1999 (1) TMI 21 - HC - Income Tax

Court rules on deduction eligibility for manufacturing costs and commissions under Section 35B

The court held that the manufacturing expenditure or cost of samples does not qualify for deduction under Section 35B. Additionally, expenditures on ... Export Market Development Allowance, Weighted Deduction, Wind Energy, Weep Commission, MFHC Commission, Depreciation Issues Involved:1. Deduction under Section 35B for sample designing expenses.2. Deduction under Section 35B for expenses on quality control, advertisement, subscription, free samples, export promotion, MFHC commission, and WEEP commission.3. Depreciation rate on generator.Issue-wise Detailed Analysis:1. Deduction under Section 35B for Sample Designing Expenses:The questions referred to the court at the instance of the assessee relate to the expenditure on sample designing. Section 35B of the Income-tax Act, 1961, allows an export markets development allowance for specified expenditures incurred outside India. The Tribunal had to determine whether expenses on sample designing qualified under this section.The Tribunal noted that sub-clause (vi) of clause (b) of section 35B(1) pertains to expenditures on furnishing samples or technical information for promoting sales outside India. However, the assessee claimed deductions for samples remaining in closing stock, not furnished to a foreign buyer, thus not meeting the criteria under sub-clause (vi). Furthermore, sub-clause (vi) was omitted from April 1, 1981, making the claim inadmissible for the assessment year 1981-82.Additionally, Explanation 2 to section 35B(1)(b) clarifies that manufacturing expenses debitable to the trading or manufacturing account are not eligible for deduction. Since sample designing costs are manufacturing expenses, they do not qualify for the deduction. Thus, the court concluded that the cost of sample designing was not eligible for deduction under section 35B.2. Deduction under Section 35B for Expenses on Quality Control, Advertisement, Subscription, Free Samples, Export Promotion, MFHC Commission, and WEEP Commission:The questions at the instance of the Revenue pertain to whether the Tribunal was correct in allowing deductions for various expenditures under sub-clause (ix) of clause (b) of section 35B(1). The Tribunal upheld the Commissioner's decision to allow these deductions, considering rule 6AA, which came into effect on August 1, 1981. However, the accounting year ended on March 31, 1981, making rule 6AA inapplicable for the relevant period.The court referenced the Supreme Court's decision in CIT v. Stepwell Industries Ltd., which held that deductions under section 35B are not admissible unless they fall under the specific sub-clauses of clause (b). Since the expenditures on quality control, subscription, export promotion, MFHC commission, and WEEP commission do not fall under any sub-clauses of clause (b), they do not qualify for deduction. Expenditures on advertisement and samples also do not qualify under sub-clause (ix) and should have been considered under sub-clauses (i) and (vi), respectively.Thus, the court concluded that the expenditures in question do not qualify for deduction under section 35B, answering the Revenue's question in the negative.3. Depreciation Rate on Generator:The Revenue questioned whether the Tribunal was correct in allowing a 30% depreciation rate on the generator instead of 10%. According to Appendix I under rule 5 of the Income-tax Rules, a 30% depreciation rate applies to electric generators running on wind energy, categorized under 'Renewable energy devices.'The Tribunal allowed the 30% rate without verifying if the generator ran on wind energy. Therefore, the court directed the Tribunal to verify this fact. If the generator runs on wind energy, the 30% depreciation rate is applicable; otherwise, it is not. The court returned this question unanswered, directing further verification.Conclusion:The court concluded that the manufacturing expenditure or cost of samples does not qualify for deduction under section 35B. It also determined that expenditures on quality control, advertisement, subscription, free samples, export promotion, MFHC commission, and WEEP commission do not qualify for deduction under section 35B. The question regarding the depreciation rate on the generator was returned unanswered, with instructions for the Tribunal to verify if the generator runs on wind energy. The reference petitions were disposed of accordingly.