w w w . L a w y e r S e r v i c e s . i n



Kansal Woollen & Hosiery Mills (P) Ltd v/s Commissioner of Income Tax


Company & Directors' Information:- O P K WOOLLEN MILLS PVT LTD [Active] CIN = U74899DL1973PTC006597

Company & Directors' Information:- J G HOSIERY PRIVATE LIMITED [Active] CIN = U18101TZ2001PTC009707

Company & Directors' Information:- R S P WOOLLEN MILLS PRIVATE LIMITED [Strike Off] CIN = U17116UR1985PTC006986

Company & Directors' Information:- K D S HOSIERY PRIVATE LIMITED [Active] CIN = U18101PB2001FTC024327

Company & Directors' Information:- J M HOSIERY MILLS PRIVATE LIMITED [Active] CIN = U17299PB2000PTC023753

Company & Directors' Information:- R M H HOSIERY PRIVATE LIMITED [Active] CIN = U17125DL2007PTC167271

Company & Directors' Information:- P T M HOSIERY PVT LTD [Active] CIN = U52322WB1994PTC062394

Company & Directors' Information:- M G HOSIERY PRIVATE LIMITED [Active] CIN = U17124TZ2002PTC010195

Company & Directors' Information:- J J HOSIERY MILLS PRIVATE LIMITED [Active] CIN = U45203WB2000PTC091570

Company & Directors' Information:- KANSAL WOOLLEN AND HOSIERY MILLS PRIVATE LIMITED [Active] CIN = U74899DL1976PTC013412

Company & Directors' Information:- T C M WOOLLEN MILLS PVT LTD [Strike Off] CIN = U17117PB1967PTC002724

Company & Directors' Information:- N P WOOLLEN MILLS PRIVATE LIMITED [Active] CIN = U17113PB2002PTC025308

Company & Directors' Information:- H S WOOLLEN MILLS PVT LTD [Active] CIN = U74899DL1989PTC037606

Company & Directors' Information:- S. R. WOOLLEN MILLS PVT LTD [Active] CIN = U45202PB1985PTC006251

Company & Directors' Information:- O K HOSIERY MILLS PVT LTD [Active] CIN = U99999DL1980PTC010979

Company & Directors' Information:- C B WOOLLEN MILLS PRIVATE LIMITED [Active] CIN = U74899DL1989PTC035913

Company & Directors' Information:- D D HOSIERY PVT LTD [Active] CIN = U18101WB1973PTC028694

Company & Directors' Information:- M. B. HOSIERY PRIVATE LIMITED [Active] CIN = U18101WB2008PTC125110

Company & Directors' Information:- A V WOOLLEN MILLS PRIVATE LIMITED [Strike Off] CIN = U17115HR1988PTC030276

Company & Directors' Information:- R R HOSIERY PRIVATE LIMITED [Active] CIN = U18101MH1984PTC034394

Company & Directors' Information:- R B WOOLLEN MILLS PVT LTD [Strike Off] CIN = U17117PB1983PTC005427

Company & Directors' Information:- K D WOOLLEN MILLS PRIVATE LIMITED [Active] CIN = U17100MH1973PTC016781

Company & Directors' Information:- K K HOSIERY PRIVATE LIMITED [Active] CIN = U18204MH2014PTC251777

Company & Directors' Information:- B B HOSIERY PRIVATE LIMITED [Strike Off] CIN = U74999MH2015PTC267158

Company & Directors' Information:- M C S HOSIERY PRIVATE LIMITED [Strike Off] CIN = U51311WB2001PTC093781

Company & Directors' Information:- THE INDIA HOSIERY MILLS LTD [Strike Off] CIN = U17121WB1949PLC018383

Company & Directors' Information:- R G WOOLLEN MILLS PRIVATE LIMITED [Strike Off] CIN = U17117RJ2004PTC019197

Company & Directors' Information:- N M WOOLLEN MILLS PVT LTD [Strike Off] CIN = U17117PB1993PTC013615

Company & Directors' Information:- S P HOSIERY PVT LTD [Strike Off] CIN = U51311PB1985PTC006113

Company & Directors' Information:- G K WOOLLEN MILLS PVT LIMITED [Active] CIN = U17123PB1993PTC013084

    Appeal No. -------

    Decided On, 15 January 1999

    At, High Court of Punjab and Haryana

    By, THE HONOURABLE MR. JUSTICE G.C. GARG & THE HONOURABLE MR. JUSTICE N.K. AGARWAL

    For the Appearing Parties: P.C. Jain, Pankaj Jain, R.P. Sawant, Rajesh Bindal, Advocates.



Judgment Text

N.K. AGRAWAL, J.


1. These are references made by the Tribunal, Chandigarh Bench (the 'tribunal') under s. 256 (1) of the IT Act, 1961 (for short, the 'act'), one at the instance of the asses see and the other on the request of the Revenue, seeking opinion of this Court on the following questions of law for the asst. yr. 1981-82 :


(a) Questions at the instance of the asses see :


"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that expenses of Rs. 1,43,837 incurred on 'sample designing' in the context of the asses see's export business, are manufacturing expenses within the meaning of the Expln. 2 to s.


35b (1) (b) of the IT Act, 1961 ?


2. Whether, on the facts and the circumstances of the case, the Expln. 2 has been properly interpreted/construed by the Tribunal in withholding legitimate weighted deduction under s. 35b (1) (b) (i) on sample designing, which has otherwise been allowed as a business expense in computing the total income of the asses see-company by the Assessing Authority ?"


(b) Question at the instance of the Revenue :


"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing weighted deduction under s. 35b in respect of the expenses incurred by the assessee on quality control, advertisement, subscription, free samples, export promotion, MFHC commission and WEEP commission under sub-cl. (ix) of cl. (b) of sub-s. (1) of s. 35b added by the Finance Act, 1980 w. e. f. 1st April, 1981 r/w r. 6aa inserted by the IT (8th Amendment) Rules, 1981 w. e. f. 1st August, 1981 ?


2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing depreciation on generator @ 30 per cent instead of 10 per cent as allowed by the ITO ?"


2. The asses see was a public limited company and was engaged in the business of hosiery goods. The asses see was exporting goods to Russia besides making sales within India. The asses see claimed deduction under s. 35b of the Act at Rs. 1,83,839. This deduction was claimed in respect of the expenditures on samples designing, quality control, inspection, advertisement, foreign tours, etc. Keeping in view the amendment made in s. 35b by Finance (No. 2) Act, 1980 w. e. f. 1st April, 1981, the AO allowed deduction only in respect of the expenditure on foreign tours amounting to Rs. 1,45,725. Thus, the AO allowed relief at Rs. 48,575 against the asses see's claim at Rs. 1,83,839.


3. The asses see went in appeal before the CIT (A) with the plea that the AO had ignored to consider the claim for a deduction under sub-cl. (ix) of cl. (b) of s. 35b (1) r/w r. 6aa of the It Rules, 1962 (for short, the 'rules' ). The CIT (A) agreed with the asses see and allowed deduction in respect of the expenditures on quality control, advertisement, export promotion, subscription for foreign trade periodicals and journals and free samples. The CIT (A) further allowed part relief in respect of samples in the closing stock. The asses see had not declared the value of samples left in the closing stock at the end of the accounting year. The AO had made addition of Rs. 41,692 in respect of 1/3rd stock of the samples manufactured by the asses see during the year and left in the closing stock. On a specific plea raised about the rate, the CIT (A) granted the relief at Rs. 8,797 after adopting the rate at Rs. 110. 93 per kilogram in place of the rate adopted by the AO at Rs. 140 per kilogram. Thus, addition was reduced from Rs. 41,692 to Rs. 32,955.


4. Both the asses see and the Revenue filed appeals before the Tribunal which deleted the entire addition made on account of the valuation of the samples in the closing stock. The Tribunal agreed with the asses see's plea that three sets of samples were manufactured for showing them to the foreign buyers. One sample was kept at the buyers, office at Delhi, one was sent to Russia and the third sample was retained to manufacture the goods on the basis of that sample. The Department challenged the order of the CIT (A) whereby deductions under s. 35b were allowed in respect of the expenditures on quality control, advertisement, subscription, free samples and export promotion, etc. The plea taken was that the CIT (A) had wrongly allowed deduction under r. 6aa of the Rules. Expenditures had been incurred during the accounting year ending on 31st March, 1981, and, therefore, the same did not qualify for deduction under the said rule, which was introduced w. e. f. 1st August, 1981. The Tribunal, however, took the view that the assessment year under appeal was 1981-82 which commenced from 1st April, 1981. Since the new r. 6aa had come into force from 1st August, 1981, it covered the entire asst. yr. 1981-82 as the assessment was pending on 1st August, 1981 at the appellate stage. The Department's plea was, therefore, rejected by the Tribunal and the deduction allowed by the CIT (A) on various expenditures under sub-cl. (ix) of cl. (b) of s. 35b (1) r/w r. 6aa was upheld. The Tribunal, in asses see's appeal, also allowed deduction under s. 35b in respect of the expenditures incurred on samples and also on the amount of commission paid.


5. The two questions, as reproduced above, referred to this Court at the instance of the asses see relate to the expenditure by the asses see on sample designing.


6. Sec. 35b of the Act permits the benefit of export markets development allowance to a company on certain specified expenditures incurred on the distribution, supply or provisions outside India of the goods, services or facilities. Clause (b) of sub-s. (1) of s. 35b specifies the expenditures, which would qualify for this weighted deduction, incurred by the taxpayer during the previous year wholly and exclusively on the activities mentioned in sub-cls. (i) to (ix ). The expenditures which qualify for such deduction are those incurred on the activities exercised outside India for the development of export markets for Indian goods. This provision was not meant to cover the expenditures which the taxpayers incurred on the activities inside India for his export business except where those were incidental to the activities outside India, such as the preparation and submission of tenders referred to in sub-cl. (v) or the furnishing of samples or technical information referred to in sub-cl. (vi) of cl. (b ). Under sub-cl. (ix) of cl. (b), it was open to the Government to notify in the IT Rules any other activities for the promotion of sale outside India. On such notification, expenditures on such activities will also qualify for the weighted deduction. Thus, it is clear that deduction under s. 35b is admissible with reference to the qualifying expenditures only.


7. Sub-cl. (vi) of cl. (b) of s. 35b (1) relates to expenditures incurred on samples or technical information which reads as under :


" (vi) furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities;"


8. Under the above sub-clause, expenditures incurred by the asses see on the furnishing of samples or technical information for the promotion of sale to a person outside India are eligible for deduction. The asses see had claimed deduction in respect of the samples left in the closing stock at the end of the accounting year. It is, thus, apparent that the samples in respect of which deduction was claim under s. 35b were not the samples furnished to a person outside India. The AO had declined to allow deduction of the value of the samples lying in the closing stock. The CIT (A) allowed part relief to the asses see by adopting a lower rate for the purpose of valuation.


The Tribunal, however, allowed the entire claim of the asses see in respect of closing stock of the samples. Since the asses see had claimed deduction in respect of closing stock of the samples, sub-cl. (vi) of cl. (b) is not attracted.


9. It is further to be noticed that sub-cls. (ii), (iii), (v), (vi) and (viii) of cl. (b) of s. 35b (1) of the Act were omitted by the Finance (No. 2) Act, 1980 w. e. f. 1st April, 1981. In the Notes on Clauses appended to the Finance (No. 2) Act, 1980 [reproduced in (1980) 123 ITR (St.) 122] it has been stated in respect of the aforesaid amendment, whereby five sub-clauses of cl. (b) of s.


35b (1) were omitted, as under :


"these amendments will take effect from 1st of April, 1981, and will accordingly apply in relation to the asst. yr. 1981-82 and subsequent years. "


10. Since the asses see claimed deduction in respect of sample designing for the asst. yr. 1981-82, benefit under sub-cl. (vi) of cl. (b) of s. 35b (1) could not be made available to him inasmuch as the said sub-clause had been omitted from the asst. yr. 1981-82.


The claim made by the asses see in respect of sample designing is also not admissible in view of the following Expln. 2, which was inserted below sub-cl. (b) of s. 35b (1) by Finance (No. 2)


Act, 1980 w. e. f. 1st April, 1981 :


"explanation 2 : For removal of doubts, it is hereby declared that nothing in cl. (b) shall be construed to include any expenditure which is in the nature of purchasing and manufacturing expenses ordinarily debatable to the trading or manufacturing account and not to the P&l a/c. "


11. Under the above Explanation, expenditures in the nature of purchasing and manufacturing expenses which are ordinarily debatable to the trading or manufacturing account are not eligible for deduction under cl. (b) of s. 35b (1) of the Act. The asses see had claimed deduction of the cost of the sample designing. There is nothing on record to show as to why the cost of manufacturing the samples was not debitable to the manufacturing account. In the light of the above Explanation, the cost of the sample designing would not qualify for deduction.


12. Learned counsel for the asses see has argued that sub-cl. (i) of cl. (b) of s. 35b (1) permitted deduction in respect of advertisement or publicity outside India. Since the samples had been manufactured for the purpose of advertisement outside India, deduction was allowable under sub-cl. (i ). Reliance has been placed on a decision of the Karnataka High Court in Gokuldas Exports vs. CIT (1993) 200 ITR 401 (Kar) : TC 15r. 489, wherein it was held that if the purpose of advertisement could be achieved by sending samples abroad, there was absolutely no reason why such an act of sending samples should be confined to sub-cl. (vi) alone.


13. The deduction claimed by the asses see related to the value of the closing stock of the samples. There is nothing on record to show that the deduction had been disallowed in respect of the samples furnished to a buyer outside India. The asses see had divided the samples into three categories. One set of samples was kept at the Delhi office of the buyers, another set of samples was sent to Russia and the third set of samples was kept at the manufacturing unit of the asses see. The AO had disallowed deduction in respect of the third set of samples which was retained by the asses see at his manufacturing unit and was shown in the closing stock. The third set of samples was not furnished to the foreign buyers. Sub-cl. (i) of cl. (b) of s. 35b (1) was, thus, not attracted, because it was not a case of sending of samples by way of advertisement or publicity outside India.


14. Learned counsel for the asses see has also placed reliance on a decision of the Madras High Court in Lucas TVS Ltd. vs. CIT (1996) 217 ITR 382 (Mad ). After considering r. 6aa of the Rules, it was held that the said rule was a clarificatory rule in respect of the pre-investment surveys, preparation of feasibility studies or project reports. Clause (a) of r. 6aa was examined in the light of sub-cl. (vi) of cl. (b) of s. 35b (1) and it was held that cl. (a) of r. 6aa being declaratory in nature was retrospective in its operation. With respect, we are unable to take the same view. As has been noticed earlier, sub-cl. (vi) of cl. (b) of s. 35b (1) was omitted w. e. f. 1st April, 1981 whereas r. 6aa was inserted in the Rules by the IT (Eighth Amendment) Rules, 1981, w. e. f. 1st August, 1981. Thus, r. 6aa came into force much after the omission of sub-cl.


(vi) of cl. (b) of s. 35b (1) of the Act. Rule 6aa was, therefore, not in the nature of a declaratory or clarificatory rule so far as the omitted sub-cl. (vi) of cl. (b) of s. 35b (1) was concerned. Since sub-cl. (vi) of cl. (b) had been omitted earlier, r. 6aa could not be treated to be in the nature of a clarificatory rule for a substantive provision of the Act, which was no more on the statute book.


Further, r. 6aa was framed under sub-cl. (ix) of cl. (b) of s. 35b (1 ). The said sub-clause reads as under :


" (ix) such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed. "


It would, thus, appear that under sub-cl. (ix), the Government had been empowered to specify other activities for the promotion of sale outside India for the purposes of weighted deduction.


Thus, sub-cl. (ix) of cl. (b) was in the nature of a residuary provision for the purpose of adding more activities to those already specified in sub-cls. (i) to (viii ). The Government had the authority to specify more activities for the purposes of deduction under s. 35b of the Act. Thus, r. 6aa, framed under sub-cl. (ix) of cl. (b) of s. 35b (1), was not in the nature of a clarificatory rule but was a distinct and independent provision specifying more qualifying activities for the purposes of weighted deduction.


15. The accounting year of the asses see ended on 31st March, 1981. Rule 6aa was inserted in the Rules w. e. f. 1st August, 1981. Thus, the said rule was not available to the asses see for the claim of any deduction there under. Moreover, the claim in respect of sample designing does not fall under any of the clauses of r. 6aa. Under cl. (a) of the said rule, expenditures incurred on pre-investment surveys or the preparation of feasibility studies or project reports are eligible for deduction. Further, expenditures incurred on the maintenance of a warehouse outside India and also expenditures incurred on the maintenance of a laboratory or other facilities for quality control or inspection of the goods have also been declared as eligible for weighted deduction under cls. (b) and (c ). Purchase of foreign trade periodicals or journals relating to the business of the asses see qualifies for deduction under cl. (d) of the rule. Thus, expenditure on sample designing does not fall under r. 6aa of the Rules.


16. In view of the above discussion, questions No. (1) and (2), referred to this Court at the instance of the asses see, are answered to the effect that the manufacturing expenditure or the cost of samples was not eligible for deduction under s. 35b of the Act.


17. The questions referred to this Court for opinion at the instance of the Revenue relate to the deduction of expenditures incurred by the asses see on quality control, advertisement, subscription, free samples, export promotion, MFHC commission and WEEP commission under sub-cl. (ix) of cl. (b) of s. 35b (1) of the Act. Expenditure on advertisement is covered under sub-cl. (i) of cl. (b) if the advertisement or publicity is made outside India in respect of the goods exported by the asses see. Expenditure on samples furnished to a buyer outside India attracts sub-cl. (vi) of cl. (b ). The other expenditures, namely, expenditures on quality control, subscription, export promotion, MFHC commission and WEEP commission do not qualify for deduction as these expenditures do not fall under any of the sub-clauses of cl. (b) of s. 35b (1) of the Act.


18. The Supreme Court in CIT vs. Step well Industries Ltd. & Ors. (1997) 228 ITR 171 (SC), has held that deduction under s. 35b is not admissible in respect of commission paid or other expenditures incurred by the asses see unless any of the sub-clauses of cl. (b) of s. 35b (1) is attracted.


19. Learned counsel for the asses see has argued that the expenditure on quality control is covered under cl. (c) of r. 6aa of the Rules and expenditure on the purchase of foreign trade periodicals and journals qualified for deduction under cl. (d) of the aforesaid rule. Clause (c) of r.6aa refers to the expenditure on the maintenance of a laboratory or other facilities for quality control or inspection of goods exported by the asses see. Such expenditures usually qualify for deduction in proportion to the exports in relation to the total sales made by the asses see. Under cl. (d) of r. 6aa, deduction of expenditure on the purchase of foreign trade periodicals or journals relating to the business of the asses see is admissible.


20. As has been seen earlier, r. 6aa was inserted by the IT (Eighth Amendment) Rules, 1981 w. e. f. 1st August, 1981. The accounting year of the asses see ended on 31st March, 1981. Thus, the said rule was not in force during the accounting period of the asses see. In this light, cls. (c) and (d) of r. 6aa do not help the asses see as these clauses were not in force prior to 1st August, 1981, whereas expenditures had been incurred by the asses see prior to 1st April, 1981.


21. Learned counsel for the asses see has relied upon two decisions of the Calcutta High Court.


In CIT vs. Moran Tea Co. (India) Ltd. (1991) 194 ITR 429 (Cal), it was held that r. 6aa having come into force from 1st August, 1981, was operative during the previous year relevant to the asst. yr. 1982-83 and, therefore, the asses see was entitled to weighted deduction of expenditure incurred during the entire period of the relevant previous year and not merely to a pro rata deduction of expenditure incurred after 1st August, 1981. In CIT vs. Bishnauth Tea Co. Ltd.


(1992) 197 ITR 150 (Cal) : TC 15r. 502, the question relating to the retrospective effect of r.


6aa was examined and it was held that the rule did not have any retrospective operation in respect of the asst. yr. 1980-81. Thus, the aforesaid decisions of the Calcutta High Court do not help the asses see in respect of his plea that r. 6aa, which came into force w. e. f. 1st August, 1981, would be applicable to the accounting period ending on 31st March, 1981. Expenditures on quality control and on the purchase of foreign trade periodicals and journals are not eligible for deduction inasmuch as r. 6aa of the Rules would not be available to the aid of the asses see.


Expenditure on advertisement and samples would also not be eligible under sub-cl. (ix) of cl. (b)


of s. 35b (1) of the Act. It is not clear as to under what circumstances deduction of expenditures on advertisement and free samples was claimed and considered under sub-cl. (ix) of cl. (b) and not under sub-cls. (i) and (vi) of cl. (b) of s. 35b (1) of the Act. B

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e that as it may, expenditures on advertisement and samples do not qualify for deduction under sub-cl. (ix) of cl. (b) of s. 35b (1) of the Act. 22. Expenditures on export promotion and commission do not qualify for deduction under any of the sub-clauses of cl. (b) of s. 35b (1) of the Act. Question No. 1 at the instance of the Revenue is, therefore, answered in the negative, i. e. , in favour of the Revenue and against the asses see. 23. Question No. 2 at the instance of the Revenue relates to the depreciation on generator. 24. In Appendix I under r. 5 of the Rules, rates have been specified at which depreciation is admissible on various assets. In Part I, under the head, "iii. Machinery and Plant (not being a ship)", entry (xiii) under "d (10a)-Renewable energy devices" reads as under : " (xiii) Any special devices including electric generators and pumps running on wind energy. " 25. The rate of depreciation at 30 per cent has been specified for an electric generator or pump running on wind energy. The Tribunal has allowed depreciation at 30 per cent on the generator without ascertaining whether it was run on wind energy. Entry (xiii) lies under the head "d (10a)-Renewable energy devices'. It, therefore, leaves no room for any doubt that the special devices including electric generators and pumps mentioned in entry (xiii) are in the nature of renewable energy devices. An electric generator run on wind energy alone fall under Entry (xiii) and not other generators. The Tribunal would, therefore, be well advised to verify whether the generator, on which the asses see claimed depreciation at 30 percent was run on wind energy. 26. Question No. 2, referred to this Court for opinion at the instance of the Revenue, is, therefore, returned unanswered with a direction to the Tribunal to verify whether the generator of the asses see was run on wind energy. If that was so, depreciation at 30 per cent would be admissible; otherwise not. 27. The two reference petitions stand disposed of.
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