THE COMMISSIONER OF INCOME TAX (CNTL.), LUDHIANAversusM/S HERO CYCLES PVT. LTD., LUDHIANA ETC. ETC.

A           THE COMMISSIONER OF INCOME TAX (CNTL.),
                                   LUDHIANA
                                v.
          MIS HERO CYCLES PVT. LTD., LUDHIANA ETC. ETC.

                                AUGUST 28, 1997
B
               (SUHAS C. SEN AND S. SAGHIR AHMAD, JJ.]

          Income Tax Act, 1961 :

C          S. 35B ( 1)(b }-Weighted deduction-Held, is pennissible if the assessee
    proves that the entire expenditure is laid out wholly and exclusively for
    purposes mentioned in sub-clause (b) of s.35B(l~nus is on assessee to
    prove his. claim-Tribunal must examine the claim on the basis of facts
    proved by assessee and give a finding as to the entitlement of assessee with
D   reference to relevant sub-clauses of Clause (b) of s. 35B(l)-Tribunal cannot
    allow any weighted deduction without linking the expenditure to one or more
    activities referred to in various sub-clauses of s.35B(l)(b).

          S.35B(l)(b}-Colltribution to Indian Cotton Mills Federation-Held,
E does not fall within any of sub-clauses of s.35B(l)(b).

          S.35B(l)(b)-Weighted deduction-Circular stated to have been issued
    by Central Board of Direct Taxes-Held, Circulars can bind income Tax
    Officer but will not bind the appellate authority or the Tribunal or the Court
    or even the assessee.
F
           S.44-l'rofits and gains pf insurance business-Computation of-Asses-
    see claims benefit of s.35B-Held, profits and gains of insurance business can
    only be assessed in the manner laid down in the Rules contained in First
    Schedule and not in any other manner.
G
          S.154-11.ectification of mistakes-Held, can be made only when glaring
    mistake of fact or law committed by officer passing the order becomes
    apparent from the recor~ectificatio11 is not possible if the question is
    debatable-Moreover, the point which was not examined 011 fact or i11 law
H   cannot be dealt as mistake apparent on record.
                                         612
         Cl.T. (CNTL) LUDHIANAv. HERO CYCLES PVf. LTD.                  613

     CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7665 of                    A
1996 Etc.

     From the Judgment and Order dated 2.6.88 of the Punjab & Haryana
High Court in l.T.C. No. 16 of 1988.

      T.L.V. Iyer, Ms. Renu George, S. Rajappa, C. Radha Krishna, Ms.          B
Janaki Ramachandran, Ms. Meenakshi Arora, A.T.M. Sampat for the
appellant in C.A. No. 4671/88, 4043/84, 5755/95, 5620-21/95 and 2230-31/95.

      Uma Datta and B. Kanta Rao for the Respondents.

      The following Order of the Court was delivered :                         c
Civil Appeal No. 7665/96

     The following question of law was referred by the Tribunal to the
High Court:
                                                                               D
        'Whether on the facts and in the circumstances of the case on a
        proper interpretation of Section 35-B of the Income Tax Act, 1961,
        the Appellate Tribunal was right in law in allowing assessee's claim
        for weighted deduction in respect of "Export Sales Commission"
        "E.C.G.C. Charges" and "Foreign Dealers Visiting Expenses"?            E
      The High Court declined to call for a reference under Section 256(2)
of the Income Tax Act, 1961. It appears that the claim for deduction under
Section 35B was not originally allowed at all. Thereafter, on an assessee's
application an order was passed by the Commissioner of Income Tax
(Appeals), Jalandhar, in which he directed certain allowances to be given      F
on proportionate basis after verification of the assessee's claim under
Section 35B.

       The Income Tax Officer thereafter entertained assessee's prayer for
rectification of the order and allowed the assessee's claim in respect of
matters like Coloured Albums, Export staff travelling expenses, Export         G
sales commission, E.C.G.C., foreign dealers visiting expenses. Rectification
under Section 154 can only be made when glaring mistake of fact or law
has been committed by the officer passing the order becomes apparent
from the record. Rectification is not possible if the question is debatable.
Moreover, the point which was not examined on fact or in law cannot be         H
    614                  SUPREME COURT REPORTS (1997) SUPP. 3 S.C.R.

A dealt as mistake apparent on the record. The dispute raised a mixed
    question of fact and law.

         The Tribunal was in error in upholding the assessee's claim for
    weighted deductions.

B         There is no point in sending the matter to the High Court to deal
    with the question raised at this stage. We treat the question as referred 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.

C CA. Nos. 7666-7667/96, SLP(C) Nos. 7485/86, 4588-89/89
          Leave granted in Special Leave Petitions.

         The following questions of law was sought to be raised by the
    Revenue from the order of the Tribunal for reference to the High Court:

D           "(i) Whether on a proper interpretation of the agreements between
            the S.T.C. and its subsidiary HHEC, the Appellate Tribunal is right
            in law in holding that one per cent margin money earned by the
            HHEC under its agreement of Export Business Association with
            the assessee is in the nature of expenditure as contemplated by
E           Section 35B and not the income of the HHEC on its own entitle-
            ment on the aforesaid agreements as held by the I.T.O.?

             (ii) Whether on the facts and in the circumstances of the case, the
             Appellate Tribunal is right in allowing weighted deduction under
             Section 35B of the Act to the total payment of Rs. 1,87,476 to the
F            HHEC without any bifurcation?

             (iii) Whether on a true interpretation of Section 35B of the Act,
             the services rendered by the. HHEC were to be related itemwise
             to the various sub-clauses of Clause (b) of sub-section (1) so as to
             entitle the assessee to weighted deduction in respect of them?"
G
          The Commissioner of Income Tax (Appeals) as well as the Tribunal          n
    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 sub-clause (b) of Section 35B. It
H   is for the assessee to prove that the entire expenditure involved was
          CI.T. (CN1L) LUDHIANAv. HERO CYCLES PVf. LTD.                 615

exclusively for the purposes mentioned in sub-clause (b) of Section 358. A
The Tribunal has also to give a finding as to the entitlement of the assessee
with reference to the particular of sub-clause (b) of section 358. 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 under
Section 358 without adverting to any of the sub-clauses of (b) of Section B
358. 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 it of 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.
                                                                              c
Civil Appeal No. 7965/96

      The amount involved is Rs.10,000 only and the case being 23 years
old we do not feel inclined to go into the question raised. However, we
make it clear that we are not expressing any opinion on the correctness of    D
the decision referred by the Tribunal. The appeal is dismissed. There will
be no order as to costs.

SLP(C) No.9027187

      The Special Leave Petition is dismissed.                                E

SLP (C) No. 10982/97

      Leave granted.
                                                  r                           F
      In this case large number of questions were sought to be raised. We
shall deal with only the question relating to Section 358. It appears that
the Tribunal was totally unmindful of the various sub-clauses of Section
358(b). Expenses can only be allowed if they are wholly and exclusively
incurred for any of the purposes mentioned in these sub-clauses. The
section is quite clear and categorical. There is no way that any other G
expenditure can be given weighted deduction under Section 358. It is the
assessee's duty to prove facts which will bring the case within any of these
sub-clauses. Unless that is done the assessee will not be entitled to get this
deduction. The Tribunal has allowed the deduction without verifying or
examining the sub-clauses under which this could be allowed.                   H
    616                    SUPREME COURT REPORTS [1997] SUPP. 3 S.C.R.

A         We have passed similar orders in a large number of cases but in this
    case on behalf of the assessee it has been contended that there is a circular
    issued by Central Board of Direct Taxes, New Delhi which should conclude
    the matter. A copy of the so-called circular dated 9th April, 1981/13th
    April, 1981 has been handed over in Court. It does not appear that the
B   document handed over in Court is a copy of Circular at all. It is a letter
    written to one Shri D'Souza with reference to a letter written by his
    predecessor.

          Moreover, it is well-settled that circulars can bind the Income Tax
    Officer but will not bind the appellate authority or the Tribunal or the
C   Court or even the assessee. There is nothing in the alleged circular which
    supports the contention of the assessee. It merely says that each case has
    to be examined and the issue would be basically a find of fact. The assessee
    had not made his claim before the Income Tax Officer by relying on this
    Circular.

D         We set aside the order of the High Court. We also set aside the
    appellate order of the Tribunal. The Tribunal must examine the question
    of Section 35B with reference to the various sub- sections of clause (b) of
    that section. The Tribunal will examine the facts of each claim made by the
    assessee and find out whether the claim can be allowed having regard to
E   the facts and also the sub-sections of Section 35B(b). The case is sent back
    to the Tribunal for fresh disposal in the light of the above direction. The
    assessee must pay cost of this appeal assessed at Rs. 5,000.

    SLP (C) Nos. 4663-65/89

F         Leave granted.

        The claim of the assessee is in respect of relief under Section 35B in
  respect of certain expenditures incurred by the assessee. The order under
  challenge passed by the High Court is set aside. The appellate order of the
  Tribunal is also set aside. The matter should go back to the Tribunal. The
G Tribunal will examine the case. The assessee must prove before the
  Tribunal the facts in respect of his claim. The Tribunal will examine the
  facts and consider the various sub-clauses, sub-sections (b) of Section 35B
  and will decide whether the assessee is entitled to exemption in any of these
  sub-clauses in respect of expenses incurred, The appeals are disposed of.
H There will be no· order as to costs.
          Cl.T. (CNTL) LUDHIANA v. HERO CYCLES PVT. LTD.                  617

 SLP (C) Nos. 8620/95                                                            A
       Leave granted.

       In this case two questions are involved. So far as Section 40C is
concerned, the appeal will have to be dismissed. So far as Section 35B is
concerned, the weighted deduction must be examined by the Tribunal on            B
the basis of the facts proved by the assessee and having reference to the
various sub-clauses of clause (b) of Section 35B. If the assessee's case
comes specifically within any of these sub-clauses it has to be allowed
otherwise not. The order of the High Court is set aside. The case is sent
back to the Tribunal for re-examination of the case in the light of the above    C
direction. No order as to costs.

SLP (C) No. 10949/95

       Leave granted.
                                                                                 D
        This case is only concerned with Section 35B. The weighted deduc-
. tion must be examined by the Tribunal on the basis of the facts proved by
  the assessee and having reference to the various sub-clauses of clause (b)
 of Section 35B. If the assessee's case comes specifically within any of these
  sub-clauses it has to be allowed otherwise not. The order of the High Court
 is set aside. The appellate order of the Tribunal is also set aside. The case   E
 is sent back to the Tribunaf for re-examination of the case in the light of
 the above direction. No order as to costs.

SLP (C) No. 9065194 & CA. Nos. 1494-96188 and 5567/90

      Leave granted in Special Leave Petition.                                   F

     The question in this case relates to scope of Section 44 of the Income
Tax Act, 1961. The Section states :

         "Sec. 44. Notwithstanding anything to the contrary contained in the G
         provisions of this Act relating to the computation of income
         chargeable under the head "Interest on securities", "Income from
         house property", "Capital gains" or "Income from other sources",
         or in Section 199 or in Sections 28 to 43B, the profits and gains of
         any business of insurance, including any such business carried on
         by a mutual insurance company or by a co-operative society, shall H
    618                  SUPREME COURT REPORTS [1997) SUPP. 3 S.C.R ..

A           be computed in accordance with the rules contained in the First
            Schedule."

          The plain reading of the section will go to show that notwithstanding
    the other provisions of the Income Tax Act, in particular provisions of
    Sections 28 to 438, the profits and gains of any business of insurance shall
                                                                                   •'
B   be computed in accordance with the rules contained in the First Schedule.
    This is a non-obstante clause and rules have been specially made for
    computatiol!- of profits and gains of insurance business. The rules are
    contained in the First Schedule of the Act. There is a rule for computation
    of profits of Life Insurance Business (Rule 2). Another rule has been
C   framed (Rule 5) for computation of profits and gains of other insurance
    business. This means that profits and gains of insurance business (whether
    the Life Insurance or General Insurance) can only be assessed in the
    manner laid down in the rules contained in the First Schedule and not in
    any other manner.

D         Ms. Ramachandran, learned counsel appearing for the assessee, has
    contended that Section 44 speaks of "Section 28 to Section 43B". It does
    not specifically mention Section 35B. Therefore, the assessee was entitled
    to the benefit of Section 35B. Section 35B was inserted in the Act by way
    of amendment. When the original Act was passed Section 35B was not in
E   the Statute Book. The contention of Ms. Ramachandran is that when
    Section 35B was inserted, it was not specifically mentioned that Section
    35B will not apply to Insurance Company. Therefore, the benefit of Section
    35B will have to be given to the Insurance Company.

          We are unable to accept this contention for two reasons. First, when
F the Act speaks of Section 28 to Section 43B then each one of the sections
  from Section 28 to Section 43B will be included. The newly inserted Section
  35B was not specifically mentioned because it was not necessary to do so
  just a~ it was not necessary to specifically mention Section 35B in Section
  29 which lays down that computation of profits and gains of business or
G profession shall be computed in accordance with the provisions contained
  in Sections 30 to 43C.

        Moreover, when the Act specifically says that profits and gains of
  insurance business shall be computed in accordance with the rules con-
  tained in the First Schedule then such computation has to be made accord-
H ing to that rule and not any other rule. We are unable to accept the
           Cl.T. (CNTL) LUDHIANA v. HERO CYCLES PVT. LTD.                619

 contention of Ms. Ramachandran that the 'benefit of Section 35B should         A
 also be given to any Insurance Company.

        There are certain other questions,- apart from Section 35B, involved
 in this case arising out of the decision of the High Court. Those points are
 not before us. We do not express any opinion on them. The argument was
 confined only to Section 35B.                                                  B
       In that view of the matter, we uphold the order of the High Court
 and dismiss these appeals. There will be no order as to costs.

 S.L.P. No. 4671188 & CA. Nos. 5755/95 and 4043/84.
                                                                                c
       Leave granted in S.L.P.

      In view of the decision of this Court in Commissioner of Income Tax,
 Tamil Nadu v. Mis National Palayacot Company, Kurinjipadi, Civil Appeal
  Nos. 16-17 of 1985, these appeals are dismissed. There will be no order as    D
' to costs.

 CA. No. 7763/95

       The following two questions of law have been sought to be raised in
 this Court :                                                                   E
          1.   "Whether on the facts and in the circumstances of the case,
               the ITAT is right in law in allowing weighted deduction under
               section 35B of the I.T. Act on car maintenance at Rs. 49,939,
               Motor Cycle at Rs. 3697 and Generator Expenses at Rs. 4639
               without linking the eiqlenditure to one or more the activities   F
               referred to in various sub-clauses of 35B(l)(b) and also
               ignoring the prohibition contained in sub-clause (iii) ibid
               regarding expenditure on distribution, supply or provision
               outside India of goods etc. incurred after 31.3.1978?

          2.   Whether on the facts and in the circumstances of the case,       G
               the ITAT is right in law in holding that the assessee was
               entitled to weighted deduction under section 35B on entire
               expenditure of Rs. 4,24,773 and 50% of the expenditure on
               various items, aggregating to Rs. 4,24,773 and50% of the
               expenditure on various items, aggregating to Rs. 9,89,950        H
    620                    SUPREME COURT REPORTS (1997) SUPP. 3 S.C.R.

A                without linking the expenditure to qne or more of the ac-
                 tivities referred to in various sub-clauses of Section 35-
                 B( 1) (b) and also ignoring the prohibition contained on
                 sub-clause (iii) ibid regarding expenditure on distribution,
                 supply or provision outside India of goods etc. incurred after
                 31.3.1978?"
B
          The High Court dismissed the reference application under Section
    256(2).

          We are of the opinion that the Tribunal cannot allow any weighted
C deduction without linking the expenditure to one or more of the activities
  referred to in various sub-clauses of Section 35(1)(b). Therefore, in our
  opinion, the question must be answered in the negative and in favour of
  the Revenue. The Tribunal will now decide the case afresh after examining
  the nature of the expenditure and the purposes for which it was spent
D having regard to the various sub-clauses of Section 35B(l)(b). The order
  of the High Court is set aside. The appellate order of the Tribunal is also .
  set aside. The appeal is allowed. There will be no order as to costs.

    C.A. No. 7045/95

E         The dispute in this case relates to an amount of Rs. 1,52,694 (Spindle
    Fee) paid to the Indian Cotton Mills Federation for Export Promotion
    Funds. The contribution to the Indian Cotton Mills Federation does not
    fall within any of the sub-clauses of Section 35B(b). The contribution may
    be for the promotion of export generally but this sort of contribution to a
F   general body or Chamber of Commerce cannot qualify for weighted
    deduction. The appeal is allowed. The order of the High Court as well as
    the appellate order of the Tribunal are set aside. There will be no order
    as to costs.

    C.A. No. 12419/96
G
          In view of the observations made in SLP No. 10982/87, the appeal is
    allowed. There will be no order as to costs.

    C.A. Nos. 5620-21/95

H         In view of the observation.s made earlier these cases are remanded
         Cl.T. (CNTL) LUDHIANA v. HERO CYCLES PVT. LTD.                 621

back to the Tribunal. The Tribunal will examine the cases in the light of A
the various sub-clauses of Section 35B and will also examine the facts to
find out whether the expenditures come within any of the categories
mentioned in sub-clause (b) of Section 358. The order of the High Court
is set aside. The appellate order of the Tribunal is also set aside. The
Tribunal will decide the cases in view of the directions given hereinabove. B
There will be no order as to costs.

CA. No. 6942/95

      The dispute in this case is about the allowances under Section 358.
The allowances in this case relate to (a) payment to Hosiery Exporters         C
Association. (b) Payment to HHEC, (c) Contribution to Hosiery Exporters
Association, and (d) Charges paid to ECGC; are also expenditure on (e)
Establi$hment, (f) Bonus, (g) leave with wages, (h) Salary to Directors, (i)
Postage, telephone and telegram, and G) printing and stationery.
                            ~                                                  D
       The only question is whether payment of HHEC and ECGC qualify
for special allowance under Section 358. The other expenditures are not
allowable. The order of the High Court is set aside. The appellate order
of the Tribunal is also set aside. The matter is remanded back to the
Tribunal only to consider whether the payment of HHEC will qualify for
the special exemption given under Section 358. The Tribunal will examine       E
the facts and find out whether the payment was for any of the activities
mentioned in sub-clause (b) of Section 358. If the expenditure was wholly
and exclusively incurred for any of these purposes, the expenditure will
qualify for deduction under Section 358. The Tribunal will examine the
case afresh with regard to payments to HHEC and also to ECGC. The              F
other items mentioned in the appellate order of the Tribunal will stand
disallowed. The case is remanded back to the Tribunal for fresh disposal.
The appeal is allowed. There will be no order as to costs.

CA. No. 387 of 1985
                                                                               G
      The appeal is dismissed. There will be no order as to costs.

CA. Nos. 786-88 of 1995

      The appeals are dismissed.                                               H
    622                  SUPREME COURT REPORTS [1997) SUPP. 3 S.C.R.
A CA. No. 7847 of 1995
          The following question of law was referred to the High Court :

            "Whether on the facts and in the circumstances of the case, on a
            proper interpretation of Section 35B, the Appellate Tribunal was
B           right in law in allowing in respect of foreign claim for weighted
            deduction in respect of foreign sales commission, E.C.G .C., char-
            ges and expenditure on articles of presentation?"

           The question relates to expenditure for which relief was claimed
    under Section 35B. The Tribunal allowed the expenditure without specifi-
c   cally deciding under which sub-clause (b) of Section 35B the expenditure
    falls. The case is remanded back to the Tribunal. The Tribunal will re-ex-
    amine the case having regard to the nature of the expenditure and will try
    to find out whether such an expenditure qualifies for weighted deduction
    under Section 35B. The order of the High Court is set aside. The appellate
D   order of the Tribunal is also set aside. The Tribunal will now examine the
    facts of the case and find out whether the expenditures are allowable under
    any of the sub-clauses of Section 35B(b). The appeal is allowed. No order
    as to costs.

    CA. Nos. 2230-31 of 1995
E
          The appeals are dismissed. There will be no order as to costs.

    CA. No. 3120 of 1995

          The dispute in this case is about the allowability of weighted deduc-
F tion under Section 35B of the Income Tax Act. The dispute relates to
    various expenditures including commissions paid to STC, HHEC and
    ECGC. There are other expenditures in regard to salary, Director's
    remuneration, rent, printing and stationery, postage and telegrams etc.
    which have not been proved to be wholly or exclusively incurred for the
    purposes of any of the sub-clauses mentioned in sub-clause (b) of Section
G   35B. These will have to be disallowed. The order of the Tribunal to this
    extent is erroneous. So far as commission payable to STC, HHEC and
    ECGC is concerned, this will have to be examined by the Tribunal afresh.
    The onus is on the assessee to prove the facts which will enable him to
    claim weighted deduction. The Tribunal will examine the claim of the
H   assessee and will find out whether the claim is allowable having regard to
         Cl.T. (CN1L) LUDHIANA v. HERO CYCLES PVT.LTD.             623

any of the sub-clauses of Section 35B(b). The judgment of the High Court A
under appeal is set aside. The appellate order of the Tribunal is also set
aside. The Tribunal will now re-hear the case on the points relating to
commission paid to STC, HHEC, ECGC only. The appeal is allowed.
There will be no order as to costs.

R.P.                                        Appeals allowed/dismissed    B
                                                   Petition dismissed.