1997 (9) TMI 86 - HC - Income Tax

Court Denies Weighted Deduction for Packing Credit Loan Interest

The court held that the assessee was not entitled to weighted deduction under section 35B for the interest paid on packing credit loan. The court ... Development Allowance, Weighted Deduction Issues Involved:1. Whether the assessee was entitled to weighted deduction under section 35B in respect of the interest paid to the bank on packing credit loan.Issue-wise Detailed Analysis:1. Entitlement to Weighted Deduction under Section 35B:The central issue pertains to whether the assessee, a public limited company engaged in the export of oil cakes, is entitled to a weighted deduction under section 35B of the Income-tax Act, 1961, for the interest of Rs. 8,17,921 paid to the bank on packing credit loan for the assessment year 1980-81. The Income-tax Officer initially rejected this claim, but the Commissioner of Income-tax (Appeals) allowed it under sub-clause (viii) of clause (b) of sub-section (1) of section 35B. The Tribunal, however, remanded the case to the assessing authority to verify the applicability of the Bombay Tribunal's decision in AADEE Corporation v. ITO.Arguments by Counsel:- Revenue's Argument: The Revenue's counsel argued that the Tribunal erred in adopting the reasoning and ratio of the Bombay Tribunal's decision without having the full facts before it and directing the assessing authority to determine the facts and apply the Bombay Bench judgment.- Assessee's Argument: The assessee's counsel contended that the interest paid on the packing credit loan should be allowed as a deduction under section 35B, as the Union of India had amended the Reserve Bank of India Act, 1934, and framed the Export Credit (Interest Subsidy) Scheme, 1968, to provide various incentives to exporters.Legal Provisions and Interpretation:Section 35B, known as the Export Markets Development Allowance, allows a deduction of a sum equal to one and one-third times the amount of expenditure incurred wholly and exclusively on specified activities, including the performance of services outside India in connection with or incidental to the execution of any contract for the supply outside India of goods, services, or facilities. The provision was in effect from April 1, 1968, to April 1, 1989.Analysis of the Export Credit Scheme:The Export Credit (Interest Subsidy) Scheme, 1968, provides a concessional rate of interest on packing credit loans to encourage exports. The scheme defines 'packing credit' as any loan or advance granted to an exporter for financing the purchase, processing, or packing of goods based on letters of credit or confirmed orders for export. However, section 35B(1)(b)(viii) is not intended to provide a deduction for all expenses, including interest paid on such loans. The expenditure must be incurred wholly and exclusively on the performance of services outside India in connection with or incidental to the execution of any contract for the supply of goods outside India.Judicial Precedents:- Bombay Tribunal's Decision in AADEE Corporation v. ITO: The Bombay Tribunal allowed the deduction of interest on packing credit loans, reasoning that the expenditure was incurred to enable the export of goods. However, the High Court in the present case did not accept this reasoning, as it did not satisfy the criteria of clause (viii).- Madhya Pradesh High Court in CIT v. Vippy Solvex Product Private Ltd.: The Madhya Pradesh High Court allowed the deduction based on the Tribunal's finding that the expenditure was incurred for promoting export sales. However, the present court did not agree with this view, as section 35B does not allow expenditure incurred on the purchase of raw materials for export.- Andhra Pradesh High Court in CIT v. Navabharat Enterprises (P.) Ltd. (No. 1): This case involved a different context where the payment to the export credit guarantee corporation was allowed under section 35B(1)(b)(viii). The present court found this case not directly relevant to the issue of interest deduction.Conclusion:The court concluded that the benefits of the packing credit loan under the Export Credit Scheme and the export markets development allowance under section 35B are distinct. Availing of one benefit does not automatically entitle the assessee to the other. The court held that the interest paid on packing credit loans does not qualify for deduction under section 35B(1)(b)(viii), as it is not an expenditure incurred on the performance of services outside India in connection with or incidental to the execution of any contract for the supply of goods outside India.Final Judgment:The court answered the question in the negative, in favor of the Revenue and against the assessee, concluding that the assessee was not entitled to weighted deduction under section 35B for the interest paid on packing credit loan. The reference was answered accordingly, with no order as to costs.