V.K. Singhal, J. - (1.) THE Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated September 28, 1984, in respect of the assessment year 1976-77 : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to claim weighted deduction of Rs. 8,29,518 being export expenses and Rs. 7,68,512 being export freight under Section 35B of the Income-tax Act, 1961 ?"
(2.) THE facts of the case are that the assessee claimed deduction under Section 35B of Rs. 8,29,518 in respect of expenses and Rs. 7,68,512 in respect of export freight. THE dispute in the present case pertains to the assessment year 1976-77. Section 35B has been omitted by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989. Sub-clauses (iii) and (viii) of the aforesaid section are as under : Sub-clause (iii) : "distribution, supply or provision outside India of such goods, services or facilities. . ." Sub-clause (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, and . . ," Explanation 2 was also inserted by the Finance Act, 1973, retrospectively with effect from April 1, 1968, which reads as under :-- " Explanation 2.-For the purposes of Sub-clause (iii) and Sub-clause (viii) of Clause (b) expenditure incurred by an assessee engaged in the business of :-- (i) operation of any ship or other vessel, aircraft or vehicle ; or (ii) carriage of, or making arrangements for carriage of, passengers, livestock, mail or goods, on or in relation to such operation or carriage or arrangements for carriage (including in each case expenditure incurred on the provision of any benefit, amenity or facility to the crew, passengers or livestock) shall not be regarded as expenditure incurred by the assessee on the supply outside India of services or facilities." Sub-clause (iii) of Section 35B refers to any expenditure on supply or provision outside India of goods, services or facilities. Explanation 2 has circumscribed the ambit of exemption that it must not be pertaining to the carriage of or making arrangement for carriage of passengers, livestock, mail or goods. Even if the expenditure is in relation to operation/carriage or arrangement for carriage it shall not be regarded as expenditure on supply outside India of service or facility. Thus, Explanation 2 has excluded the carriage of goods which is the subject-matter of dispute in the present reference. The expenditure may be incurred in India in connection therewith or it may be incurred outside India or the carriage of such goods may be to their destination outside India. If the goods are carried outside India, then the freight has to be paid and in view of Explanation 2 the said expenditure shall not be regarded as expenditure incurred on supply outside India of services or facilities. Sub- Clause (viii) covers expenditure incurred on the performance outside India in connection with service incidental to the contract for the export. It has no relevancy so far as the present controversy is concerned and the relevant clause under which the deduction could have been considered is sub- Clause (iii) alone. The Explanation cannot be interpreted to include the freight charge paid as entitled for deduction under Section 35B. This matter was considered by this court in the case of Associated Stone Industries Ltd. v. CIT [1994] 210 ITR 821, wherein the dispute was with regard to freight and packing charges and it was held that they fell within the exclusive Sub-clause (iii) of Section 35B(1)(b), namely, on the carriage of such goods to their destination outside India and, therefore, no weighted deduction in respect of packing charges and freight was allowable. In view of the provisions of Section 35B(1)(b)(iii) read with the Explanation 2, we are of the view that the Tribunal was right in holding that the assessee was not entitled to claim weighted deduction of Rs. 8,29,518 being export expenses and Rs. 7,68,512 being export freight under Section 35B of the Income-tax Act. Consequently, the reference is answered in favour of the Revenue and against the assessee. No order as to costs.;