N.K. Agrawal, J.
1. This order will dispose of Income-tax References Nos. 47 and 48 of 1983 and Income-tax References Nos. 96 to 99 of 1982, as common questions of law and facts are involved therein.
2. The questions of law referred to this court for opinion by the assessee as well as the Commissioner of Income-tax for the assessment years 1975-76, 1976-77 and 1977-78 are as under :
Questions of law referred at the instance of the assessee : For the assessment year 1975-76 :
'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the additional grounds taken for the first time before the Tribunal, in respect of claiming the value of entitlements to import against the export as capital receipt immune from taxation, cannot be admitted ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the provisions of Section 144B of the Income-tax Act, 1961, introduced with effect from January 1, 1976, have rightly been applied and the assessment made was not barred by limitation ?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the expenditure of Rs. 10,000 and Rs. 6,000 incurred on food and light refreshment served to the trainees and engineers under the heads 'Dealers conference expenses' and 'sales promotion expenses', respectively, can be termed as entertainment within the meaning of Section 37(2A) of the Income-tax Act ?
4. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the claims of the appellant-company are -not eligible for weighted deduction under Section 35B in respect of the following expenses :
(Rs.)
(i) Freight on export
2,91,003
(ii) Handling charges onexport consignment
20,974
(iii) Interest on exportpromotion
77,186
(iv) Expenses on packinggoods and card board cases for export consignment.
2,66,755.'
For the assessment year 1976-77 :
'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the additional grounds taken for the first time before the Tribunal, in respect of claiming the value of entitlements to import against the export as capital receipt immune from taxation, cannot be admitted ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the expenditure of Rs. 12,000 incurred on food and light refreshment served to the trainees and engineers under the head 'Sales promotion expenses' can be termed as entertainment within the meaning of Section 37(2A) of the Income-tax Act ?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the claims of the appellant-company are not eligible for weighted deduction under Section 35B in respect of the following expenses :
(Rs.)
(i)
Interest on exportpromotion
55,543
(ii)
Gift to foreign buyers
586
(iii)
Packing expenses forexport consignment
1,33,053
(iv)
Card board boxes forexport consignment
77,013
(v)
Sea freight onconsignment including handling charges Rs. 21,180
2,75,214
(vi)
Insurance on exportconsignments
11,110
(vii)
Expenses on certificateof origin
455.'
For the assessment year 1977-78 :
'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the additional grounds taken for the first time before the Tribunal, in respect of claiming the value of entitlements to import against the export as capital receipt immune from taxation, cannot be admitted '.
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the expenditure of Rs. 8,000 incurred on food and light refreshment served to the trainees and engineers under the head 'Sales promotion expenses' can be termed as entertainment within the meaning of Section 37(2A) of the Income-tax Act, 1961 ?
3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the claims of the appellant-company are not eligible for weighted deduction under Section 35B in respect of the following expenses :
(Rs.)
(i)
Handling charges forexport consignment
42,162
(ii)
Expenses on certificateof origin
565
(iii)
Bank guarantee charges
7,187
(iv)
Bank charges for export
51,853
(v)
Freight under CIF and C& F Contract
3,76,310
(vi)
Interest paid for export
1,42,467
(vii)
Cost of packing expenses
2,79,606.'
Questions of law referred at the instance of the Commissioner of Income-tax :
For the assessment year 1975-76 :
'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing weighted deduction on miscellaneous expenses of Rs. 3,76,715 which included salary and other establishment expenses ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing weighted deduction of Rs. 26,007 being commission paid to Project and Equipment Corporation of India Ltd., New Delhi ?'
For the assessment year 1976-77 :
'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing weighted deduction on miscellaneous expenses of Rs. 2,86,978 which included salary and other establishment expenses ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing weighted deduction of Rs. 87,043 being commission paid to Larsen and Toubro Ltd. and Gemini International (P.) Ltd. ?'
For the assessment year 1977-78 :
'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that penalty of Rs. 4,950 paid to the Punjab State Electricity Board for delay in delivery of goods was allowable as deduction in view of the decision of the Punjab and Haryana High Court in Cineramas v. CIT ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the sum of Rs. 36,699 on account of extinguishment of sales tax liability for the assessment years 1970-71 to 1973-74 was not a trading receipt and not includible in the assessee's income ?'
3. Learned counsel for the assessee has not pressed the questions of law, Nos. 1 and 2 for the assessment year 1975-76 and question No. 1 for the assessment year 1976-77, and also for the assessment year 1977-78--all referred to this court for opinion at the instance of the assessee. Therefore, these questions are returned unanswered.
4. Expenditure disallowed under Section 37(2A) of the Income-tax Act, 1961 (for short, 'the Act') :
Question No. 3 for the assessment year 1975-76 and question No. 2 in the next two assessment years pertain to expenditures incurred by the assessee on food and light refreshment served to the trainees and engineers and claimed as deduction under the expenditure head 'Sales promotion expenses'. In the assessment year 1975-76, the assessee had claimed an expenditure of Rs. 22,514 under the head 'Dealers' conference expenses' and Rs. 16,718 under the head 'Sales promotion expenses'. The Assessing Officer made a disallowance of Rs. 20,000 out of the expenditure shown under the first head and Rs. 12,500 under the second head. Disallowances under both the heads of expenditure were ultimately reduced to Rs. 10,000 and Rs. 6,000, respectively, by the Income-tax Appellate Tribunal (for short, 'the Tribunal').
5. In the assessment for the assessment year 1976-77, expenditure under the head 'Sales promotion expenses' had been shown by the assessee at Rs. 37,041. Disallowance in this year was made by the Assessing Officer at Rs. 15,000 but it came to be reduced to Rs. 12,000 by the Tribunal.
6. In the assessment year 1977-78, expenditure under the head 'Sales promotion expenses' had been shown at Rs. 59,687 out of which, the expenditure of Rs. 15,000 was disallowed by the Assessing Officer but ultimately this disallowance was reduced to Rs. 8,000 by the Tribunal.
7. The question for determination in all the three years relates to the nature of expenditure. The assessee-company manufactured electric switch-gears. The plea of the assessee was that seminars and conferences were arranged by the company from time to time, wherein trainees and engineers working with the purchasing dealers were invited so that the items manufactured by the assessee-company could be made known and explained to them. Therefore, the main purpose for organising the conferences was advertisement and publicity and whatever expenditure had been incurred in providing food and light refreshment to the invitees, was not at all in the nature of entertainment expenditure within the meaning of Section 37(2A) of the Act. It was necessary for the assessee-company to hold dealers' conferences so that the electric switch-gears manufactured by the company was made more popular and the engineers could also be imparted training about the use of electric switch-gears. The object and purpose for which seminars and conferences had been organised should be looked into and simply because food and light refreshment had been served to the trainees and engineers, that should not make it an expenditure on entertainment.
8. The question whether the expenditure incurred on food and refreshment was in the nature of entertainment expenditure has been examined by various High Courts. A similar question came up for examination before the Karnataka High Court in Addl. CIT v. Bangalore Turf Club Ltd. : [1980]126ITR430(KAR) . That was a case where the assessee-company conducted, as its business, horse races. Certain expenditure had been incurred under the head 'Refreshments'. Deduction had been claimed of the entire expenditure but was disallowed by the Assessing Officer on the ground that the entire expenditure was in the nature of entertainment expenditure. The assessee went in appeal and succeeded partly. The Assistant Commissioner took the view that the expenditure on liquors or hot drinks and on throwing parties to outsiders was entertainment expenditure and, therefore, subject to limits laid down in Section 37(2A) of the Act. The rest of the expenditure was considered to be not in the nature of entertainment expenditure and was, therefore, treated as deductible under Section 37(1) of the Act on the ground that it was incurred for the purposes of the business. The matter did not rest there and reached the Tribunal which held that expenditure incurred towards refreshment and lunch served at the business meetings did not partake of the character of entertainment expenditure. The High Court, after examining a catena of judicial decisions, held that an expenditure shall constitute an expenditure in the nature of entertainment if it was expended for entertaining persons, whether they are customers or guests, either by way of providing food, drinks, refreshment or in providing any type of pleasure or amusement. Expenses incurred during the official business meetings of the managing committee and of office bearers were incurred as of necessity and constituted part of the expenses incurred for the purposes of business. The High Court endorsed the view taken by the Tribunal that an expenditure incurred albeit for the purposes of serving food, refreshments drinks, etc., at the business meetings would be in the nature of administrative or business expenditure and would have no taint of expenditure in the nature of entertainment.
9. The Bombay High Court had also an occasion to examine a question about entertainment expenditure in CIT v. Kirloskar Oil Engines Ltd. : [1986]157ITR762(Bom) wherein the assessee-company was engaged in the business of manufacture and export of oil engines. It had arranged a seminar of the foreign and local distributors with a view to boosting sales, particularly in the foreign market. Since the assessee's guest house was small, accommodation was arranged in hotels and clubs. The assessee claimed the expenditure as business expenditure but that was declined by the Assessing Officer treating the same as entertainment expenditure. The assessee's contention was, however, accepted in appeal on the ground that it was a customary practice to make arrangement for the stay of the distributors and also to give them presentation articles when they visited the assessee's factory. It was held by the High Court that the seminar had been arranged in connection with the assessee's business and, therefore, the expenditure incurred for travel, boarding and lodging of the distributors attending the seminar and the expenditure involved in giving the presentation articles were expenditures incurred in connection with the assessee's business.
10. The Calcutta High Court has also examined a similar question about sales promotion expenses in two cases. In CIT v. The Statesman Ltd. : [1992]198ITR582(Cal) it has been observed that 'sales promotion' necessarily involved an element of advertisement and publicity. A manufacturer of a product may intend to further the popularity or sales by publishing and advertising or by several other modes, but the cost incurred to sell the product will not come within the purview of 'sales promotion'. The expression 'sales promotion' cannot include the selling expenses incurred in the ordinary course of business. It only restricts such expenses as are of like nature as advertisement and publicity. The same High Court in CIT v. Santosh Agencies : [1994]210ITR78(Cal) reiterated the same view and held that 'sales promotion expenses' connote activity akin to advertisement or publicity. A special discount allowed to the dealers as well as expenditure to meet the dealers' foreign tour expenses were held to be the selling expenses of the assessee incurred in the ordinary course of business and not part of expenditure which could be disallowed under Section 37(3A) or Section 37(3B) of the Act.
11. The Kerala High Court had also an occasion to examine an expenditure incurred in connection with the inauguration ceremony on commissioning of a new project. In CIT v. Aluminium Industries Ltd. [1995] 214 ITR 541 it was held that the expenditure incurred on the inauguration ceremony was in the nature of revenue expenditure.
12. The assessee's main plea is that disallowances made in all the three years in question were totally on an incorrect and baseless presumption that the assessee had spent money on entertainment and not because of a business necessity. Learned counsel for the assessee has argued that whatever expenditure was incurred on food and light refreshment served to the trainees and engineers attending the seminars and conferences, was an expenditure for the purposes of business and not for entertainment within the meaning of Section 37(2A) of the Act.
13. The Revenue's plea is based on the proposition that the provisions of Sub-sections (2) and (2A) of the Act do not permit an expenditure if it has been incurred on food and refreshment. All hospitality, whether lavish or frugal, comes within the ambit of the phrase 'in the nature of entertainment expenditure'. The Full Bench of this court in CIT v. Khem Chand Bahadur Chand examined the scope of Section 37(2A) of the Act and observed that any lavish hospitality expended for business purposes would amount to 'entertainment expenditure'. Under Sub-section (1) of Section 37 of the Act, an expenditure wholly and exclusively incurred for the purposes of the business, including entertainment at a lavish, modest or even a frugal level, would come within the wide language thereof.
14. The term 'entertainment' has also been examined by the Gujarat High Court in CIT v. Patel Brothers and Co. Ltd. : [1977]106ITR424(Guj) it was observed that the term 'entertainment' in the context of Section 37(2A) and (2B) of the Act on a true construction and meaning would include the acts or practice of receiving and entertaining strangers and friends in a friendly, generous and liberal way. These acts may consist of providing, inter alia, a formal or elegant meal, a banquet and being hospitable in providing for the wants of a guest in a liberal and generous manner. If the provision of food or drinks to a client, constituent or customer is in the nature of bare necessity, or by way of ordinary courtesy, or as an express or implied term of the contract of employment spelled out from the long-standing practice or custom of trade or business, it will not amount to entertainment. If the provision of food, drinks or any amusement to a client, constituent or customer is on a lavish and extravagant scale, or is of wasteful nature, it is entertainment per se. The provision of food or drinks may amount to entertainment having regard to the place, item and cost of such provision. The provision of amusement to a client, customer or constituent by way of hospitality or otherwise will always be entertainment.
15. Shri R.P. Sawhney, senior advocate, standing counsel for the Revenue, has explained that Explanation 2 to Section 37(2A) of the Act prohibits any expenditure on hospitality of every kind to any person whether by way of provision of food or beverages or in any manner whatsoever. This prohibition came into force with effect from April 1, 1977, and, therefore, the disallowance made for the assessment year 1977-78 was definitely sustainable under the said Explanation . The Supreme Court in CIT v. Patel Brothers and Co. Ltd. : [1995]215ITR165(SC) while examining a disallowance made under Section 37(2A) of the Act, has observed as under (headnote) :
' Generally, entertainment expenditure is an expression of wide import. However, in the context of disallowance of entertainment expenditure as a business expenditure by virtue of Sub-section (2A) of Section 37 of the Income-tax Act, 1961, the word 'entertainment' must be construed strictly and not expansively. Ordinarily, 'entertainment' connotes something which may be beneficial for mental or physical well-being but is not essential or indispensable for human existence. A bare necessity, like an ordinary meal, is essential or indispensable and, therefore, is not entertainment. Where such a bare necessity is offered, it is hospitality not entertainment. Unless the definition of entertainment includes hospitality, the ordinary meaning of 'entertainment' cannot include hospitality. For this reason, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity, would not be 'entertainment expenditure' without the aid of the enlarged meaning given to the words by Explanation 2 inserted with effect from April 1, 1976. The definition in Explanation 2 is not the ordinary meaning of the words 'entertainment expenditure', but the enlarged meaning given for the purposes of the Act with effect from April 1, 1976. The object of Sub-section (2A) is to disallow any lavish expenditure in the form of business expenditure.'
16. It is clear from the nature of expenditure in all the three assessment years in the present case that food and light refreshment had been served to the trainees and engineers attending the dealers' conference organized by the assessee. These expenditures cannot, therefore, be treated to be in the nature of entertainment but on account of business necessity and expediency. The assessee had shown these expenditures under two heads, namely, 'Dealers' conference expenditure' and 'Sales promotion expenditure' in the assessment year 1975-76 and under the second head, as aforesaid, in the next two years. Obviously, such expenditures do not fall within the ambit of Section 37(2A) of the Act. The nature and purpose of expenditure distinctly establish that expenditure on food and light refreshment was for the advancement of business and for advertisement and publicity of the goods manufactured by the assessee. Question No. 3 in the assessment year 1975-76 and question No. 2 in the next two assessment years are answered in the negative and in favour of the assessee.
17. Disallowance made under Section 35B of the Act :
The questions of law have been referred on the weighted deduction claimed by the assessee at the instance of the assessee as well as the Commissioner of Income-tax.
18. We shall first take up the question of law referred to this court for opinion at the instance of the assessee.
19. Question No. 4 in the assessment year 1975-76 and question No. 3 in the next two assessment years have come up for opinion at the instance of the assessee. Learned counsel for the assessee has at the outset stated that he would only argue on the admissibility of deduction in regard to the sea freight paid on export of consignments and insurance charges paid on such consignments. Initially, deductions had been claimed by the assessee under various heads and the questions referred to this court for opinion also relate to expenses under various heads. Since learned counsel for the assessee has not opted to argue various deductions except deduction of freight and insurance charges, we would confine our opinion to that alone.
20. The assessee had claimed freight and insurance charges as under :
Assessment year 1975-76 :
Freight charges onexport consignments
Rs. 2,91,003
Assessment,year 1976-77 :
Freight and handlingcharges (Rs. 2,54,034 and Rs. 21,180)
Rs. 2,75,214
Insurance
Rs. 11,110
Assessment year 1977-78
Freight under CIF and C& F contract
Rs. 3,76,310
21. The Assessing Officer disallowed weighted deduction in regard to freight and insurance charges on the ground that these expenditures were not covered under Sub-clause (iii) of Clause (b) of Section 35B(1) of the Act. The Assessing Officer took the view that expenses in India or outside India in connection with the distribution, supply or provision of goods, services or facilities were not allowable as deductions if these were incurred on the carriage of goods to their destination outside India and on the insurance of such goods while in transit. The question about the deductibility went up to the Tribunal but the assessee did not succeed.
22. The expenditure which qualifies for weighted deduction is that which is incurred on the activities exercised outside India for the development of the export market for Indian goods on long-term basis. This provision is not intended to cover expenditure which the taxpayer incurs on activities inside India for his export business except where these are incidental to the activities outside India. The weighted deduction is admissible with reference to the qualifying expenditure only. Expenditure of a capital nature and personal expenses do not qualify for such a deduction. The expenditure to be allowed as deduction under Section 35B is an amount equal to one and one-third times the amount of the qualifying expenditure so incurred. The expenditure must be incurred wholly and exclusively for the purposes of the business and on certain specified items in relation to the export business. Eligibility of an expenditure is, therefore, to be tested with reference to Sub-clauses (i) to (ix) of Clause (b) of Section 35B(1) of the Act. The relevant Sub-clauses for the purposes of deduction of freight and insurance charges are Sub-clauses (iii) and (viii) which read 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, where such expenditure is incurred before the 1st day of April, 1978 ; . . .
(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.'
23. The assessee's plea is that freight and insurance charges had been incurred on the performance of services outside India in connection with, and incidental to, the execution of the contract entered into by the assessee with foreign buyers for the supply outside India of the goods. It is stated that Sub-clause (iii) which prohibited deduction of expenditure incurred on the carriage of goods and on their insurance would not be a bar if, on an independent reading, the deduction is found to be allowable under Sub-clause (viii).
24. A similar question came up for examination before this court in CIT v. Road-master Industries of India Pvt. Ltd. . In that case, the assessee had claimed weighted deduction under Section 35B of the Act in respect of the railway freight, sea freight and marine insurance. After examining the Sub-clauses (iii) and (viii), it was held that railway freight did not qualify for deduction but sea freight and marine insurance were eligible for the purposes of deduction under Sub-clause (viii). The following observation is relevant (at page 974) :
' Sea freight and marine insurance are clearly services rendered outside India. Further, both these services are in connection with the execution of the contract entered into with the foreign buyer. Both the conditions of Sub-clause (viii) are, therefore, satisfied. Once this conclusion is reached, it is no reason to exclude Sub-clause (viii) that the expenditure was incurred in India ; because there is no such condition laid down in Sub-clause (viii) either expressly or by necessary implication as distinguished from Sub-clause (iii) where the expenditure incurred in India has been specifically excluded.'
25. Mr. B.S. Gupta, senior advocate, learned counsel for the assessee, has contended that the S. L. P. No. 2292 of 1994 filed by the Commissioner of Income-tax against the said decision has been rejected by the Supreme Court, vide order dated February 26, 1996. The matter, therefore, stands concluded even though the Supreme Court rejected the special leave petition without detailed discussion. Learned counsel for the assessee has pointed out that the distinction between Sub-clause (iii) and Sub-clause (viii) is subtle and, since the sub-clauses are distinct and independent of each other, the admissibility of expenditure can and should be examined under each sub-clause and, if, after such examination, expenditures of sea freight and insurances are found to be covered under Sub-clause (viii), then Sub-clause (iii) should not be treated as a hurdle.
26. Mr. R.P. Sawhney, senior advocate, learned counsel for the Department, has put forward the contention that both the expenditures, namely, sea freight and insurance charges, had been incurred by the assessee in India solely in connection with the activities mentioned in Sub-clause (iii) and, therefore, it was not admissible as deduction. Both the expenditures were attributable to the distribution and supply of the goods outside India. Since the two expenditures have been specifically excluded from the purview of the Sub-clause (iii), these expenditures cannot be declared to be covered by Sub-clause (viii). Reliance has been placed by Shri Sawhney on a decision of the Calcutta High Court in Brooke Bond India Ltd. v. CIT : [1992]193ITR390(Cal) . In that case, expenditures on freight and insurance have been held to have been incurred in India. It was noticed that the goods were shipped and, before shipment, the goods had to be properly insured and the freight had to be paid. Similar view has been taken by the Bombay High Court in Sam Fashion Wear Pvt. Ltd. v. CIT : [1994]209ITR214(Bom) . There, expenditure incurred on packing of goods was under examination and it was held that Sub-clause (viii) would not take this expenditure within its ambit because packing of the goods in India cannot tantamount to 'performance of service outside India'.
27. The argument put forward by Mr. Sawhney, learned counsel for the Department, is not found to be acceptable. The provision of Sub-clause (viii) is very wide in amplitude and, therefore, it must be given full effect if an assessee claims deduction of an expenditure under that sub-clause. Sea carriage and marine insurance are, in our view, such services which are rendered outside India and are also in connection with the execution of the contract entered into with the foreign buyers. Since both the conditions of Sub-clause (viii) stand satisfied, there is no reason to hold that expenditures on sea freight and marine insurance would not be covered under Sub-clause (viii). The view taken by this court in Roadmaster Industries' case stands upheld by the Supreme Court when the special leave petition filed by the Department has been rejected. Though the Supreme Court did not pass a detailed order, the view taken by this court, nevertheless, stands approved. We, therefore, take the same view and hold the expenditures on sea freight and marine insurance are eligible for deductions under Sub-clause (viii) of Clause (b) of Section 35B(1) of the Act. The three questions referred to this court for opinion are, therefore, answered in the above terms. We do not give any opinion on other expenditures inasmuch as learned counsel for the assessee has not pressed the assessee's point of view on those expenditures.
28. Two questions each have been referred to this court for opinion in the assessment years 1975-76 and 1976-77 at the instance of the Department on the deductibility of miscellaneous expenses and commission paid to the agents.
29. In the assessment year 1975-76, the assessee had claimed weighted deduction of miscellaneous expenses including salary and establishment expenses at Rs. 3,76,715 and in the next assessment year at Rs. 2,86,978. The Assessing Officer did not allow deduction of the miscellaneous expenses under Section 35B of the Act, taking the view that such expenses were not at all covered under any of the nine sub-clauses of Clause (b) of Section 35B(1) of the Act. The Tribunal noticed that the establishment expenses incurred on the development and export wing should be allowed for the purposes of weighted deduction. The export sales of the assessee constituted 43.4 per cent. of the total sales in the assessment year 1975-76 and 51 per cent. in the next assessment year. In that light, establishment expenses were eligible for purposes of deduction on the basis of the same percentage. It was indeed correct that such expenses included salary and other establishment expenditures. Some members of the staff were also looking after the work of production and manufacture and, to that extent, their salary was not eligible for the purposes of weighted deduction. The expenses incurred on establishment were mixed expenses and, therefore, a reasonable proportion was required to be determined for allowing weighted deduction. The Tribunal, therefore, held that 20 per cent. of the expenditure other than bank charges should be considered for the purposes of weighted deduction in both the assessment years (1975-76 and 1976-77).
30. The assessee had also claimed weighted deduction on the amount of commission in the assessment year 1975-76 at Rs. 26,007 paid to Project and Equipment Corporation of India. In the next assessment year, weighted deduction had been claimed at Rs. 87,042 being commission paid to Larsen and Toubro Ltd. and Gemini International Pvt. Ltd, The assessee's plea was that export business had been secured through the aforesaid agents and, since they had rendered various services and had arranged contacts with the foreign customers and had procured certain information, commission paid to them was eligible for weighted deduction. It was explained by the assessee that agents had secured approval from the foreign buyers for the assessee's product and had developed export market for the goods. These agents had their offices abroad and had posted their market engineers there. The Commissioner of Income-tax allowed 50 per cent. of the total amount of commission as eligible for weighted deduction. The Tribunal, however, allowed the entire commission on the ground that this amount of expenditure had been incurred in lieu of the services rendered by the recognised export houses. Those export houses and agents displayed the product of the assessee in their own offices and also provided after sales services. Since the expenditure had been incurred for export development, it was held to be eligible for deduction. The agents used to advertise the goods of the assessee and also exchanged information regarding the export business. Commission was paid to them for various services relating to the advertisement of the assessee's product, development of the export prospects and expansion of the export market. Even if the commission was paid in India, it was eligible for deduction because it was paid for the services rendered by the agents outside India.
31. Mr. R.P. Sawhney, senior advocate, learned counsel for the Department, has placed reliance on a decision of this court in HMM Ltd. v. CIT . That was a case where expenditures incurred on inspection and supervision charges, bank charges, cost of excise revenue stamps and miscellaneous expenses had been claimed as eligible for weighted deduction. It was held that the assessee was not entitled to weighted deduction on such expenses in the light of Sub-clause (iii) of Clause (b) of Section 35B(1) of the Act. Reliance is also placed on a decision of the Kerala High Court in CIT v. Bakul Cashew Company : [1992]197ITR135(Ker) . That was a case where deduction in respect of 75 per cent. of the salary paid to the clerical staff was held to be eligible under Section 35B of the Act. The High Court took the view that the estimate made was purely arbitrary and, therefore, remitted the question back for verification.
32. The assessee's case is that miscellaneous expenditure including expenditure on salary and establishment was eligible for weighted deduction if a co-relation was established between the items of expenditure and the heads referred to in the various sub-clauses of Section 35B(1)(b) of the Act. A similar question came up for examination before the Delhi High Court in CIT v. Raunaq International Ltd. : [1986]158ITR701(Delhi) . In that case, more than 80 per cent. of the sales of the assessee were export sales. It was noticed that the expenditures incurred under various heads were items of expenditure which promoted export development. Expenditures on repairs and renewals, directors' remuneration, electricity and power and expenditure on foreign customers were claimed by the assessee as admissible deductions under Section 35B of the Act. The Tribunal held that the assessee was entitled to deduction in respect of 75 per cent. of the expenditures on repairs and renewals, directors' remuneration and electricity and power and hundred per cent. of the expenditure on foreign customers. That view was affirmed by the High Court on the ground that expenditures incurred under various heads related to export sales of the assessee as opposed to the small magnitude of the other turnover inside the country. Expenditure was attributable to the export sales to the extent of 75 per cent. A similar view has been again taken by the Delhi High Court in CIT v. Hindustan Monark P. Ltd. : [1994]208ITR396(Delhi) . That was a case where the payment of commission in respect of export sales was under examination. It was noticed that commission had been paid to the agents abroad who had introduced buyers to the assessee and thereby provided information in regard to export markets. It was, therefore, held that commission to the foreign agents did qualify for weighted deduction under Sub-clause (ii) of Section 35B(1)(b) of the Act. However, in the case before us, commission has been paid to the Indian agents for services rendered outside India. The Kerala High Court had also an occasion to examine a similar question on the commission paid to agents for the marketing of goods outside India. In CIT v. Kerala Nut Food Co. : [1991]192ITR585(Ker) the High Court took notice of a circular dated December 28, 1981, issued by the Central Board of Direct Taxes laying down that payment of commission made to parties to bring about export sales will be entitled to weighted deduction irrespective of whether the same is incurred in India or outside India. It was held that even if the circular had gone beyond the parameters drawn in Section 35B, in so far as the circular contained a provision beneficial to the assessee, the circular had to be given effect to. Since the agents had rendered positive and specific services for the marketing of the assessee's goods outside India, the commission payments were entitled to the weighted deduction. The Calcutta High Court has also examined the question of deduction of commission paid to the agent. In CIT v. Hukumchand Jute and Industries Ltd. : [1994]208ITR257(Cal) it has been held that, where the manufacturer of the export goods paid commission to an agent because the goods had been exported through that agent to the buyers abroad, the manufacturer was entitled to weighted deduction on such commission.
33. The claim of the assessee regarding weighted deduction on the miscellaneous expenses and commission paid to the agents is held to be acceptable. As we have already noticed, the Tribunal allowed deduction of 20 per cent. of the miscellaneous expenses (establishment expenses and salary). Therefore, it is only the proportionate expenditure which has been allowed keeping in view the percentage of export business of the assessee. As regards the payment of commission, it has also to be allowed because commission was paid in lieu of the services rendered by the export agents. They had secured export business for the assessee and, in lieu thereof, commission had been paid. Therefore, payment of commission is directly relatable to the export development and thus eligible for weighted deduction.
34. Resultantly, questions Nos. 1 and 2 in the assessment years 1975-76 and 1976-77 referred to this court for opinion at the instance of the Department are answered in the affirmative and against the Revenue.
35. Disallowance of penalty of Rs. 4,950 (assessment year 1977-78) :
The question referred to this court for opinion at the instance of the Department arises from the amount of Rs. 4,950 paid by the assessee to the Punjab State Electricity Board (for short 'the Board') on account of late delivery of the goods. The assessee had explained before the Assessing Officer that this amount was paid on account of the breach of a contractual obligation and, therefore, was allowable as deduction under Section 37(1) of the Act. The Assessing Officer declined to allow deduction on the ground that it was in the nature of damages and penalty paid by the assessee. The assessee went in appeal and succeeded on the plea that payment had been made not for the breach of any law but breach of a term of the agreement. The Commissioner of Income-tax (Appeals) agreed with the assessee that payment was made on account of delay in the delivery of goods because of the power cut. Since it was incidental to the business, it was held to be allowable. The Tribunal agreed with this view.
36. Shri R.P. Sawhney, senior advocate, learned counsel for the Department, has placed reliance on a decision of this court in Cineramas v. CIT . That was a case where the assessee had to pay a sum of Rs. 4,300 by way of penalty to the East Punjab Motion Pictures Association. The assessee had, as a member, failed to carry out certain directives of the association and was seeking reinstatement of membership by paying the penalty. It was held that it was not allowable as a revenue expenditure.
37. The plea of learned counsel for the assessee, on the other hand, is that the decision of this court in Cineramas' case is distinguishable on facts. Since here, it is a case of a breach of agreement only, and not a case of payment on account of infraction of any law, the expenditure is allowable as a deduction on the ground of commercial expediency.
38. A question about such deductibility also came up for examination before this court in CIT v. Murari Lal Ahuja and Sons . That was a case where the assessee, who carried on the business of sale of cotton, was unable to fulfil a contract of supplying cotton to the mills and, therefore, settled the dispute by paying them a sum of Rs. 48,158. The Income-tax Officer disallowed the payment holding it to be a speculative transaction in terms of Section 43(5) of the Act. The Tribunal, however, took the view that payment had been made due to abnormal circumstances for the reason that the assessee had flouted the agreement of sale to save himself from a ruinous situation and, therefore, the compensation paid in the shape of settlement for breach of contract was an allowable deduction. It was held by this court that the transaction did not amount to a speculative transaction and compensation was paid by the assessee for breach of contract. Therefore, the payment made was an allowable deduction.
39. Similar view has been taken by the Madhya Pradesh High Court in CIT v. Rajkumar Mills Ltd. : [1982]135ITR811(MP) . In that case, the assessee had claimed deduction of Rs. 5,600 paid by it on account of shortfall in the export performance. The Income-tax Officer took the view that the amount was paid as a penalty. The Tribunal rejected that view and gave the finding that the payment was not in the nature of any penalty. The High Court upheld that view.
40. In CIT v. Sri Rajagopal Transports (Put.) Ltd. : [1983]144ITR573(Mad) the Madras High Court was examining the question of deductibility of certain money paid by the assessee-company to the purchasers of buses under a court decree. The assessee-company had agreed to transfer one of its buses along with the route permit to two joint purchasers and also received an advance money from them. The delivery of the vehicle was to be made on receipt of the balance amount of consideration. Till then, the assessee undertook to run the bus and hand over the daily collections to the purchasers. However, the assessee did not remit the daily collections for more than a week or so nor was ready and willing to deliver the bus on receiving the balance of sale consideration. The court decreed the suit filed by the purchasers. The quantum of damages included an element of interest reckoned at Rs. 37,132. The assessee debited this amount in its interest account and claimed it as a deduction. It was held that the deduction was not allowable under Section 36(1)(iii) of the Act as payment of interest but it was allowable as a penalty. It was observed by the High Court that there was a distinction between penalties for infractions of the law and compensation or damages for breaches of contract. Somewhere, in between, apparently fall the cases relating to payment of damages in actions for negligence for other tortious acts, either of the assessee or of his employees or agents. It was noticed by the High Court that, where the assessee pays a penalty for any violation or infraction of the law, he would not be entitled to a deduction of that loss. In trades, damages paid by an assessee for a breach of trading agreement is regarded, with very few exceptions, as a loss incidental to the carrying on of the trade. The Supreme Court has also, in two cases, examined the questions relating to deduction in respect of certain payments which appeared to be compensatory or penal in nature. In Prakash Cotton Mills P. Ltd. v. CIT : [1993]201ITR684(SC) the assessee carried on business in the manufacture of textile goods. Certain amount paid by way of interest and damages for delayed payment of sales tax under the Bombay Sales Tax Act and for delayed payment of contribution under the Employees State Insurance Act was claimed as a revenue expenditure under Section 37(1) of the Act. It was observed by the Supreme Court that the Income-tax Officer and the appellate authorities had refused to allow the claims made by the assessee under Section 37(1) without any examination of the scheme of the provisions of the Bombay Sales Tax Act to find whether impost of the interest paid by the assessee for delayed payments of sales tax was compensatory in nature as would entitle it for deduction under Section 37(1) of the Act. The same was the position as regards the impost of damages paid by the assessee under the Employees' State Insurance Act, 1948, for delayed payment of contribution thereunder. The question was, therefore, remitted back to the Tribunal for deciding the assessee's claims for deduction of interest and damages under Section 37(1) of the Act.
41. In the second case, the Supreme Court again examined a similar matter. In CIT v. Ahmedabad Cotton Mfg. Co. Ltd. : [1994]205ITR163(SC) the assessee-company, which ran a textile mill, was required to comply with certain directions issued from time to time by the Textile Commissioner under the provisions of the Cotton Textiles (Control) Order, 1948. The assessee had not fulfilled its export obligation under a bond entered into as regards exporting a certain sanforized cloth and paid to the Textile Commissioner Rs. 5,17,781 for non-fulfilment of that obligation, in exercise of its option available under the terms of the bond. This amount was claimed as deduction by way of business expenditure. The Income-tax Officer refused to allow the claimed deduction, taking the view that the said amount paid by the assessee to the Textile Commissioner was not a business expenditure. In appeal, the assessee's claim was allowed. The Supreme Court upheld the deduction on the ground that the payment had been made in compliance with the law or the scheme thereunder and not for committing any breach or infraction of the law or statutory scheme.
42. In the present case, the assessee has paid certain amount by way of penalty to the Board on account of late delivery of the goods. Obviously, this is not on account of infraction of any law. The true test is whether there is breach of law or breach of an agreement. If it was in the latter category, then damages paid would be treated to be a business or commercial loss and admissible as deduction under Section 37(1) of the Act. Since it was incidental to business, it cannot be disallowed.
43. In the result, the question is answered in the affirmative and against the Revenue.
44. Extinguishment of the sales tax liability :
Question No. 2 referred to this court for opinion at the instance of the Department for the assessment year 1977-78 arises from a credit entry made by the assessee in its books of account. The assessee had paid certain amount of sales tax in the earlier years. Two amounts, Rs. 11,565.49 and Rs. 25,134.25, were debited by the assessee on November 1, 1976, to the sales tax account. However, the assessee made a reverse entry in its books of account on March 31, 1977, on the ground that the refund amount or the adjustment order had not actually been received. The cases regarding the payment of sales tax on the amount of freight had been reopened by the assessing authority for the earlier assessment years 1968-69 and 1969-70. Since assessments had been reopened for the earlier two years, the assessee found it appropriate to reverse the entries regarding the two amounts which were considered as refundable earlier. These two amounts were treated as refundable in respect of the assessments for the assessment years 1970-71 to 1973-74. The Assessing Officer did not accept the reverse entry made by the assessee on March 31, 1977, and treated the entry made on November 1, 1976, as the entry evidencing the extinguishment of the sales tax liability. Addition was, therefore, made under Section 41(1) of the Act. The assessee succeeded in appeal before the Commissioner of Income-tax (Appeals). The Tribunal affirmed the view taken by the first appellate authority.
45. Shri R.P. Sawhney, senior advocate, learned counsel for the Department, has put forward the plea that if the amount of sales tax claimed in the earlier years as deduction had become refundable to the assessee, it constituted a trading receipt. Since the tax liability had been extinguished and deduction had been claimed in the earlier years, it was but reasonable and within law to treat it as a case of extinguishment of liability and, therefore, includible in the assessee's income under Section 41(1) of the Act. It is explained by Shri Sawhney that liability to pay sales tax arises the moment a dealer made either purchases or sales which were subject to sales tax. This proposition has been affirmed by the Supreme Court in Kedarnath Jute Mfg. Co Ltd. v. CIT : [1971]82ITR363(SC) . On the same analogy, if the liability, which had been earlier created, stood extinguished, the amount found to be refundable shall be included in the assessee's income. Reliance is placed by Shri Sawhney on a decision of the Allahabad High Court in CIT v. Taj Gas Service : [1980]122ITR1034(All) . There, the assessee had obtained a refund of two amounts for two assessment years. He had claimed deduction in respect of those amounts in the earlier years. It was noticed that the requirements of Section 41(1) of the Act were satisfied inasmuch as the assessee, after incurring expenditure in payment of sales tax, had received refund of this expenditure.
46. The plea of learned counsel for the Department is found to be not applicable to the case in hand. The decision of the Allahabad High Court in Taj Gas Service's case : [1980]122ITR1034(All) is also distinguishable on facts. Here, the undisputed fact is that neither any refund order nor any adjustment order had been given to the assessee, nor was there any other evidence showing the receipt of money from the sales tax authorities. The assessee had explained that no amount had actually been received and the assessee had made an entry in the books of account on November 1, 1976, after it was noticed that sales tax on freight charges had been held to be not payable in some other assessment years. After the entry was made in the books of account, the assessee realised that cases for the assessment years 1968-69 and 1969-70, had been reopened by the assessing authority under the Sales Tax Act and, therefore, the amount believed to be refundable may not be actually received. The refund money related to the assessment years 1970-71 to 1973-74. It was correct that sales tax had been paid to the State Government and had been claimed as deductions in those years, but the amount may ultimately be not received at all if the assessing authority insisted on the levy of sales tax on freight charges.
47. A question regarding refund came up for examination before the Gujarat High Court in CIT v. Rashmi Trading : [1976]103ITR312(Guj) . The word 'obtained' occurring in Section 41(1) of the Act was examined and it was held that it would mean actually obtained or obtainable. In that case, the assessee had taken the matter against the levy of sales tax to the High Court and the High Court had pronounced its decision on December 5, 1962, in the assessee's favour, It was found that though the assessee became entitled to claim refund of the sales tax amount paid in the past by virtue of the judgment of the High Court dated December 5, 1962, but he received the refund order on August 19, 1965, only. Therefore, the amount was assessable in the previous year relevant to the assessment year 1966-67 and not in the earlier year.
48. The Gujarat High Court has again examined a similar matter about the claim for refund in CIT v. Bharat Iron and Steel Industries : [1993]199ITR67(Guj) . It was observed that, for considering the taxability of an amount coming within the mischief of Section 41(1) of the Act, the system of accounting followed by the assessee was of no relevance or consequence. A certain amount had been refunded to the assessee during the pendency of the review or revisional proceedings. Since the assessee's claim for refund of the excise duty was in jeopardy and there was no final decision on the question, the assessee was not entitled to claim the refund of excise duty. The assessee became finally entitled to claim refund after the review or the revisional proceedings were dropped. The payment received by the assessee was subject to the decision in the review or revisional proceedings. The amount of refund became includible in the assessee's income under Section 41(1) of the Act in the assessment year 1976-77 inasmuch as the review or revisional proceedings had been dropped on April 30, 1976.
49. In the case of the assessee, there is neither the receipt of refund money nor any order of refund or adjustment as such in the assessee's favour. The facts, as disclosed by the assessee, make it clear that an entry showing the proposed amount of refund was made on November 1, 1976, under the belief that the sales tax liability created on the amount of freight in the assessment year 1974-75 had not been sustained. However, the assessee realised soon thereafter that the assessments for the years 1968-69 and 1969-70 had been reopened on the issue of liability of sales tax payable on freight. In these circumstances, the reverse entry was made on March 31, 1977. The view taken by the Tribunal is, therefore, found to be correct and is upheld. There was no cessation of liability under Section 41(1) of the Act.
50. The question is, therefore, answered in the affirmative and against the Revenue.