1994 (2) TMI 107 - AT - Income Tax

Accounting Year, Assessment Year, Business Expenditure, Business Income, Deduction Of Interest, Development Allowance, Foreign Exchange, Litigation Expenses, Mercantile System, Previous Year, Sale Proceeds, Weighted Deduction

Summary

Issues Involved:
1. Taxability of cash compensatory support received from the Government.
2. Weighted deduction under section 35B on inspection fees and certifying charges.
3. Weighted deduction under section 35B on cartons and packing materials.
4. Weighted deduction on interest on shipping loan account and bank charges.
5. Disallowance of provision for litigation expenses.
6. Disallowance of provision for interest beyond the previous year.
7. Weighted deduction under section 35B for polythene bags, cartons, and tea chests.
8. Classification of the assessee as a small-scale exporter.
9. Admission of additional grounds and cancellation of interest under sections 139(8) and 215.

Detailed Analysis:

1. Taxability of Cash Compensatory Support:
The assessee received Rs. 17,72,275 as cash incentives from the Dy. Chief Controller of Imports and Exports. Rs. 13,14,954 was credited to the profit and loss account, while Rs. 4,57,320 was carried forward to the balance sheet. The Assessing Officer taxed the entire amount, and the CIT (Appeals) upheld this decision. The Tribunal dismissed the assessee's contention regarding Rs. 13,14,954 due to the insertion of clause (iiib) to section 28 by the Finance Act, 1990, effective from 1-4-1967. Regarding Rs. 4,57,320, the Tribunal noted that the liability to refund the cash assistance arises only under specific contingencies, which had not materialized as of 31-3-1979, thus upholding its inclusion in the income.

2. Weighted Deduction on Inspection Fees and Certifying Charges:
For the assessment year 1979-80, the Tribunal allowed weighted deduction under section 35B on inspection fees and certifying charges, relying on the Calcutta High Court's decision in Union Carbide India Ltd. v. CIT. However, for the assessment year 1981-82, such deduction was disallowed due to the omission of clause (vi) to section 35B(1)(b) effective from 1-4-1981.

3. Weighted Deduction on Cartons and Packing Materials:
The Tribunal held that the assessee is not entitled to weighted deduction under section 35B on cartons and packing materials, except for printing charges on these items. The Assessing Officer was directed to allow weighted deduction on printing charges after giving the assessee an opportunity to be heard.

4. Weighted Deduction on Interest on Shipping Loan Account and Bank Charges:
For the assessment year 1979-80, the Tribunal allowed weighted deduction on interest on the shipping loan account, directing the Assessing Officer to verify the claim's quantum. However, weighted deduction on bank charges was disallowed, following the Special Bench decision in J. Hemchand & Co.

5. Disallowance of Provision for Litigation Expenses:
The Tribunal allowed a deduction of Rs. 76,234.40 for litigation expenses related to the hijacking of the ship m.v. Twilight, based on actual expenses incurred as per the Union Bank of India's Debit Note dated 30-6-1978. The provision for Rs. 4 lakhs was not fully allowed due to the lack of detailed break-up of probable costs.

6. Disallowance of Provision for Interest Beyond the Previous Year:
The Tribunal upheld the disallowance of interest provision extending beyond the previous year, citing the Kerala High Court's decision in Tara Agencies v. CIT. The Tribunal found no substantial fresh facts to deviate from this precedent, asserting that each year's interest should be assessed separately.

7. Weighted Deduction for Polythene Bags, Cartons, and Tea Chests:
For the assessment year 1981-82, the Tribunal disallowed weighted deduction under section 35B for polythene bags, cartons, and tea chests, as they do not fall under advertisement and publicity. The CIT (Appeals)'s decision to grant such deduction was overturned.

8. Classification as a Small-Scale Exporter:
The Tribunal upheld the CIT (Appeals)'s decision that the assessee is a small-scale unit, eligible for weighted deduction under section 35B, based on the Central Excise Rules, 1944 license and the Kerala Government's certification. The Tribunal emphasized a liberal construction of the short-lived provision of section 35B(1A).

9. Admission of Additional Grounds and Cancellation of Interest:
The Tribunal allowed the CIT (Appeals) to entertain additional grounds regarding the levy of interest under sections 139(8) and 215, following the Supreme Court's decision in Jute Corpn. of India Ltd. v. CIT. Interest under section 139(8) was upheld, but the cancellation of interest under section 215 was confirmed.

Conclusion:
The assessee's appeals were partly allowed, and the revenue's appeal for the assessment year 1979-80 was partly allowed, while the appeal for the assessment year 1981-82 was allowed.