1997 (7) TMI 85 - HC - Income Tax

Business Expenditure, Development Allowance, Expenditure Incurred, Export Promotion, Political Party, Travelling Expenses, Weighted Deduction

Summary

Issues Involved:
1. Weighted deduction under section 35B of the Income-tax Act, 1961.
2. Allowability of expenditure on advertisement in a souvenir as business expenditure.

Issue-wise Detailed Analysis:

1. Weighted Deduction under Section 35B:

The first issue pertains to whether the Tribunal was right in allowing weighted deduction under section 35B to the assessee on various expenses including establishment expenses, printing and stationery expenses, vehicle repairs, meeting fees, export promotion expenses, travelling expenses, foreign telex and telephone expenses, and foreign postage.

The assessee, a private limited company engaged in the manufacture and sale of sports goods, claimed relief under section 35B for expenses totaling Rs. 5,93,638. The Assessing Officer allowed weighted deduction only on export markets development expenses amounting to Rs. 1,73,412, rejecting other claims. The Commissioner of Income-tax (Appeals) allowed weighted deduction on Rs. 1,256 under the head "Export markets development expenses" and proportionately on other expenses, but disallowed contributions to the export promotion council, export guarantee charges, and bank commission on export bills.

The Tribunal upheld the Commissioner's order and maintained the proportionate expenditures eligible for weighted deduction under section 35B. The High Court noted that the benefit of weighted deduction is available for specific categories of expenditure mentioned in sub-clauses under clause (b) of sub-section (1) of section 35B, provided the expenses are neither capital nor personal and are incurred wholly and exclusively on export promotion.

The High Court referenced several precedents, including decisions from the Bombay, Kerala, Calcutta, and Delhi High Courts, which supported the allowance of proportionate expenditures on salaries, printing and stationery, vehicle repairs, and other related expenses for deduction under section 35B. The Court emphasized a liberal interpretation of section 35B to encourage exports. Consequently, the Court held that the expenses in question directly or indirectly pertain to the promotion and development of the export market and are eligible for deduction under section 35B.

Question No. 1 was answered in the affirmative, in favor of the assessee and against the Department.

2. Allowability of Expenditure on Advertisement in Souvenir:

The second issue concerns whether the expenditure of Rs. 5,000 incurred by the assessee on advertisement in a souvenir brought by the Indian National Congress was allowable as business expenditure.

The Assessing Officer disallowed the expenditure, viewing it as a donation to a political party under the guise of advertisement. The Commissioner of Income-tax (Appeals) partially accepted the claim, allowing Rs. 1,000 as advertisement expenditure and treating the remaining amount as excessive. The Tribunal, however, allowed the entire sum of Rs. 5,000 as a deductible expense.

The High Court considered arguments from both sides. The Department argued that the payment to a political party was for extra-business considerations and amounted to a donation. The assessee contended that the expenditure was for genuine advertisement purposes, as evidenced by the publication of the advertisement in the souvenir.

The High Court referenced decisions from the Calcutta, Madras, Gujarat, Kerala, and Gauhati High Courts, which consistently held that expenditures on advertisements in souvenirs, even those published by political parties or charitable institutions, should be treated as business expenditures if they serve an advertisement purpose. The Court concluded that since the advertisement mentioned the goods manufactured by the assessee, it was a legitimate business expenditure and not a donation.

Question No. 2 was answered in the affirmative, against the Revenue and in favor of the assessee.