1997 (7) TMI 84 - HC - Income Tax

Development Allowance, Expenditure Incurred, Export Business, Export Promotion, Weighted Deduction

Summary

Issues Involved:
1. Eligibility of weighted deduction under section 35B on part of the salary and other establishment expenses.
2. Eligibility of weighted deduction on expenditure incurred on receiving and treating foreign buyers in India.

Issue-wise Detailed Analysis:

1. Eligibility of weighted deduction under section 35B on part of the salary and other establishment expenses:

Section 35B of the Income-tax Act, 1961, allows for a weighted deduction on certain specified categories of expenditure incurred wholly and exclusively on export promotion. The main objective is to incentivize the promotion of exports. The assessee claimed weighted deduction on a total expenditure of Rs. 12,04,147, but the Assessing Officer allowed only Rs. 1,64,577. The Commissioner of Income-tax (Appeals) increased this to Rs. 3,41,740, and the Tribunal further raised the deduction from 60% to 65% regarding establishment expenses, while maintaining full deduction for export promotion expenses.

The court examined various precedents, including CIT v. Bakul Cashew Co. [1992] 197 ITR 135 (Kerala High Court), CIT v. Aspinwall and Co. Ltd. [1993] 204 ITR 225 (Kerala High Court), and Jayshree Tea and Industries Ltd. v. CIT [1993] 202 ITR 695 (Calcutta High Court). These cases established that weighted deduction is allowable on salary and other expenses proportionate to the extent of export business. The Gujarat High Court in Testeels Ltd. v. CIT [1994] 205 ITR 230 upheld the deductibility of salary to the employee in charge of the export department to the extent of 50%.

In this case, the assessee had significant export sales amounting to Rs. 72,58,000 out of total sales of Rs. 92,61,902. Given the substantial proportion of export business, the court found the Tribunal's decision to allow 65% of the total expenditure on salary, bonus, etc., as weighted deduction to be appropriate. Thus, Question No. 1 was answered in the affirmative, in favor of the assessee and against the Revenue.

2. Eligibility of weighted deduction on expenditure incurred on receiving and treating foreign buyers in India:

The assessee incurred Rs. 4,839 on receiving and treating foreign buyers, categorized under "Export promotion expenses." The Assessing Officer disallowed Rs. 2,000 of this amount as entertainment expenses, but the Commissioner allowed the full amount as weighted deduction under section 35B.

The court referred to CIT v. Bata India Ltd. [1989] 178 ITR 669 (Calcutta High Court), where expenses incurred on foreign personnel for an export promotion conference in India were deemed deductible under sub-clause (ix) of section 35B(1)(b). Similarly, in Chief CIT v. H. M. T (International) Ltd. [1993] 203 ITR 573 (Karnataka High Court), expenses on foreign delegates were allowed as they were directly related to export promotion activities.

Given that the assessee's main business was export, the court concluded that expenses on foreign buyers aimed at promoting and developing the export market qualify for deduction under sub-clause (ix) of section 35B(1)(b). Therefore, Question No. 2 was also answered in the affirmative, in favor of the assessee and against the Revenue.