1986 (12) TMI 15 - HC - Income Tax

Issues Involved:
1. Entitlement to export markets development allowance under section 35B of the Income-tax Act, 1961.
2. Determination of the place where the expenditure was incurred.
3. Interpretation of the term "expenditure" under section 35B(1)(b)(iii) of the Income-tax Act, 1961.
4. Applicability of precedents cited by the assessee.

Detailed Analysis:

1. Entitlement to Export Markets Development Allowance under Section 35B:
The primary issue was whether the assessee was entitled to a weighted deduction under section 35B of the Income-tax Act, 1961, for the payment of Rs. 3,01,239 as a late shipment penalty. The Income-tax Officer initially disallowed the claim, but the Appellate Assistant Commissioner reversed this decision, allowing the weighted deduction on one-third of the expenditure. The Tribunal, however, set aside the Appellate Assistant Commissioner's decision, affirming the Income-tax Officer's original disallowance. The court held that the expenditure was incurred in India and was incidental to the carriage of goods, thereby not qualifying for the allowance under section 35B.

2. Determination of the Place Where the Expenditure Was Incurred:
The Tribunal found that the situs of the contract, the sale, the dispute, and its resolution through arbitration were all in India. Despite the payment being made in foreign currency with the Reserve Bank of India's approval, the court concluded that the expenditure was incurred in India. The court emphasized that the liability to pay the penalty arose in India due to the failure to ship the goods on time, and the subsequent arbitration and award were also conducted in India. Therefore, the place of payment did not determine the place of expenditure.

3. Interpretation of the Term "Expenditure" under Section 35B(1)(b)(iii):
The court analyzed the meaning of "expenditure" and "payment," stating that they cannot be equated. The assessee's liability to pay the penalty arose in India, and the expenditure was considered incurred in India when the money was arranged to be remitted abroad. The court referred to the relevant provisions of section 35B, highlighting that if the expenditure was incurred in India or on the carriage of goods to their destination outside India, the assessee would not be entitled to the allowance. The court did not find it necessary to decide whether the expenditure was incurred on the carriage of goods, as the primary determination was that the expenditure was incurred in India.

4. Applicability of Precedents Cited by the Assessee:
The assessee cited several decisions to support their claim, including:
- Indian Molasses Co. (Private) Ltd. v. CIT [1959] 37 ITR 66 (SC): Discussed the meaning of "expenditure."
- CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC): Interpreted "for the purpose of the business."
- CIT v. Kasturi Palayacat Co. [1979] 120 ITR 827 (Mad): Held that customs duty and packing charges incurred abroad were not excluded under section 35B.
- Nanhoomal Jyoti Prasad v. CIT [1980] 123 ITR 269 (All): Discussed demurrage as compensation for delay.
- Bharat General and Textile Industries Ltd. v. CIT [1985] 153 ITR 747 (Cal): Held that clearing and forwarding charges did not qualify for weighted deduction under section 35B.

The court considered these precedents but determined that they did not alter the conclusion that the expenditure was incurred in India. The court noted that while the assessee's arguments had merit, the primary issue of where the expenditure was incurred was decisive.

Conclusion:
The court answered the referred question in the negative, ruling in favor of the Revenue. The expenditure for the late shipment penalty was incurred in India, and therefore, the assessee was not entitled to the weighted deduction under section 35B of the Income-tax Act, 1961. The court did not impose any costs on the parties.

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