SECTIONS 35B AND 35C – EXPORT MARKETS DEVELOPMENT
ALLOWANCE/AGRICULTURAL DEVELOPMENT ALLOWANCE
293. Weighted deduction for export markets development allowance/agricultural development allowance under sections 35B and 35C, respectively – Whether circumstances in which, and the conditions subject to which, expenditure incurred indirectly will count therefor
1. The Finance Act, 1968 made provisions in sections 35B and 35C, respectively, for the grant of “export markets development allowance” and “agricultural development allowance” in computing the profits and gains from business. Under section 35B, an assessee, being a domestic company or a resident non-corporate person, who incurs expenditure under specified heads for development of export markets for Indian goods on a long-term basis, is entitled to a weighted deduction of a sum equal to one and one-half times the amount of the qualifying expenditure in computation of his business profits. Under section 35C, a company engaged in any agro-based industry, which incurs expenditure in the provision of agricultural inputs and extension services of the specified categories to independent farmers, cultivators or producers in India of the products of agriculture, animal husbandry or dairy or poultry farming, is entitled to a deduction of a sum equal to one and one-half times the amount of the qualifying expenditure in the computation of its business profits. [The details of these provisions have been explained in paragraphs 42-46 and 54-59 of the Board’s Circular No. 6-P of 1968, dated 6-7-1968]. The weighted deduction under both these sections is available not only with reference to the qualifying expenditure incurred directly by the assessee but also with reference to such expenditure incurred indirectly by him. In the case of the export markets development allowance, expenditure incurred by the assessee in association with any other person also qualifies for the allowance. In the case of agricultural development allowance, expenditure incurred through an association or body approved in this behalf by the prescribed authority, also qualifies for the allowance.
2. A question has been raised as to the circumstances in which, and the conditions, if any, subject to which, expenditure incurred by an assessee indirectly, as stated above, will count for the weighted deduction contemplated under sections 35B and 35C. This is particularly important in the case of expenditure incurred by export houses for development of export markets on behalf of their constituents, or by associations, such as IJMA, providing agricultural inputs and extension services to jute growers with a view to improving the productivity and quality of jute. While it is not possible to lay down any general rule in this regard which would be applicable in all situations, it may be stated that individual members of constituents of an association or body, which undertakes export markets development or agricultural development on behalf of or for the benefit of its members, will qualify for the weighted deduction under section 35B or 35C with reference to their share in the expenditure incurred by the association or body, provided—
a. the expenditure falls under one or more of the several qualifying categories specified in the respective sections and the rules, if any, framed thereunder;
b. where the expenditure incurred by the association or body includes any expenditure on activities other than those which fall under the specified heads, such expenditure is isolated; and
c. the net amount of expenditure incurred by the association or body under the specified heads [i.e., after excluding the expenditure referred to in (b) above, and after taking credit for any grant or subsidy received by it from the Government or any other source for carrying on the said activities] is apportioned among the members of the association or body on a rational basis and recovered from them.
To facilitate verification, it is necessary that proper accounts are maintained in respect of expenditure incurred by an association or body with reference to which the allowance under section 35B or 35C is claimed by its members or constituents.
3. It is to be noted that the weighted deduction under section 35C by way of agricultural development allowance for expenditure incurred by an assessee under specified heads through an association or body is available only if such association or body has been approved in this behalf by the prescribed authority. The authorities which are to grant approval in such cases will be notified shortly in the Income-tax Rules, 1962.
Circular : No. 27 [F. No. 1(252)/69-TPL], dated 16-8-1969.
JUDICIAL ANALYSIS
The above circular was applied in ITO v. Kamani Engg. Corporation Ltd. [1989] 79 CTR (Bom. – Trib.) 82, with the following observations :
“. . . If one goes through the provisions of section 35B, it would be clear that to be eligible for weighted deduction under section 35B, it is not necessary that the expenses should be directly incurred by the assessee. Even where the expenses are incurred through another party, the same would be eligible for weighted deduction. The matter has also been clarified by the CBDT vide Circular No. 27 dt. 16th Aug., 1987. In these circumstances, we are of the view that the CIT(A) was justified in allowing weighted deduction on the above three items… .” (p. 90).
In Gokuldas Exports v. CIT [1993] 67 Taxman 219 (Kar.), it was held that while discussing the provisions of sections 35B and 35C of the Act, the Board observes that to avail the benefit of these provisions it is necessary that ‘the expenditure falls’ under ‘one or more’ of the several qualifying categories specified in the respective sections and the rules, if any, framed thereunder. This sentence clearly brings out the scheme of section 35B(1)(b). The expenditure may fall under one or more of the sub-clauses, is a fact recognised even by the Board.
