Interest on Packing Credit not Eligible for Export Market Development Allowance under Income Tax Act

The Bombay High Court ruled in favor of the Revenue and against the assessee, holding that interest paid on packing credit is not eligible for export market development allowance under Section 35B of the Income Tax Act. The Court emphasized that such expenditure does not involve the performance of services outside India, making it non-deductible. The judgment aligned with a Division Bench decision and no conflicting precedent was presented. Therefore, the Court disposed of the Reference accordingly.

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Issues:
Interpretation of Section 35B of the Income Tax Act - Eligibility of interest paid on packing credit for export market development allowance.

Analysis:
The judgment by the Bombay High Court involved a reference at the instance of the Revenue regarding the eligibility of interest paid on packing credit for export market development allowance under Section 35B of the Income Tax Act, 1961. The Tribunal was required to refer the question of law arising from its order dated 23rd May, 1988 in Income Tax Appeal 42/(Bom)/1985. The Tribunal allowed the claim for weighted deduction on packing credit based on a judgment of the High Court of Madhya Pradesh. However, the Revenue cited a Division Bench judgment of the Bombay High Court in the case of KEC International Ltd. vs. Commissioner of Income Tax, Central Range-II (2010) 322 ITR 465, which held that weighted deduction is permissible only to the extent indicated in the judgment of the Andhra Pradesh High Court in the case of Commissioner of Income-tax vs. Coromandel Agro Products Oil Limited (1998) 230 ITR 335, differing from the view of the High Court of Madhya Pradesh.

The assessee, a private limited company, claimed weighted deduction on packing credit interest for the assessment year 1977-78. The Income-tax Officer allowed a deduction of &8377; 5,68,756/-, which was 1/3rd of the expenses considered eligible for weighted deduction. The Commissioner directed that only expenditure on entertainment of foreign customers should be considered for weighted deduction. The Tribunal, following the Madhya Pradesh High Court judgment, allowed the claim for weighted deduction on packing credit. However, the Bombay High Court, relying on the Division Bench judgment, held that the interest paid on packing credit is not eligible for export market development allowance under Section 35B of the Income Tax Act. The Court emphasized that obtaining a packing credit loan or paying interest thereon in India does not entail the performance of any service outside India, making such expenditure non-deductible.

In conclusion, the Bombay High Court answered the question of law in favor of the Revenue and against the assessee, stating that weighted deduction cannot be granted on interest paid on packing credit. The judgment aligned with the Division Bench decision, and no conflicting precedent was brought to the Court's attention. Therefore, the Reference was disposed of accordingly.

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