Commissioner of Income Tax vs O.K. Hosiery Mills

Following questions of law have been referred for opinion of this court by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh, arising out of its order dated September 8, 1988, in R.A. No. 9/Chandi/89 in respect of the assessment year 1980-81:

Whether, on the facts and in the circumstances of the case on a proper interpretation of Section 35B of the Income Tax Act, 1961, the Appellate Tribunal was right in law in allowing weighted deduction u/s 35B of the following items:

(a) Subscription paid to Hosiery Exporters Association and Export Promotion Council.

(b) salary and bonus.

(c) salary, security and guard.

(d) printing and stationery.

(e) postage, telephone and telegrams.

(f) advertisement.

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing weighted deduction u/s 35B in respect of packing credit interest?

The assessee is a firm engaged in the business of manufacturing, sale and export of hosiery goods. Accounts are maintained on the mercantile basis. For the relevant year, the assessee claimed weighted deduction in respect of subscription to hosiery exporters association and to the Export Promotion Council, salary and bonus, salary, security and guard, printing and stationery, postage, telephone and telegrams and advertisements etc.

The Assessing Officer disallowed the said claim, but the Commissioner of Income Tax (Appeals) allowed the same, which was upheld by the Tribunal. The Tribunal also allowed weighted deduction u/s 35B of the Income Tax Act, 1961 (for short, "the Act") in respect of packing credit interest.

The issue has been examined by the hon''ble Supreme Court of India in Commissioner of Income Tax (CNTL), Ludhiana Vs. Hero Cycles Pvt. Ltd., Ludhiana, , wherein it was held that deduction is permissible if expenditure is laid out wholly and exclusively for the purposes mentioned in Clause (b) of Section 35B(1). It was observed (page 468):

The Commissioner of Income Tax (Appeals) as well as the Tribunal allowed this claim of the assessee without examining the facts of this case. 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. It appears that generally a certain percentage of the claim has been allowed u/s 35B without adverting to any of the Sub-clauses of Clause (b) of Section 35B(1). Under those circumstances, we think it fit to set aside the order of the Tribunal and send the matter back to the Tribunal to dispose of it after examining the facts afresh. The appeals are allowed. The order of the High Court as well as the appellate order of the Tribunal is set aside. There will be no order as to costs.

The Assessing Officer disallowed the claim for weighted deduction on the ground that the same is admissible only if the expenditure is incurred for the purpose of export and not admissible only on the ground that it was part of business expenditure.

The Commissioner of Income Tax (Appeals) allowed the claim for weighted deduction without recording any finding that the expenditure was relatable exclusively for the purposes mentioned in Clause (b) of Section 35B(1). The Tribunal also upheld the order of the Commissioner of Income Tax (Appeals) without any finding that the expenditure being relatable to Clause (b) of Section 35B(1).

In view of the judgment of the hon''ble Supreme Court, the view taken by the Commissioner of Income Tax (Appeals) as well as by the Tribunal cannot be upheld.

The question is answered in favour of the Revenue and against the assessee. Since the Commissioner of Income Tax (Appeals) as well as the Tribunal have not gone into the correctness of findings recorded by the Assessing Officer with reference to the provision of Section 35B(1)(b), the matter is remanded to the Commissioner of Income Tax (Appeals) for fresh decision in accordance with law.