1999 (8) TMI 62 - HC - Income Tax

Capital Or Revenue Expenditure, Foreign Exchange, Weighted Deduction, Export Market Development Allowance

Issues Involved:
1. Justification of the deletion of the disallowance of Rs. 7,65,21,000 on account of additional liability due to the change in rupee-rouble parity ratio.
2. Entitlement to weighted deduction under section 35B(1)(b)(viii) of the Income-tax Act, 1961, for specific expenditures incurred by the assessee.

Issue-wise Detailed Analysis:

1. Justification of the deletion of the disallowance of Rs. 7,65,21,000:

The primary issue was whether the additional liability of Rs. 7,65,21,000, which arose due to the change in the rupee-rouble parity ratio under a protocol agreement between the Governments of India and USSR, was a trading liability and thus allowable. The assessee, a government-owned corporation, had included this liability in its profit and loss account for the assessment year 1979-80. The Assessing Officer disallowed this claim, arguing that the liability, initially related to raw material imports, had changed its character into a deferred payment account, providing an enduring advantage to the assessee.

The Commissioner of Income-tax (Appeals) reversed this decision, referencing the Calcutta High Court's ruling in CIT v. International Combustion (I.) Pvt. Ltd. [1982] 137 ITR 184, which treated such additional expenditure as an allowable trading liability arising on the date of devaluation. The Tribunal upheld the Commissioner's view, noting that the liability originated from the purchase of goods and remained a trading liability.

The court applied the principle from Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC), which distinguishes between trading and capital assets. Since the liability arose from a trading debt (purchase of raw material), it retained its character as a trading liability. Thus, the Tribunal correctly concluded that the additional liability due to the rupee-rouble parity change was allowable.

2. Entitlement to weighted deduction under section 35B(1)(b)(viii):

The second issue involved the assessee's claim for weighted deduction under section 35B(1)(b)(viii) for expenses incurred in Malaysia and Libya, and for erection sub-contracts expenses. The Assessing Officer denied this claim, stating that the expenses were not directly related to export market development. However, the Commissioner allowed the claim, and the Tribunal upheld this decision.

Section 35B(1)(b)(viii) allows for weighted deductions on expenditures incurred "wholly and exclusively on the performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities." The court noted that the expenses must relate to services performed outside India in connection with the execution of an export contract.

The Revenue argued that the expenses included manufacturing costs, which are not eligible for weighted deduction as per Explanation 2 to section 35B. However, the assessee's counsel clarified that the expenses were not manufacturing costs but related to site expenses and subcontractor payments for services performed outside India.

The Tribunal found that the expenses were indeed for services rendered outside India as part of a turnkey project, including design, manufacture, completion, testing, commissioning, operation, and maintenance. Thus, these expenses fell within the ambit of section 35B(1)(b)(viii).

Conclusion:

Both questions were answered in the affirmative, in favor of the assessee and against the Revenue. The additional liability due to the rupee-rouble parity change was deemed an allowable trading liability, and the weighted deduction under section 35B(1)(b)(viii) was justified for the specified expenditures. There was no order as to costs.

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