1998 (4) TMI 10 - HC - Income Tax

Export Markets Development Allowance, Weighted Deduction, Condition Precedent, Business Expenditure, Disallowance

Summary

Issues Involved:
1. Entitlement to weighted deduction under section 35B of the Income-tax Act, 1961.
2. Calculation of disallowance under section 40A(8) of the Income-tax Act, 1961, based on net interest or gross interest.

Issue-wise Detailed Analysis:

1. Entitlement to Weighted Deduction under Section 35B of the Income-tax Act, 1961:

The assessee, a private limited company, claimed a weighted deduction under section 35B of the Income-tax Act, 1961, for its chartering business. The Income-tax Officer rejected this claim, stating it did not fall under any sub-clauses (i) to (ix) of clause (b) of sub-section (1) of section 35B. The Commissioner of Income-tax (Appeals) ("the CIT") and the Tribunal, however, held that the expenditure might fall under some sub-clauses, and directed verification.

Section 35B deals with export markets development allowance, allowing a deduction of one and one-third times the expenditure incurred, provided it falls under the specified sub-clauses. The expenditure must be wholly and exclusively for purposes mentioned in sub-clauses (i) to (ix) of clause (b). Rule 6AA of the Income-tax Rules, 1962, further prescribes activities for export markets development allowance.

The court concluded that the nature of the expenditure incurred by the assessee did not fall under any sub-clauses of clause (b) of sub-section (1) of section 35B or clauses (a) to (e) of rule 6AA. The court referred to Supreme Court decisions in CIT v. Stepwell Industries Ltd. [1997] 228 ITR 171 (SC) and CIT v. Hero Cycles Pvt. Ltd. [1997] 228 ITR 463 (SC), emphasizing that the onus is on the assessee to prove that the expenditure falls under the specified sub-clauses. The court held that the Tribunal was not right in law in holding that the assessee is entitled to weighted deduction under section 35B.

2. Calculation of Disallowance under Section 40A(8) of the Income-tax Act, 1961:

The assessee claimed disallowance of interest under section 40A(8) on net interest. The Income-tax Officer rejected this, stating disallowance should be on gross interest. The CIT and the Tribunal held that net interest should be considered for disallowance under section 40A(8).

Section 40A(8) states that fifteen percent of the expenditure by way of interest on deposits received by a company (other than a banking or financial company) shall not be allowed as a deduction. The issue was whether "interest" referred to net or gross interest.

The court referenced a Division Bench decision in Andhra Prabha (P.) Ltd. v. CIT [1999] 238 ITR 525, which held that the section does not use the term "net interest," and the assessee cannot set off interest income against interest expenditure before applying section 40A(8). The court emphasized the statutory language's clarity, citing Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC), which stated that unambiguous statutory language should not be interpreted to reflect supposed legislative intent.

The court held that the Tribunal was not correct in law in holding that net interest payment alone should be considered for calculating disallowance under section 40A(8). The question was answered accordingly, and the tax case was disposed of without any order as to costs.