The Commissioner of Income Tax vs Allana Sons (P.) Ltd.

This Reference is at the instance of the Revenue. The Tribunal had before it an application under section 256(1) of the Income Tax Act, 1961, then in force, of the Commissioner of Income Tax requiring the Tribunal to refer the following question of law. That question of law arises out of the order of the Tribunal dated 23rd May, 1988 in Income Tax Appeal 42/(Bom)/1985 :

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest paid on packing credit is eligible for export market development allowance u/s. 35B of the I.T. Act ?"

The assessee-respondent before this Court is a private limited company. The assessment year involved is 1977-78 for which the accounting year ended on 31st January, 1976. The Income-tax Officer while computing the total income of the assessee allowed deduction under section 35B of Rs.5,68,756/-. This amount was 1/3rd of the expenses of Rs.17,06,269/- which the Income-tax Officer considered as eligible for weighted deduction. The appeal before the Commissioner ended in confirmation of the additions made by the A.O. However, the Commissioner only directed that expenditure on entertainment of foreign customers should be considered for weighted deduction. Before the Tribunal, the assessee raised a claim for weighted deduction on packing credit which the Tribunal allowed following a judgment of the High Court of Madhya Pradesh in the case of Commissioner of Income Tax Vs. Vippy Solvex Product Private Limited, (1985) 47 CTR 44 : (1986) 159 ITR 487 : (1986) 28 TAXMAN 611 . It is in these circumstances that on 9th October, 1989 the Tribunal drew up a statement of case and forwarded the above question for opinion and answer of this Court.

When this Reference was placed before us today for hearing and final disposal, the Revenue cited the Division Bench judgment of this Court in the case of KEC International Ltd. Vs. The Commissioner of Income Tax, (2009) 111 BOMLR 928 : (2009) 221 CTR 660 : (2010) 322 ITR 465 : (2009) 177 TAXMAN 229 . The Division Bench held that weighted deduction is permissible and to the extent indicated in the judgment of the Andhra Pradesh High Court in the case of Commissioner of Income Tax Vs. Coromandel Agro Products Oil Ltd., (1998) 146 CTR 520 : (1998) 230 ITR 335 . The Division Bench differed from the view taken by the High Court of Madhya Pradesh.

In the circumstances, the question of law is answered in favour of the Revenue and against the assessee. The weighted deduction cannot be granted on the interest paid on packing credit. Mere obtaining of a packing credit loan or payment of interest thereon in India cannot be said to entail the performance of any service outside India. This expenditure is, therefore, not deductible. We answer this question in favour of the Revenue in terms of the Division Bench judgment as nothing contrary thereto has been brought to our notice.

The Reference is disposed of accordingly.