JKLR-Part(I)                                                 I.T.R. 18/1983                                          Back To Index

The Commissioner of income Tax                                                                                                 Petitioner
                                                                              versus
M/s Indo Carpet Factory, Srinagar                                                                                               Respondent

I.T. Ref. No. 18 / 1983, decided on 14.11.2000.

Income-tax Act 1961, S. 35B - Allowance of weighted deduction in respect of various items of expenditure - The tribunal not showing under which sub- clause of clause (f) of section 35B (1) of the Act the expenditure in respect of which weighted deduction has been allowed is covered nor there is any material to show that the expenditure would fall under any of the sub-clauses - Whether in such circumstances deduction is sustainable - Held : No.

The Tribunal has allowed the deduction without verifying or examining the sub-clauses under which it could be allowed. There is no material on record to show that the expenditure in respect of which weighted deduction has been allowed fall under any sub-clauses of clause (b) of section 35B(1) of the Act. In that view of the matter, we set-aside the order of the Tribunal and remand the matter back to the Tribunal for re-examination of the case in the light of the law laid down above.                                                                                  [Para 11]

Advocates who appeared in this case :
Senior Central Government Standing Counsel, Mr. Anil Bhan for the revenue
Mr. A.K. Malik, Advocate for the assessee

Cases referred : Chronological
1. Central Provinces Maganese Ore Co. Ltd. v. CIT (1986) 160 ITR 961
2. Fort Properties Ltd. v. CIT (1994) 208 ITR 232
3. CIT v. Stepwell Industries Ltd. (1997) 228 ITR 171
4. CIT v. Hero Cycles Pvt. Ltd. (1997) 463

JUDGMENT AND ORDER

Per Dr. B. P. Saraf, Chief Justice

By this reference under section 256(1) of the Income-tax Act, 1961 ("Act"), the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar ("Tribunal") has referred the following two questions of law to this Court for opinion at the instance of the revenue :

"1.Whether on the facts and in the circumstances of the case the Appellate Tribunal is right in holding that the leviability and the quantum of interest charged under sections 139(8) and 217 of the Income-tax Act can be challenged by the assessee in appeal filed under section 246(1)(c) of the Act?

2. Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding in the manner it has done that weighted deduction was allowable on:

(1) Establishment Expenditure;

(2) Rent, Rates and Taxes Expenditure;

(3) Stationery and Printing Expenditure;

Postage, Telegram,Telephone & Telex Expenditure;

(4) Export Sale Promotion Expenditure; and

(5) Commission?"

2. This reference pertains to assessment year 1978-79. The assessee is a registered firm engaged in the business of manufacture, purchase and sale of carpets. The assessee also exports carpets outside the country. The head office of the assessee is at Srinagar. It has also a branch at Delhi. By this reference the Tribunal has referred two questions of law to this Court for opinion. The controversy in the first question pertains to the right of appeal under section 246(1)(c) of the Act against charge of interest under section 139(8) and section 217 of the Act. The Tribunal has held that the assessee can also challenge the leviability and quantum of interest charged under section 139(8) and section 217 of the Act. Aggrieved by the decision of the Tribunal, the revenue applied for reference of question No.1 to this Court for opinion which the Tribunal has done. The controversy in the second question pertains to allowability of weighted deduction in respect of certain items of expenditure. The Tribunal has allowed weighted deduction to the assessee in respect of the following items of expenditure:

1. Establishment expenditure,

2. Rent, rates and taxes expenditure,

3. Stationery and printing expenditure,

4. Postage, telegram, telephone and telex expenditure,

5. Export sale promotion expenditure; and

6. Commission.

The grievance of the revenue is that the Tribunal could not have allowed weighted deduction in respect of the above items of expenditure without specifying as to under which sub-clause of clause (b) of sub-section (1) of section 35B of the Act the expenditure in question would be covered and without having any relevant material to show that the expenditure under consideration did fall under any of those sub-clauses.

3. So far as the first question is concerned, the controversy raised therein now stands concluded by ratio of the decision of the Supreme Court in Central Provinces Maganese Ore Co. Ltd. v. CIT (1986) 160 ITR 961. In that case the question before the Supreme Court was whether orders levying interest under sub-section (8) of section 139 and under section 215 are appealable under section 246 of the Income-tax Act, 1961. The Supreme Court held:

"Clause ( c ) of section 246 provides an appeal against an order where the assessee denies his liability to be assessed under the Act or against any assessment under sub-section (3) of section 143 or section 144 where the assessee objects to the amount of tax determined or to the amount of loss computed or the status under which he is assessed. Inasmuch as the levy of interest is a part of the process of assessment, it is open to an assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy all."

The ratio of the above decision would also apply to appeal against levy of interest under section 217 of the Act.

4. We are supported in our above conclusion about the maintainability of appeal against levy of interest under section 217 of the Act by the decision of the Bombay High Court in Fort Properties Ltd v CIT (1994) 208 ITR 232. In that case also, the controversy before the Court was whether the Appellate Assistant Commissioner was justified in entertaining the ground against the levy of interest under section 217 of the Act. The contention of the assessee was that no advance tax being payable by the assessee on capital gains, the dispute regarding levy of interest under section 217 for non- payment of the same was not a dispute in regard to the quantum of interest but a challenge to the levy of interest under section 217 of the Act. The High Court held :

" … [T]he decision of the Supreme Court in Central Provinces Maganese Ore Co. Ltd. v CIT (1986) 160 ITR 961 will apply and the appeal will be maintainable. It will be open to the assessee to dispute the levy of interest in appeal subject to the limits laid down by the Supreme Court in the above decision."

5. In view of the above we are of the opinion that levy of interest being a part of the process of assessment, it is open to the assessee to dispute the levy in an appeal under section 246 ( c ) of the Act provided he limits himself to the ground that he is not liable to the levy at all. Question No. 1 is answered accordingly.

6. The controversy in the second question pertains to allowance of weighted deduction under 35B of the Act in respect of various items of expenditure. The grievance of the revenue is that there is nothing in the order of the Tribunal to show under which sub-clauses of clause (b) of section 35B(1) of the Act, according to the Tribunal, the expenditure in respect of which weighted deduction has been allowed is covered nor is there any material to show that the expenditure would fall under any of the sub-clauses of clause (b) of section 35B(1). The learned counsel for revenue submits that in such circumstances allowance of weighted deduction in respect of the various items of expenditure cannot be sustained.

7. We have given our careful consideration to the above submission of the learned counsel for the revenue and perused the provisions of section 35B of the Act. It is clear from a plain reading of the above section that weighted deduction is permissible only if the expenditure is laid out wholly and exclusively for the purposes mention in clause (b) of section 35B (1). It is the assessee’s duty to prove fact, which will bring the case within any of the sub-clauses of clause (b). In other words, the onus is on the assessee to prove that he is entitled to weighted deduction. Unless that is done, the assessee will not be entitled to get this deduction.

8. This legal position has been well-settled now by the decisions of the Supreme Court in CIT v Stepwell Industries Ltd (1997) 228 ITR 171 and CIT v. Hero Cycles Pvt. Ltd (1997) 228 ITR 463.

9. In CIT v Stepwell Industries Ltd (Supra), the controversy before the Supreme Court was whether the Tribunal was justified in allowing weighted deduction in respect of various items of expenditure. The Supreme Court interpreted section 35 B of the Act and held (at p 175):

"In order to get this deduction, the assessee will have to prove that the expenditure was incurred during the previous year wholly and exclusively for the purposes set out in clause (b) of section 35B (1)(b). There cannot be any blanket allowance of the expenditure nor can there by any blanket disallowance. Every case has to be discussed specifically and the expenditure must be found to be of the nature mentioned in any one of the sub-clauses. If the expenditure does not fall in any of these categories, it cannot be allowed as a deduction. Some of the sub-clauses provide that if the expenditure is incurred in India, it cannot be allowed but in some of the sub-clauses this requirement is not there. In such cases, the expenditure may or may not be incurred in India. Every case will have to be examined in the light of the provisions of the sub-clauses and the facts proved by the assessee."

The Supreme Court considered the facts of that case in the light of the legal position set out above and observed (at p 177):

" …It appears that the Tribunal did not examine the claim of the assessee by reference to any of the sub-clauses of section 35B(1)(b). No expenditure can be allowed under section 35B generally. The assessee must be able to establish the facts to prove that the expenditure falls within the ambit of sub-clauses (i) to (ix) of clause (b) of section 35B(1). This has not been done…"

In view of the above finding, the Supreme Court set aside the order of the High Court as also the Tribunal and remanded the case back to the Tribunal with the following direction:

"…We are of the view that the appellate order of the Tribunal has to be set aside. We set aside the order of the High Court as also the appellate order of the Tribunal and remand the case back to the Tribunal. The assessee will have an opportunity of proving the nature of the expenditure and establishing that the expenditure falls within any one of the sub-clauses of section 35B(1)(b). It has to be remembered that the onus is on the assessee to establish the facts to obtain the deduction claimed. The appeal is allowed with the above observations. There will be no order as to costs.

10. The legal position in regard to the allowability of weighted deduction under section 35B of the Act has been reiterated by the Supreme Court in CIT v. Hero Cycles Pvt. Ltd. ( Supra ) in the following words ( at p. 468):

"…The deduction is permissible if the expenditure is laid out wholly and exclusively for the purposes mentioned in clause (b) of section 35B(1). It is for the assessee to prove that the entire expenditure involved was exclusively for the purposes mentioned in clause (b) of section 35B(1). The Tribunal has also to give a finding as to the entitlement of the assessee with reference to the particulars of clause (b) of section 35B(1). The facts have to be found out and the law has to be applied to those facts"

On perusal of the facts of the case before it, the Supreme Court observed that the Tribunal was unmindful of the various sub-clauses of section 35B (1) (b) and had allowed the deduction without verifying or examining the sub-clauses under which the deduction claimed by the assessee could be allowed .The Supreme Court, therefore, set aside the order of the Tribunal and sent the matter back to the Tribunal to dispose the same after examining the facts afresh.

11. We have examined the order of the Tribunal in the light of the law laid down by the Supreme Court. We find that the Tribunal has allowed the deduction without verifying or examining the sub-clauses under which it could be allowed. There is no material on record to show that any of the expenditure in respect of which weighted deduction has been allowed fall under any sub-clauses of clause (b) of section 35B(1) of the Act. In that view of the matter, we set-aside the order of the Tribunal and remand the matter back to the Tribunal for re-examination of the case in the light of the law laid down above.

For the foregoing reasons question No.2 is answered in the negative, i.e., in favour of the revenue and against the assessee.

This reference is disposed of accordingly with no order as to costs.