COMMISSIONER OF INCOME TAX Vs. WALCHANDNAGAR INDUSTRIES LTD

JUDGEMENT

(1.) THE following questions of law have been referred to us for our opinion under Section 256 (1) by the Tribunal at the behest of the Department. The reference pertains to asst. yr. 1978-79.

(2.) THE assessee is a public limited company engaged in the business of manufacture of industrial machinery required for manufacture of sugar. The assessee claimed weighted deduction under Section 35b on three items viz. , guarantee commission paid to ECGC amounting to Rs. 5,91,015; Rs. 8,37,862 paid as commission to Tata Exports for monitoring and doing liaisoning work outside India; and the assessee has claimed weighted deduction on account of proportionate administrative expenses. These three items concerning weighted deduction under Section 35b are covered by question No. 1 quoted above. The weighted deduction on the above three items was disallowed. The assessee went in appeal to the first appellate authority, where the claim of the assessee stood allowed. This decision was affirmed by the Tribunal. Therefore, the Department has come by way of a reference under Section 256 (1) of the IT Act as it stood at the relevant time. As regards question No. 2 is concerned, it may be stated that the ITO came to the conclusion that the assessee was entitled to claim entertainment expenditure under Section 35b. However, the ITO found that the entertainment expenditure was very lavish and, therefore, he curtailed that expenditure by invoking Section 37 (2a) of the Act and consequently, he added back Rs. 29,983 as income. Being aggrieved, the assessee went in appeal to the first appellate authority who deleted the addition on the ground that Section 37 (2a) had no application as Section 37 (2a) would apply only if Section 37 (1) is applicable. At this stage it may be pointed out that since the ITO had concluded that Section 35b of the Act stood attracted, the assessee did not prefer any appeal against that finding of the ITO. Moreover, the Department did not go in appeal against that finding of the ITO. What was challenged in the appeal by the assessee was only disallowance of a sum of Rs. 29,983 under Section 37 (2a ). Therefore, the finding of the ITO that Section 35b was applicable to this case became final. On this point, the Tribunal concurred with the findings given by the first appellate authority. Therefore, the Department has come by way of reference seeking our opinion on question No. 2, which only states as to whether the Tribunal was right in law in deleting the addition of Rs. 29,983 under Section 37 (2a) on account of entertainment expenditure. As far as question No. 3 quoted above is concerned, the facts are as follows. In the appeal before the first appellate authority, an additional ground was taken by the assessee as the ITO had brought to tax the difference between the levy price of the sugar and the amount allowed to be collected by the assessee as per Court's order. In this connection it may be mentioned that the levy price fixed by the Government was challenged by the assessee by filing a writ petition in the Bombay High Court. According to the assessee the levy price was understated. By an interim order passed by the Bombay High Court at the stage of admission, the assessee was permitted to charge and collect the excess sale price pending hearing and final disposal of the writ petition and subject to the assessee furnishing bank guarantee. The AO taxed this excess sale price. In appeal the first appellate authority allowed the assessee to raise an additional ground and in the final hearing, the first appellate authority came to the conclusion that excess sale price collected by the assessee over and above the levy price fixed by the Government, cannot be subjected to tax since the assessee did not get an unconditional and undisputed right to receive and appropriate the said excess. This order was confirmed by the Tribunal. Hence this reference.

(3.) BEFORE coming to the findings, we would like to refer to Section 35b of the IT Act as it stood at the relevant time. The said section concerns export market development allowance. Under Section 35b (1) (a) it is, inter aha, provided that where an assessee has incurred any expenditure referred to in Clause (b), not being in the nature of capital expenditure/personal expenses, such assessee shall be allowed a weighted deduction. Therefore, in this case, we are required to examine Sub-clause (b) of Section 35b (1 ). Sub-clause (b) contains items (i) to (ix ). We are concerned with items (i), (ii) and (iii ). Accordingly, Sub-clauses (b) (i) to (iii) is reproduced hereinbelow: