COMMISSIONER OF INCOME TAX Vs. K PATTABHIRAMA REDDY

JUDGEMENT

(1.) AT the instance of the Revenue, the Tribunal, Hyderabad Bench 'B', referred the following questions under S. 256(2) of the IT Act, 1961 ('the Act') said to arise out of its order in IT Appeal No. 518 (Hyd.) of 1985, dt. 15th Feb., 1988, for the asst. yr. 1981 82 for the opinion of this Court :

(2.) THE facts of the case are as under : The assessee is an individual. The assessment year in question in 1981 82 for which the previous year was the calender year 1980. The assessee entered into an agreement of sub contract with Engineering Products (India) Ltd. Delhi (the 'main contractor') on 5th March, 1980, to provide labour force required for carrying on construction work in Iraq by the main contractor. For this purpose the assessee had maintained a branch office at Baghdad. The branch office at Baghdad incurred a total expenditure of Rs. 81,88,102 during the previous year relevant to the assessment year in question. The said expenditure represented not only wages paid to the labourers who were engaged in the construction work but also the salaries of the supervising staff and other expenses at Baghdad which were Rs. 13,73,791. The assessee claimed deduction under S. 35B of the Act on the total expenditure incurred at Baghdad relying on sub cls. (i), (iv), (vii) and (ix) of S. 35B(1)(b). The AO found that the provisions of S. 35B have been substantially amended w.e.f. 1st April, 1981. The AO rejected the claim of the assessee with regard to the expenditure debitable to trading account relying on Expln. 2 to S. 35B(1)(b). With regard to the balance of expenses debitable to the P&L a/c, the AO took note of the nature of the assessee's business. According to the AO, the expenditure does not fall under any of the clauses mentioned under S. 35B(1)(b). The AO dealing with the clauses under which the assessee claimed, observed that the assessee's contention that the very fact that it could successfully execute the contract outside the country would amount to publicity of the assessee's capacity to undertake large contracts, does not bring its case within sub cl. (i) as expenditure incurred on advertisement and publicity outside India. According to the AO, what can be allowed under this clause is actual expenditure incurred on advertisement or publicity outside India and not the successful completion of a project which might go to help the assessee in promoting his business outside the country. The AO was also of the opinion that the assessee is only a sub contractor, who executed part of the work relating to the project, which was undertaken by Engineering Projects (India) Ltd. the main contractor. With reference to sub cl. (iv), according to the AO, the requirement is that the expenditure incurred on maintenance of a branch outside India would be allowed if the branch is maintained for the promotion of the sale outside India of the goods dealt in or services or facilities provided by the assessee. Mere incurring expenditure on a branch outside India does not entitle the assessee to claim the benefit of weighted deduction under this sub clause. With reference to sub cl. (vii), the AO was of the opinion that the expenditure on travelling outside India was incurred by the assessee not for the sale outside India of the goods dealt in by the assessee or services or facilities provided by the assessee, but for completion of the sub contract work undertaken by the assessee from the main contractor. Therefore, the claim would not come under this sub clause. The AO also considered the claim of the assessee with reference to cl. (c) of r. 6AA of the IT Rules, 1962, and held that the same is not acceptable, as admittedly the assessee did not maintain laboratory or facilities for quality control or inspection of such goods dealt in by the assessee. Therefore, the AO negatived the claim of the assessee.

(3.) THE learned senior counsel for the Revenue contended that the Tribunal was not justified in allowing the claim of the assessee that it is entitled for weighted deduction in respect of the expenditure incurred on a branch office at Baghdad. According to the learned counsel, the assessee was only a sub contractor for supply of labour or for execution of a part of the work. The branch office was maintained only in connection with either to supply labour to the main contractor or for supervising the execution of part of the work for which the assessee had entered into an agreement. Therefore, the branch office was maintained only for successful completion of the contract entered into by the assessee with the main contractor and not for the purpose of either promoting the sale of the goods or services of the assessee outside India. Therefore, the assessee is not entitled for the benefit of weighted deduction under S. 35B. The learned counsel also contended that prior to the omission of sub cl. (viii) of S. 35B(1)(b) perhaps the assessee might have been entitled for the benefit, but the said sub clause was omitted by the Finance (No. 2) Act, 1980 w.e.f. 1st April, 1981. Therefore, the expenditure incurred by the assessee for the purpose 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 is not available for the assessment year in question. Therefore, the assessee is not entitled to the benefit claimed. It is also stated that the AO gave a categorical finding that the branch office existed only with a view to supervise the execution of the contract work undertaken by the assessee and not for any other purpose. Though it was contended by the assessee before the Tribunal that the said contention is only a figment of imagination and the AO did not elicit from the assessee as to what were the functions undertaken by the branch office, but the assessee did not even before the Tribunal explained the functions that were undertaken by the branch office. In the absence of any evidence that the branch office was maintained by the assessee for the purpose of promotion of sale outside India of such goods, services or facilities, the assessee is not entitled to the benefit of the relief sought for. The learned counsel also contended that r. 6AA has no application to the present case as the said rule was intended to prescribe the services that would come under sub cl. (ix) of S. 35B(1)(b) and the said rule was not framed with reference to any of the other clauses. Apart from that, the said r. 6AA(c) was also inserted w.e.f. 1st Aug., 1981, and the same would not apply as the law on the first day of the assessment year alone is appreciable. Therefore, it was contended that the order of the Tribunal is not based on any material facts and, therefore, is not in accordance with law.