1998 (12) TMI 60 - HC - Income Tax

Supreme Court clarifies deductions under Income-tax Act

The Supreme Court ruled in favor of the Revenue in a case concerning the entitlement to export markets development allowance under section 35B of the ... Export Market Development Allowance, Weighted Deduction, Business Expenditure, Entertainment Expenditure Issues:1. Entitlement to export markets development allowance under section 35B of the Income-tax Act, 1961.2. Nature of business expenditure and disallowance of entertainment expenditure.Entitlement to Export Markets Development Allowance:The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the entitlement of the assessee to the export markets development allowance under section 35B for the assessment year 1975-76. The assessee, engaged in manufacturing bicycles and parts with exports, claimed deductions under section 35B for various expenditures related to exports. The Assessing Officer allowed deductions only for commission paid to foreign dealers. The Commissioner of Income-tax (Appeals) allowed deductions for some other expenditures but disallowed many items. Both the assessee and the Revenue appealed, with the Tribunal partly allowing the assessee's appeal and dismissing the Revenue's appeal.The Supreme Court's ruling in CIT v. Stepwell Industries Ltd. emphasized that the burden lies on the assessee to prove that the expenditure falls within the specified purposes of section 35B(1)(b). The court highlighted the need for specific examination of each case to determine if the expenditure qualifies for deduction. In this case, expenses like bank commission, interest on foreign bills, transit insurance charges, and carriage outward expenses did not meet the criteria for deduction under section 35B.The specific prohibition in sub-clause (iii) of section 35B(1)(b) regarding distribution, supply, or provision outside India of goods or services excluded deductions for transit insurance charges and carriage outward expenses. Clearing and forwarding charges were also deemed ineligible for deduction as they did not fall under any sub-clause of section 35B(1)(b). The court concluded that the assessee failed to demonstrate which sub-clause would warrant deduction, leading to a negative answer to question No. 1 against the assessee.Nature of Business Expenditure and Disallowance of Entertainment Expenditure:The Assessing Officer disallowed expenditures on hotel bills, payments to the Diners Club, and dinner expenses for foreign dealers. The counsel for the assessee argued that these expenses constituted sales promotion expenditure, citing a previous court decision. However, the court noted that the nature of these expenses did not align with advertisement, publicity, or sales promotion in India as specified under sub-sections (2A) and (3A) of section 37 of the Act. Consequently, the expenditures on hotel bills, dinner for dealers, and payments to the Diners Club were considered entertainment expenditures falling under sub-section (2A) of section 37, leading to their disallowance.The court's analysis highlighted the distinction between allowable business expenditures and disallowable entertainment expenditures, emphasizing the specific criteria outlined in the Income-tax Act. The judgment answered question No. 2 in favor of the Revenue, concluding that the mentioned expenditures did not qualify for deduction under the Act.In conclusion, the court disposed of the reference without any order as to costs, providing a detailed analysis of the issues related to export markets development allowance and the nature of business expenditures, ultimately ruling in favor of the Revenue on both counts.