N.K. AGRAWAL, J.
1. The following question of law has been referred by the Income-tax Appellate Tribunal (for short "the Tribunal"), at the instance of the Department under Section 256 (1) of the Income-tax Act, 1961 (for short, "the Act"), in I. T. R. No. 72 of 1986 :
"whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing weighted deduction under Section 35b in respect of packing credit interest ?"
2. In the other two references No. 9 of 1987 (CIT v. Raj Bahadur Knitting Works) and No. 95 of 1986 (CIT v. Avon Cycles (P.) Ltd.) an identical question of law has been referred in each. In both these references, the relevant assessment year is 1980-81.
3. The facts herein are being discussed as are found in I. T. Reference No. 72 of 1986, relating to the assessment year 1979-80.
4. The assessor?s main business was the export of hosiery goods to the U. S. S. R, Local sales were also made. Besides, the assessee earned spinning charges also. A return of income for the assessment year 1979-80 (accounting year ending on March 31, 1979), was filed declaring a total income at Rs. 6,06,901. The assessee claimed weighted deduction under Section 35b of the Act on the full amount of the expenditure, namely, foreign traveling, commission to wool and woolen export promotion council, export promotion and E. C. G. Commission. Weighted deduction was also claimed on salary, printing, postage, traveling in India, etc. , on proportionate basis. The Assessing Officer allowed weighted deduction on foreign traveling and export promotion expenses. The claim for weighted deduction was declined by the Assessing Officer on other items.
5. The assessee went in appeal before the Commissioner of Income-tax and obtained some relief, against which the Department went in appeal before the Tribunal. The assessee filed cross-objections and raised an additional ground before the Tribunal. The assessee, in that additional ground so raised, claimed weighted deduction on the packing credit interest. The claim for weighted deduction on this expenditure had been made neither before the Assessing Officer nor the Commissioner of Income-tax. The Tribunal admitted the additional ground raised by the assessee and allowed weighted deduction on packing credit interest in the light of a certificate from the Punjab National Bank.
6. Shri B. S. Gupta, learned senior counsel for the Department, has, at the outset, argued that the assessee had failed to give necessary details in order to show as to what were the services rendered by the bank for which packing credit interest was paid. In the absence of requisite information on record, it would not be appropriate to allow weighted deduction on the packing credit interest. Shri Gupta has further argued that the taking of a loan by the assessee from the bank to meet manufacturing expenses of the items which had been exported by the assessee would not enable the assessee to claim weighted deduction on the amount of interest paid on such loan.
7. Shri S. S. Mahajan, learned counsel for the assessee, has on the other hand, contended that packing credit interest was an eligible expenditure for the purposes of weighted deduction under Sub-clause (viii) of Clause (b) of Section 35b (1) of the Act because it was an expenditure in connection with the execution of a contract for the supply outside India of the goods by the assessee.
8. The Finance Act, 1968, made provisions in Sections 55b and 35c of the Act for the grant of export markets development allowance and agricultural development allowance in computing the profits and gains from business. Under Section 35b, the assessee, who incurred expenditure under specified heads for development of export markets for the Indian goods on a long-term basis, was entitled to a weighted deduction of a sum equal to 1 1/3 times the amount of the qualifying expenditure.
9. Sub-clauses (i) to (ix) of Clause (b) of Section 35b (1) specified the various activities on which the assessee could incur expenditure and claim weighted deduction. So far as general administrative expenses are concerned, these may qualify for weighted deduction only to the extent these could be co-related to any of the activities listed in those sub-clauses. If an assessee claimed the benefit of weighted deduction, the onus squarely rested upon him to satisfy the revenue authorities that the purpose for which the expenditure concerned was incurred, fell within any of the sub-clauses of Clause (b) of Section 35b (1) of the Act. If he could not establish this, he was not entitled to any weighted deduction. It is further required to be established by the assessee that the expenditure had been incurred wholly and exclusively for the specified purposes.
10. What Section 35b required was that the assessee must establish that the expenditure was incurred for the specified activity. The burden is on the assessee to prove that fundamental fact.
It was not sufficient that the assessee sold goods to foreign buyers or it was assisted by a bank or a commission agent in connection with the manufacture or sale of those goods. The burden was on the assessee to prove that the commission paid was wholly and exclusively for the specified activities conducted outside the country. The object of the special concession allowed under Section 35b was to facilitate the export trade.
11. In the case of the assessee in hand, it has not been explained by the assessee before the Revenue authorities as to what was the nature of service rendered by the bank for which packing credit interest was paid. If the bank had rendered or performed any service outside the country, Sub-clause (viii) of Clause (b) of Section 35b (1) would come to the aid of the assessee. If, on the other hand, the bank had advanced certain loan to the assessee in connection with the manufacture of the goods to be exported, that would not be a service by the bank outside India. It is necessary that the expenditure should be incurred by the assessee wholly and exclusively on the distribution, supply or provision to foreign countries of goods, services or facilities. The allowance given under Section 35b was an amount equal to 1 1/3 times the amount of the qualifying expenditure. The basic criteria to attract Section 35b or Section 37 (1) are more or less similar. The expenditure must not be a capital expenditure or personal expenses of the assessee.
It should be wholly and exclusively for the purposes of the business. Eligibility of an expenditure is first to be tested with reference to Section 35b.
12. Shri B. S. Gupta, learned senior counsel for the Department, has placed reliance on the decisions of four High Courts. In Brooke Bond India Ltd. v. CIT  193 ITR 390, the Calcutta High Court was examining the assessor?s claim with regard to packing credit interest payable on account of loans allowed at a confessional rate of interest to the assessee. The asses-see had contended that the loan was taken for the purpose of meeting the expenses prior to the shipment of the goods. Overdue interest was charged by the banks in respect of discounted export bills met by the buyer beyond due dates or delayed remittances by the buyer's banker.
There was no finding that the bank had performed any service outside India. It was held that the assessee could not claim weighted deduction in respect of that expenditure.
13. The next decision relied upon by Shri Gupta is from the Gujarat High Court in Test eels Ltd.
v. CIT  205 ITR 230. There also the assessee had incurred expenditure in paying interest to the bank on the advances and loans given for purchase of raw materials. It was noticed that no services were performed in taking credit or the loan facility from the bank in order to purchase raw materials for the manufacture of goods. It was also found that if any services were performed, those were not performed outside India. It was, therefore, held that the interest paid by the assessee to the bank on the credit or loan facility would not be covered by Sub-clause (viii) of Clause (b) of Section 35b (1) of the Act.
14. The Madras High Court has also taken a similar view in connection with the weighted deduction on interest on export packing credit in Lucas TVS Ltd. v. CIT  217 ITR 382.
The Bombay High Court in CIT v. Jaipur Metals and Electrical Ltd.  215 ITR 413, also took the same view on interest paid by the assessee on advances from banks for manufacture of goods which were exported.
15. Shri S. S. Mahajan, learned counsel for the assessee, has heavily relied on a decision of the Madhya Pradesh High Court in CIT v. Vippy Solvex Product Private Limited  159 IT r 487. The assessee therein manufactured and exported certain goods and claimed weighted deduction on certain expenditure including interest paid to the bank on export packing credit account. The assessor?s plea was that expenditure on interest paid to the bank in the export packing credit account was incurred for promoting export sales. A certificate was furnished by the bank stating that the assessee had maintained with it an export packing credit loan account.
Advances from this account were given to the assessee for the purchase of raw materials for manufacturing goods to be exported out of India. It was held that, on the basis of the certificate issued by the bank, the assessee was entitled to claim weighted deduction under Sub-clause (viii)
of Clause (b) of Section 35b (1) of the Act. The High Court observed that the expenditure was incurred in connection with the execution of a contract for the supply of goods outside India.
There is, however, no discussion as to whether the bank had performed any service outside India as was required as a pre-condition in Sub-clause (viii) of Clause (b) of Section 35b (1 ). In this light, the decision relied upon by Sh. Mahajan could not bring out a correct interpretation of Sub-clause (viii ). Sub-clause (viii) of Clause (b) of Section 35b (1) reads as under :
"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 ;"
16. A plain reading of the aforesaid sub-clause would make out
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that three conditions must be fulfilled to claim weighted deduction there under. These conditions are as under : (i) the service must be performed outside India ; (ii) the service should be rendered in connection with, or incidental to, the execution of any contract ; and (iii) the activity should be for the supply of goody, services or facilities to a foreign country. 17. If any of the three conditions is not available in connection with any activity on which expenditure is incurred by the assessee, it would not attract Sub-clause (viii ). 18. In the case of the present assessee, there is no evidence on record to show that the bank had rendered any service outside India. The loan advanced by the bank may be in connection with the execution of any contract for the supply of goods to a foreign country by the assessee, but that would not make the assessee entitled to claim weighted deduction, unless it is also shown that the services were performed by the bank outside India. 19. In the result, the question is answered in the negative, i. e. , in favour of the Revenue and against the assessee.