2000 (9) TMI 11 - HC - Income Tax

Summary

Issues:
1. Interpretation of disallowance under sub-section (5) of section 40A of the Income-tax Act, 1961 for salary paid to an employee working abroad.
2. Eligibility of freight and insurance charges for weighted deduction under section 35B of the Income-tax Act, 1961.

Analysis:

*Interpretation of Disallowance under Section 40A (5) for Salary Paid Abroad:*
The primary issue revolved around whether the salary paid to an employee working outside India should be considered for determining disallowance under sub-section (5) of section 40A of the Income-tax Act, 1961. The court referred to the precedent set by the Supreme Court in CIT v. Continental Construction Ltd. [1998] 230 ITR 485, where it was established that salary paid to an employee for work outside India is exempt from disallowance under section 40A(5). The court emphasized the exception provided in section 40A(5)(b), stating that any salary or allowance paid to an employee for employment outside India falls outside the purview of disallowance under section 40A(5)(a). Consequently, the court ruled in favor of the assessee, allowing the deduction of the salary paid to the employee working abroad.

*Eligibility of Freight and Insurance Charges for Weighted Deduction under Section 35B:*
The second issue pertained to the eligibility of freight and insurance charges for weighted deduction under section 35B of the Income-tax Act, 1961. Citing the judgment in CIT v. M. M. Khambhatwala [1992] 198 ITR 144 (Guj), the court held that expenses such as premium, freight, etc., incurred in the process of exporting goods cannot be factored into the calculation for weighted deduction under section 35B. Consequently, the court ruled in favor of the Revenue, denying the assessee's claim for weighted deduction on the freight and insurance charges amounting to Rs.1,37,639.

In conclusion, the court answered the common question for both assessment years 1978-79 and 1979-80 in favor of the assessee regarding the disallowance of salary paid to an employee working abroad under section 40A(5). However, the court ruled in favor of the Revenue regarding the ineligibility of freight and insurance charges for weighted deduction under section 35B. The reference was disposed of with no order as to costs.