable opportunities both to the assessee-bank and to the ITO, to substantiate their respective stands in respect of the weighted deduction that is to be allowed under Section 35B in respect of each item of expenditure after making a fair apportionment of the expenses relating to the maintenance of the foreign branch for the purpose of promoting the sale of the services outside India.
26. In the result, both the appeals filed by the revenue and the assessee shall be treated as partly allowed, for statistical purposes.