2002 (7) TMI 21 - HC - Income Tax

Weighted deduction under section 35B - technical director s salary - The condition precedent for weighted deduction on a salary of the person is that he should perform the services outside India. Admittedly, the technical director had rendered the services in India and not outside India and when the services had been rendered by the director in India and he has been paid the salary for the same in India, the payment does not come under sub-clause (viii) of sub-section (1)(b) of section 35B of the Income-tax Act, 1961. Merely because his services have some connection with export, his salary is not eligible for weighted deduction, as required under sub-clause (viii) of sub-section (1)(b) of section 35B of the Income-tax Act, 1961. Tribunal was not justified in holding that weighted deduction under section 35B of the Income-tax Act, 1961, is admissible on technical director s salary

Summary

Issues:
1. Interpretation of section 35B of the Income-tax Act, 1961 regarding weighted deduction on technical director's salary.

Analysis:
The case involved a dispute over the admissibility of weighted deduction under section 35B of the Income-tax Act, 1961, on the salary paid to a technical director amounting to Rs. 67,948 by an assessee-company engaged in manufacturing and sale of ready-made garments. The Assessing Officer rejected the claim of the assessee, stating that it did not fall under any sub-clauses of sub-section (1)(b) of section 35B. The Commissioner of Income-tax (Appeals) upheld this decision. However, the Tribunal allowed the claim, citing sub-clause (viii) of section 35B(1)(b) which pertains to services outside India in connection with export. The Tribunal held that since the salary was paid in India for services rendered in India, it qualified for weighted deduction under sub-clause (viii).

The main contention revolved around the interpretation of sub-clause (viii) of section 35B(1)(b), which specifies that services performed outside India in connection with export are eligible for deduction. The Revenue argued that unless services are rendered outside India, weighted deduction on the salary of a technical director is not permissible. They relied on precedents such as CIT v. Hero Cycles (P) Ltd. and Brooke Bond India Ltd. v. CIT to support their stance. On the other hand, the assessee's counsel contended that even if the services were related to export and performed in India, the salary should qualify for deduction under sub-clause (viii). They cited cases like CIT v. Stepwell Industries Ltd. and V. D. Swami and Co. (P) Ltd. v. CIT to bolster their argument.

The High Court referred to the judgments in CIT v. Hero Cycles (P) Ltd. and Brooke Bond India Ltd. v. CIT, emphasizing that the weighted deduction under section 35B is subject to specific conditions mentioned in the sub-clauses. The court highlighted that the plain language of sub-clause (viii) requires services to be performed outside India for eligibility. Since the technical director's services were rendered in India, the payment of salary did not meet the criteria for deduction under sub-clause (viii) of section 35B(1)(b). Consequently, the court ruled in favor of the Revenue, stating that the Tribunal erred in allowing weighted deduction on the salary paid to the technical director for services provided in India.

In conclusion, the High Court held that the assessee's case did not fall under any sub-clauses of sub-section (1)(b) of section 35B, thereby disallowing the weighted deduction on the technical director's salary. The judgment favored the Revenue and ruled against the assessee, highlighting the importance of meeting the specific criteria outlined in the relevant provisions for claiming deductions under the Income-tax Act, 1961.