COMMISSIONER OF INCOME TAX, DELHIversusSTEPWELL INDUSTRIES LTD. ETC. ETC.

A                COMMISSIONER OF INCOME TAX, DELHI
                                          v.
                  STEPWELL INDUSTRIES LTD. ETC. ETC.
                                                                                      -
                                AUGUST 27, 1997

B                [SUHAS C. SEN AND SAGHIR AHMAD, JJ.]

          Income Tax Act, 1961.

        S. 35B(l)(b)-Weighted deduction-Held, in order to get the deduction,
C onus lies 011 assessee to establish that expenditure falls within any of the
  purposes set out in various sub-clauses of Clause (b) of s. 35-B(J)-Merely
  becau~e some activities took place outside India or some expenditure was
  incu"ed in India, it will not qualify the expenditure for deductions mentioned
  in the section-No expenditure can be allowed under s.35B generally-Asses-
  see should place the particulars before I. T. 0. or Appellate CommissioneHf
D assessee fails to do this, he cannot get the deduction-Nor can the Tribunal
  allow the claim on assumption of facts.

          Addi. Commissioner of Income Tax Gujarat v. GuTjargravures Pvt. Ltd.,
    111 I.T.R. 1, relied on.

E        CIVIL APPELLATE JURJSDJCTION : Civil Appeal No. 1275 of
    1992 Etc. Etc.

         From the Judgment and Order dated 29.11.91 of the Delhi High
    Court in l.T.C. No. 24 of 1991.
F         T.V.L. Iyer, G.C. Sharma, Ms. Renu George, B.K. Prasad, H.K. Puri,
    Rajesh Srivastava, Ujjwal Banerjee, Vineet Kumar, Ms. Janki
    Ramachandran, S. Ganesh, K.J. John, Ms. Manju Mishra, B. Kanta Rao,
    K. Janjani and K.L. J anani for the appearing parties.

G         The following Order of the Court was, delivered :

         The following question of law came up for consideration before the
    High Court under Section 256 (2) Income Tax Act, 1961 :

             "Whether, on the facts and in the circumstances of the case, the
H            I.T .A.T. was correct in law in holding that the assessee was entitled
                                         580
             C.I.T. DELHI v. STEPWELL INDUSTRIES LTD.                  581

        to weighted deduction u/s 35B of the Income Tax Act, 1961 in A
        respect of commission payment of Rs. 1,46,678?"

     The High Court declined to entertain this question. Hence this
appeal to this Court.
                                                                             B
     · The assessee's goods were sold by the State Trading Corporation of
India Limited to various parties outside India. The assessee claimed
weighted deduction under Section 35B(l)(b)(i) and (iv). The claim of the
assessee is not admissible on these facts. The weighted deduction is allowed
for activities carried out wholly and exclusively on the various purposes set C
out in sub-clauses (i) (ii), (v) (vii) (viii) and (ix) of Section 35B(l)(b).
Section 35B allowed at the material time deduction of a sum equal to one
and one third times of the amount of such exenditure incurred during the
previous year. In order to get this kind of deduction, the onus lies heavily
on the assessee to prove that the expenditure falls within any of the D
purposes set out in various sub-clauses of Clause (b) of Section 35B(l).
Merely because some activities took place outside India will not qualify the
expenditure for th.e deductions mentioned in Section 35(B). If the State
Trading Corporation incurs expenditure for an advertisement or publicity
outside India, the assessee will not be entitled to any deduction unless the
assessee can establish that the advertisement or publicity was being done E
outside Inida for and on behalf of the assessee and in respect of goods the
assessee deals in or provides in course of his business. Likewise, if the State
Trading Corporation maintains a branch officer or agency for the
promotion of sale outside Inida, the assessee cannot claim any deduction
on account of maintenance of such branch office or agency but if such F
branch office or agency is maintained by the assessee himself for the·
promotion of sale outside India of his goods, services or facilities, then the
assessee will be entitled to a deduction under Section 35B.


      We are of the view that the High Court should have called for a G
reference of this question. However, at this stage, there is no point in
sending the case back to the High Court. We treat the reference as to have.
been made to this Court and .answer the question in the negative and in
favour of the Revenue. There will be no order as to costs. The appeal is
allowed.                                                                    H
    582                   SUPREME COURT REPORTS [1997] SUPP. 3 S.C.R.

A   CIVIL APPEAL NO. 3280/1995

        The following question of law was sought to be referred to the High
    Court:

            "Whether on the facts and in the circumstances o_f the case, the
B
            Appellate Tribunal was right in law in holding that the amount of
            Rs. 3,10,750 paid as commission to M/s. Singh and Co. and HREC
            is entitled to weighted deduction under Section 35B(l)(b) of the
            Income Tax Act, 1961?"

C          The question was not referred to the High Court because in the view
    of the Tribunal the case was concluded by the decision of the Tribunal in
    M/s. J. Hem Chand & Co. It is difficult to follow the logic of this decision
    of the Tribunal. When a claim for weighted deduction is made, it is for the
    assessee to satisfy the Income Tax Officer that the expenditure falls in any
D   of the sub-clauses of Clause (b) of Section 35B(l). The onus is on the
    assessee to prove that he is entitled to the weighted deduction allowed
    under Section 35B.

          In order to get this deduction the assessee will have to prove that the
E   expenditure was incurred during the previous year wholly and exclusively
    for the purposes set out in sub-clause (b) of Section 35B(l). There cannot
    be any blanket allowance of the expenditure nor can there be any blanket
    disallowance. Every case has to be discussed specifically and the
    expenditure must be found to be of the nature mentioned in any one of the
F   sub- clauses. If the expenditure does not fall in any of these categories, it
    cannot be allowed as a deduction. Some of the sub-clauses provide that if
    the expenditure is incurred in India, it cannot be allowed but in some of
    sub-clauses this requirement is not there. In such cases, the expenditure
    may not be incurred in India. Every case will have to be examined in the
    light of the provisions of the sub-clauses and the facts proved by the
G   assessee.

          We allow this appeal, set aside the order of the High Court as also
    the appellate order of the Tribunal. The case is remanded back to the
    Tribunal. The assessee will have an opportunity to establish his case before
H   the Tribunal to claim deduction. The appeal is disposed of.
              C.l.T. DELHI v. STEPWELL INDUSTRIES LID.                  583

Civil Appeal Nos. 146511981a11d1466/1981                                       A
      The appeals are dismissed.

Civil Appeal Nos. 1624-25/1988

     The following question of law was referred to the High Court by the       B
Tribunal:

            "Whether, on the facts and in the circumstances of the case,
         the assessee is entitled to weighted deduction under Section 35B
       . of the Income Tax Act for the assessment year 1975-76 and
         1976-77?                              /                               c
            Whether on the facts and in the circumstances of the case and

        (i) since the foreign buyer had through the Indian agent located
        the assessee,
                                                                               D
        (ii) the commission had been paid in India the assessee is entitled
        to weighted deduction under Section 35B(ii) or (iii) or both"?

        The expenditure which qualifies for deduction under Section 35B(iii)
will have to be the expenditures incurred outside India in connection with     E
distribution, supply or provision outside India of such goods, services or
facitlities.No deduction under Section 35B can be allowed to the assessee
for expenditure incurred in India in connection with sale of goods. There
is no dispute that the expenditure was wholly incurred in India.

        The next question is whether the assessee is entitled to relief under
                                                                               F
sub-clause (ii) of Section 35B. Sub-cause (ii) speaks of "obtaining
information regarding market outside India of such goods ~<!rvices or
facilities". From the facts stated by the Tribunal, it appears that a
middleman approached the assessee for purchase of its goods for and on
behalf of the foreign buyer. The assessee agreed to sell his goods. The G
middleman obtained the commission. This does not amount to obtaining
information regarding "market outside India of such goods, services or
facilities." This is nothing but payment of sales commission to a middleman
for the purpose of effecting sales. The foreign buyer located the assessee
through the middleman. We are of the view that these appeals have no H
    584                     SUPREME COURT REPORTS [1997) SUPP. 3 S.C.R.

A merit and have to be dismissed. The appeals are dismissed. There will be
    no order as to costs.

     Civil Appeal No. 2365/1994

          The following question of law was sought to be referred :
B
             "l. Whether on the facts and in the circumstances of the case and
             on a proper interpretation of Section 35B of the Income Tax Act,
             1961, the Appellate Tribunal was right in law in allowing full
             deduction in r/o the following items :
c            (a) Commission paid to E.C.G.C./H.H.E.C.

             (b) Advertisement expenses,

             (c) Registration charges for Olympiad-SO &
D
             (d) Part of expenses under the head "Director's salary, postage,
             and telegrams" not incidental to exports?

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

        The Tribunal declined to refer this question. The High Court rjected
  the application under Section 256(2). It appears that the Tribunal did not
  examine the claim of the assessee by reference to any of the sub-clauses of
F Section 35B(l) (b). No expenditure can be altowed under Section 35B
  generally. The assessee must be able to establish the facts to prove that the
  expenditure falls within the ambit of sub-clauses (i) to (ix) cif clause (b) of
  Section 35B(1). This has not been done. We are of the view that the
  appellate order of the Tribunal has to be set aside. We set aside the order
  of the High Court as also the appellate order of the Tribunal and remand
G the case back to the Tribunal. The assessee will have an opportunity of
  proving the nature of the expenditure and establishing that the expenditure
  falls within any one of the sub-clauses of Section 35B(l). It has to be
  remembered that the onus is on the assessee to establish the facts to obtain
  the deduction claimed. The appeal is allowed with above observations,
H There will be no order as to costs.
                  C.I.T. DELHI v. STEPWELL INDUSTRIES LTD.                   585

    Civil Appeal No. 9105 of 1994                                                   A
          It appears that the Tribunal did not examine the claim of the assessee
    by reference to any of the sub-clauses of Section 35B(l)(b). No expenditure
    can be allowed under Section 35B generally. The assessee must be able to
    establish the facts to prove that the expenditure falls within the ambit of
    sub-clauses (i) to (ix) of clause (b) of Section 35B(l). This has not been      B
    done. We are of the view that the appellate order of the Tribunal has to
    be set aside. We set aside the order of the High Court as also the appellate
    order of the Tribunal and remand the case back to the Tribunal. The
    assessee will have an opportunity of proving the nature of the expenditure
    and establishing that the expenditure falls within any one of the sub-clauses   C
    of Section 35B(l). It has to be remembered that the onus is on the•assessee
    to estabish the facts to obtain the deduction claimed. The appeal is allowed
    with above observations. There will be no order as to costs.

     Civil Appeal Nos. 2324-26/1995
                                                                                    D
         Two questions of law arose for consideration in this case before the
    High Court:

             ''RA. No. 17

            1. Whether on the facts and in the circumstances Cf the case, on        E
            a proper interpretation of Section 35B, the Appellate Tribunal was
            right in allowing weighted deduction on total service charges paid
            to the STC of India amounting to Rs. 7,35, 721 and whether the
            Tribunal was right in law in allowing weighted deduction on entire
            service charges paid to STC when the assessee had claimed
            weighted deduction only on 2/3rd of service charges paid to STC?        F

            2. Whether on the facts and in the circumstances of the case, the
            Appellate Tribunal was right in law in allowing weighted deduction
            to the assessee in respect of expenses such as :-
J
            (i) Establishment expenses,                                             G
            (ii) Rent paid for Kamal Office,
            (iii) Rent paid for Delhi Office,
            (iv) Car expenses,
            (v) Telephone charges,
            (vi) Stationary expenses                                                H
    586                  SUPREME COURT REPORTS (1997) SUPP. 3 S.C.R.

A           which was disallowed by the ITO in toto and the disallowance was
            confirmed by the CIT(A) but allowed by the Tribunal in the
            proportion worked out by the Tribunal?

            3. Whether on the facts and in the circumstances of the case, on
            a proper interpretation of Section 40A{3), the Appellate Tribunal
B           was right in law in vacating the addition of Rs. 3,500 made by the
            ITO by invoking the provisions of Section 40A{3) of the Act in
            respect of payment of Rs. 2000 and Rs. 1,500 made on 25.2.1978
            to Mis Leather Products, Jagdishpura.

            RA. No. 18
c           •
            Whether on the facts and in the circumstances of the case, on a
            proper interpretation of Section 35B, the Appellate Tribunal was
            right in law in affirming the order of the CIT (A) allowing weighted
            deduction on 50% of service charges paid to STC of India amount-
            ing tci Rs. 7,35,721?"
D
          The High Court declined to call for a reference of these questions.
    We are of the view that the High Court was clearly in error. Questions of
    law arose out of the order of the Tribunal. We are of the view that the
    Tribunal was not right in allowing weighted deduction without investigating
E   the facts and examining the law applicable. There is no point in calling for
    a reference of this case at this stage. The Tribunal must examine the case
    afresh in the light of the observations made in C.A. No. 2365/94. The onus
    is on the assessee to prove that he was entitled to the expenditure by
    refernece to various sub-clauses of Section 35B(l)(b). The expenditures
F   cannot generally be allowed as claimed. We set aside the order of the High
    Court as also the appellate order of the Tribunal. The appeals are allowed.
    No order as to costs.

    Civil Appeal No. 3200 of 1995

G         It appears that the Tribunal did not examine the claim of the assessee
    by reference to any of the sub-clauses of Section 35B(l)(b). No expenditure
    can be allowed under Section 35B generally. The assessee must be able to
    establish the facts to prove that the expenditure falls within the ambit of
    sub-clauses (i) to (ix) of clause (b) of Section 35B(l). This has not been
    done. We are of the view that the appellate mder of the Tribunal has to
H   be ;et aside. We set aside the order of the High Court as also the appellate




                                                                                   T
             C.l.T. DELHI v. STEPWELL INDUSTRIES LTD.                  587
order of the Tribunal and remand the case back to the Tribunal. The A
assessee will have an opportunity of proving the nature of the expenditure
and'establishing that the expenditure falls within any one of the sub-clauses
of Section 35B. It has to be remembered that the onus is on the assessee
to establish the facts to obtain the deduction claimed. The appeal ts
allowed with above observations. There will be no order as to costs.
                                                                              B
Civil Appeal No. 3201/95

      In this case, the Tribunal .was wrong in allowing the deduction
claimed without examining the facts. The High Court was also. wrong in
not calling for a reference. The order of the High Court is set aside. The
appellate order of the Tribunal is also set aside. The appeal is allowed.     C
The assessee can satisfy the Tribunal by giving particulars that the expen-
diture was of such a nature as falls in any of the sub-clauses of Section
35B(l)(b).

Civil Appeal No. 3975/95
                                                                              D
      The Tribunal was wrong in allowing the claim of the assessee for
weighted deduction under Section 35B without going into the facts of the
case. The claim was not made before the Income Tax Officer or the
Apellate Assistant Commissioner. No particulars of the expenditures were
furnished to them. The particulars should have been placed before the ITO     E
or the Appellate Assistant Commissioner for examination. The onus of
proving the facts and getting the benefit of the deduction lies on the
assessee. The assessee not having proved anything either before the ITO
or the Appell~te Assistant Commissioner cannot get this deduction. The
Tribunal cannot allow the claim on assumption of facts. The Tribunal was
also in error in not referring the following question of law sought to be     p
raised to the High Court :

        "(i) Whether on the facts and in the circumstances of the case, the
        Appellate Tribunal was right in law in admitting assessee's addi-
        tional grounds claiming weighted deduction under Section 35B of
        items of which no claim has been made before the Income Tax G
        Officer or before the Commissioner of Income Tax (Appeals)?

        (ii) Whether on the facts and in the circumstances of the case, the
        Appellate Tribunal was right in law in allowing weighted deduction
        under Section 35B in respect of packing credit interest for which
        there has been no claim before the lower authorities?               H
    588                   SUPREME COURT REPORTS [1997) SUPP. 3 S.C.R.

A           (iii) 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 on whole of the E.C.G.C. charges?"

          The High Court was also in error in not calling for a reference in
B   this case.

           In the case of Addi. Commissioner of I11come Tax, Gujarat v. Gur-
    jargravures Pvt. Ltd., 111 l.T.R. 1, this Court held that a claim not made
    under Section 84 was neither made before the Income Tax Officer nor
C   before the Apellate Assistant Commissioner, the Tribunal was not right in
     entertaining that claim and allowing it in favour of the assessee.

          In view of the the above facts, we are of the opinion that the decision
    of the Tribunal was erroneous and the same is set aside. The appeal is
    allowed, there will be no order as to costs.
D
    Civil Apeal No. 4106 of 1995

          The appeal is dismissed. There will be no order as to costs.

     Civil Appeal No. 6411 of 1995
E         The Tribunal overlooked that in order to qualify for deduction the
    expenditures must have been wholly or exclusively incurred for the pur-
    poses mentioned in sub-clause (b) of Section 35B(l). The order of the High
    Court under appeal is set aside. The appellate order of the Tribunal is also
    set aside. The appeal is allowed.
F
     Civil Appeal No. 6715 of 1995

        The following question of law was sought to be referred to the High
    Court:

G            "Whether on the facts and circumstances of the case, the l.T.A.T.
             was righr in law in allowing weighted deduction u/s. 35B in respect
             of Rs. 29,746 paid as export agency commission to ECGC?"

          The Tribunal declined to refer the question. The High Court rejected
    the application. Our attention was drawn that the question sought to be
H   raised before the High Court under Section 256(2) was differently worded.
               C.I.T. DELHiv. STEPWELLINDUSTRIES LTD.                    589
                     •
But the Hieh Court could have referred the question. The Tribunal should        A
not have declined to refer the question to the High Court under Section
256(1).

       In view of our earlier decisions, this case is remanded back to the
Tribunal for decision in accordance with the directions given earlier. The
order of the High Court is· set aside. The appellate order of the Tribunal      B
is also set aside. The appeal is allowed. There will be no order as to costs.

CA. No. 6941/95

      In view of the principles laid down in the aforesaid cases, the order
under appeal passed by the High Court is set aside. The appellate order         C
of the Tribunal is also set aside.

      The appeal is disposed of. There will be no order as to costs.

Civil Appeal Nos. 8044-8045195
                                                                                D
      The following questions of law arise in this case :

          "1. Whether, on the facts and in the circumstances of the case, the
          Tribunal was right in law in holding that the assessee was entitled
          to weighted deduction u/s. 35B on the expenditure incurred by it
          under the heads "Customs Duty" Repairs and re-assembly, clearing      E
          and storage and certain expenditure incurred by foreign branches?

          2. Whether on the facts and in the circumstances of the case,
          Tribunal was right in law in holding that the assessee was entitled
          to weighted deduction under Section 35B on the expenses which         F
          were general in nature and thus not covered under any of the
          clauses of Section 35B?"

      The finding of fact by the Tribunal is that most of the expenditures
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      G
branch paid the duty, is quite immaterial. The transaction was internal
transactions 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.

      The appeals are allowed. There will be no order as to costs.              H
    590                  SUPREME COURT REPORTS (1997) SUPP. 3 S.C.R.

A   Civil Appeal No. 8482/95

         The Revenue has not advanced any argument except on question No.
    1 which is as under :

            "l. Whether on the facts and circumstances of the case, and on a
B           proper interpretation of Section 35B of the Income Tax Act, 1961,
            the Appellate Tribunal was right in law in allowing further
            weighted deduction in respect of expenses under various heads
            ill'cluding "Travelling", "service charges/commission to various
            Agencies'', "Expenses on Foreign Delegation in India, "Bank Inter-
c           est on packing Credit", "Subscriptions" "Commission and
            Brokerage" and on proportionate expenses under other heads like
            "salary'', "Telex, Telephone and Telegram", "postage", "printing" and
            Stationery" "Electricity", "Jamnagar office Expenses", "Bank Char-
            ges" etc.?"

D         The Tribunal was clearly in error in allowing this claim for weighted
    deduction without examining the claim, the assessee has also failed to
    adduce any proper findings and make out a proper case under Clause (b)
    of Section 35B(l). In that view of the matter, we are of the opinion that
    the Tribunal was in error in not referring the question of law to the High
E   Court. The High Court was in error in not calling for a reference. There
    is no point in directing reference at this stage. We hold that the Appellate
    Tribunal's decision in regard to Section 35B was erroneous. We set aside
    the order of the High Court. We also set aside the appellate order of the
    Tribunal.

F         The appeal is allowed to the above extent. There will be no order as
    to costs.

     C.A. No. 8790/95

          This case relates to payment of commission to S.T.C. and H.H.E.C.
G   by the assessee Company. The admissibility of this expenditure under
    Section 35B will depend upon the facts of the case. The assessee will have
    to prove the facts to bring it within the compass of various sub-clauses of
    clause (b) of Section 35B(l). The Tribunal has not examined this case
    properly at all. The assessee has also not proved his case in any way. Under
H   these circumstances, we set aside the order of the Tribunal and send the
              C.l.T. DELHI v. STEPWELLINDUSTRIES LTD.                   591
case back to the Tribunal to decide it in accordance with law. The order A
of the High Court under appeal is set aside. The appellate order of the
Tribunal is also set aside. The appeal is disposed of. There will be no order
as to costs.

CA. No. 9835 of 1995
                                                                              B
      This case relates to weighted deductions. No question of law was
referred to the High Court. The High Court also did not call for reference.
The order of the High Court is clearly erroneous and is set aside. The
appellate order is also set aside. The Tribunal will examine the case afresh.
There will be an opportunity give·n to the assessee to tJroVe that the claim C
of weighted deductions were for activities falling within the sub-clauses of
clause (b) of Section 35B(l).

       The appeal is disposed of. There will be no order as to costs.

 Civil Appeal No. 2293 of 1996.                                               D
       The appeal is dismissed.

R.P.                                             C.A. No. 1275/92 allowed.
                                                 C.A. No. 3280/95 allowed.
                                                 C.A. No. 2365/94 allowed. E
                                                 C.A. No. 9105/94 allowed.
                                              C.A. No. 2324-26/95 allowed.
                                                 C.A. No, 3200/95 allowed.
                                                 C.A. No. 3201/95 allowed.
                                                 C.A.,No. 3975/95 allowed. F
                                                 C.A. No. 6715/95 allowed.
                                           C.A. No. 8044-8045/95 allowed.
                                                 C.A. No. 8482/95 allowed.
                                   C.A. No. 1465/81 'and 1466/81 dismissed.
                                            C.A. No. 1624-25/88 dismissed. G
                                               C.A. No. 4106/95 dismissed.
                                               C.A. No. 6411/95 dismissed.
                                               C.A. No. 2293/96 dismissed.
                                             C.A. No. 6941/95 disposed of.
                                             C.A. No. 8790/95 disposed of.
                                             C.A. No. 9835/95 disposed of.