Commissioner of Income-tax Vs. Navabharat Enterprises (P.) Ltd. - Court Judgment

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direct taxation - deduction - sections 35b, 35b (1) and 37 of income tax act, 1961 - whether assessee entitled to weighted deduction under section 35b - expenditure claimed by assessee comprises payments made for obtaining information regarding marketability of goods and to export credit guarantee - such expenditure was well within ambit of sub-clauses (2) and (8) of section 35b (1) (b) - held, assessee had good claim of deduction. head note: income tax export market development allowance--weighted deduction--amount paid to export credit guarantee corporation held: the payment is made to the corporation to ensure the financial capacity of the foreign buyer to fulfil the commitment of deferred payment and insulate the assessee against the risk of non-recovery from the foreign buyer. the locationof the office of the corporation within india is not relevant as cl. (viii) is essentially concerned with rendering services outside india. the services extracted by the assessee are in connection with streamlining the contract for the export of goods and as such cl. (viii) applies. note- sec. 35b has been omitted by dtl (amendment) act, 1987 w.e.f. 1-4-1989. income tax act 1961 s.35b export market development allowance--weighted deduction--expenditure on obtaining information regarding marketability of goods held: sub-cl. (ii) of s. 35b is obviously aimed at giving relief in the event of spending the amount for survey of export potential. therefore, the expenditure incurred by the assessee for obtaining information regarding market potentiality for the goods sought to be put in the stream of export is squarely within the purview of cl. (ii). income tax act 1961 s.35b export market development allowance--weighted deduction--sec. 35b to be strictly construed held: sec. 35b is obviously intended to give extra deduction for the items of expenditure contemplated therein with a view to give incentive and fillip to export market. this additional deduction over and above the normal deduction under s. 37 should be allowed if the expenditure is strictly within the contours of the item of expenditure otherwise, the object of giving additional deduction will be defeated. income tax act 1961 s.35b - motor vehicles act (59 of 1988)section 149 (2): [v. gopala gowda & jawad rahim, jj] insurers entitlement to defend the action joint appeal by insured and insurer - held, the language employed in enacting sub-section (2) of section 149 appears to be plain and simple and there is no ambiguity in it. it shows that when an insurer is impleaded and has been given notice of the case, it is entitled to defend the action only on grounds enumerated in sub-section (2) of section 149 of the act, and no other grounds are available to it. the insurer is not allowed to contest the claim of the injured or heirs of the deceased on other grounds, which are available to the insured. if insurer is permitted to contest the claim on other grounds it would mean adding more grounds of contest to the insurer and will be negation of the intention of the legislature and annihilate mandate of the provisions of sections 170 and 149 of the act. the insured can pursue appeal only after giving up the insurer as the appellant and not otherwise. in the instant case, the insurer has not withdrawn from party array but has remained prosecuting the appeal with the insured on the grounds which are available only to the insured. therefore, the joint appeal as filed by the insured and the insurer is not maintainable. section 166: [v. gopala gowda & jawad rahim, jj] claim for compensation accident due to mechanical defect in the vehicle held, it is not in dispute that the claimant suffered injuries in an accident, which occurred during the course of his employment, albeit due to his negligence but law does not render him remediless. statutory right is conferred on him, accruing by virtue of his employment under insured to claim compensation under workmens compensation act. the insurer is statutorily duty bound to discharge the liability of the owner of the vehicle, to pay such compensation to the employee, as mandated under the provisions of section 149 of the act. the right of an injured employee or his dependents as the case may be to be compensated, when injury is suffered or death occurs during his employment, is recognised not only under workmens compensation act, but also under benevolent provisions under section 166 and 167 of the m.v. act. the right of driver to seek compensation is not restricted only to the workmens compensation act, it has been enlarged to enable such person to seek just compensation (sections 166 and 168), conferring upon him the right of election engrafted under section 167 of the act to choose either of the two forum. the only defence which the insurer could take is limit of its liability as enumerated under section 147 of the act, leading to contest, inter alia, only between insured and insurer and does not impact claimants right to recover the compensation determined by the tribunal which crystallizes into enforceable right against both. in the instant case, the claimant/driver has exercised right of election under section 167 of the act to seek compensation under section 166 of the act resulting in award passed by the tribunal. therefore, the insured and the insurer have no escape but to discharge the said award as directed. undisputedly, in this case as deduced for proved facts, the vehicle in question was not properly maintained by the owner and despite faulty brake system, the claimant had undertaken the hazardous journey to his peril at the behest of and at the instruction of the owner. the owner is therefore, tortfeasor. section 168: [v. gopala gowda & jawad rahim, jj] insurers limit of liability - held, it is well settled that the liability of the insurance company for payment of compensation can be statutory or contractual. is for the insurance company to show that the insurance policy was a statutory policy and not a contractual policy to restrict its liability. that issue was neither raised before the tribunal nor is raised in this appeal requiring decision. thus, if at all the insurer has any valid ground to restrict its liability, it can proceed against the insured but firstly it has to discharge the award as required under section 149 (1) of the act. where the owner/insured has failed to maintain the vehicle as per prescribed safety standards and has caused the claimant to drive the vehicle with mechanical defects, the owner would be the tortfeasor and the claimant can maintain a petition seeking compensation under the provisions of the act, instead of seeking compensation under the workmens compensation act. on facts, held, the material evidence on record, particularly, with regard to the income of the claimant, his age, medical evidence and the evidence relating to pecuniary loss has not been considered by the tribunal in the correct perspective, which has resulted in passing of the impugned award, disproportionate to the pecuniary loss and the loss of future income of the victim. the settled principles governing determination of compensation has been given a go-bye. compensation of rs.4,15,150/- awarded by the tribunal was enhanced to rs.8,20,000/-. - this additional deduction over and above the normal deduction under section 37 of the act should be allowed if the expenditure is strictly within the contours of the items of expenditure comprised in clause (b) and if a liberal or stretched interpretation is given, the object of giving additional deduction will be defeated.rama rao, j.1. the question referred at the instance of the commissioner of income-tax is : 'whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction under section 35b of the income-tax act, 1961, in respect of rs. 2,05,211 incurred for export credit guarantee insurance ?' 2. the assessee claimed weighted deduction of certain items of expenditure amounting to rs. 10,74,535. out of this amount, the income-tax officer declined to allow the claim for an amount of rs. 6,02,113. out of the amounts disallowed by the income-tax officer, a sum of rs. 2,05,211 represented the expenditure incurred for export credit guarantee insurance and both the appellate authorities concurrently held that weighted deduction should be allowed and this reference is concerned with this amount only. the appellate authorities held that the payment is made to the export credit guarantee corporation for the information furnished to the assessee regarding credit-worthiness of the foreign purchaser but also providing a guarantee for payment of such amount and such activity for obtaining information and arranging guarantee falls within sub-clause (ii) of section 35b(1)(b) of the act and as such is eligible for weighted deduction. 3. learned standing counsel for the revenue contends that the expenditure does not fall within any of the clauses under section 35b of the income-tax act and as such the exemption granted by the tribunal is not justified. learned counsel for the assessee, seeking to sustain the order of the tribunal contends that the deduction under section 35b should be considered from a broad perspective and the expenditure claimed is within the purview of sub-clauses (ii) and (viii) of section 35b(1)(b). to appreciate the rival contentions, it is necessary to get at section 35b to the extent relevant, which is as follows : '35b. (l)(a) where an assessee, being a domestic company or a person (other than a company) who is resident in india, has incurred after the 29th day of february 1968, but before march 1, 1983, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in clause (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one third times the amount of such expenditure incurred during the previous year : ...... (b) the expenditure referred to in clause (a) is that incurred wholly and exclusively on - (i) advertisement or publicity outside india in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business; (ii) obtaining information regarding markets outside india for such goods, services or facilities; *(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; *(iv) maintenance outside india of a branch, office or agency for the promotion of the sale outside india of such goods, services or facilities; *(v) preparation and submission of tenders for the supply or provision outside india of such goods, services or facilities, and activities incidental thereto; *(vi) furnishing to a person outside india samples or technical information for the promotion of the sale of such goods, services or facilities; (vii) travelling outside india for the promotion of the sale outside india of such goods, services or facilities, including travelling outward from, and return to, india; *(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; (ix) such other activities for the promotion of the sale outside india of such goods, services or facilities as may be prescribed.' 4. section 35b bearing the caption of export markets development allowance is in the nature of a subsidy designed to provide more deduction than the deduction normally allowed under section 37 of the act with a view to give impetus to export potential. the expenditure relatable only to export of goods is eligible for weighted deduction under this provision. clause (b) of sub-section (1) enumerates the diverse sorts of expenditure eligible for deduction and the texture of expenditure embodied therein is closely integrated with export business. the expenditure claimed by the assessee comprises payments made for obtaining information regarding the marketability of goods and to the export credit guarantee corporation for the purpose of being apprised of the credit-worthiness of the foreign buyer and also providing guarantee for the payment. sub-clause (ii) contemplates deduction of expenditure for information regarding markets outside india. this is obviously aimed at giving relief in the event of spending the amount for survey of export potential. therefore, the expenditure incurred by the assessee for obtaining information regarding market potentiality for the goods sought to be put in the stream of export is squarely within the purview of sub-clause (ii). the appellate tribunal held that both the items of expenditure fall within sub-clause (ii). 5. in so far as the payment to export credit guarantee corporation is concerned, it is difficult to accommodate the expenditure within the precincts of sub-clause (ii). but, however, learned counsel for the assessee sought to sustain the allowance under sub-clause (viii). sub-clause (viii) envisages deduction for performance of services relatable to execution of a contract for the supply of goods outside india. the payment is made to the corporation to ensure the financial capacity of the foreign buyer to fulfil the commitment of deferred payment and insulate the assessee against the risk of nonrecovery from the foreign buyer. the location of the office of the corporation within india is not relevant as sub-clause (viii) is essentially concerned with rendering services outside india. it is not necessary that the person or corporation rendering services should be situated outside india and it is sufficient to attract sub-clause (viii) if services are rendered outside even if the corporation performing such services is situated within india. the services extracted by the assessee are in connection with streamlining the contract for the export of goods and as such sub-clause (viii) applies. 6. learned standing counsel for the revenue invited us to the decision in cit v. southern sea foods p. ltd. : [1983]140itr855(mad) . in this case, the assessee indented the services of another company for the purpose of procuring orders from foreign buyers in respect of export of prawns and shrimps to foreign countries and paid a certain amount by way of commission. in the context of considering whether such payment can be allowed as a deduction under section 35b of the act, the madras high court held that the commission paid for getting orders does not fall within the items of expenditure set out in clause (b). the nature of activity in the instant case is entirely different and, therefore, this decision does not apply. in k. vensimal & sons v. cit : [1986]157itr807(mad) , the assessee claimed weighted deduction in respect of various items of expenditure relating to salary, rent, packing, freight and insurance, cooly, insurance premium paid to the export credit guarantee corporation, trade expenses and legal expenses and, in so far as the insurance premium paid to the export credit guarantee corporation was concerned, the madras high court held that the deduction is admissible as the expenditure is solely and exclusively relatable to export. in cit v. vippy solvex product (p.) ltd. : [1986]159itr487(mp) , the assessee-company claimed weighted deduction on the interest paid to the bank on export-packing credit account and the amounts were taken on credit for purchase of raw material for manufacturing goods to be exported outside india. the madhya pradesh high court, applying sub-clause (viii), held that this expenditure is incurred in connection with the execution of a contract outside india and as such the deduction is admissible. in cit v. raunaq international ltd. : [1986]158itr701(delhi) , the assessee claimed deduction for expenditure for repairs and renewals, directors' remuneration and electricity and power and 100 per cent. of the expenditure on foreign customers and in the context of considering the contention on behalf of the revenue that these items of expenditure were incurred in india and not entitled to weighted deduction, the delhi high court held that the assessee-company is one which has, as its main business, export and more than 80 per cent. of its sales are export sales and the expenditure is intended to promote export development and these items of expenditure are attributable to export sales and as such they are entitled to weighted deduction. in handicrafts & handloom export corporation of india v. cit : [1983]140itr532(delhi) the delhi high court, reiterating the same view, held that any expenditure incurred with a view to develop its export and expenses for administrative establishments located at delhi and madras attending to the export business are allowable. 7. taking a clue from the wide observations in the decision of the delhi high court, learned counsel for the assessee contends that the items of expenditure categorised under clause (b) should be given a broad connotation and any expenditure connected with export directly or even in a remote manner is eligible for deduction. we are unable to subscribe to this proposition. section 35b is obviously intended to give extra deduction for the items of expenditure contemplated therein with a view to give an incentive and fillip to the export market. this additional deduction over and above the normal deduction under section 37 of the act should be allowed if the expenditure is strictly within the contours of the items of expenditure comprised in clause (b) and if a liberal or stretched interpretation is given, the object of giving additional deduction will be defeated. 8. we agree with the conclusion of the appellate tribunal that the items of expenditure in question fall within sub-clauses (ii) and (viii) of section 35b(1)(b). 9. in the result, the question is answered in the affirmative and in favour of the assessee.