1996 (6) TMI 47 - HC - Income Tax

Key Rulings on Income Tax Act Deductions: Specific Criteria for Export Expenses

The court ruled on various issues related to deductions under the Income-tax Act, 1961. It emphasized the need for specific criteria to qualify for ... Actual Cost, Business Expenditure, Development Allowance, Weighted Deduction Issues Involved:1. Deduction under Section 35B of the Income-tax Act, 1961.2. Entitlement to deduction under Section 35B for interest on packing credits and shipping lien.3. Allowance of Rs. 73,415 as retirement compensation and gratuity.4. Deduction of subsidy from the cost for the purpose of depreciation.5. Weighted deduction under Section 35B on Export Credit Guarantee Corporation (ECGC) Premium.Detailed Analysis:Issue 1: Deduction under Section 35B of the Income-tax Act, 1961The court addressed the common question regarding the deduction under Section 35B of the Income-tax Act, 1961, applicable to all references. The court emphasized that Section 35B was introduced as an incentive to encourage export activities. The provision allows a deduction for specific expenditures incurred by a domestic company or a resident individual, provided the expenditure is not capital or personal in nature. The court highlighted the necessity of a bank certificate specifying the exact calculation of the amount of interest related to post-shipment credit, as only this qualifies for the deduction under Section 35B.Issue 2: Entitlement to Deduction under Section 35B for Interest on Packing Credits and Shipping LienThe court considered whether the assessee is entitled to weighted deduction under Section 35B for interest on packing credits and shipping lien. The court referred to various judgments, including those from the Madhya Pradesh, Calcutta, and Gujarat High Courts, which emphasized the territoriality aspect of the services performed outside India. The court concluded that the deduction under Section 35B should be granted only for services performed outside India in connection with the execution of an export contract. The court remanded the matter to the tax authorities to re-examine the bank certificates and ensure they meet the statutory requirements.Issue 3: Allowance of Rs. 73,415 as Retirement Compensation and GratuityThe court examined whether the Tribunal was right in allowing the assessee's claim of Rs. 73,415 as retirement compensation and gratuity. The court noted that the Company Law Board had declined approval for the remuneration of the two managing directors, who were also directors in other companies. Despite this, the management board passed resolutions to pay compensation to the directors. The court found that the Tribunal ignored the concurrent findings of the fact-finding authorities and the reasons for the disapproval by the Company Law Board. The court concluded that the payment styled as compensation in lieu of remuneration was not permissible and answered the question in the negative, in favor of the Revenue.Issue 4: Deduction of Subsidy from the Cost for the Purpose of DepreciationThe court addressed whether the Tribunal was right in directing the Income-tax Officer not to deduct the subsidy from the cost for the purpose of depreciation. The court referred to the Supreme Court decision in CIT v. P. J. Chemicals Ltd., which interpreted 'actual cost' liberally, stating that the subsidy amount should not be deducted from the 'actual cost' for depreciation calculation. The court answered the question in the affirmative, in favor of the assessee.Issue 5: Weighted Deduction under Section 35B on Export Credit Guarantee Corporation (ECGC) PremiumThe court considered whether the Tribunal was right in directing the Income-tax Officer to grant weighted deduction under Section 35B on ECGC premium. The court referred to its own decision in CIT v. Alleppey Co. Ltd., which held that the ECGC premium is eligible for weighted deduction under Section 35B(1)(b)(ii). The court answered the question in the affirmative, in favor of the assessee.Conclusion:- Income-tax Reference Nos. 227 and 228 of 1987:- Question No. 1: Declined to be answered.- Question No. 2: Answered in the negative, in favor of the Revenue.- Question No. 3: Answered in the affirmative, in favor of the assessee.- Question No. 4: Answered in the affirmative, in favor of the assessee.- Income-tax Reference Nos. 89 and 90 of 1987:- Question: Declined to be answered.The court directed that a copy of the judgment be sent to the Income-tax Appellate Tribunal, Cochin Bench, for passing consequential orders.