INCOME TAX OFFICER v. SATYA INDUSTRIAL CORPORATION
[Citation -1987-LL-0128-7]

Citation 1987-LL-0128-7
Appellant Name INCOME TAX OFFICER
Respondent Name SATYA INDUSTRIAL CORPORATION
Court ITAT
Relevant Act Income-tax
Date of Order 28/01/1987
Assessment Year 1981-82
Judgment View Judgment
Keyword Tags substantive provision • development allowance • procedural in nature • method of accounting • judicial discipline • weighted deduction • domestic company • quality control • registered firm • special bench • foreign party
Bot Summary: The assessee's claim of weighted deduction in respect of inspection charges amounting to Rs. 15,737 was disallowed by the learned ITO with the following observations: Coming to inspecting charges amounting to Rs. 15,737, assessee's claim for the same is covered by rule 6AA of the Income-tax Rules, 1962. Such expenditure as referred to above is allowable for deduction under section 35B. However, till rule 6AA was framed by the CBDT on 1-8-1981 sub- clause of section 35B(1)(b) which reads as below becomes more or less inoperative: such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed. Since the above rule is clarificatory in nature, bringing in the above activities within the scope of section 35B, any pending assessment as on 1-8- 1981 has to be decided in the above manner and deduction has to be allowed if such expenditure otherwise qualifies the conditions prescribed in the substantive provisions, namely, section 35B. 3. If rule 6AA is intended to be substantive and operative with effect from the following assessment year, then the CBDT would make it clear and stipulate separate qualifying conditions, namely, expenditure incurred on or after 1-8-1981 on such activities as are referred to in rule 6AA. That being not the case the substantive provisions of section 35B will remain applicable to sub-clause of section 35B(1)(b) and the qualifying activities have to be considered in the light of rule 6AA and deduction has to be allowed in all eligible cases decided on or after 1-8-1981. For his reasons, he relied upon a decision of the Special Bench of the Tribunal in the case of J.H. Co. He was of the opinion that any claim pertaining to the period earlier to 1-8-1981 was not intended to be covered by this rule 6AA. The learned Accountant Member, on the other hand, held that the rule was clarificatory in nature and it was only an extension of the main section 35B, sub-clause, which remained inactive all these years without the proper procedure being prescribed by the Rules because sub-clause of section 35B(1)(b) would apply only to those activities which were prescribed by the Rules. The learned departmental representative, on the other hand, pointed out that lately in another decision in the case of Rainbow Travels Ltd. v. IAC another Bench of the Tribunal at Delhi had held that this rule 6AA is substantive in nature and following that view, he argued that I should hold that the rule is substantive and not procedural. In these three cases the Bench held that rule 6AA was procedural in nature on the ground that that rule must be held to be in continuation of section 35B and rule 6AA was retrospective in operation and would apply to all pending assessments.


appellant revenue by their present appeal challenge first appellate order dated 21-3-1983 of learned AAC, Agra for assessment year 1980- 81, inter alia, on following ground: "The learned AAC, Range-I, Agra has erred in law and on facts in directing ITO to allow weighted deduction under section 35B of Income-tax Act, 1961 in respect of inspecting charges amounting to Rs. 15,737." 2. By status, assessee is registered firm and accounting period is year ending 31-3-1981. method of accounting is mercantile. assessee's claim of weighted deduction in respect of inspection charges amounting to Rs. 15,737 was disallowed by learned ITO with following observations: "Coming to inspecting charges amounting to Rs. 15,737, assessee's claim for same is covered by rule 6AA of Income-tax Rules, 1962. I find that this rule has not come into force from 1-8-1981. question arises whether this rule is substantive or procedural. Had this rule been procedural it would apply to all pending assessments on that date. I find that this rule provides deduction in income and accordingly rule is not procedural and is substantive rule. In view of this position rule cannot apply to all pending assessments on 1-8-1981. Now question arises as to whether assessee will get relief for assessment year 1981- 82. I am of opinion that it is not allowable unless if this rule would have come into force on or before 1-4-1981, there may be cases where assessments 1981- 82 are taken up and decided prior to 1-8-1981. There cannot be any discrimination between assessment framed prior to that date and after this date. In view of this position, assessee's claim for deduction under section 35B is not allowable under rule 6AA for assessment year 1981-82." 3. disallowance was contested by assessee and it was argued before learned AAC that rule 6AA of Income-tax Rules, 1962 ('the Rules') framed by CWT, was no doubt inserted with effect from 1-8-1981, but was argued to be retrospective in operation. According to assessee's learned counsel before learned AAC, said rule was applicable in all pending assessments as same were framed in pursuant to provisions contained in section 35B of Income-tax Act, 1961 ('the Act'). learned AAC being convinced by arguments made before him held that inspection agency activities were incidental to execution of contract of supply of goods outside India and was, therefore, not disallowable under section 35B. payment was said to have been made by assessee to prospective buyers nominated by agency. With such understanding, learned AAC directed learned ITO to allow weighted deduction on amount of Rs. 15,737 said to have been spent by assessee in respect of inspection charges. 4. revenue is in appeal against said finding of learned AAC. On behalf of revenue, Shri M.K. Chakraborty, learned senior departmental representative, supported assessment order on point and further argued that rule 6AA as conferred certain rights was, therefore, substantive in nature and, therefore, cannot be of procedural nature at same time. It was also argued that said rule became operative with effect from 1-8-1981 and it is not shown that it was having retrospective operation. Our attention was also invited to paragraph 6 of Kanga and Palkhiwala's Law and Practice of Income-tax, Vol. 1 for explaining as to how statute should be interpreted. 5. On behalf of assessee, Shri K.C. Aggarwal, learned counsel, placed reliance on impugned order and further repeated and reiterated all arguments made before lower authorities. It was submitted that Special Bench of Tribunal, in case of Biju Patnaik v. WTO [1982] 1 SOT 623 (Delhi) found rule 1BB of Wealth-tax Rules, 1957, applicable to all pending assessments and, therefore, of retrospective nature. 6. We have heard arguments and perused record carefully. assessee's instant claim was under section 35B. In fact, to be more specific, claim was under sub-clause (ix) of clause (b) of sub-section (1) of said section. said sub-clause (ix) provides 'such other activities for promotion of sale outside India of such goods, services or facilities as may be prescribed'. 7. As very language of this sub-clause suggests, relief was allowable only after authorities concerned had prescribed. It means this particular clause was not activated along with remaining clauses of section. This is clear because in other clauses, there is no such rider. operation is straightaway and at once. On this point, Special Bench of Tribunal in case of J.H. & Co. v. Second ITO [1982] 1 SOT 150 (Bom.) is very specific and clear. In fact, Bench observed as under in said case: " . . . is not for us, in administering law, to rewrite section or to introduce into it any new kind of expenditure, however analogous it be to kinds of expenditure specifically referred to in its clause (b). For same reason, we are convinced that it is also not open to us to breath life into sub- clause (ix) of section 35B(1)(b) which has hitherto not been activated by rule- making authority, and bring within ambit of section, under its cover, other activities not covered by other sub-clauses. No doubt Legislature has delegated its authority to Central Board of Direct Taxes to prescribe 'other activities for promotion of sale outside India of such goods, services or facilities' as additions to those enumerated in sub-clauses (i) to (viii). But that in no way is to be understood as indicating that law-makers gave direction to Board to mandatorily prescribe for sphere of section all and every other kind of activities for promotion of sale outside India as are not covered by sub-clauses (i) to (viii). If that were intention, there was no need at all for subsection (1) of section to be specifically restrictive to expenditure referred to in clause (b) and again for cataloguing of such expenditure as done in various sub-clauses of that clause. It is purposeless to contend that in not activating sub-clause (ix) of section 35B(1)(b), Board has committed dereliction of duty imposed on it by Legislature. Where rule-making authority has not prescribed, as in this case, any further activities on authority of sub-clause (ix), it is only to be taken that in its wisdom it has thought it fit and necessary that ambit of beneficial provisions of section in form of weighted deduction be extended no further. In any event, by asking us to activate that sub-clause in manner pressed before us, assessees are requiring us in effect to legislate, rewrite and expand section, function which is far beyond us." (p. 159) 8. From above observation of Special Bench, it is clear that sub- clause (ix) of section 35B(1)(b) did not become operative before it was clause (ix) of section 35B(1)(b) did not become operative before it was prescribed by authority concerned. It is seen that authority prescribed operation of said clause with effect from 1-8-1981, i.e., date from which rule 6AA became operative. Thus any claim pertaining to period earlier to 1- 8-1981 appears to be not covered and, therefore, not allowable under section 35B(1)(b)(ix). We are concerned with assessment year 1981- 82, accounting period is year ending 31-3-1981. It is thus clear that assessee's accounting period ended earlier to rule coming into vogue. benefit of said rule, therefore, in our considered view was not allowable to assessee. learned ITO in our view, therefore, rightly negatived assessee's contention and learned AAC because of misconception of legal position vacated such finding. impugned order on this point, in our view, cannot be supported. 9. reference by learned counsel to finding in case of Biju Patnaik (supra) is altogether irrelevant and inapplicable. said rule is procedural in nature and in fact does not confer any substantive right. Whereas scope of rule 6AA is such that it confers certain rights and is, therefore, substantive in nature. Moreover, it is not retrospective in operation and, therefore, was only applicable with effect from 1-8-1981. 10. In light of preceding discussion, we quash impugned order on this point and, in fact, restore finding recorded by learned ITO. 11. In result, appeal is allowed. Per Shri V. Dongzathang, Accountant Member - I have carefully perused order of my learned brother. However, in my view, rule 6AA is procedural and applicable to all pending cases as on 1-8-1981. Section 35B is main substantive provision which prescribes qualifying conditions for entitlement to export markets development allowance. qualifying conditions as per section 35B(1)(a) and (b) are briefly as under: (a) assessee should be domestic company or person other than company who is resident; (b) expenditure should not be in nature of capital or personal and should be incurred before 1-3-1983 but after 29-2-1968; and (c) such expenditure should be wholly and exclusively for items referred to in section 35B(1)(b)(i) to (ix). 2. Such expenditure as referred to above is allowable for deduction under section 35B. However, till rule 6AA was framed by CBDT on 1-8-1981 sub- clause (ix) of section 35B(1)(b) which reads as below becomes more or less inoperative: "(ix) such other activities for promotion of sale outside India of such goods, services or facilities as may be prescribed." By rule 6AA CBDT prescribes following activities for purpose of export development allowance under sub-clause (ix) of clause (b) of sub-section (1) of section 35B: "(a) conducting of pre-investment surveys or preparation of feasibility studies or project reports: Provided that pre-investment surveys are conducted or feasibility studies are made or project reports are prepared on request in writing made by Central Government or foreign party to whom such goods, services or facilities are likely to be sold or provided by assessee; (b) maintenance outside India of warehouse for promotion of sale outside India of such goods; (c) maintenance of laboratory or other facilities for quality control or inspection of such goods: Provided that in case where only part of sales is made outside India, amount of expenditure incurred on maintenance of such laboratory or other facilities which shall qualify for deduction under clause (a) of sub-section (1) of section 35B shall not exceed amount which bears same proportion as value of turnover in respect of such exports bears to turnover of business in respect of which laboratory or other facilities are maintained; (d) purchase of foreign trade periodicals or journals related to business of assessee." Since above rule is clarificatory in nature, bringing in above activities within scope of section 35B, any pending assessment as on 1-8- 1981 has to be decided in above manner and deduction has to be allowed if such expenditure otherwise qualifies conditions prescribed in substantive provisions, namely, section 35B. 3. If rule 6AA is intended to be substantive and operative with effect from following assessment year, then CBDT would make it clear and stipulate separate qualifying conditions, namely, expenditure incurred on or after 1-8-1981 on such activities as are referred to in rule 6AA. That being not case substantive provisions of section 35B will remain applicable to sub-clause (ix) of section 35B(1)(b) and qualifying activities have to be considered in light of rule 6AA and deduction has to be allowed in all eligible cases decided on or after 1-8-1981. 4. appeal accordingly fails and is dismissed. ORDER UNDER SECTION 255(4) OF INCOME-TAX ACT, 1961 difference of opinion has arisen between us. matter is, therefore, being placed before Hon'ble Senior Vice President for being placed before worthy President for referring matter on point of difference to Third Member for determination, under section 255(4) of Act. point of difference is as under: "Whether, on facts and in circumstances of case, weighted deduction under section 35B(1)(b)(ix) of Act, read with rule 6AA of Income-tax Rules, 1962, in respect of inspection charges, amounting to Rs. 15,737 was allowable?" THIRD MEMBER ORDER Per Shri Ch. G. Krishnamurthy, Senior Vice President-This is matter referred to me by President of Tribunal under section 255(4) as Third Member to express my opinion on following point of difference that arose between learned Members, who heard this appeal constituting Delhi Bench 'E': "Whether, on facts and in circumstances of case, weighted deduction under section 35B(1)(b)(ix) of Act, read with rule 6AA of Income-tax Rules, 1962, in respect of inspection charges, amounting to Rs. 15,737 was allowable T' 2. My task is made much easier by fact that this matter is no longer res integra except that some Benches of Tribunal have expressed one view while others have expressed different view and all I have to do is to express m y agreement with view which is more appealing. Before I do so, it is necessary to refer to facts that gave rise to this difference of opinion. 3. assessee in this appeal is registered firm carrying on business of manufacture of industrial goods and their exports outside country. During course of assessment proceedings, assessee-firm claimed weighted deduction under section 35B in respect of inspection charges amounting to Rs. 15,737. assessee claimed this benefit by relying upon rule 6AA, which came into force with effect from 1-8-1981. It was inserted by Income-tax (Eighth Amendment) Rules, 1981. It is not necessary for me to reproduce entire rule over here for purpose of disposal of this matter except to state that controversy that arose before ITO and thereafter all through up to present stage is whether this rule is procedural or substantive in nature and operation. If this rule is procedural, it applies to all assessments pending on date when rule came into force whereas if it is held to be substantive, it would be applicable only for assessment year after rule was introduced. ITO held that this rule is substantive and not procedural and, therefore, did not apply to pending assessments. His reason was that as this rule provided for deduction in computing income, this rule ought to be substantive in character and nature and not procedural. So holding he denied claim of assessee. 4. However, on appeal, AAC, who decided assessee's appeal, held that this rule was procedural and would apply to pending assessments and, therefore, assessee was entitled to deduction. He also held that inspection was part of activity incidental to execution of contract of supply of goods outside India and, therefore, was covered by rule 6AA. Aggrieved by this decision revenue has filed further appeal before Tribunal urging that AAC was not justified in allowing weighted deduction under section 35B in respect of inspection charges. 5. That was how matter reached Tribunal. After considering arguments addressed to it both for and against this proposition, learned Judicial Member held that rule was substantive in character and not procedural. Therefore, ITO was justified in negativing claim of assessee. For his reasons, he relied upon decision of Special Bench of Tribunal in case of J.H. & Co. (supra). He was of opinion that any claim pertaining to period earlier to 1-8-1981 was not intended to be covered by this rule 6AA. learned Accountant Member, on other hand, held that rule was clarificatory in nature and it was only extension of main section 35B, sub-clause (ix), which remained inactive all these years without proper procedure being prescribed by Rules because sub-clause (ix) of section 35B(1)(b) would apply only to those activities which were prescribed by Rules. Since those activities were prescribed by rule 6AA, view taken by learned Accountant Member was that it was only extension of section 35B and it was in force even from earlier times when section 35B was brought on statute book. Though this was not his finding in so many words, that is how his reasoning appeared to me. 6. Now this matter has been referred to me as Third Member to resolve this difference of opinion. assessee did not present himself at time of hearing of this matter but only sent written arguments, wherein he pointed out that following Benches of Tribunal have taken view that this rule was procedural and not substantive and, therefore, following those views, matter should be decided in his favour: In cases of Agra Leatherite Ltd. [IT Appeal No. 4290 (Delhi) of 1986] of Bench 'A', Good Year Shoe Factory [IT Appeal 4621 (Delhi) of 1986] of Bench V and Rajasthan Charma Kala Kendra [IT Appeal No. 5231 (Delhi) of 1984] of Bench 'D'. 7. learned departmental representative, on other hand, pointed out that lately in another decision in case of Rainbow Travels (India) (P.) Ltd. v. IAC another Bench of Tribunal at Delhi had held that this rule 6AA is substantive in nature and following that view, he argued that I should hold that rule is substantive and not procedural. He also pointed out that in later decision, Bench relied upon Special Bench decision of Tribunal in case of Rajapalayam Mills Ltd. v. ITO [1986] 18 ITD 114 (Mad.) and as Special Bench decision was relied upon by this Bench, this view is entitled to more respect and deserves to be followed rather than views expressed by other Benches, which did not have benefit of Special Bench decision of Tribunal or in any case did not refer to it. 8. I have gone through orders passed by four Benches. It is true, as pointed out by learned departmental representative, that in earlier three orders, there was no reference made to decision of Special Bench of Tribunal. But, however, in these three cases Bench held that rule 6AA was procedural in nature on ground that that rule must be held to be in continuation of section 35B and, therefore, rule 6AA was retrospective in operation and would apply to all pending assessments. But these decisions were given in April, May and July 1986 whereas latest decision was given on 22- 10-1986. In this decision reliance was placed on decision in case of Rajapalayam Mills Ltd. (supra). By referring to facts of Rajapalayam Mills Ltd.'s case (supra) Bench took view that rule 6AA must be held to be substantive in nature and not procedural. I may also point out that this Bench placed reliance upon another decision of Special Bench of Tribunal, namely, in case of J.H. & Co. (supra) in support of its conclusion. In view of fact that latest order of Tribunal passed by Delhi Benches was based upon decision given by Special Bench of Tribunal, I thought it would be more appropriate and in keeping with judicial discipline to follow that view in preference to view expressed by other three Benches. I am not entering into discussion part at all as that exercise was already made by my learned brothers who delivered their judgments and it is idle to embark upon discussion all over again. discussion all over again. 9. Agreeing, therefore, with view expressed by Tribunal in case of Rainbow Travels (India) (P.) Ltd. (supra) it appeared to me that view taken by learned Judicial Member is correct and I agree with it. 10. Now matter will go before regular Bench, who heard this appeal originally, for decision according to majority view. *** INCOME TAX OFFICER v. SATYA INDUSTRIAL CORPORATION
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