1991 (1) TMI 190 - AT - Income Tax

Summary

Issues Involved:
1. Exercise of jurisdiction under section 263 by the Commissioner of Income-tax (CIT).
2. Eligibility for weighted deduction under section 35B for purchases and commission expenses.
3. Conditions under section 35B(1A) for claiming weighted deduction.
4. Entitlement to weighted deduction for specific expenditure items.

Detailed Analysis:

1. Exercise of Jurisdiction under Section 263 by the Commissioner of Income-tax (CIT):
The Commissioner of Income-tax (CIT) set aside the original assessment order dated 15-1-1983 under section 263, directing a fresh assessment. The CIT's action was based on the observation that the Income-tax Officer (ITO) had not properly applied his mind while allowing the weighted deduction claim. The CIT specifically mentioned the expenditure of Rs. 1,31,12,831 for purchases and expenses in the Kuwait Branch and commission payments amounting to Rs. 7,61,892. The Tribunal found that the CIT had come to a tentative conclusion that some items were not entitled to weighted deduction and that the ITO had accepted the claims without proper examination. Therefore, the Tribunal upheld the CIT's order under section 263, dismissing the assessee's appeal against it.

2. Eligibility for Weighted Deduction under Section 35B for Purchases and Commission Expenses:
The fresh assessment order denied weighted deduction for two items: purchases amounting to Rs. 1,30,82,011 and commission expenses of Rs. 7,61,892. The assessee argued that except for imported instruments costing Rs. 55,96,913, all other items were necessary for rendering services related to contract execution and should be considered for weighted deduction. The Tribunal found that certain items like hardware, concrete mix, and cement could not be wholly and exclusively considered for the performance of services. It estimated reasonable amounts for these items and denied weighted deduction for Rs. 34 lakhs out of the total expenditure of Rs. 1,30,82,011. The Tribunal also partially allowed the commission expenses, retaining disallowance for Rs. 3,45,000 paid to M/s. Mitsui & Co., Japan, and remanded the matter for fresh adjudication.

3. Conditions under Section 35B(1A) for Claiming Weighted Deduction:
Section 35B(1A) stipulates that no deduction under this section shall be allowed for any expenditure incurred after 31-3-1978 unless the assessee is engaged in the business of export of goods as a small-scale exporter or holder of an Export House Certificate, or in the business of providing technical know-how or rendering services in connection with it. The Tribunal found that the assessee's business involved the design, engineering, and fabrication of tanks, which were then exported and erected abroad. This activity was considered to involve the provision of technical know-how, thus fulfilling the conditions under section 35B(1A).

4. Entitlement to Weighted Deduction for Specific Expenditure Items:
The Tribunal analyzed the specific expenditure items and found that certain items like hardware, concrete mix, and cement could not be wholly and exclusively attributed to the performance of services. It estimated reasonable amounts for these items and denied weighted deduction for Rs. 34 lakhs out of the total expenditure of Rs. 1,30,82,011. For the commission expenses, the Tribunal upheld the CIT(A)'s decision to allow weighted deduction for payments made before 1-4-1978 and remanded the matter for fresh adjudication regarding the payment to M/s. Mitsui & Co., Japan.

Separate Judgment by Judicial Member:
The Judicial Member agreed with the exercise of jurisdiction under section 263 but disagreed with the allowance of weighted deduction for certain items. He argued that the assessee did not fulfill the conditions under section 35B(1A) as it was not engaged in the provision of technical know-how but in the execution of contracts. He concluded that the expenditure was not incurred wholly and exclusively for the performance of services and thus did not qualify for weighted deduction.

Third Member's Opinion:
The Third Member agreed with the Accountant Member's view that the assessee was engaged in the provision of technical know-how and that the expenditure incurred was related to the performance of services. He concluded that the assessee was entitled to weighted deduction for the expenditure items as estimated by the Accountant Member, thus resolving the difference of opinion in favor of the assessee.

Conclusion:
The Tribunal upheld the CIT's order under section 263, dismissed the departmental appeal, and partly allowed the assessee's appeal on merits. The Third Member's opinion confirmed the allowance of weighted deduction for specific expenditure items, resolving the difference of opinion in favor of the assessee.