N. K. AGRAWAL, J. :
The following two questions of law have been referred to this Court for opinion under s. 256(1) of the IT Act, 1961 (for short the Act) :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing weighted deduction under s. 35B to the assessee on a part of the following expenses, viz. establishment expenses, printing & stationary expenses, expenses on vehicles repairs, meeting fees, export promotion expenses, travelling expenses, foreign telex & telephone expenses and foreign postage.
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 5000 incurred by the assessee on advertisement in the Souvenir brought by the Indian National Congress was allowable as business expenditure'.
2. The assessee, a private limited company, was engaged in the manufacture and sale of sports goods. Return of income for the asst. yr. 1976-77 (accounting year ending on 31st March, 1976) was filed, declaring total income at Rs. 6,45,800. The assessee subsequently revised the return showing total income at Rs. 5,56,800. Relief under s. 35B of the Act in respect of certain expenses aggregating to Rs. 4,79,868, as against the earlier claim on expenses amounting to Rs. 2,12,863 was claimed. Again, during the assessment proceedings, the assessee revised its claim under s. 35B on the expenses totalling Rs. 5,93,638 as under :
Rs.
Rs.
'(i) Establishment including salary to the managing director.
3,98,495
Commission to the managing director 75 per cent. thereof relating to promotion of exports.
70,709
3,41,902
(ii) Export market development expenses.
1,74,668
(iii) Printing and stationary 50 per cent. thereof relating to promotion of export.
18,618
9,509
(iv) Vehicle repairs and maintenance.
15,004
50 per cent. thereof relating to promotion of export.
7,502
(v) Meeting fee to directors, Rs. 250 - 75 per cent. thereof relating to promotion of exports.
187
(vi) Export promotion expenses.
1,568
(vii) Travelling expenses. 8,496-50 per cent. thereof.
4,245
(viii) Foreign telex and telephone expenses.
10,020
(ix) Promotion telex and telephone expenses.
22,514
(x) Foreign postage.
5,661
(xi) E.C.G.C. charges.
3,957
(xii) Bank commission on export bills.
12,105
Total
1,93,638
The AO allowed weighted deduction under s. 35B of the Act only on the export market development expenses amounting to Rs. 1,73,412 after deducting a sum of Rs. 1,256 on account of expenses in the nature of entertainment expenses. Assessees claim in respect of all other expenses was rejected.
In appeal filed by the assessee, the CIT(A) took the view that weighted deduction was also allowable on Rs. 1,256 under the head 'Export market development expenses'. Weighted deduction was also allowed on certain other expenses, though proportionately. However, expenditures shown by way of contribution to the export promotion council, export guarantee charges and bank commission on export bills were totally disallowed by the CIT.
The assessee went in further appeal before the Tribunal but the order of the CIT was upheld there and whatever proportionate expenditures had been held to be eligible for the purposes of weighted deduction under s. 35B, those were maintained.
3. Benefit of weighted deduction was available for certain specified categories of expenditure only. Such expenditures have been mentioned in various sub-clauses under cl. (b) of sub-s. (1) of s. 35B of the Act. There are two preliminary requirements to be seen while examining as to whether an expenditure fell under any of the sub-clauses of cl. (b) and these are (i) that the expenditure should neither be capital expenditure nor in the nature of personal expenses and (ii) that the expenditure should be incurred wholly and exclusively on export promotion.
In the present case, expenditure under the head 'Establishment' relates to the payment of salary to the managing director, marketing manager, commercial executive, personal assistant, stenographers and other members of the staff. The CIT allowed 50 per cent. of the expenditure incurred on the payment of salary to the members of the staff but restricted the benefit of weighted deduction to 25 per cent. of the remaining expenditure pertaining to salary to the members of the management. The Tribunal, however, in assessees appeal increased the benefit to 60 per cent. of the expenditure in respect of salary to the members of the staff and 30 per cent. on the salary paid to the members of the management including the managing director.
The assessee does not appear to be aggrieved from the proportionate expenditure having been allowed for the purposes of deduction under s. 35B of the Act. The question of law has been raised by the Department only.
4. Sh. R. P. Sawhney, learned senior counsel for the Department, has argued that expenditures for the purposes of s. 35B were only those expenditure which were incurred for sales promotion or development and not merely for making sales or exports. Sh. Sawhney contends that what s. 35B provided, was to allow an expenditure, for the purposes of weighted deduction, in order to encourage, promote or develop export markets. If the expenditure was incurred by an assessee for developing the export markets, then only a further deduction at the rate of 1/3 is to be allowed.
Shri B. S. Gupta, learned Senior Counsel for the assessee, has explained that it was not a correct proposition that weighted deduction could be admissible only with reference to those activities which promote or develop the export market. Sub-cls. (iii) and (viii), in particular, did not fully support such a proposition. The expenditure which would qualify for weighted deduction could also include such expenditure as would indirectly develop or promote export markets.
Shri Sawhney placed reliance on three decisions of the Bombay High Court. In M. H. Daryani vs . CIT : [1993]202ITR731(Bom) , the Bombay High Court was examining the question relating to freight, forwarding charges on the carriage of goods and insurance on goods while in transit. It was held that such expenditures were not entitled to weighted deduction in the light of sub-cl. (iii) of cl. (b) of sub-s. (i) of s. 35B of the Act. The second decision of the Bombay High Court also relates to export inspection fees, trade discount on sales and interest paid to the State Trading Corporation of India in addition to the freight and forwarding charges. Here also, it was held that such expenditures did not qualify for weighted deduction [Carona Sahu Co. Ltd. vs . CIT : [1995]213ITR106(Bom) ]. The third decision of the same High Court to which Mr. Sawhney drew our attention, again relates to expenses on duty and clearing charges, delivery charges, insurance and freight charges. Since the expenditure were of the same nature as in the other two cases, the learned judges took the same view and held that these expenses were not entitled to weighted deduction [Geoffrey Manners & Co. Ltd. vs . CIT : [1996]221ITR695(Bom) ].
The question of weighted deduction on proportionate expenditure incurred on payment of salary to the staff was examined by the Kerala High Court in CIT vs . Aspinwall & Co. Ltd. : [1993]204ITR225(Ker) . The assessee had claimed deduction under s. 35B of the Act on 50 per cent. of the total salary, provident fund, medical expenses, etc. incurred on the staff employed. Similarly, 50 per cent. of the amount paid to a person employed as an export advisor was also sought to be allowed by way of deduction under that section. The Tribunal had allowed deduction on the amount representing 50 per cent. of the expenditure following a decision of the Special Bench of the Bombay Tribunal in ITA No. 3255 of 1976-77 in the case of J. Hemchand & Co. vs. ITO 1 SOT 150 (Bom) . That was upheld by the High Court.
The Calcutta High Court has also taken a similar view in CIT vs. Tungabhadra Industries Ltd. (1996) 196 ITR 912 . The assessee had claimed expenditure incurred on payment of fees to the Export Credit Guarantee Corporation and also in respect of salary expenses attributed to export business. The High Court upheld the order of the Tribunal whereby deduction had been allowed on the salary of the export department upto 75 per cent. of the claim.
In a subsequent decision in Jayshree T. & Industries Ltd. vs . CIT : [1993]202ITR695(Cal) , the same High Court again took a similar view and held that proportionate head office expenses pertaining to export were eligible for deduction under s. 35B of the Act. A reference was also made to a Circular dt. 28th December, 1981 issued by the CBDT which had been mentioned in its judgment by the Allahabad High Court in CIT vs . Novelty Trading Corpn. : [1984]150ITR453(All) .
In CIT vs . Continental Device India Ltd. : [1992]198ITR680(Delhi) the Delhi High Court had also an occasion to examine the assessees claim of export markets development allowance under s. 35B of the Act in respect of the expenses incurred in foreign travelling, salaries, bonus, provident fund, staff welfare, etc. It was observed that the expenditure incurred towards salary and bonus was in respect of those employees who were directly connected with the exports and, therefore, such expenses were eligible for the purposes of deduction under s. 35B of the Act. However, only proportionate expenditure, which was relatable to the export, was treated to be so eligible. In the case of CIT vs . Indian Aluminium Cables Ltd. : [1990]184ITR587(Delhi) , similar expenditure incurred on payment of salaries to the staff had been proportionately allowed earlier.
This High Court has, in CIT vs . Indo Asian Switch-Gears (P) Ltd. , and thereafter in ITR Nos. 15 and 16 of 1982, decided on 7th July, 1997-CIT vs. Hansa Agencies (P) Ltd. [since reported at (1997) 143 CTR], taken a view that establishment expenses are eligible, though proportionately, for the purposes of deduction under s. 35B of the Act.
It is, thus, evident that expenditures incurred on the payment of salary are eligible for deduction under s. 35B of the Act. The question of apportionment is, however, a question of fact and does not require any comment.
5. The other expenses incurred on printing and stationary, vehicle repairs and maintenance, travelling expenses, foreign telex and telephones and foreign postage shall also be allowed, if such expenses were incurred in connection with the export promotion. The subjects covered under s. 35B of the Act are very wide. Provisions have been made under various sub-clauses for giving weighted deduction, so as to encourage export from India. Having regard to the object of s. 35B, it is necessary to give a liberal interpretation to it, so that the purpose behind it could be achieved. Those are the expenditures, as mentioned above, relating to the foreign trade and are, therefore, entitled to be considered for allowing deduction under s. 35B of the Act. The export department of the assessee is engaged in such work for the promotion of foreign trade. Therefore, expenditure incurred in connection with the foreign trade shall qualify for deduction. In Continental Device India Ltd., (supra), expenditure on the repairs and renewals, electricity and power, rent and printing and stationery were claimed for being considered for deduction under s. 35B of the Act. The Tribunal had allowed such deduction on 75 per cent. of repairs and renewals and electricity and power. Expenditure upto 50 per cent. of rent and printing and stationery had been allowed for being considered for such deduction. It was held that weighted deduction shall be allowed on such expenditures inasmuch as a correlation was established between the items of expenditures and the heads referred to in the various sub-clauses of cl. (b) of s. 35B(1) of the Act. In CIT vs . Usha Sales Ltd. : [1990]182ITR452(Delhi) , expenditure incurred under the heads custom duty, repairs and reassembly, clearing and storage, etc., which had been allowed for the purposes of deduction under s. 35B, were approved and it was held that no question of law arose from such deduction.
The Allahabad High Court in CIT vs . Lalls International : [1987]167ITR237(All) , has also taken a view that the amount spent on repairs, reconstruction of show room and the amount paid by way of bonus to the employees qualified for the purposes of weighted deduction and no question of law arose from the Tribunals order. The Kerala High Court has also taken a similar view in the matter of weighted deduction under s. 35B of the Act on the cost of printing on the cartons used for exporting the products [Kesaria Tea Co. Ltd. vs . CIT : [1991]189ITR374(Ker) .
The Supreme Court dismissed the Departments Special Leave Petition against the order of the Delhi High Court, whereby deduction under s. 35B had been allowed on salaries, wages, telegram expenses, postage and telephone expenses [ : [1992]19ITR1(SC) ].
6. All the aforesaid expenditures, namely, printing and stationery, vehicle repairs, meeting fees, export promotion expenses, travelling expenses, foreign telex and telephone expenses and foreign postage are held to be eligible for deduction under s. 35B of the Act inasmuch as they directly or indirectly pertain to the promotion and development of the export market and the export activities of the assessee. Question No. 1 is, therefor, answered in the affirmative, in favour of the assessee and against the Department.
7. The second question relates to the expenditure of Rs. 5,000 on advertisement in the Souvenir. The AO had disallowed the expenditure on the ground that it was a donation to a political party in the garb of advertisement. The assessee had claimed that a cheque for Rs. 5,000 was given for publishing an advertisement in Souvenir named 'Anushasan Parva' issued at the 75th Plenary Session of the Indian National Congress in Punjab in December, 1975. The AO doubted the advertisement potential of the souvenir and took the view that the assessee could not derive any benefit from such advertisement.
In appeal, the assessees claim was accepted, though in part. The CIT took the view that the actual advertisement, which had appeared in the souvenir, did have the advertisement value but the amount paid was treated to be excessive and, therefore, deduction was allowed at Rs. 1,000 only.
Shri R. P. Sawhney, learned counsel for the Department, has argued that the payment of a large amount by the assessee to a political party was for extra business considerations and amounted to a donation. The AO looked into the substance of the transaction and rightly doubted the advertisement.
Shri B. S. Gupta, learned senior counsel for the assessee has argued that there was no material on record to make any bifurcation or to split the payment between one for business consideration and the other for non-business consideration. The actual advertisement published in the souvenir had been looked into by the CIT and since the factum of publication stood proved, there was no justification in treating part of the expenditure as a donation.
8. From the facts, it is apparent that the assessee did make a payment of Rs. 5,000 for the purpose of publishing an advertisement of its product in the Souvenir. Since the advertisement had appeared in the souvenir, part or proportionate expenditure could not be legitimately disallowed on a presumption that the entire amount did not represent the advertisement cost. Since the advertisement in the souvenir had mentioned the goods manufactured by the assessee, it was no different from the advertisement in other publications.
A question about expenditure on advertisement in souvenir by charitable Institution was examined by the Calcutta High Court in British Electrical & Pumps (P) Ltd. vs . CIT : [1977]106ITR620(Cal) and it was held that the Tribunal was not justified in going into the question of motive of the assessee after it was found that there was an element of advertisement in making insertions in the Souvenir. A similar matter was examined by the Madras High Court in CIT s. Sundaram Finance (P) Ltd. : [1985]154ITR564(Mad) There also advertisement had been given by the assessee in the souvenir released by a political party on the eve of the elections. It was observed that such advertisements did not cease to be advertisements and the expenses incurred therefore, could not be labelled as a donation to a political party. The Gujarat High Court in CIT vs . Saurashtra Cement & Chemical Industries Ltd. : [1987]163ITR258(Guj) has also taken a similar view about the advertisement expenses. It was held that an expenditure incurred on advertisements given in various souvenirs should not be disallowed and there need not be any link between the assessees business and the souvenir. The Kerala High Court has also in CIT vs. Aluminium Industries Ltd. (1995) 214 ITR 541 observed that an expenditure incurred for publicity or advertisement could not be disallowed, if it was found that such an expenditure had been laid out wholly and exclusively for the purpose of business. It was not for the Department to consider what commercial expediency justified the expenditure. Taking that view, expenditure incurred on the inauguration of a project was allowed. That expenditure had been claimed by the assessee under the head (sic) Indian Trading Corpn. vs. CIT (1995) 216 ITR 751 examined payments made by the assessee to the Delhi Flying Club and the AICC Souvenir Committee on account of advertisement expenses and held that the expenditure was deductible.
9. In the case of the assessee before us payment made for giving an advertisement in the souvenir of the political party was undoubtedly an expenditure on advertisement and, therefore, it cannot be treated to be a donation. Therefore, question No. 2 is answered in the affirmative, against the Revenue and in favour of the assessee.