High Court rules in favor of assessee: Expenditure on samples for advertisement eligible for deduction

The High Court of Karnataka ruled in favor of the assessee, holding that expenditure on samples sent abroad for advertisement was eligible for weighted deduction under section 35B of the Income-tax Act, 1961. The court rejected the Revenue's argument that such expenditure fell under a different category, emphasizing the need for a liberal interpretation to encourage exports. The court's decision aligned with the assessee's position, emphasizing that sending samples for advertisement abroad could fulfill the section's objective.

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Issues:
Interpretation of section 35B of the Income-tax Act, 1961 regarding weighted deduction for expenditure on samples sent abroad.

Analysis:
The High Court of Karnataka considered two references under section 256(1) of the Income-tax Act, 1961, both concerning the availability of weighted deduction under section 35B for expenditure on samples sent abroad. The court focused on whether such expenditure falls under sub-clause (i) or sub-clause (vi) of section 35B(1)(b). The Revenue argued that samples were covered by sub-clause (vi), making them ineligible for deduction under sub-clause (i), while the assessee contended that sending samples for advertisement abroad should be covered by sub-clause (i) as it promotes export trade. The court noted that the purpose of sending samples for advertisement was undisputed and could fall under multiple sub-clauses of section 35B(1)(b), emphasizing the need for a liberal interpretation to fulfill the section's objective of encouraging exports.

The court examined the Board's Circular No. 27, dated August 16, 1969, which highlighted the need for expenditure to fall under one or more qualifying categories specified in the relevant sections and rules. This circular supported the interpretation that expenditure could be covered by multiple sub-clauses of section 35B(1)(b), reinforcing the assessee's argument that sending samples for advertisement abroad could align with the section's intent.

Regarding the Revenue's reliance on the amended Explanation 2 to section 35B, which excluded certain types of expenditure, the court rejected the contention that expenditure on samples sent for advertisement should be considered purchasing or manufacturing expenses. Consequently, the court disagreed with the Revenue's position and ruled in favor of the assessee, holding that the expenditure on samples sent abroad for advertisement was eligible for weighted deduction under section 35B.

In conclusion, the court answered the question referred to them in the negative and against the Revenue, affirming the availability of weighted deduction for expenditure on samples sent abroad for advertisement under section 35B of the Income-tax Act, 1961.

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