COMMISSIONER OF INCOME TAX Vs. IVORY MART

JUDGEMENT

(1.) AT the instance of the Revenue, the Income-tax Appellate Tribunal, New Delhi (for short the Tribunal), has referred under S. 256(1) of the IT Act, 1961 (for short the Act), the following question for our opinion :

(2.) THE material facts as emerging from the statement of the case drawn up by the Tribunal are as follows : The assessee, a registered firm, deals in handicraft items, including ivory and jewellery. In its return of income for the asst. yr. 1976-77, for which the previous year ended on 31st March, 1976, the assessee claimed weighted deduction under S. 35B of the Act in respect of the expenses incurred by it on the sales made in India to foreign tourists against foreign currency amounting to Rs. 2,31,221. However, while framing assessment for the said assessment year, the AO disallowed the said claim on the ground that weighted deduction under the said section could be allowed only on the expenses incurred on export sales. Aggrieved, the assessee preferred appeal to the Commissioner of Income-tax (Appeals) [for short CIT(A)]. Following the order of the Tribunal in the case of India Handicrafts Emporium, the CIT(A) granted partial relief to the assessee under the said section. Being aggrieved, the Revenue took the matter in appeal to the Tribunal. The Tribunal, following the decision of the Special Bench in the case of J. Hem Chand & Co. vs. ITO (1982) 1 SOT 150 (Bom)(SB), dismissed the Revenue's appeal. On Revenue's moving an application under S. 256(1) of the Act, the aforenoted question has been referred.

(3.) THE issue raised in the present reference is no longer res integra. In CIT vs. Stepwell Industries Ltd. (1997) 142 CTR (SC) 345 : (1997) 228 ITR 171 (SC) while disapproving the logic of the decision of the Special Bench of the Tribunal in J. Hem Chand (supra), the apex Court observed that when claim for weighted deduction is made it is for the assessee to satisfy the ITO that the expenditure falls in one of the sub-clauses of cl. (b) of S. 35B(1). Their Lordships of the Supreme Court held that the expenditure which qualifies for deduction under S. 35B(1)(b)(iii) will have to be the expenditure incurred outside India in connection with distribution, supply or provision outside India of such goods, services or facilities. No weighted deduction under S. 35B can be allowed to the assessee for expenditure incurred in India in connection with sale of goods in India. As noted above, in the present case, the Tribunal has found that the entire expenditure on which the assessee had claimed weighted deduction was incurred in India on sales effected in India. Support is also lent to this view by a decision of the Supreme Court in CIT vs. Chika Ltd. (2000) 162 CTR (SC) 177 : (2000) 243 ITR 5 (SC).