PADMANABHAN J.


The following question of law has been referred for our opinion by the Tribunal at the instance of the assessee.



"Whether the Tribunal was right in law in holding that the assessee was not entitled to the relief under section 35B of the Income-tax Act, 1961, for the assessment years 1969-70, 1970-71 and 1971-72 ?" *


The following question of law has been referred for our opinion by the Tribunal at the instance of the Revenue.


"Whether, on the facts and in the circumstances of the case, it has been rightly held that the payment of Rs. 26, 955 made by the assessee to the recognised provident fund of the employees of the company on account of the devaluation of the Indian rupee would be an allowable deduction under section 37 of the Income-tax Act, 1961 ?" *


The assessee is the United India Fire and General Insurance Company, Madras. It carries on general insurance business other than life insurance. For the assessment year 1969-70, the assessee claimed deduction of Rs. 7, 78, 001 under s. 35B of the Act. The amount represented one-third of the total working expenses of Rs. 23, 34, 303 expended by the assessee on its foreign branches for the year 1969-70. For the years 1970-71, the assessee claimed deduction of Rs. 8, 14, 282 and for the year 1971-72, it claimed deduction of Rs. 6, 27, 123 on the same basis. The deduction was claimed under the provisions of s. 35B of the Act. The ITO refused to allow the claim for deduction made by the assessee. On appeal by the assessee, the AAC dismissed the appeal. Thereupon, the assessee carried the matter in appeal before the Income-tax Appellate Tribunal. The question whether the assessee was entitled to the deduction claimed by it for the year 1969-70 was heard by the Tribunal in the first instance. The Tribunal by a majority held that the assessee was not entitled to any deduction under s. 35B of the Act. For the subsequent years, the Tribunal followed its earlier order and held against the assessee. Hence, the assessee obtained orders for referring the above question for our considerationBefore the ITO, there was a claim for deduction of Rs. 26, 955 described as "devaluation loss" for the assessment year 1969-70. The head office of the assessee-company was originally keeping the provident fund amount accumulated relating to its employees of the Singapore branch. Later on it transferred the same to the Singapore branch in pursuance of Singapore Central Provident Fund Ordinance, since it was obligatory for the trustees of the provident fund to invest the contributions in Singapore itself. The transfer was made soon after the devaluation of the Indian rupee, as a result of which the provident fund amount diminished in value when converted into Singapore dollars. Since there was demand by the employees of the Singapore branch that a part of the loss amounting to Rs. 26, 955 be made good, the assessee-company paid the same and claimed it as a deduction. The ITO disallowed the claim. On appeal, the AAC confirmed the disallowance. On further appeal before the Tribunal, the Tribunal held that the said expenditure was an expenditure incurred wholly for the purpose of the business and, therefore, the same should be allowed as a deduction under s. 37 of the I.T. Act, 1961. Thus, the Department obtained orders for referring the second question extracted above for our opinion.


Taking up the question referred to us at the instance of the assessee, Mr. T. V. Balakrishnan on behalf of the assessee argued that under s. 35B which was introduced with effect from lst April, 1968, by the Finance Act, 1968, domestic companies and also persons who are resident in India who incurred expenditure under specified heads to promote the sale outside India of any goods, services or facilities dealt with or provided by them in the course of their business, will be entitled to what is called an "Export Markets Development Allowance". The quantum of allowance will be a deduction of a sum equal to 1-1/3rd times the amount of such expenditure incurred during the previous year. Section 35B(1)(b) categorises the various items on which the company or the persons concerned have to incur expenditure wholly and exclusively. This allowance has come to be known as weighted deduction The assessee claims deduction on the ground that the amount had been spent on the maintenance of foreign branchesThe contention of the Revenue is that the assessee is not entitled to the weighted deduction claimed under S.. 35B in view of s. 44 of the Act read with r. 5 of the First Schedule.


Section 44 deals with computation of profits and gains of business of insurance companies. It reads as under:

"Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head 'Interest on securities ', 'Income from house property ', ' Capital gains', or 'Income from other sources ', or in section 199 or in sections 28 to 43A, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule." *


The effect of s. 44 is that the provisions of the Act relating to the computation of income chargeable under the heads "Interest on securities",

"Income from house property "," Capital gains "or" Income from other sources" *


will not apply in the case of computation of income from insurance business. Similarly, the provisions of s. 44 will apply notwithstanding the provisions contained in s. 199 or ss. 28 to 43A of the Act.


The section further states that the profits from the insurance business shall be computed in accordance with the rules contained in the First Schedule.


Section 35B of the Act reads as under.


"35B. Export markets development allowance.-(1) (a) Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th day of February, 1968, whether directly or in association with any other person any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee), referred to in clause (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year." *


The rest of the section has been omitted


The first contention of Mr. T. V. Balakrishnan is that s. 44 refers to ss. 28 to 43A. At the time s. 44 was enacted, s. 35B was not there in the statute book. Section 35B, as already shown, was introduced for the first time by the Finance Act, 1968. Consequently, it could not be said that the reference to ss. 25 to 43A in s. 44 took in s. 35B as well. In other words, the learned counsel argued that, since at the time of the enactment of s. 44, s. 35B was not in the statute book. Parliament would not have intended that s. 35B would also be taken in by s. 44, when it stated that s. 44 would prevail over ss. 28 to 43A. In this context, the learned counsel referred to the fact that s. 43A was inserted in the Act by the Finance Act 20 of 1967, and consequently s. 44 was also amended by including s. 43A


We are unable to accept the contention of Mr. Balakrishnan. No doubt, at the time s. 44 was introduced it mentioned only ss. 28 to 43. Section 43A was introduced by way of an amendment. Since s. 35B was introduced after s. 35A and since the section itself fell between ss. 28 to 43, it was unnecessary on the part of Parliament to amend s. 44 so as to include s. 35B also in it specifically. The fact that s. 44 was amended so as to include s. 43A also has no relevance to decide the question whether s. 35B could also be deemed to have been taken in within the ambit of s. 44 without a special mention being, made of s. 35B. The reason for amendment of s. 44 so as to include s. 43A after the insertion of s. 43A in the Act was because, otherwise, s. 43A could not be deemed to have been included in s. 44, when it referred to only ss. 28 to 43. The obvious reason is, s. 43A comes after s. 43. On the other hand, s. 35B falls between ss. 28 to 43A. In the circumstances, it was unnecessary on the part of Parliament to have again amended. s. 44 so as to specifically include s. 35B. We, therefore, overrule the contention of Mr. Balakrishnan that in view of the fact that after the insertion of s. 35B by the Finance Act, 1968, s. 44 too should have been amended so as to include s. 35B and that, inasmuch as that has not been done, s. 44 would not prevail over s. 35BApart from the above, we are of the opinion, that even assuming, without finding, that s. 35B could not be taken to be included in ss. 28 to 43A, as is now found, in s. 44, the assessee-company will not be entitled to the weighted deduction provided for under s. 35B. Section 44 clearly states that the profit and gains of any business of insurance including any such business carried on by a mutual insurance company or by co-operative society, shall be computed in accordance with the rules contained in the First Schedule.


The First Schedule is a complete code by itself. Part B of the First Schedule deals with insurance business other than life insurance. Rule 5 deals with the computation of profits and gains of insurance business other than life insurance. It reads as follows.


"5. Computation of profits and gains of other insurance business.The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Controller of Insurance, subject to the following adjustments


(a) subject to the other provisions of this rule, any expenditure or allowance which is not admissible under the provisions of sections 30 to 43A in computing the profits and gains of a business shall be added back ;


(b) any amount either written off or reserved in the accounts to meet depreciation of or loss on the realisation of investments shall be allowed as a deduction, and any sums taken credit for in the accounts on account of appreciation of or gains on the realisation of investments shall be treated as part of the profits and gains


Provided that the Income-tax Officer is satisfied about the reasonableness of the amount written off or reserved in the accounts, as the case may be, to meet depreciation of or loss on the realisation of investments ;(c) such amount carried over to a reserve for unexpired risks as may be prescribed in this behalf shall be allowed as a deduction." *


From the above it will be clear that the First Schedule does not contain any provision for the ITO to make any adjustments other than what is specified under r. 5. It is admitted in this case that the assessee has included the amount expended by it on the maintenance of its foreign branches as a business expenditure in the profit and loss account. It is also admitted that consequently the assessee has obtained a deduction of such an expenditure in its profit and loss account, in the computation of the income chargeable under the head "Profits and gains of business". What is now claimed by the assessee is that over and above the expenditure incurred by it in the maintenance of foreign branches, which has been brought into the profit and loss account and deducted from the profits, it will be entitled to an allowance of one-third of the expenditure under s. 35B of the Act. In the absence of any provision in the rules contained in the First Schedule empowering the ITO to give such an allowance, the assessee will not be entitled to the same. What is granted under s. 35B is an allowance. The section itself calls it export markets development allowance. This clearly amounts to a relief granted to domestic companies and also non-corporate taxpayers resident in India which incur expenditure under specified heads to promote sale outside India of any goods, services, etc., in the course of their business. The language of the section itself shows that it applies only to domestic companies and also non-corporate taxpayers resident in India. It cannot apply to life insurance business or other kind of insurance business in respect of which separate rules are framed in the First Schedule. There is a difference between the relief to which an assessee is entitled under the different provisions of the I.T. Act and the deductions he may be entitled to claim in the computation of income chargeable under the head "Profits and gains of business or: profession". The export markets development rebate is a relief granted to a domestic company or a resident in India by way of allowance calculated on the basis of one and one-third times of the expenditure incurred under certain specified heads. What is granted under s. 35B cannot be said to be a deduction to which an assessee will be entitled in the matter of computation of the income chargeable under the head

"Profits and gains of business or profession Viewed in this light, the rules contained in the First Schedule do not empower the ITO to grant any general insurance company an allowance similar to the allowance contemplated under s. 35B. In this case, what is now claimed by the assessee is only an additional one-third of the said expenditure to be allowed as a deduction under s. 35B of the Act. The ITO has no jurisdiction to grant any such relief to the assessee to the extent of one-third of the expenditure over and above the actual expenditure which the assessee has incurred in the maintenance of foreign branches. We are, therefore, of the view that the assessee is not entitled to claim any further allowance under the head "weighted deduction" over and above the expenditure incurred by it in the maintenance of the foreign branches which has already been taken into account by it in arriving at its profits. We, therefore, answer the first question in the affirmative and against the assesseeWe now take up for consideration the second of the questions referred for our opinion, viz.,"


whether, on the facts and in the circumstances of the case, it has been rightly held that the payment of Rs. 26, 955 made by the assessee to the recognised provident fund of the employees of the company on account of the devaluation of the Indian rupee would be an allowable deduction under s. 37 of the I.T. Act, 1961 ?

"In order to get the benefit of s. 37 it is necessary that the expenditure which is claimed as an allowable deduction must be laid out and expended wholly and exclusively for the purpose of the business of the assessee. The item of expenditure must not be of the nature described in ss, 30 to 36 or of the nature of capital expenditure. In this case, we are concerned with the assessment year 1969-70. During the assessment year the head office of the assessee-company transferred the provident fund account relating to the employees of the company of the Singapore branch to the Singapore branch, consequent on the coming into force of the Singapore Central Provident Fund Ordinance, which made it obligatory to invest the provident fund contribution in Singapore itself. The transfer of the provident fund account happened to be made soon after the devaluation of the Indian rupee. Naturally, therefore, there was a dimunition in value of the amount standing to the credit of the provident fund when converted into dollars. The employees of the Singapore branch, therefore, made representation to the assessee that a portion of the loss resulting from the devaluation to the extent of Rs. 26, 955 should be made good. Accordingly, the assessee paid the said amount and claimed it as a deduction under the Act. It is in these circumstances that the question whether the said amount of Rs. 26, 955 can be allowed as a deduction arises for consideration. It was contended on behalf of the Revenue that inasmuch as the amount was paid voluntarily by the assessee-company, the assessee would not be entitled to claim deduction of the said amount as an item of business expenditureIt is well settled that any payment made by an assessee in his character as a trader, not out of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of Commercial expediency, and in order indirectly to facilitate the carrying on of his business, might still be treated as having been made wholly or exclusively for the purposes of the trade (vide Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL) and CIT v. Ashok Leyland Ltd. It is equally well settled by the decision of the Supreme Court in Swadeshi Colton Mills Co. Ltd. v. CIT, that the question as to whether an amount claimed as a permissible deduction was laid out or expended wholly and exclusively for the purposes of the business of the assessee has to be decided on the facts and in the light of the circumstances of each case.


It will be convenient in this connection to refer to the decision of the Supreme Court in Gordon Woodroffe Leather Mfg. Co. v. CIT In that case, one J. H. Philips was at first an employee of the managing agent of the assessee-company for several years and later employee of the assessee-company and subsequently its director. On his retirement he was paid a large amount as gratuity in appreciation of his long and valuable service to the assessee-company. The amount paid as and by way of gratuity was claimed as deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922. The amount was disallowed by the ITO as well as by the AAC as also by the Income-tax Appellate Tribunal. On reference the High Court agreed with the decision of the Tribunal. In the appeal before the Supreme Court it was urged on behalf of the assessee company that the amount had been paid as a matter of commercial expediency and in the interest of the assessee-company as an inducement to the other employees that if they rendered service in a similar manner with efficiency and honesty, they would be similarly rewarded. The Supreme Court, however, on the facts of that case did not accept the plea of the assessee that the payment was made with the object of facilitating the carrying on of the business or of commercial expediency but that it was paid in recognition of a long and faithful service. However, the Supreme Court laid down the test in the following words, (p. 555)" *


In our opinion, the proper test to apply in this case is, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity or was the sum of money expended on the ground of commercial expediency and in order to indirectly facilitate the carrying on of the business.

"In CIT v. Laxmi Cement Distributors Pvt. Ltd. the assessee-company had sent its secretary to the United States for training in sales technology of asbestos and cement products. Unfortunately, the said secretary died while in the States. The company thereupon paid a compensation of Rs. 12, 500 to his daughter and claimed the amount as a deduction in its assessment for the relevant year. It was held by the Gujarat High Court that the tests laid down in Gordon Woodroffe Leather Mfg. Co. v. CIT are independent and alternative tests and that any one of them can be applied to determine whether any such payment could be deducted as a permissible deduction.


In CIT v. Fairdeal Corporation Pvt. Ltd. Tulzapurkar J. (as he then was), after setting out the tests and the relevant passages from the judgment of the Supreme Court in Gordon Woodroffe's case has observed as follows (p. 287)" *


The aforesaid passage itself clearly brings out the fact that the three tests which have been indicated by the Supreme Court in this case are alternative tests and each one is independent of the other and in our view what the Tribunal has observed in its order is quite correct. The Tribunal clearly stated that the test about commercial expediency is not dependent on the other two tests and that even if there was no specific understanding that the lower salary would be compensated eventually and even, if there is no regular scheme, the payment of gratuity to an employee or his legal heir may yet be one dictated by commercial expediency.


"In CIT v. Patel Cotton Co. Pvt. Ltd. it has been observed as follows" *


All these three cases were considered in an unreported judgment of a Division Bench of this court consisting of the learned Chief justice and Tulzapurkar J., in Income-tax Reference No. 40 of 1970, decided on 15th July, 1975 (since reported as CIT v. Oxford University PressAccording to Tulzapurkar J., who delivered the judgment of the court, the Supreme Court in Gordon Woodroffe Leather Manufacturing Co.'s case had laid down three tests for a determination of the question.


(a) was the payment made as a matter of practice which effected the quantum of salary ?


(b) was there an expectation by the employee of getting a gratuity ? and


(c) was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business ?


If the answer to any of the tests is in the affirmative, the payment would be allowed as a revenue expenditure.


"A similar question arose for consideration before the Supreme Court again in Sassoon J. David and Co. P. Ltd. v. CIT. It is unnecessary to refer to the facts of the case. Suffice i

t to refer to the ratio laid down by their Lordships. Venkataramiah J., speaking for the Bench, observed as follows (p. 274)" * We feel that the expenditure in respect of which deduction is claimed by the company in this case falls within the third test laid down by this court in the case of Gordon Woodroffe Leather Manufacturing Co. v. CIT viz., that the sum of money had been expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. We are of the view that the three tests laid down by this court in the above case, viz., (i) that the payment should have been made as a matter of practice which affected the quantum of salary; (ii) that there was an expectation by the employee of getting a gratuity, and (iii) that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee, have to be read disjunctively and if they are so read, the present case which satisfies the third test should be held as falling under s. 10(2)(xv) of the Act. " The principle that emerges from the above is that if any expenditure that has been incurred by an assessee has been dictated by commercial expediency and considerations directed towards facilitating directly or indirectly the carrying on of the business, that can be treated as permissible deduction. In this case, the Tribunal has found that the payment has been made by the assessee-company to the credit of the provident fund account of its employees of the Singapore branch to make good the loss resulting from devaluation of the Indian rupee and it has been solely made to maintain cordial relationship with its employees and as a matter of commercial expediency. We do not find any reason to dissent from the finding entered by the Tribunal. Once we accept that the incurring of the expenditure of Rs. 26, 955 on the part of the company has been dictated by considerations of commercial expediency then the case falls within the third test formulated by the Supreme Court in Gordon Woodroffe's case. We have, therefore, no hesitation in holding that the said expenditure is a revenue expenditure and there is no reason to disallow the deduction under s. 37 of the Act. We, therefore, answer the second question in the affirmative and against the Revenue. In view of the mixed results, there will be no order as to costs.