1983 (8) TMI 106 - AT - Income Tax

Appellate Assistant Commissioner, Development Allowance, Expenditure Incurred, Foreign Currency, Hybrid System, Protective Assessment, Weighted Deduction

Issues Involved:
1. Entitlement to weighted deduction under section 35B of the Income-tax Act, 1961.
2. Method of accounting for commission income.
3. Maintainability of the appeal by the assessee.

Detailed Analysis:

1. Entitlement to Weighted Deduction under Section 35B:
The primary issue is whether the assessee, a partnership firm engaged in ship brokering, is entitled to weighted deduction under section 35B of the Income-tax Act, 1961. The assessee claimed weighted deductions on various expenses, arguing that these were incurred for promoting services and facilities outside India. The Income Tax Officer (ITO) rejected the claim, stating that the assessee was not engaged in the export of goods, services, or facilities, and thus, was not entitled to any weighted deduction under section 35B.

The Commissioner (Appeals) also did not accept the assessee's claim, observing that the nature of the assessee's business did not involve exporting goods or services produced in India. The Commissioner (Appeals) noted that the assessee was helping in the import of foreign goods, services, or facilities into India, and thus, the market for the services rendered by the assessee was in India, not abroad.

The Tribunal, however, disagreed with the lower authorities. It concluded that the expenditure incurred by the assessee was covered by sub-clauses (i), (ii), and (vi) of section 35B(1)(b). The Tribunal noted that the major part of the expenditure was on telex messages sent to foreign parties, which could not be considered private communications. The Tribunal also referred to the case of Indian Hotels Co. Ltd., where it was held that actual export of goods was not a prerequisite for claiming deduction under section 35B. Consequently, the Tribunal held that the assessee was entitled to weighted deduction under section 35B for the expenses incurred.

2. Method of Accounting for Commission Income:
The second issue concerns the method of accounting for commission income. The assessee followed a hybrid system of accounting, wherein commission income was accounted for on a cash basis, while expenses were accounted for on a mercantile basis. The ITO rejected this method and assessed the commission on an accrual basis, leading to a protective assessment of Rs. 5,08,510.

The Tribunal observed that the assessee had consistently followed this hybrid method of accounting since its inception, and this method had been accepted by the revenue authorities in previous years. The Tribunal noted that the assessee's commission income depended on the receipt of freight by the consignor, which was often beyond the assessee's control. The Tribunal held that the hybrid method of accounting was a recognized system and that true profits could be deduced from it. Therefore, the Tribunal concluded that the ITO was not justified in rejecting the assessee's method of accounting.

3. Maintainability of the Appeal by the Assessee:
The third issue is whether the appeal by the assessee was maintainable. The revenue argued that since the returned income had been accepted and there was no additional tax liability, the assessee had no grievance and thus, no right to appeal. The Tribunal rejected this argument, stating that the assessee was aggrieved by the rejection of its method of accounting, which had implications for future assessments.

The Tribunal emphasized that the right to appeal should be liberally construed and that the assessee had a legitimate grievance regarding the method of accounting. The Tribunal held that the assessee was entitled to maintain an appeal under section 246(1)(c) of the Income-tax Act, as the assessee was objecting to the amount of income assessed and the method of accounting adopted by the ITO.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the assessee was entitled to weighted deduction under section 35B for the expenses incurred. It also upheld the assessee's method of accounting for commission income and confirmed the maintainability of the appeal, providing a detailed rationale for its decisions on each issue.

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