Judgment:
N.V. Balasubramanian, J.
1. At the instance of the assessee, the Appellate Tribunal has stated a case and referred the following common question of law under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), for our opinion.
'Whether, on the facts and in the circumstances of the case, the assessee's claim for weighted deduction under section 35B of the Income-tax Act, was prohibited under sub-clause (iii) of section 35B(1)(b) of the Act, in respect of (1) air freight, (2) railway freight, (3) insurance, (4) difference due to exchange fluctuations, (5) interest and (6) rent and lighting, for the assessment years 1976-77, 1977-78 and 1978-79 ?'
2. The assessee claimed, during the course of assessment proceedings for the assessment years 1976-77, 1977-78 and 1978-79, weighted deduction under the provisions of section 35B of the Act in respect of the following expenditure :
------------------------------------------------------------------------ 1976-77 1977-78 1978-79 ------------------------------------------------------------------------ Rs. Rs. Rs. ------------------------------------------------------------------------ 1. Railway freight 50,212 12,002 14,407 2. Air freight 1,07,860 2,88,518 14,464 3. Insurance 3,944 4,754 2,737 4. Exchange fluctuation 4,354 4,650 1,312 5. Interest 79,300 1,02,115 34,802 6. Rent and lighting 79,508 31,432 47,138 ------------------------------------------------------------------------
3. The Income-tax Officer rejected the claim of the assessee on the ground that the expenditure for all assessment years were incurred in India, and hence the assessee was not entitled to claim weighted deduction under section 35B of the Act. The assessee preferred appeals before the Commissioner of Income-tax (Appeals) against the orders of the assessment. The Commissioner of Income-tax (Appeals) analysed the nature of the expenditure incurred by the assessee for each of the assessment years and allowed weighted deduction in respect of the expenditure which related to the export market and disallowed the balance of the amount.
4. The assessee preferred appeals before the Income-tax Appellate Tribunal and the Appellate Tribunal, as regards the first three items, viz., railway freight, air freight and insurance, held that the assessee was not entitled to weighted deduction in view of the statutory bar imposed by section 35B(1)(b)(iii) of the Act. As regards the expenditure claimed due to exchange fluctuation, the Appellate Tribunal was of the view that the liability which arose due to exchange fluctuation is a normal business expenditure and it is not peculiar to the export business. Therefore, the Appellate Tribunal held that the assessee was not entitled to claim weighted deduction in respect of the expenditure incurred due to exchange fluctuation as well.
5. In so far as the interest to the bank is concerned, the Appellate Tribunal found that the interest was paid by the assessee to the bank for the amount of capital borrowed for the purpose of business, and, hence, the assessee was not entitled to weighted deduction on the ground that, the expenditure did not fall within one of the enumerated items found under section 35B(1)(b)(iii) of the Act. As regards the rent paid and lighting for the factory, the expenditure relates to manufacturing expenditure which cannot be regarded as marketing expenditure and, hence, the assessee was not entitled to claim weighted deduction in respect of rent and lighting expenditure for the factory building. It is this order of the Appellate Tribunal that is the subject-matter of the tax case reference.
6. We have heard learned counsel for the assessee as well as learned counsel appearing for the Revenue.
7. In so far as the first three items are concerned, viz., railway freight, air freight and insurance, Mr. Janarthana Raja, learned counsel for the assessee fairly brought to our notice an earlier decision of this court in the case of the same assessee in T.C. No. 190 of 1983 and this court in the said T.C. No. 190 of 1983 by judgment dated February 9, 1995, held that the assessee was not entitled to claim weighted deduction in respect of the said three items on the score that the expenditure was incurred in India. Following the said judgment, we hold that in view of the specific statutory bar imposed by section 35B(1)(b)(iii) of the Act, the assessee is not eligible to claim weighted deduction in respect of railway freight, air freight and insurance.
8. As regards the fourth item that is, exchange fluctuation, we are of the view that the Tribunal has correctly come to the conclusion that the expenditure incurred by the assessee due to exchange fluctuation cannot be brought within any of the enumerated items found in section 35B(1)(b)(iii) of the Act. Secondly, the exchange fluctuation has nothing to do with the marketing expenditure of the assessee, and the said expenditure can only be regarded as normal business expenditure and not export marketing expenditure. In this view of the matter, we are of the view that the Tribunal was correct in holding that the assessee was not entitled to marketing expenditure incurred due to exchange fluctuation as well.
9. In so far as the claim of the assessee for weighted deduction in respect of interest paid to the bank is concerned, this court in T.C. No. 1302 of 1982 by judgment dated November 12, 1996, has taken a view that the assessee is not entitled to claim weighted deduction. It is seen, on the facts of the case, that the interest was paid by the assessee to the bank for the amount borrowed for its business and the interest paid has nothing to do with the export of the goods made by the assessee. The Gujarat High Court in the case of Testeels Ltd. v. CIT : [1994]205ITR230(Guj) has also taken a view that the assessee is not entitled to claim weighted deduction in respect of the interest paid to the bank for the money borrowed for the purpose of business. Following the earlier decision of this court as well as the decision of the Gujarat High Court, we are of the view that the Appellate Tribunal has correctly come to the conclusion in holding that for the interest paid to the bank as well as on commission paid to the bank, the assessee is not entitled to claim weighted deduction. In so far as the expenditure incurred for the rent and lighting with reference to the factory building is concerned, the Appellate Tribunal has found that the expenditure related to the manufacture of goods. Section 35B of the Act postulates the grant of weighted deduction in respect of the expenditure specified under section 35B of the Act, and it should be a marketing expenditure. A close study of the various provisions of section 35B(1)(b)(iii) of the Act clearly shows that the expenditures covered under the said sub-section are all export marketing expenditures and manufacturing expenses cannot be brought under section 35B of the Act. It is well established that the manufacturing expenses incurred by the assessee can be regarded as pre-marketing expenditures and they cannot be regarded as marketing expenditures eligible to be allowed as weighted deduction under section 35B of the Act. Admittedly, the expenses incurred by the assessee do not relate to the export marketing, and in the absence of any proof that the expenditure was incurred with reference to any of the items found in section 35B of the Act, it is not possible for the assessee to claim weighted deduction in respect of manufacturing expenses. Hence, we reject the contention of the assessee that the assessee would be entitled to claim weighted deduction even in respect of manufacturing expenditure as well. Accordingly, we are of the view that the Appellate Tribunal has correctly come to the conclusion that the assessee is not entitled to weighted deduction in respect of railway freight air freight, insurance, exchange fluctuation, interest and rent and lighting for the assessment years in question. Therefore, we answer the common question of law referred to us in the affirmative and against the assessee. There will be no order as to costs.