1995 (4) TMI 38 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to weighted deduction under section 35B(1)(b)(iii) of the Income-tax Act, 1961, for expenditure on transport of goods and marine insurance.
2. Interpretation of section 35B(1)(b)(iii) concerning exclusion criteria for different heads of expenditure.
3. Applicability of the phrase "wherever incurred" in section 35B(1)(b)(iii) to expenditure on carriage of goods outside India and insurance of goods in transit.

Issue-Wise Detailed Analysis:

1. Entitlement to weighted deduction under section 35B(1)(b)(iii) of the Income-tax Act, 1961, for expenditure on transport of goods and marine insurance:

The assessee, a registered firm exporting leather goods, claimed an export markets development allowance for the assessment year 1974-75 and subsequent years, including 1976-77. The Income-tax Officer initially declined this claim for 1974-75, which was later allowed by the Appellate Assistant Commissioner but subsequently disallowed by the Tribunal. The Tribunal held that the assessee was not entitled to the weighted deduction for expenses on transport of goods and marine insurance. The court examined section 35B(1)(a) and clause (b) of the Income-tax Act, which provide for a deduction of one and one-third times the amount of specified expenditure, excluding capital or personal expenses. Item (iii) of clause (b) specifies expenditure on the distribution, supply, or provision outside India of goods, services, or facilities, excluding expenditure incurred in India in connection therewith, or on the carriage of goods to their destination outside India, or on the insurance of goods while in transit.

2. Interpretation of section 35B(1)(b)(iii) concerning exclusion criteria for different heads of expenditure:

The court noted that various items in clause (b) of section 35B(1) required expenditure to be incurred wholly and exclusively on activities like advertisement or publicity outside India, obtaining market information, etc., without necessarily being incurred outside India. However, item (iii) specifically excludes expenditure incurred in India in connection with the distribution, supply, or provision outside India. The court referred to V. D. Swami and Co. Pvt. Ltd. v. CIT [1984] 146 ITR 425, which emphasized that weighted deduction is not available for expenditure incurred inside India. The court clarified that exclusionary clauses in section 35B(1)(b) are confined to item (iii), and other items in clause (b) should be interpreted independently to determine if the expenditure is related to the specific item, regardless of where it is incurred.

3. Applicability of the phrase "wherever incurred" in section 35B(1)(b)(iii) to expenditure on carriage of goods outside India and insurance of goods in transit:

The court addressed the interpretation of the phrase "wherever incurred" in item (iii). It noted that the phrase "not being expenditure incurred in India" applies to the first part of item (iii) concerning distribution, supply, or provision outside India, but not to the second part concerning expenditure on carriage of goods to their destination outside India or on the insurance of goods while in transit. The court emphasized that imposing the qualifying expression "not being expenditure incurred in India" on the second part would render the phrase "wherever incurred" meaningless. The court concluded that the expenditure on carriage of goods and insurance should not necessarily be incurred outside India. The court also highlighted the legislative intention to cover transport costs for export incurred in India to ensure fair competition among manufacturers, irrespective of their location. The court found that the Tribunal erred in law by requiring the expenditure on carriage and insurance to be incurred outside India.

Conclusion:

The court answered the questions in favor of the assessee, ruling that the Tribunal committed an error of law. The assessee is entitled to the weighted deduction under section 35B(1)(b)(iii) for expenditure on transport of goods and marine insurance, regardless of whether the expenditure was incurred in India or outside India. The court emphasized the need for a balanced interpretation that aligns with the legislative intent and promotes fair competition among exporters. There was no order as to costs.