2012 (9) TMI 660 - HC - Income Tax

Weighted deduction u/s 35B in respect of bank interest and bank charges - export packing credit facility from the State Bank of India - Held that - As decided in M/s. KEC International Ltd. Versus CIT 2009 (1) TMI 5 - BOMBAY HIGH COURT the very definition of the expression packing credit as advanced in the Export Credit (Interest Subsidy) Scheme, 1968, indicates that it is a loan or advance for the purpose of purchase processing and packing of goods. The Reserve Bank requires the lending bank to furnish it a declaration in writing that the loan was granted for pre-shipment activities. - That necessarily means that the activities for which the loan has been granted have to be carried out within India - Section 35B(1)(b)(viii) operates only when there is a performance of services outside India. Mere obtaining of a packing credit loan or payment of interest thereon in India cannot be said to entail the performance of any service outside India. The said expenditure would, therefore, not be deductible - against assessee. Professional fees paid in respect of its cement project - Capital expenditure or Revenue expenditure - Held that - As decided in CIT Versus J. K. Chemicals Limited 1992 (10) TMI 18 - BOMBAY HIGH COURT & Trade Wings Limited v. Commissioner of Income-tax 1989 (9) TMI 21 - BOMBAY HIGH COURT order to decide whether to acquire some profit-making assets for the purposes of its business which would be of an enduring nature. The expenses incurred for the project report have, therefore, to be viewed as being capital in nature. Simply because the assessee had a running business of manufacturing it cannot be said that the expense for obtaining such a project report was a part of the expenses incurred by the assessee for running its business. It was clearly an expenditure incurred for ascertaining whether to acquire new assets of some durability for the purpose of earning profits - against assessee. Receipt from B.B.C. Limited, Switzerland under Memorandum of Settlement - Revenue receipt OR Capital receipt - Held that - The termination of distributorship agreement and the compensation allegedly paid in respect thereof was only a part of the normal running of the business of the assessee - conclusion is based on the fact that the assessee has not established that the termination of the distributorship agreement has resulted in a loss of source of income or has affected its trading contract. This was not even the assessee s case before the authorities before whom it was contended that the receipt was in the nature of a gift or akin to a gift. The material on record, in fact, establishes that the distributorship agreement was but one of the many contracts that the assessee had entered into. - It was one of the many activities that the assessee had engaged in and that the assessee is not prevented in any manner whatsoever from continuing a similar line of business with other enterprises - Tribunal didn t erred in treating it as Revenue receipt - against assessee.

Summary

Issues Involved:
1. Entitlement to weighted deduction under section 35B of the Income-tax Act, 1961 for bank interest and charges.
2. Classification of professional fees as capital or revenue expenditure.
3. Classification of Rs.75,00,000/- received under a Memorandum of Settlement as revenue or capital receipt.

Issue-wise Detailed Analysis:

Re: Question No.1:
The Tribunal held that the assessee was not entitled to the weighted deduction under section 35B of the Income-tax Act, 1961, for bank interest and charges incurred on Export Packing Credit facilities. The assessee had availed of an export packing credit facility from the State Bank of India and claimed the benefit of section 35B for the interest paid. The Tribunal relied on the Division Bench judgment in KEC International Limited v. Commissioner of Income-tax, which stated that packing credit loans or payment of interest thereon in India do not entail the performance of any service outside India, and thus, the expenditure would not be deductible. The question was answered in the negative, against the assessee and in favor of the Revenue.

Re: Question No.2:
The Tribunal held that the professional fees of Rs.71,200/- paid by the assessee in respect of its cement project was a capital expenditure and not revenue expenditure. The assessee conceded before the Tribunal that the issue was liable to be decided against it based on an earlier order in its own case. The High Court had previously answered a similar reference in favor of the Revenue, considering itself bound by the decisions in Commissioner of Income-tax v. J.K. Chemicals Ltd. and Trade Wings Limited v. Commissioner of Income-tax. This question was also answered in the negative, against the assessee and in favor of the Revenue.

Re: Question No.3:
The Tribunal held that Rs.75,00,000/- received by the assessee from B.B.C. Brown Broweri Company Limited, Switzerland under a Memorandum of Settlement dated 12th March, 1979, was a revenue receipt. The assessee had entered into an agreement with Hindustan Brown Broweri Limited (HBB) for the distribution of electrical motors. Upon the expiration of the agreement, the assessee was not reappointed as the distributor, and a settlement was reached with BBC. The payment of Rs.75,00,000/- was made without specifying the purpose, and the assessee did not clearly state the reason for the payment. The High Court noted that the termination of the distributorship agreement did not impair the assessee's trading structure or source of income, as the assessee was free to enter into similar agreements with other parties and was engaged in multiple business activities. The compensation was considered part of the normal running of the business. The question was answered in the negative, against the assessee and in favor of the Revenue.

Conclusion:
The Reference was answered in favor of the Revenue and against the assessee on all three questions. There was no order as to costs.