Assessee denied tax deduction for customs duty on goods supplied abroad

The High Court held that the assessee-firm was not entitled to claim weighted deduction under section 35B of the Income-tax Act for customs duty paid outside India. The Court relied on a Supreme Court decision emphasizing that the nature of the transaction determines eligibility for deduction, and since the goods were supplied by the assessee for display at exhibitions abroad, considered an internal transaction, the deduction was disallowed. The Court ruled in favor of the Revenue and against the assessee, with no costs awarded.

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Issues: Whether customs duty paid by the assessee-firm outside India is entitled to weighted deduction under section 35B of the Income-tax Act for the assessment years 1974-75, 1975-76, and 1976-77.

Analysis:
The judgment pertains to three references under section 256(1) of the Income-tax Act, 1961, where the common question of law raised was the entitlement of the assessee-firm to claim weighted deduction under section 35B for customs duty paid outside India. The assessee, engaged in the export business of ivory goods, brass goods, and handicrafts, participated in exhibitions abroad during the relevant assessment years. Customs duty was paid on the goods sent for exhibitions. The deduction was initially disallowed by the assessing authority but allowed in appeals by the Commissioner of Income-tax (Appeals)/Appellate Assistant Commissioner. However, the Income-tax Appellate Tribunal later disallowed the deduction, leading to the reference of the question to the High Court.

The High Court referred to a recent pronouncement of the Supreme Court in CIT v. Stepwell Industries Ltd., where it was held that the nature of the transaction at the time of incurring the expenditure determines its eligibility for deduction. If the transaction was an internal one of the assessee, the deduction would not be allowed. The Court also cited a Division Bench judgment in a previous case involving the same assessee, Faqir Chand Raghunath Dass v. CIT, where a similar expenditure was allowed for weighted deduction under section 35B. The Court agreed with the reasoning in the previous case but stated that they are bound by the Supreme Court's decision in Stepwell Industries Ltd.

The Court concluded that as the goods were supplied outside India by the assessee for display at exhibitions, which was considered an internal transaction of the assessee, the deduction for customs duty paid outside India was not permissible. Therefore, the question was answered in favor of the Revenue and against the assessee. No costs were awarded in the matter.

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