2000 (11) TMI 115 - HC - Income Tax

Business Expenditure, Interpretation Of Taxing Statutes, Strict Construction, Export Markets Development

Issues Involved:
1. Whether the salary payable to the floating staff for the period of employment outside India should not be considered for disallowance under section 40A(5)(a) of the Income-tax Act, 1961.
2. Whether the assessee was entitled to weighted deduction under section 35B of the Income-tax Act, 1961, on brokerage and commission on freight paid in foreign countries for the assessment year 1977-78.

Issue-wise Detailed Analysis:

1. Disallowance of Salary Payable to Floating Staff under Section 40A(5)(a):

The primary issue was whether the salary payable to the floating staff for the period of employment outside India should be considered for disallowance under section 40A(5)(a) of the Income-tax Act, 1961. The Assessing Officer included the salary payable to the floating staff of an Indian vessel for a period of employment outside India, reasoning that as long as the Indian flag was flying on the ship, it was considered Indian territory. Consequently, the place of employment of the floating staff was deemed to be in India, making section 40A(5) applicable.

The Commissioner of Income-tax (Appeals) disagreed, interpreting section 40A(5)(b)(i) to exclude the salary paid for employment outside the territorial boundaries of India from disallowance. This decision was upheld by the Tribunal, leading the Department to refer the matter to the High Court.

The High Court analyzed section 40A(5) and emphasized the distinction between "employment in India" and "employment outside India." It was noted that section 40A(5)(a) imposes a ceiling on salary expenditure for employment in India, while section 40A(5)(b)(i) excludes salary expenditure for employment outside India from this ceiling. The court rejected the Department's argument that the terms "working outside India" and "employment outside India" were synonymous, clarifying that the terms of the contract, nature of work, and place of performance were crucial in determining the location of employment.

The court also considered the definition of "India" under section 2(25A), which does not extend to Indian ships operating beyond territorial waters. The circular issued by the Board (No. 586, dated November 28, 1990) supported this interpretation, indicating that Indian ships outside territorial waters do not form part of "India" for tax purposes.

The High Court concluded that the salary paid to the floating staff for employment outside India should not be disallowed under section 40A(5)(a), answering the question in the affirmative, i.e., against the Department and in favor of the assessee.

2. Weighted Deduction under Section 35B on Brokerage and Commission:

An additional question in I.T.R. No. 342 of 1988 concerned whether the assessee was entitled to weighted deduction under section 35B of the Income-tax Act, 1961, on brokerage and commission on freight paid in foreign countries for the assessment year 1977-78.

The High Court referred to the judgment of the Supreme Court in the case of Aravinda Paramila Works v. CIT [1999] 237 ITR 284, which guided the decision. Consequently, the question was answered in the negative, i.e., in favor of the Department and against the assessee.

Conclusion:

The High Court ruled that the salary payable to the floating staff for the period of employment outside India should not be considered for disallowance under section 40A(5)(a), siding with the assessee. However, the court denied the assessee's claim for a weighted deduction under section 35B on brokerage and commission on freight paid in foreign countries, siding with the Department.

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