Weighted deduction denied on packing credit interest where expenditure was not incurred outside India or for export contract execution.

Bank interest paid on packing credit obtained in India was held not to qualify for weighted deduction under section 35B of the Income-tax Act, 1961. The Court applied the earlier principle that interest on borrowing for purchase of raw or packing materials is expenditure incurred in the course of manufacture or processing and does not fall within item (viii) of section 35B(1)(b). As the expenditure was not shown to have been incurred outside India, in performance of services rendered outside India, or in connection with or incidental to execution of an export contract, the assessee was denied weighted deduction and the answer was given in favour of the revenue.

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Issues: Whether bank interest paid on packing credit obtained in India qualifies for weighted deduction under section 35B of the Income-tax Act, 1961.

Analysis: The claim for weighted deduction was examined in the light of section 35B and the earlier decision holding that interest paid on borrowing for purchase of raw materials, including packing materials, is expenditure incurred in the course of manufacture or processing and does not fall within item (viii) of clause (b) of sub-section (1) of section 35B. The expenditure in question was not shown to be expenditure incurred outside India or in performance of services rendered outside India, or in connection with or incidental to execution of an export contract.

Conclusion: The question was answered in the negative. The assessee was not entitled to weighted deduction on the bank interest paid on packing credit, and the answer was in favour of the revenue.

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