Faqir Chand Raghunath Dass vs Commissioner of Income Tax

These are three references u/s 256(1) of the Income Tax Act, 1961, made by the Income Tax Appellate Tribunal at the instance of the assessed raising the following common question of law arising out of the assessment years 1974-75, 1975-76 and 1976-77 :

"Whether, on the facts and circumstances of the case, the customs duty of Rs. 33,659 for the first year, Rs. 75,738 for the second year, and Rs. 46,950 for the third year that were paid by the assessee-firm outside India was as an expenditure entitled to weighted deduction under the provisions of Section 35B of the Income Tax Act ?"

The assessed is a registered firm engaged in the business of sale and purchase of ivory goods, brass goods and other handicrafts. Most of its business is that of exports in the above said items. The assessee-firm participated year after year in various exhibitions held abroad. During the relevant assessment years, it took part in exhibitions held at Montreal, U.S.A. and Japan. The assessed sent its goods to such countries for the purpose of holding exhibitions. Customs duty had to be paid on the consignments of the goods. The petitioner claimed weighted deduction u/s 35B(l)(b)(iii) of the Act as it stood at the relevant time. The deduction was disallowed by the assessing authority but allowed in appeals by the Commissioner of Income Tax (Appeals)/Appellate Assistant Commissioner. However, the Income Tax Appellate Tribunal in an appeal preferred by the Revenue disallowed the said deduction. The assessed has sought for reference of the above said question.

A detailed discussion of the law on the subject is not required inasmuch as the issue is covered by a recent pronouncement of the Supreme Court in Commissioner of Income Tax, Delhi Vs. Stepwell Industries Ltd. and etc. etc., . Vide para 30, their Lordships have held :

"The finding of fact by the Tribunal is that most of the expenditure were of customs duty paid for sending the goods by the Indian party to its foreign branches. Whether the foreign branches paid the duty or the Indian branch paid the duty, is quite immaterial. The transaction was an internal transaction of sending goods by the company to its own branches abroad. In that view of the matter, we set aside the order of the High Court as well as the appellate order of the Tribunal."

It has been brought to our notice that for the assessment years 1971-72 to 1973-74 a similar expenditure was held entitled to weighted deduction u/s 35B of the Act by a Division Bench of this court vide judgment dated September 15, 1993, in the case of this very assessed reported as Faqir Chand Raghunath Dass Vs. Commissioner of Income Tax, . The Division Bench has held (page 698) : ,

"In our opinion, the money which was spent by the assessed was clearly an expenditure incurred in relation to the distribution, supply and provision of goods outside India. The goods having been exported from India were to be sold abroad. Without incurring the expenditure of payment of customs duty the said goods could not be distributed, supplied or provided to the markets outside India. A similar situation had arisen in the case of Handicrafts and Handloom Export Corporation of India Vs. Commissioner of Income Tax, Delhi-II, . In that case also, goods were exported from India and customs duty had to be paid in the U. S. A. before the goods entered the market there. A Division Bench of this court came to the conclusion that (page 543) : ''the payment of customs duty was, Therefore, an item of expenditure which the assessed incurred in the process of supplying or providing outside India its goods, services and facilities''. In coming to this conclusion the court also relied upon the decision of the Madras High Court in the case of Commissioner of Income Tax Vs. Kasturi Palayacat Co., .

We are in complete agreement with the aforesaid decision in the case of Handicrafts and Handloom Export Corporation of India Vs. Commissioner of Income Tax, Delhi-II, . Just as the assessed in that case paid customs duty in the U. S. A., in the present case, the customs duty has been paid in Japan and in Canada. The goods could not have been supplied or provided without the assessed incurring this expenditure outside India. The assessed was, Therefore, entitled to the benefit of the weighted deduction u/s 35B of the Act."

However, we are bound by the law laid down by the Supreme Court in the case of Commissioner of Income Tax, Delhi Vs. Stepwell Industries Ltd. and etc. etc., which judgment has been delivered on August 27, 1997. Their Lordships have laid down that the dividing line is whether at the stage of incurring the expenditure the transaction was an internal transaction of the assessed or not. Inasmuch as the goods were supplied outside India by the assessed for the purpose of being displayed at the exhibition (obviously by the assessed itself), till that point of time the transaction would be an internal transaction of the assessee. In other words, at the time of payment of customs duty the goods were being supplied by the assessed to itself.

In view of the law laid down by the Supreme Court, the question is answered in the negative, i.e., in favor of the Revenue and against the assessee.

No order as to the costs.