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Commissioner of Income-tax Vs. Vippy Solvex Product Private Limited - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberM.C.C. No. 65 of 1984
Judge
Reported in(1985)47CTR(MP)44; [1986]159ITR487(MP)
ActsIncome Tax Act, 1961 - Sections 35B and 35B(1)
AppellantCommissioner of Income-tax
RespondentVippy Solvex Product Private Limited
Appellant AdvocateR.C. Mukati, Adv.
Respondent AdvocateC.M. Mehta, Adv.
Excerpt:
- - the findings of fact arrived at by the tribunal on the basis of the certificate issued by the bank clearly show that all these credits in this account were given for purchase of raw material and thiscredit is only given when the contract for supply of goods to the foreign parties is shown and, therefore, these findings of fact clearly indicate that this expenditure was incurred in connection with the execution of any contract for supply outside india......was also required to show that this expenditure wasincidental to the performance of services outside india or in connection with the execution of any contract for supply outside india for the goods exported. the tribunal further found that from the aforesaid facts, it is proved that the assessee did incur the said expenditure. it is stated by the tribunal that the learned commissioner never said that the said expenditure was not incurred by the assessee and, therefore, the tribunal has observed that the only point which deserves consideration is as to whether the expenditure in question was incurred by the assessee in connection with the performance of services outside india or they are incidental to, or they are incurred in the execution of, any contract for supply outside india.....
Judgment:

G.L. Oza, C.J.

1. This is a reference made by the Income-tax Appellate Tribunal for answering the question :

'Whether, on the facts and in the circumstances of the case, the order of the Commissioner of Income-tax directing the Income-tax Officer todisallow the assessee's claim for weighted deduction on interest amounting to Rs. 3,65,875 paid to the Bank of Maharashtra under Section 35B(1)(b)(viii) of the Income-tax Act, 1961, was correct in law and the Tribunal was in error in vacating it '

2. The facts stated in the reference by the Tribunal are that the assessee is a private limited company and manufactures deoiled cakes. For the previous year relevant to the assessment year in dispute, the assessee filed a return on June 29, 1976. Subsequently, it filed a revised return on February 7, 1979, declaring a loss of Rs. 4,80,202. In the computation filed with the return, it claimed depreciation and development rebate at Rs. 1,88,448. Thereafter, it further claimed a sum of Rs. 1,57,653 as weighted deduction under Section 35B of the Income-tax Act. The assessee's stand was that a sum of Rs. 4,72,960 incurred by it as expenses were eligible for this deduction. The break-up of this amount is as under :

Rs.

(1) Interest paid to the Bankof Maharashtra on export packing credit account

3,65,875

(2) Commission and brokeragefor export

81,500

(3) Postage, telephone andtelegram expenses

8,460

(4) Bankcommission on export packing credit account

17,125

Total4,72,960

3. After complying with the necessary formalities which included proceedings under Section 144B of the Income-tax Act, the Income-tax Officer allowed the weighted deduction at Rs. 1,57,653 purporting to be 1/3rd of Rs. 4,72,960 (though it was not exactly equal to 1/3rd). The assessee-moved an application under Section 154 for rectification. The Inspecting Assistant Commissioner (Assessment), however, stayed the proceedings as the matter had been taken up by the Commissioner of Income-tax under Section 263 on the ground that the assessment order was erroneous in so far as it was prejudicial to the interests of the Revenue. After complying with the necessary formalities and hearing the representative of the assessee, the Commissioner of Income-tax passed a very detailed order holding that the order of the Income-tax Officer was obviously erroneous in so far as it was prejudicial to the interests of the Revenue. It, therefore, could not be sustained. He, therefore, directed the Income-tax Officer to recompute the income and withdraw the weighted deduction wrongly allowed by him for the reasons given in the order of the Commissioner of Income-tax. The assessee preferred an appeal before the Tribunal against this order ofthe Commissioner of Income-tax passed under Section 263. A preliminary objection was taken that the Commissioner had no jurisdiction inasmuch as the order of the Income-tax Officer was passed under directions from the Inspecting Assistant Commissioner but this objection was overruled by the learned members of the Bench. On merits, the Tribunal was of the opinion that the order of the Commissioner was wrong in law and the assessee was entitled to weighted deduction. It accordingly cancelled the order. The Tribunal thereafter has quoted the (relevant) part of its order. The learned Tribunal thereafter has observed in the statement of the case that the facts necessary for decision of this reference are that the assessee had paid commission and brokerage amounting to Rs. 81,476 to various foreign parties at different places, namely, Poland, Germany, London, Manchau, etc., in connection with the export of its products and it was on account of this fact that the assessee was able to make export sales to the extent of Rs. 1,12,54,223 out of the total sales of Rs. 1,72,19,702. The assessee also paid interest of Rs. 3,65,875 in the export packing credit account of the Bank of Maharashtra, Indore, and this expenditure was also incurred for promoting export sales. The assessee furnished a certificate dated June 23,1980, from the Bank of Maharashtra stating that the assessee had maintained with it an export packing credit loan account and advances in this account were given only for the purchase of raw materials for manufacturing goods to be exported out of India and these advances were made available only when the parties submitted a copy of the export contract entered into with the foreign party. It was further stated that this account was quite different from the normal cash credit account and it was only for this reason that there was a preferential rate of interest, i.e., for this account, the rate of interest was 11% per annum, whereas (normal) interest was 17% per annum. The certificate further goes to show that the loan given in this export packing credit loan account was at the rate of 100% of cost of raw material, unlike 65% in the case of normal hypothecation/cash credit account. These accounts are stated in the certificate furnished by the bank. They were neither challenged by the learned Income-tax Officer nor by the learned Commissioner of Income-tax. The correctness of the said certificate was not disputed by the Commissioner of Income-tax. So, according to the Tribunal, the facts stated in the certificate will have to be taken as correct. The Tribunal, therefore, further stated that, on these facts, the question is as to whether for claiming weighted deduction under the said provision, the assessee is required to show that it incurred expenditure of Rs. 3,65,875 in the export packing credit account to the Maharashtra Bank, Indore, and these expenses were incurred for promotion of export sales. The assessee was also required to show that this expenditure wasincidental to the performance of services outside India or in connection with the execution of any contract for supply outside India for the goods exported. The Tribunal further found that from the aforesaid facts, it is proved that the assessee did incur the said expenditure. It is stated by the Tribunal that the learned Commissioner never said that the said expenditure was not incurred by the assessee and, therefore, the Tribunal has observed that the only point which deserves consideration is as to whether the expenditure in question was incurred by the assessee in connection with the performance of services outside India or they are incidental to, or they are incurred in the execution of, any contract for supply outside India of such goods, services or facilities, in other words, as to whether the assessee is entitled to weighted deduction of these expenses under Section 35B(1)(b)(viii).

4. The Tribunal has further found that it is clear from these facts that the assessee had maintained the account with the bank and the export packing credit loan and advances in this account were given to the assessee for purchase of raw materials for manufacturing goods to be exported outside India and these advances were made available only when the assessee submitted a copy of the export contract with the foreign parties. This account was quite different from the normal cash credit account and it was only for this reason that there was a preferential rate of interest for this account. The Tribunal also observed that from the material on record, it is also clear that the loan given in this export packing loan account was 100% of the cost of raw material, unlike 65% in the case of normal hypothecation/cash credit account.

5. Learned counsel appearing for the Department contended that, on credit from the Maharashtra Bank, the petitioner purchased raw materials and there is nothing to indicate that all the products made out of the raw materials were exported and, on that basis, it was contended that it could not be said that all this expenditure was incurred for the services rendered in the foreign countries within the meaning of the language of Sub-clause (viii) of Section 35B(1)(b). Learned counsel referred to a decision of this court in CIT v. K.N. Oil Industries [1982] 134 ITR 651, wherein the words occurring in Sub-clause (iii) of Section 35B(1)(b) have been considered.

6. Learned counsel appearing for the assessee, on the other hand, contended that the findings of fact arrived at by the Tribunal on the basis of the certificate of the bank which was not challenged at any stage of the proceedings are that all this cash credit under this account, i.e., export packing credit account, is utilised for purchasing raw material for supply of the finished goods on the basis of contracts with foreign parties. He,therefore, contended that so far as this fact is concerned, it is not disputed and, on these facts, it could not be said that the assessee was not entitled to weighted deduction. Learned counsel contended that the judgment on which reliance is placed is of no assistance as in that case the language of Sub-clause (iii) of Section 35B(1)(b) was considered whereas in the present case, we are concerned with the language of Section 35B(1)(b)(viii).

7. Section 35B reads :

'35B. (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 ;

Provided that in respect of the expenditure incurred after the 28th day of February, 1973, by a domestic company, being a company in which the public are substantially interested, the provisions of this clause shall have effect as if for the words 'one and one-third times', the words 'one and one-half times' had been substituted. (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 ;

(ii) obtaining information regarding markets outside India for such goods, services or facilities ;

(iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit ;

(iv) maintenance outside India of a branch office or agency for the promotion of the sale outside India of such goods, services or facilities ;

(v) preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto ;

(vi) furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities ;

(vii) travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from, and return to India ;

(viii) performance of services outside India in connection with,or incidental to, the execution 'of any contract for the supply but sideIndia of such goods, services or facilities ;

(ix) such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed.

Explanation 1.--In this section, domestic company, shall have the meaning assigned to it in Clause (2) of Section 80B.

Explanation 2.--For the purposes of Sub-clause (in) and Sub-clause (viii) of Clause (b), expenditure incurred by an assessee engaged in the business of-

(i) operation of any ship or other vessel, aircraft or vehicle, or

(ii) carriage of, or making arrangements for carriage of, passengers, livestock, mail or goods,

on or in relation to such operation or carriage or arrangements for carriage (including in each case expenditure incurred on the provision of any benefit, amenity or facility to the crew, passengers or livestock) shall not be regarded as expenditure incurred by the assessee on the supply outside India of services or facilities.

(2) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to in Sub-section (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year.'

8. This section provides a deduction of a sum equal to 1/3rd of the amount of such expenditure incurred during the previous year, and Sub-clause (viii) of Sub-section (1)(b) of this section provides that such expenditure, if it is incurred for the purposes indicated in the sub-clause, the assessee will be entitled to the advantage of this section. Sub-clause (viii) talks of performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities. This, therefore, contemplates that expenditure incurred in connection with the services rendered outside India or expenditure incurred in connection with or incidental to the execution of any contract for the supply outside India of such goods will be covered under this section. The findings of fact arrived at by the Tribunal on the basis of the certificate issued by the bank clearly show that all these credits in this account were given for purchase of raw material and thiscredit is only given when the contract for supply of goods to the foreign parties is shown and, therefore, these findings of fact clearly indicate that this expenditure was incurred in connection with the execution of any contract for supply outside India. It is significant that even incidental expenditure will be covered under this clause as the language shows if the expenditure is in connection with or incidental to the execution of the contract. In this view of the matter, therefore, on the findings of fact arrived at by the learned Tribunal, it appears that the view taken by the Tribunal is correct.

9. The decision to which reference has been made by the learned counsel for the assessee has considered the language of Sub-clause (iii) of this section and apparently, therefore, is of no assistance so far as the decision of this case is concerned.

10. In the light of the discussion above, therefore, in our opinion, the answer to the question is in the negative, i.e., the order of the Commissioner of Income-tax directing the Income-tax Officer to disallow the assessee's claim for weighted deduction on Rs. 3,65,875 paid to the Bank of Maharashtra under Section 35B(1)(b)(viii) of the Income-tax Act, 1961, is not correct, and further that the Tribunal was not in error in vacating it, In substance, the view taken by the Tribunal appears to be correct. In the circumstances of the case, parties are directed to bear their own costs.


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