COMMISSIONER OF INCOME TAX Vs. ALLEPPEY COMPANY LIMITED

JUDGEMENT

(1.) These are connected cases. At the instance of the Revenue, the Income Tax Appellate Tribunal, Cochin Bench has referred the following two questions of law for the decision of this Court, in the above reference:

(2.) The respondent is the same assessee in all the four cases. It is a limited company. It is engaged in the business of manufacture of coir mats and mattings. We are concerned with the assessment years 1977-78 and 1978-79. In the course of the accounting year, the assessee had exported a large portion of production. In respect of the expenses connected with export, the assessee had claimed weighted deduction under S.35B of the Income tax Act. One of the items on which such weighted deduction claimed was the premium paid to Export Credit Guarantee Corporation. In the accounting year relevant to the assessment year 1977-78, the assessee company had paid a premium of Rs.7,204/ -. An amount of Rs 11,078/- was also paid through Bank. For the assessment year 1978-79, the amount paid was Rs.34,344/-. The Income Tax Officer did not allow the claim for both the years. In appeal, the Commissioner of Income tax (Appeals) took the view that E.C.G.C. premium was paid in part for guaranteeing the export credit given by the assessee to the various purchasers. The payment was not exclusively for obtaining information regarding the credit worthiness of the buyers. He held that 50% of the amount should be treated as eligible for deduction under S.35B of the Act. The assessee as well as the Revenue appealed against the order passed by the Commissioner of Income Tax (Appeals). The Appellate Tribunal relied on its decision of the Special Bench in G & Company v. ITO (3 ITD 566) and allowed the assessee's claim as falling under sub clause (ii) of S.35B(1)(b) of the Act: The assessee was held entitled to 100% deduction. It is this aspect which forms a common question for both the assessment 'years, formulated as question No.1 by the Appellate Tribunal.

(3.) An additional aspect was involved for the assessment year 1978-79 and that forms the subject matter of question No.2 formulated by the Appellate Tribunal. In the course of the export business, foreigners representing buyers came to Kerala. During the accounting period relevant for the assessment year 1978-79, the assessee had given certain presents to those persons. A sum of Rs.2,693/- represented the cost of curious presented to foreign guests. The assessee had also incurred a sum of Rs.8,782/- towards the lodging expenses of the buyers. The Income Tax Officer disallowed both the above items of expenditure holding that they are in the nature of entertainment expenditure. In appeal, the Commissioner of Income tax (Appeals) held that as per the ratio of the decision of the Kerala High Court in C.LT. v. Veeriah Reddiar ( 1976 KLT 684 = 106 ITR 610), the above two expenses should be held to be in the nature of entertainment expenditure. He rejected the assessee's claim for weighted deduction holding that such expenditure do not come under any of the clauses of S.35B of the Act. The assessee filed an appeal before the Appellate Tribunal. Certain other allowances were afforded to the assessee by the Commissioner of Income tax (Appeals) against which the Revenue had filed an appeal. In the appeals, in so far as it concerned the expenses incurred in presenting curious to the foreign buyers and the expenses incurred for providing lodging facilities to them, the Appellate Tribunal held that such expenditure cannot be treated as entertainment expenditure. The claim for deduction under S.37 of the Income tax Act, on the above two items, was allowed. It is thereafter, at the instance of the Revenue, the Income tax Appellate Tribunal has referred the above two questions of law, which arose out of its common appellate order dated 2-9-1983 in disposing of the four appeals for the two years - 1977-78 and 1978-79.