1989 (4) TMI 124 - AT - Income Tax

Issues Involved:

1. Weighted deduction claims under Section 35B.
2. Taxability of Cash Compensatory Support (CCS), Duty Drawback (DBK), and Import Entitlements (IE).
3. Treatment of exchange rate differences.
4. Reduction of Central subsidy from the cost of fixed assets for depreciation and investment allowance.
5. Validity of the Special Bench composition.
6. Minority view consideration for reference.

Issue-wise Detailed Analysis:

1. Weighted Deduction Claims Under Section 35B:

The Tribunal addressed the assessee's claims for weighted deduction under Section 35B for various expenses related to exports for the assessment years 1979-80 to 1982-83. The Tribunal did not uphold the claims for items such as interest on post-shipment export credit loans, exchange rate differences, inland and ocean freight, forwarding charges, inspection fees, insurance charges, bank charges, and 50% of general charges, postage, telegrams, telephone, printing, and stationery related to exports. This decision followed the earlier orders of the Tribunal in the assessee's own case and the decision of the Special Bench in J.H. & Co. v. Second ITO [1982] 1 SOT 150 (Bom.).

For the assessment year 1982-83, the Tribunal upheld the order of the Commissioner of Income-tax (Appeals) allowing weighted deduction on expenses for laboratory and quality control, despite Rule 6AA of the Income-tax Rules, 1962 coming into effect from 1-8-1981. The Tribunal reasoned that the assessment was pending on 1-8-1981 when Rule 6AA was introduced, thus the claim could not be considered under it.

2. Taxability of Cash Compensatory Support (CCS), Duty Drawback (DBK), and Import Entitlements (IE):

The Tribunal examined the nature of CCS, DBK, and IE received by the assessee. The CIT(A) had classified CCS as partly capital and partly revenue, taxing 55% of it as revenue receipt. The Tribunal, however, held that CCS was on capital account, aimed at developing infrastructure for increasing exports, not to compensate for losses in export trade.

For DBK, the Tribunal held it as taxable under Section 41(1) since it represented a remission or drawback. The Tribunal also affirmed the taxability of amounts received from the sale of import entitlements, given their statutory basis under the Imports and Exports (Control) Act, 1947.

3. Treatment of Exchange Rate Differences:

The Tribunal held that gains from exchange rate differences were taxable as revenue receipts, relying on the Supreme Court decision in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1.

4. Reduction of Central Subsidy from the Cost of Fixed Assets for Depreciation and Investment Allowance:

The Tribunal ruled that the Central subsidy did not relate to the cost of the asset and thus should not reduce the cost for computing depreciation and investment allowance. This decision aligned with earlier rulings in Pioneer Match Works v. ITO [1983] 3 ITD 714 (Mad.) and other cited cases.

5. Validity of the Special Bench Composition:

A preliminary objection was raised regarding the composition of the Special Bench hearing the Reference Applications. The Tribunal dismissed this objection, stating that the President had directed the applications to be placed before a three-member Special Bench, satisfying the requirements of rule 40 of the Income-tax (Appellate Tribunal) Rules, 1963.

6. Minority View Consideration for Reference:

The assessee sought to raise questions based on the minority orders of the Special Bench members. The Tribunal declined to refer these questions, emphasizing that under Section 255(4), the majority view constitutes the Tribunal's decision.

Questions Referred to the High Court:

Assessee's Questions:

1. Whether the amounts of duty drawback received were not capital receipts and thus taxable.
2. Whether the gains from the sale of import entitlements were not capital receipts and thus taxable.
3. Whether certain export-related expenses were not entitled to weighted deduction under Section 35B.

Department's Questions:

1. Whether the CCS amounts were not revenue receipts and thus not taxable.
2. Whether the Tribunal erred in distinguishing the decision of the Calcutta High Court in Jeewanlal (1929) Ltd. v. CIT.
3. Whether the Tribunal erred in upholding the CIT(A)'s decision not to enhance the assessment by withdrawing weighted deduction allowed under Section 35B.
4. Whether the Central subsidy should not be reduced from the cost of fixed assets for investment allowance purposes.
5. Whether the assessee was eligible for weighted deduction on expenses for wrappers after bifurcation by the Income-tax Officer.
6. Whether the assessee was eligible for weighted deduction on 50% of expenses for postage, telegram, telephone, printing, and stationery on exports.
7. Whether the Tribunal erred in allowing weighted deduction for laboratory and quality control expenses for the A.Y. 1982-83 under Rule 6AA.

The Tribunal concluded by finalizing the Statement of the Case and forwarding relevant documents and orders to the High Court for its esteemed opinion.

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