JUDGMENT
1. At the instance of the Revenue, the Income-tax Appellate Tribunal referred the following questions for the opinion of this court relating to the assessment year 1975-76 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that two separate assessments should be made in this case and that the incomes of the two periods could not be clubbed ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in upholding the Appellate Assistant Commissioner's view that two separate assessments would have to be made in this case even if the Income-tax Officer considers it to be a case of change in the constitution of the firm under Section 187(2) of the Income-tax Act, 1961 ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was entitled to weighted deduction under Section 35B in respect of the expenditure on advertisement, stationery and printing, postage and telephone expenses as claimed by the assessee ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee was entitled to weighted deduction under Section 35B in respect of expenditure on salaries relatable to exports ?"
2. The aforesaid questions arise from the decisions rendered by the Appellate Tribunal in ITA Nos. 1936 and 1811 (Delhi) of 1978-79.
3. The facts, as stated by the Appellate Tribunal in its order dated December 26, 1979, are that one of the partners of the assessee-firm, namely, Inder Mohan died on December 22, 1974, and then the business was continued by inducting Smt. Nikki Mehra (widow of Inder Mohan) as a partner. Separate accounts were kept for the two periods, namely, anterior to December 22, 1974, and posterior to the date of death. The assessing authority was urged to make separate assessments for the two broken periods. The assessing authority, however, was of the view that there was a change in the constitution of the assessee-firm and, therefore, only one assessment was to be made legally, and hence he made one single assessment for both the periods.
4. On appeal, the Appellate Assistant Commissioner held that even if there was a change in the constitution of the firm, there had to be two assessments and not one.
5. On further appeal, the Appellate Tribunal held as follows :
"There is indeed a clause in the partnership deed which provides that the partnership will not be dissolved by the death of any partner but shall continue to the benefits of his legal heirs, representatives or executors. The result of this clause is that under the Partnership Act also the partnership will not automatically stand dissolved by the death of a partner, because the partnership deed provides to the contrary. The question, however, still arises whether there should be one assessment for the entire year or two and the answer to this is to be found, as rightly done by the learned Appellate Assistant Commissioner, in the ruling of the Allahabad High Court in Shiv Shanker Lal Ram Nath's case [1977] 106 ITR 342."
6. Referring to the case of Shiv Shanker Lal [1977] 106 ITR 342 (All), the Appellate Tribunal held as follows :
"We hold that the learned Appellate Assistant Commissioner was correct in holding that two separate assessments should be made."
7. From the facts as found by the Appellate Tribunal, it is manifest that the partnership deed contains an agreement to the contrary that despite the death of one of the partners the firm would not be dissolved, but the business of the firm would be continued by the other partners.
8. The question for consideration is whether on the facts and in the circumstances of this case, there was a change in the constitution of the firm and if so, whether one single assessment has to be made, and whether despite the change in constitution, two separate assessments have to be made, as averred by counsel for the assessee. In CIT v. Empire Estate [1996] 218 ITR 355 (SC), the court stated the legal position arising from Sections 187 and 188 of the Income-tax Act, 1961 (briefly "the Act"), as follows (page 359) :
"Section 188 states that where a firm carrying on a business is succeeded by another firm and the case is not covered by Section 187, separate assessments have to be made on the predecessor firm and the successor firm. Section 187 says that where, at the time of making an assessment, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as it is constituted at the time of making the assessment. 'Change in the constitution of the firm' is defined for the purpose. The relevant part of the definition states that if one or more of the partners cease to be partners in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change, there is a change in the constitution of the firm. These provisions would apply to a firm which survives upon the death of a partner. They would apply to the case of a partnership where a partner dies and the partnership deed provides that death shall not result in the dissolution of the partnership. Such provision is lawful because Section 42 of the Partnership Act contemplates it. If there is no such provision and a partner dies, the partnership stands dissolved. The partnership does not then survive upon the death of the partner. The case is not one of a change in the constitution of the partnership. It falls outside the scope of Section 187. When the surviving partners in such a case continue the business in partnership, Section 188 is attracted for there is a succession of one by another partnership."
9. From the above reproduced observations, it is manifest that if there is an agreement to the contrary in the partnership deed, then the firm would not stand dissolved and in that case, Section 42 of the Partnership Act will not be attracted. If there is no agreement to the contrary and a partner of a firm dies then the firm will stand dissolved in view of Section 42 of the Partnership Act. The legal position that arises in the instant case in which an agreement to the contrary was made in the partnership deed that despite the death of one of the partners, the firm will not stand dissolved, is that despite death of Inder Mohan, the firm did not stand dissolved and the business was continued by the surviving partners and hence the instant case falls under Section 187 of the Act, meaning thereby, that it is a case of change in constitution. Therefore, only one assessment has to be made for the entire period. In Empire Estate [1996] 218 ITR 355 (SC), one of the partners died. But in that case there was no agreement to the contrary in the partnership deed and, therefore, the court held that on the death of one of the partners, the firm stood dissolved and two assessments for two periods had to be made under the law.
10. Thus following the ratio of the case of Empire Estate [1996] 218 ITR 355 (SC), the view taken by the Appellate Tribunal has to be rejected.
11. We, therefore, hold that in the instant case, there was merely a change in the constitution of the assessee-firm and, therefore, one single assessment has to be made for the entire period on the firm as it stood at the end of the year.
12. Another controversy in this case relates to the weighted deduction under Section 35B of the Act. The Appellate Tribunal stated the facts and the finding of the Income-tax Officer as follows :
"The business of the assessee-firm consists of the purchase and sale of jewellery, precious stones and handicrafts. The assessee has export business also. It claimed deduction under Section 35B in respect of expenditure on advertisement, cost of samples, stationery and printing, salaries, postage, T. A. and telephone. The total claim of allowance was Rs. 8,377 for the first period and Rs. 1,854 for the second period being one-third of the expenditure incurred on the above items. The Income-tax Officer held that the expenditure incurred on the cost of samples was wholly and exclusively for exports and was entitled to weighted deduction. Again expenses on T. A. were in connection with foreign tour which were entitled to weighted deduction. Regarding other items of expenditure it was claimed that the weighted deduction was being claimed on ad hoc basis without any proof that the expenditure on advertisement, stationery, salary, telephone and postage was incurred wholly and exclusively for purposes of its export business. The Income-tax Officer, therefore, rejected the claim for weighted deduction in respect of these items .... The Income-tax Officer also disallowed the assessee's claim for commission payments, conveyance expenses, telephone expenses, sales promotion expenses and expenses on pension account in part ....
The learned Appellate Assistant Commissioner held following the earlier year's order that disallowance of commission of Rs, 2,500 in the first period and Rs. 2,800 in the second period should be reduced to Rs. 2,000 in each period. As regards telephone expenses, he upheld the disallowance of l/3rd following the earlier year's order. He also upheld disallowance of telephone expenses of Rs. 1,000 in the first period and that of Rs.400 in the second period . . . ."
13. The Appellate Tribunal recorded the following finding in respect of weighted deduction :
". . . The assessee's case for the immediately preceding year was decided by the Tribunal in ITA No. 5058 of 1977-78 by Delhi Bench 'A' in August, 1979. The Tribunal held that the assessee's claim for weighted deduction on expenditure on advertisement which pertains to advertisements in export magazines, catering to export market in foreign countries and for photographs was wholly related to exports and was entitled to weighted deduction, Similarly expenditure incurred on printing of catalogues and other advertising materials were also entitled to weighted deduction. The expenditure on telephones and cables sent to foreign countries was also entitled to weighted deduction. Following the earlier order, we allow the assessee's claim in full. .... We would like to point out that as is clear from the statements on page 2 of the paper book, the assessee has not claimed the entire expenditure on advertisement, printing and stationery, for telephones and cables or for foreign postage as incurred by it but only part of it for purposes of weighted deduction. The claim shall, therefore, be allowed as claimed before the Income-tax Officer."
14. Standing counsel urges before us that under Section 35B deduction is allowed only in respect of the expenditure incurred abroad, Section 35B of Sub-section (1), Clause (a); reads :
"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, but before the 1st day of March, 1983, 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 of equal to one and one-third times the amount of such expenditure incurred during the previous year."
15. Clause (b) of Section 35B(1), in so far as material, states as under :
"(b) The expenditure referred to in Clause (a) is that incurred wholly and exclusively on-
(i) advertisement or publicity outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business ;....."
16. From a perusal of Clause (b) of Section 35B(1) of the Act, it is clear that weighted deduction will be allowed in respect of the expenditure referred to in Clause (a), which is incurred wholly and exclusively on advertisement or publicity made outside India in respect of the goods, services or facilities which the assessee deals in. Clause (b) or other sub-clauses as contained in Section 35B(1), do not indicate that only that expenditure will qualify for weighted deduction, which has been made outside India. The only requirement is that the expenditure should be such which is incurred wholly and exclusively on advertisement or publicity made outside India or on the other items, as mentioned in the other sub-clauses of Clause (b). The expenditure should be wholly and exclusively incurred for the promotion of exports. It cannot be said that the expenditure which is made abroad only qualifies for weighted deduction. The law is that the expenditure wholly or exclusively incurred for the purposes of export business will qualify for weighted deduction.
17. The Appellate Tribunal clearly found that the expenditure in respect of which weighted deduction has been claimed by the assessee, was wholly and exclusively incurred for the advertisement or publicity made outside India and in respect of other things, as mentioned in the other sub-clauses of Clause (b).
18. For these reasons, the view taken by the Tribunal in respect of allow-ability of weighted deduction is accepted.
19. In view of the foregoing findings,'questions Nos. 1 and 2 are answered in the negative, i.e., in favour of the Revenue and against the assessee; and questions Nos. 3 and 4 are answered in the affirmative, i.e., in favour of the assessee and against the Revenue.