Weighted deduction under Section 35B of the Income-tax Act, 1961 is allowable on expenditure incurred on salary, bonus, etc., to employees engaged in the export business of the assessee, but only to the extent that the expenditure is proportionate to the percentage of export business conducted by the assessee. Expenditure incurred on receiving and treating foreign buyers also qualifies for deduction under Section 35B(1)(b)(ix) of the Act as an activity for the promotion of sale outside India.

N.K.Agrawal, J.

1. By a common statement of the case, the following two questions of law have been referred by the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar (for short "the Tribunal"), in two reference applications to this court for opinion :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing weighted deduction under Section 35B to the assessee on a part of the salary and other establishment expenses ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing weighted deduction to the assessee on the expenditure incurred on receiving and treating the foreign buyers in India ?"

2. The assessee derived income from export of handicrafts, brassware, readymade garments, etc. During the course of the assessment for the assessment year 1976-77, the Assessing Officer allowed weighted deduction under Section 35B of the Income-tax Act, 1961 (for short "the Act"), on the expenditure amounting to Rs. 1,64,577 only. The assessee had, however, claimed such deduction on a total expenditure, under different heads, of Rs. 12,04,147. The assessee, therefore, went in appeal and the Commissioner of Income-tax (Appeals) examined each item of expenditure on which weighted deduction had been claimed by the assessee and thereafter allowed expenditure amounting to Rs. 3,41,740, holding that such expenditure qualified for deduction under Section 35B of the Act. While doing so, the Commissioner also took the view that certain other expenditure qualified for deduction to the extent of 50 per cent. of the total amount spent. Under the head "Establishment expenses", weighted deduction was allowed by the Commissioner at 60 per cent. of the total amount of Rs. 4,46,010. Under the head "Export promotion expenses", deduction of the entire expenditure amounting to Rs. 4,839 was allowed.

3. Both the assessee and the Revenue carried appeals before the Tribunal. The assessee wanted full deduction of the expenditure under the head "Establishment expenses" amounting to Rs. 4,46,010 whereas the Revenue felt aggrieved by the full deduction allowed by the Commissioner in respect of export promotion expenses amounting to Rs. 4,839. The Tribunal raised deduction from 60 per cent. to 65 per cent. with regard to "Establishment expenses" and upheld the full deduction allowed for export promotion expenses at Rs. 4,839.

Question No. 1 :

4. Section 35B permits export markets development allowance in the form of and called in tax parlance as a weighted deduction. The basic object for the grant of a weighted deduction in respect of expenditure on the development of export markets was primarily to provide an incentive for promotion of exports. The benefit of weighted deduction was, however, limited to certain specified categories of expenditure only. Any expenditure, other than capital expenditure or personal expenses of the assessee, specified in Clause (b) of Sub-section (1) of Section 35B of the Act and incurred wholly and exclusively on export promotion is to be allowed as deduction. Having regard to the object of this provision, it is necessary to give a liberal interpretation, so that the purpose behind it could be properly achieved. Expenditure is, therefore, to be first localised with reference to the sub-clauses of Clause (b) of Sub-section (1) of Section 35B of the Act and then it has to be determined whether the expenditure had been fully and exclusively incurred for any of the purposes listed therein. Each sub-clause is to be read independently. The condition specified in each sub-clause, whereunder deduction is claimed, has to be satisfied. A direct nexus between the expenditure and promotion of exports is necessary.

5. Clause (b) of Sub-section (1) of Section 35B of the Act specifies the conditions in each sub-clause as under :

"35B. Export markets development allowance.--. . . (b) The expenditure referred to in Clause (a) is that incurred w