Isabgul Export Corporation vs Commissioner of Income Tax

R.C. Mankad, Actg. C.J.

The assessee is a registered partnership firm. The assessment year under reference is 1977-78, the year of account being Samvat year 2032. In the course of assessment for the assessment year under reference, the assessee claimed export markets development allowance u/s 35B of the Income Tax Act, 1961 ("the Act", for short), in respect of the following items of expenditure, namely :-

(1) expenditure of Rs. 50,000 incurred for packing material; and

(2) expenditure of Rs. 88,855 incurred for payment of interest to the bank and bank charges.

The Income Tax Officer disallowed the claim. The Commissioner of Income Tax (Appeals) ("the Commissioner", for short), held that the interest of Rs. 88,855 was paid in connection with export credit facilities. He further held that this expenditure was incurred in connection with the assessee''s export trade and, as such, it was admissible for weighted that the finished products had to be packed before exporting them to various countries. Therefore, this was am expenditure of Rs. 50,000, incurred by way of packing charges, was also admissible for weighted deduction u/s 35B of the Act. The Revenue, being before the Income Tax Appellate Tribunal ("the Tribunal", for short), packing material expenses of Rs. 50,000 were eligible for allowance u/s 35B. It further held expenditure of Rs. 88,855 also did not the above conclusion, the Tribunal relied on the decision of its Special Bench in the case of J. Hemchand and Co. In the result, it allowed the Revenue''s appeal.

The assessee, being aggrieved by the decision of the Tribunal, at its instance, the following question has been referred to us, for our opinion u/s 256(1) of the Act :

"Whether the Tribunal was justified in holding that the assessee was not entitled to claim export markets development allowance u/s 35B of the Income Tax Act, 1961, (i) on expenses of Rs. 50,000 incurred for packing material, and (ii) on the sum of Rs. 88,855 incurred for interest to bank and bank charges ?"

Expenditure of Rs. 50,000, which the assessee had incurred for packing charges, if at all, would be covered by clause (iii) of section 35B(1)(b). As held by the Commissioner, the said expenditure was incurred for packing of goods which were exported. The expenditure, therefore, must have been incurred in India, Expenditure incurred in India in connection with the supply or distribution of goods would not be admissible for weighted deduction under sub-clause (iii) of section 35B(1)(b). The Tribunal was, therefore, right in reversing the view of the Commissioner and holding that the said expenditure did not qualify for weighted deduction u/s 35B.

So far as expenditure of Rs. 88,855 incurred for payment of interest and bank charges is concerned, it does not fall under any of the sub-clauses of clause (b) of section 35B(1). The assessee would be entitled to weighted deduction u/s 35B(1)(a) only if the expenditure is of the nature referred to in clause (b) of section 35B(1). The Tribunal was, therefore, right in holding that the said expenditure also did not qualify for weighted deduction u/s 35B.

In the result, we answer the question which has been referred to us for our opinion, in the affirmative and against the assessee. Reference answered accordingly with no order as to costs.