Export incentives and accounting method: receipt basis accepted for export benefits, while weighted deduction on export expenses was upheld

Export incentives such as drawback, cash assistance and replenishment licence benefits were treated as separate revenue receipts, taxable when the right to receive them accrued and not merely in the year of export. The assessee's consistent method of recording export sales on mercantile basis and export incentives on receipt basis was accepted, because rejection under section 145(1) requires a showing that the method does not properly determine income. Future benefit from replenishment licences was not assessable on notional accrual in the export year, and the weighted deduction claim for specified export-related expenses under section 35B was also upheld.

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Issues: (i) Whether export incentives consisting of drawback, cash assistance and replenishment licence benefits were required to be brought to tax in the year of export on accrual basis and whether the assessee's method of accounting could be rejected under section 145(1) of the Income-tax Act, 1961; (ii) Whether weighted deduction under section 35B of the Income-tax Act, 1961 was allowable in respect of the specified export-related expenses.

Issue (i): Whether export incentives consisting of drawback, cash assistance and replenishment licence benefits were required to be brought to tax in the year of export on accrual basis and whether the assessee's method of accounting could be rejected under section 145(1) of the Income-tax Act, 1961.

Analysis: Export benefits arising from sales did not form part of the export sale price itself, but were separate revenue receipts arising from Government schemes and became taxable according to the point at which the relevant right to receive them accrued. The assessee had consistently followed a system of accounting under which export sales were recorded on mercantile basis while export incentives were recorded on receipt basis, and that method had been accepted in earlier years. The proviso to section 145(1) could be invoked only where the method employed failed to enable proper deduction of income, which was not shown here. The future advantage attached to replenishment licences was not assessable in the year of export, and drawback or cash assistance also did not warrant inclusion on notional accrual in that year.

Conclusion: The addition on account of export incentives was not sustainable, and the assessee's method of accounting was accepted for this purpose.

Issue (ii): Whether weighted deduction under section 35B of the Income-tax Act, 1961 was allowable in respect of the specified export-related expenses.

Analysis: The Commissioner (Appeals) had allowed the claim after examining the nature of the expenses and the statutory conditions for weighted deduction, and no reason was found to disturb that allowance.

Conclusion: The allowance of weighted deduction was upheld.

Final Conclusion: The appeal failed in full, with both the addition relating to export incentives and the challenge to weighted deduction decided against the Revenue.

Ratio Decidendi: Where export incentives are separately receivable under statutory schemes and the assessee's regularly followed accounting method records them on receipt basis, the revenue cannot compel accrual taxation in the export year unless the statutory conditions for rejecting that method are satisfied.

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