D.V. JUNNARKAR, A.M. ORDER assessee is company engaged in large scale export of engineering g o o d s manufactured by other manufacturers. During course of assessment proceedings it claimed relief under s. 35B of IT Act, 1961 ('the Act') in respect of expenses amounting to Rs. 3,45,69,974. One of items of expenditure included in this was relating to commission to overseas agents amounting to Rs. 1,78,83,30. In course of assessment made under s. 143(3) r/w s. 144B of Act, ITO observed that, following guidelines in Tribunal Special Bench decision in case of J.H. & Co. vs. Second ITO (1982) 1 SOT 150 (Bom) in IT Appeal Nos. 3255 and 3330 (Bom) of 1976-77 decided on 17th June, 1978, this item of expenditure along with some other items fully qualified for weighted deduction under s. 35B, meaning thereby that assessee was entitled to entire claim under s. 35B in respect of this item whereas in respect of some other items, assessee was entitled to claim to extent of 75 per cent ITO allowed assessee's claim 'as per last year's order and keeping in view directions issued by IAC, Companies Range-I, under s. 144B'. 2 . On perusal of assessee's record, CIT observed that ITO had allowed weighted deduction of Rs. 59,61, 10on amount of Rs. 1,78,83,301 being commission paid to overseas agents. CIT observed that deduction was allowed by ITO under s. 35B(1)(b)(iii) as claimed by assessee. According to him, under aforesaid provision of Act, weighted deduction was permissible in respect of expenditure incurred wholly and exclusively on distribution, supply or provision outside India of goods, services or facilities, where such expenditure was incurred before 1st April, 1978. As assessee's accounting period for present assessment year began on 1st April, 1978, as such, aforesaid commission incurred after that date was not eligible for relief under s. 35B. Further, according to him, deduction under s. 35B was also not admissible in view of Madras High Court decision in case of CIT vs. Southern Sea Foods (P) Ltd. (1982) 31 CTR (Mad) 23 : (1983) 140 ITR 855 (Mad). In opinion of CIT, therefore, ITO's order in allowing aforesaid relief of Rs. 59,61, 10was erroneous, relief having been granted without examining whether expenditure was eligible for relief under s. 35B. He, therefore, initiated proceedings under s. 263 of Act by notice dt. 11th Aug., 1983 calling upon assessee to show cause why order under s. 263 should not be passed by setting aside assessment order made by ITO and directing ITO to make fresh assessment in accordance with law and relevant facts. 3 . Thereafter, after hearing assessee's representatives and after considering their submissions, CIT passed order on 27th Aug., 1983 observing that no such deduction was permissible under s. 35B(1)(b)(iii) for any such expenditure incurred after 1st April, 1978 and, therefore, ITO erred in allowing deduction of Rs. 59,61, 10on this ground. Hence, he considered that assessment order of ITO for asst. yr. 1979-80 was erroneous insofar as it was prejudicial to interests of Revenue. He, therefore, set aside assessment. He directed ITO to make fresh assessment order in accordance with law and facts and after taking into account facts and circumstances of case and after making proper inquiries. ITO was directed to give reasonable opportunity to assessee of being heard. 4 . assessee has appealed against this order of CIT on various grounds. first ground is to effect that assessment having been made by ITO under s. 143(3) r/w s. 144B, it was not amenable to interference by CIT under s. 263. In this connection, it was urged that under scheme of s. 144B ITO was expected to submit draft of assessment order to IAC where there was difference of more than Rs. 1,00,000 between income as declared by assessee and income as proposed to be assessed by ITO. Copy of draft assessment order was expected to be furnished to IAC. After hearing objections, if any, of assessee, IAC was expected to give instructions to ITO. Once ITO made assessment under instructions from IAC issued under s. 144B, ITO's order merged with that of IAC's instructions under s. 144B and such order could not be interfered with by CIT under s. 263. Our attention is invited to observations made by ITO in assessment order to effect that decision in this respect was taken by ITO in view of instructions issued by IAC under s. 144B. 5 . On behalf of Revenue, our attention is invited to draft assessment order submitted by ITO to IAC and instructions of IAC dt. 23rd Sept., 1982 in this respect. It was stated on behalf of Revenue that ITO himself had proposed to grant relief under s. 35B in respect of this item of expenditure amounting to Rs. 1,78,83,301. Therefore, IAC had not issued any instructions under s. 144B with reference to this item of expenditure. In this connection, our attention was invited to Tribunal Special Bench decision in case of East Coast Marine Products (P) Ltd. vs. ITO (1983) 4 ITD 73 (Hyd) in IT Appeal No. 1398 (Hyd) of 1980 decided on 16th March, 1983 wherein learned Members of Special Bench have held that, no doubt, ITO's order under s. 143(3) merged with IAC's instructions issued under s. 144B in respect of items on which there was dispute between ITO and assessee and where IAC had issued such instructions under s. 144B and, therefore, CIT could not interfere with such order under s. 263. But items in respect of which there was no dispute between ITO and assessee and IAC had not issued any instructions under s. 144B, ITO's order did not merge with IAC's instructions under s. 144B. CIT could interfere with ITO's order in respect of such items under powers vested in him under s. 263. 6 . We have carefully considered facts and circumstances of case and arguments on either side. We find that there was no dispute between assessee and ITO in respect of assessee's entitlement to relief under s. 35B as regards commission to overseas agents amounting to Rs. 1,78,83,301. ITO himself had proposed to allow relief under s. 35B claimed by assessee. Naturally, there were no instructions from IAC in respect of this item. Tribunal Special Bench decision in case of East Coast Marine Products (P) Ltd. (supra) will apply. We find that Tribunal Special Bench at Hyderabad has in this case considered entire case law on subject and arrived at decision that in such circumstances, CIT was justified in interfering with order of ITO under s. 263. No contrary decision even of Tribunal has been brought to our notice on behalf of assessee. even of Tribunal has been brought to our notice on behalf of assessee. We, therefore, reject assessee's objection on this ground. 7 . second objection on behalf of assessee is to wrong assumption of jurisdiction by CIT under s. 263. It is explained by learned counsel on behalf of assessee that CIT has proceeded on assumption that ITO had made allowance in assessment order under sub-cl. (iii) of s. 35B(l)(b). It is submitted that assessee had in return of income claimed relief under s. 35B without indicating sub-clause of s. 35B(1)(b). copy of relevant statement accompanying return of income has been shown to us. ITO has allowed relief under s. 35B following guidelines in Tribunal Special Bench decision in case of J. H. & Co. (supra). He has allowed it 'as per last year's order and keeping in view directions issued by IAC, Companies Range-I, under s. 144B '. learned counsel proceeded to point out that for year under consideration IAC has not issued any instructions under s. 144B in respect of this item as discussed in paragraph 6 above. It was submitted by learned counsel that even in preceding assessment year, i.e., for asst. yr. 1978-79, there was no dispute concerning this item and, therefore, IAC had no occasion to issue any instructions under s. 144B in respect of this item. He has furnished copy of instructions under s. 144B(4) dt. 16th April, 1977 for asst. yr. 1974-75 where IAC had issued directions for allowance of claim for relief under s. 35B in respect of expenditure of Rs. 15,51,043 for that assessment year on payment of commission to foreign agents again without reference to sub- clause of s. 35B(1)(b). Therefore, there were no instructions from IAC under s. 144B for present year as well as for earlier years for allowance of relief under sub-cl. (iii) of s. 35B(1)(b). 8. Thereafter, learned counsel has proceeded to point out that only other source from which ITO has taken any guidance for making this allowance suo moto in his order dt. 23rd Sept., 1982 under s. 35B was order of Special Bench of Tribunal in case of J.H. & Co. (supra) .The learned counsel has brought to our notice that in case of J.H. & Co. (supra) also Special Bench was concerned with admissibility of relief under s. 35B in respect of commission on foreign business. learned members recorded their decision in respect of this item in following terms : " commission payment in this case was to parties who brought about export sales. It was those parties who furnished information to assessee about foreign buyers and publicised assessee's goods to those buyers. It was they who brought together buyer and seller for concluding sales. It was through them that goods were supplied outside India. That being so this expenditure is allowable under sub-cls. (i) and (ii) of cl. (b) of sub-s. (1) of s. 35B. " From above extract it would be seen that allowance had been made under sub-cls. (i) and (ii) of s. 35B(1)(b). It was not under sub-cl. (iii). Therefore, if at all, ITO could be deemed to have made allowance under any particular sub-clause of s. 35B(1)(b) which were sub-cls. (i) and (ii) of s. 35B(1)(b) and not sub-cl. (iii) as presumed by learned CIT. 9. Further, pointing to contents of notice issued by CIT under s. 263, learned counsel has pointed out that CIT's objection to ITO's action in allowing relief under s. 35B was that sub-cl. (iii) of s. 35B(1)(b) was deleted from statute book w.e.f. 1st April, 1981. assessee's accounting period for assessment year began on 1st April, 1978. As such, expenditure incurred after that date by assessee was not eligible for deduction under s. 35B. Even in order under s. 263 of Act CIT in paragraph 8 has mentioned this as sole reason for holding that ITO was in error in allowing relief under s. 35B(1)(b)(iii) in respect of this expenditure. It was pointed out that sub-cl. (iii) of s. 35B(1)(b) was deleted from statute book w.e.f. 1st April, 1981 by Finance (No. 2) Act, 1980. Apparently, CIT was labouring under some misapprehension as to state of law even if assessee's claim fell under sub-cl. (iii) of s. 35B(1)(b). 1 0 . Apart from assessee's objection on wrongful assumption of jurisdiction under s. 263 by CIT, learned counsel for assessee has proceeded to support ITO's action in allowing this relief in case of assessee on facts and in circumstances of case as discussed earlier in this order. learned counsel has pointed out that assessee had made claim under s. 35B without indicating sub-clause of s. 35B(1)(b) under which assessee's claim was admissible. ITO had apparently allowed claim under sub-cls. (i) and (ii) as mentioned in paragraph 8 above. question, according to learned counsel, was whether in first instance Madras High Court decision in case of Southern Sea Foods (P) Ltd. (supra) in any manner disentitled assessee from claiming this relief. No doubt, Madras High Court had held that relief was not admissible to assessee under similar circumstances either under sub-cl. (ii), (iv) or (viii) of s. 35B(1)(b). Madras High Court also held that relief would not be admissible to that assessee even under sub-cl. (iii) as payment in that case was made in India. learned counsel pointed out that payments in instant case were made abroad to parties in respective countries with permission of RBI through RBI. Therefore, condition laid down under sub-cl. (iii) of s. 35B(1)(b) that payment should be made abroad and not in India did not hit assessee. As regards objection in case of Southern Sea Food (P) Ltd. (supra) to allowance being made under sub-cls. (ii), (iv) and (viii) of s. 35B(1)(b), learned counsel has referred to Bombay High Court decision in case of CIT vs. Eldee Wire Ropes Ltd. 1978 CTR (Bom) 296 : (1978) 114 ITR 485 (Bom). learned Judges had made it abundantly clear that ban on payments in India applied only to sub-cl. (iii) and not other sub-clauses. Further, reference was also made to another Bombay High Court decision in case of Universal Ferro & Allied Chemicals Ltd. vs. P.G.K. Warrier (1983) 143 ITR 959. Reference was also made to Tribunal decision dt. 15th July, 1976 in case of L.D. Ltd. [IT Appeal No. 1921 (Bom) of 1974-75) where payment of commission was held to be covered under sub-cls. (i) and (viii) of s. 35B(1)(b). As to services rendered by foreign agents, it was submitted that assessee had only one overseas office at Cairo. Since it did not have offices in any other country, it was necessary to have international marketing network which was achieved by appointment of agency in other countries. contribution made by this agent in promoting sale outside India of goods, services and facilities was demonstrated by steady growth turnover of assessee outside India, as indicated below : Total export Total commission paid by Asst. Asst. turnover of assessee to its overseas yr. assessee agents (Rupees in crores) 1974- 20.09 .16 75 1975- 32.20 .33 76 1976- 54.86 .67 77 1977- 81.94 .85 78 1978- 84.00 .88 79 1979- 84.00 1.79 80 payments to these agents were made abroad. As to nature of services rendered by these agents, learned counsel has placed before us copies of agreements with various agents from which it was pointed out that agents rendered following services : 1. to exert with diligence his best efforts to promote, expand, advance and develop foreign and export business of appellant and to that end a. explore and study market conditions prevailing in world markets ; b. establish business connection with prospective buyers and secure orders from them for purchase of appellant's products ; 2. to be responsible for sales negotiations covering entire range of activity including a. canvassing ; b. visiting prospective buyers and collect information regarding their requirements ; c. organising demonstrations of appellant's products and services ; d. obtaining offers and tenders ; e. creating specific Department for appellant to handle appellant's export business ; f. in course of time and as may be necessary, expanding establishment according to experience and requirements ; and g. generally, doing all such acts and things necessary and desirable for successful negotiation and finalisation of contracts and for promotion of appellant's export business ; 3. to render after-sales services during warranty period ; 4. to stock spare parts (relating to appellant's products) ; 5. to provide following services to appellant : a. facility of telex for receiving messages, fees of charge and transmitting messages, charged separately ; b. facility of letter/cable despatching by post and messenger services for collecting mail from post office and distributing local letters ; c. facility of Post Office Box and cable address ; d. staff time for above as well as for providing services regarding legal and corporate affairs, accounting supervision, keeping books of accounts as per local laws, auditing and taxation facilities ; e. all matters concerned with local Government agencies in fulfilment of local requirement. 11. On behalf of Revenue, it was pointed out that expenses were considered by ITO under sub-cl. (iii) of s. 35B(1)(b) as stated by CIT in his order. Further, CIT's order was not final. Observations were not conclusive. We have to judge on facts of case whether ITO's order was erroneous or not and it was erroneous and prejudicial to interests of Revenue, CIT had valid jurisdiction under s. 263 to interfere with order of ITO. Further, it was pointed out that assessee was constantly shifting grounds inasmuch as once it was claimed that assessee was eligible under sub-cls. (i) and (ii), sometimes it was stated that assessee was eligible for relief under sub-cl. (iv) and at times under sub-cl. (viii). assessee should be pinned down to specific provision under Act under which it was claiming relief. 12. On behalf of assessee, on rejoinder, it was pointed out that ITO had allowed claim under sub-cls. (i) and (ii), which has been upheld by Tribunal in various cases as admissible. assessee was eligible for relief under sub-cl. (iv) and also under sub-cl. (viii). Our attention was invited to Tribunal decision in case of Indian Hotels Co. Ltd. vs. ITO in IT Appeal No. 467 (Bom) of 1975-76 decided on 30th Sept., 1976. Tribunal has held in unambiguous terms that various sub-clauses of s. 35B(1)(b) were overlapping and assessee could be held to be entitled to relief under various sub-clauses at same time. Revenue had sought reference to High Court under s. 256(1) of Act, which was rejected. Having failed under s. 256(2) before Bombay High Court, Revenue approached Supreme C o u r t with special leave petition, which was also rejected. In circumstances, it was submitted that there was no substance in argument on behalf of Revenue that assessee had to make claim only under one sub-clause in respect of one specific item of expenditure and none other. 13. We have carefully considered facts and circumstances as to further objection on behalf of assessee to order of CIT. assessee had preferred claim under s. 35B without specifying sub-clause of s. 35B(1)(b). ITO had not indicated sub-clause under which he was allowing claim. On reference to material relied upon by him while framing assessment, it is patent that he has made allowance under sub- framing assessment, it is patent that he has made allowance under sub- cls. (i) and (ii) of s. 35B(1)(b). Therefore, in our opinion, CIT was in error in proceeding to hold that ITO had made allowance under sub-cl. (iii) of s. 35B(1)(b) and, therefore, order of ITO was erroneous. 1 4 . Coming to question whether ITO's order suffered from any infirmity which rendered his order erroneous and, therefore, prejudicial to interests of Revenue, we find that assessee had made aforesaid payment of Rs. 1,78,83,301 to non-resident parties in foreign countries through RBI for rendering services enumerated at end of paragraph 10 above. T h e ITO has allowed assessee's claim under sub-cls. (i) and (ii) of s. 35B(1)(b). On reference to s. 35B(1)(b), sub-cls. (i) and (ii) it is found that ITO could make such allowance if expenditure under consideration was for (i) advertisement or publicity outside India in respect of goods, services or facilities which assessee deals in or provides in course of his business, and (ii) obtaining information regarding markets outside India for such goods, services or facilities. On careful study of nature of duties performed by foreign agents enumerated in paragraph 10 above, it is clear that assessee was eligible for relief under s. 35B in respect of these payments under sub-cls. (i) and (ii) of s. 35B(1)(b). ITO's order did not suffer from any infirmity so as to render it erroneous and, hence, prejudicial to interests of Revenue. 15. During course of hearing before us, no doubt, assessee's counsel has argued that assessee was eligible for relief in respect of this expenditure under sub-cls. (iv) and (viii) as well. We do not propose to examine assessee's claim under these sub-clauses, because all that we are interested in knowing is whether ITO's action in allowing claim under sub- cls. (i) and (ii) suffered from any infirmity, to which our answer is in negative. 16. As to objection on behalf of Revenue on ground that assessee was pressing its claim under various sub-clauses of s. 35B(1)(b), in our opinion, assessee's argument on basis of Tribunal decision in case of Indian Hotels Co. Ltd. (supra), provides perfect answer. Since Tribunal decision in that case has been finally confirmed by Supreme Court decision, we do not propose to give any further time to this issue. 1 7 . Finally, therefore, in our opinion, ITO's order suffered from no infirmity whereby it could be held that his order was erroneous and prejudicial to interests of Revenue. Further, CIT's action in assuming jurisdiction under s. 263, on facts and in circumstances of present case, was totally unwarranted. 18. In result, appeal filed by assessee is allowed. *** TATA EXPORTS LTD. v. INCOME TAX OFFICER