Revenue expenditure and export-market weighted deduction: business subsidy and foreign-branch spending qualified for tax relief.

Subsidy paid by a bank to its subsidiary banks for opening new branches was held to be revenue expenditure because it was incurred in the course of business, the branch assets belonged to the subsidiary banks, and the payer obtained only a business advantage; the character of the receipt in the subsidiaries' hands did not govern deductibility in the payer's hands. Weighted deduction under section 35B was also stated to apply to qualifying revenue expenditure incurred to develop export markets, even where the assessee was not itself an exporter or had not earned export profits, and expenditure on foreign branches could qualify. Both issues were answered in favour of the assessee-bank.

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Issues: (i) Whether subsidy paid by the State Bank of India to its subsidiary banks for opening new branches was revenue expenditure deductible under the Income-tax Act, 1961. (ii) Whether the State Bank of India was entitled to weighted deduction in respect of expenditure on its foreign branches under section 35B of the Income-tax Act, 1961.

Issue (i): Whether subsidy paid by the State Bank of India to its subsidiary banks for opening new branches was revenue expenditure deductible under the Income-tax Act, 1961.

Analysis: The subsidy was paid in the course of the bank's statutory and business activities under the governing banking statutes. The assets created by the branch expansion belonged to the subsidiary banks and not to the payer bank. The payer derived only a business advantage, and the nature of the receipt in the hands of the subsidiary did not control the character of the expenditure in the hands of the payer.

Conclusion: The expenditure was revenue expenditure and was deductible. The issue was decided in favour of the assessee-bank.

Issue (ii): Whether the State Bank of India was entitled to weighted deduction in respect of expenditure on its foreign branches under section 35B of the Income-tax Act, 1961.

Analysis: Weighted deduction under section 35B is available for revenue expenditure incurred for development of export markets. The allowance does not depend on the assessee having exported goods or earned export profits. Branches outside India were capable of facilitating and promoting export markets, and the allowance was allowable on the relevant specified expenditure.

Conclusion: The assessee-bank was eligible for the allowance, and the claim for weighted deduction was allowable. The issue was decided in favour of the assessee-bank.

Final Conclusion: Both referred questions were answered in favour of the assessee-bank, with the result that the revenue's challenge failed on all substantive issues.

Ratio Decidendi: For determining the nature of expenditure in the payer's hands, the character of the corresponding receipt in the payee's hands is not ative; and weighted deduction under section 35B is available for qualifying expenditure incurred to promote export markets even if the assessee is not itself an exporter or has not earned export profits.

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