Gopalan Nambiyar, C.J. -
(1.) THESE two references under Section 256(1) of the I.T. Act are by the Tribunal, Cochin Bench, at the instance of the revenue. The assessment years with which we are concerned are 1971-72 (ITR No. 12 of 1977), 1972-73 (ITR No. 23 of 1977). The assessee is the same, and is a private limited company, doing business in export of sea-food. The accounting year is the calendar year. The assessee has an agent in the United States of America by name Atlanta Trading Corporation. By agreement dated July 21, 1953, the corporation agreed to act as the commission agent of the assessee. They were to establish letter of credit for each of shipments in advance, at prices which will adequately cover the cost of the sea-food packing, etc. They were to further advance ocean freight, insurance, import charges, storage charges, etc. They were finally to sell the products in the American market and to remit the full proceeds of the sales less all advances and the commission at 10% due to them, to the assessee-company rendering a detailed account of all sales and shipments separately. By a notification dated 24th February, 1966, the commission due to the agent was reduced from 10% to 7 1/2%. Shipments to the agents and sales by the agents of the sea-food were being made in accordance with the agreement. The assessee was drawing in advance, on letters of credit, amounts which were adjusted in the final settlement of accounts in respect of each shipment. In the course of the accounting year 1970, and part of the subsequent year 1971, the assessee drew as advance much more than what was due to them as per accounts for the sales in the United States. For the accounting year 1971-72, the assessee had overdrawn to the extent of Rs. 1,01,789. The assessee was disputing the state of accounts; and eventually, the agents agreed to waive 50% of the amount aforementioned in settlement of the debts. The assessee thus got the benefit of 50,894 dollars and 90 cents. But, of this, the amount referable to shipments in the year 1970 was 16,376 dollars and 53 cents, and the balance was for the accounting year 1971. In terms of rupees this worked out to Rs. 1,22,824 for 1970 and Rs. 2,58,887 for 1971. In the books of accounts of 1970, the assessee debited this amount to M/s. Atlanta Trading Corporation and credited the sales account. The adjustment of figures relevant to 1971 was made by reducing the value of the closing stock. We are concerned with the adjustment of Rs. 1,22,824 in 1970 and with a similar adjustment of Rs. 2,58,887 for 1971. The assessee claimed exemption by way of weighted deduction of the amounts under Section 35B of the I.T. Act, in respect of the entire commission payable to M/s. Atlanta Trading Corporation. Considering the fact that out of the debit balance the Atlanta Trading Corporation had agreed to waive 50% of the loss incurred, the ITO took the view that the loss would only be a deduction in the commission payable by the assessee to M/s. Atlanta Trading Corporation. It was, therefore, of the view that the relief under s 35B had to be worked out on the balance of the commission payable after deducting the amount waived by the corporation. He rejected the assessee's contention that what was forgone was not commission but certain other items. On appeal by the assessee, the AAC found that the transaction in reality did not amount to a sharing of losses by the assessee and his agent, but that the assessee had been paid by the agents a larger amount than what was agreed to. Therefore, the actual payment by the assessee to the agent was only the difference between the sale price and the actual price realised by the assessee. In this view, the assessee would not be entitled to deduction under Section 35B in respect of the amount waived by the agent. On further appeal by the assessee, the Tribunal found that the agent incurred on behalf of the assessee certain expenses in freight, storage, etc., and that in respect of these, the assessee was a debtor. So it was, again, in respect of advances drawn, and in respect of commission payable, on the sales effected. THESE represented the three items of dues from the assessee. In the accounting years in question, the assessee had overdrawn. The Tribunal was of the view that the overdrawing could be in respect of any of the three types of debts. Against the amounts thus due to the agent, 50% was waived; and the question for determination, according to the Tribunal, would be which of the three categories of debts had been waived. This, the Tribunal held, had to be determined by considering to which item of debt the amount waived is appropriated. It applied the law of appropriation. As the assessee had credited the amount to the sales account, it was treated as the amount due on sales. Therefore, the assessee was entitled to deduction of the full amount waived. The Tribunal, accordingly, allowed the assessee's appeals. It has referred the following question of law for our determination.
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the Income-tax Officer was not justified in disallowing weighted deduction to the assessee, under Section 35B of the Income-tax Act, 1961, on the sum of Rs. 1,22,824 forgone by the assessee's agent, the Atlanta Trading Corporation, and credited by the assessee to the sales account ?"
(2.) SECTION 35B of the I.T. Act, in so far as it is material, reads as follows : " Export markets development allowance.--(1)(a) Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th day of February, 1968, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in Clause (b), he shall, subject to the provisions of this section, be allow- ed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year :
Provided that in respect of the expenditure incurred after the 28th day of February, 1973, by a domestic company, being a company in which the public are substantially interested, the provisions of this clause shall have effect as if for the words 'one and one-third times ', the words 'one and one-half times ' had been substituted."
(b) The expenditure referred to in Clause (a) is that incurred wholly and exclusively on-
(i) advertisement or publicity outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business;
(ii) obtaining information regarding markets outside India for such goods, services or facilities;
(iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit;
(iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities; "
(v) preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto;
(vi) furnishing to a person outside India samples or technical information for" the promotion of the sale of such goods, services or facilities;
(vii) travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from, and return to, India;
(viii) performance 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 ;
(ix) such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed.........." (Explanations and Sub-section (2) omitted)
On the terms of the section, the question for consideration would be whether the amount overdrawn by the assessee, 50% of which was waived by the agent, represented expenditure, wholly and exclusively incurred on any of the grounds or for any of the purposes listed in Clauses (i) to (ix) of the above section. From this point of view, we find no approach by the Tribunal, and no discussion by it; nor, for that matter, by the authorities below. Without thus getting to grips with the section and its clauses and sub-clauses, the discussion of this aspect of the question would, it seems to us, be unsatisfactory. The Tribunal did not even quote the section or refer to the relevant sub-clauses of Clause (b) which, according to it, had application. In the absence of such specific and pointed consideration, the finding recorded by the Tribunal has little value. We are not very much impressed by the Jaw as to appropriation of payments pressed into service by the Tribunal. The Tribunal should localise the expenditure with specific reference to the sub-clause in Clause (b) of Section 35B(1) and proceed to determine whether the expenditure had been wholly and exclusively incurred for any of the purposes listed therein. In the circumstances, we would decline to answer the question referred and would send the references back to the Tribunal for being dealt with in accordance with law and in the light of the observations contained in this judgment. There will be no order as to costs.;