1988 (3) TMI 108 - AT - Income Tax

Summary

Issues Involved:
1. Relief under Section 80J
2. Claim of weighted deduction under Section 35B
3. Taxability of Cash Compensatory Support (CCS)
4. Taxability of Duty Drawback (DBK)
5. Taxability of Income from Sale of Import Entitlement (IE)
6. Taxability of income arising from exchange rate difference
7. Reduction of the amount of central subsidy from the cost of fixed assets for depreciation and investment allowance
8. Enhancement of income by withdrawing weighted deduction under Section 35B

Detailed Analysis:

1. Relief under Section 80J:
The assessee claimed relief under Section 80J for Unit No. IV (Kundli Unit) and Unit No. V (Aurangabad). The ITO reduced the claims by applying Rule 19-A. The CIT(A) directed the ITO to allow relief in accordance with the Calcutta High Court's decision in Century Enka Ltd. vs. ITO. However, the CIT(A) also mentioned that if the Supreme Court upheld the retrospective amendment of Section 80-J, the relief would be recomputed accordingly. The Supreme Court's decision in Lohia Machines Ltd. vs. Union of India was cited, confirming that all liabilities should be deducted for computing capital employed. The Tribunal directed the ITO to recompute the relief under Section 80J per the Supreme Court's decision.

2. Claim of Weighted Deduction under Section 35B:
The assessee claimed weighted deductions for various expenses, including directors' foreign tour expenses, foreign publicity, commission on export sales, inspection fees, insurance charges, and packing materials. The ITO allowed deductions for some items but not others. The CIT(A) allowed deductions for additional items but upheld the ITO's disallowance for others. The Tribunal confirmed the disallowance of deductions for items like interest on post-shipment export credit loan, exchange rate difference, inland freight, ocean freight, and forwarding charges. However, the Tribunal directed the ITO to allow deductions for expenses on packing materials used for exports, treating them as samples.

3. Taxability of Cash Compensatory Support (CCS):
The assessee argued that CCS was a capital receipt and not taxable. The CIT(A) apportioned the CCS into capital and revenue receipts. The Tribunal, after considering various reports and judgments, concluded that CCS was not a revenue receipt taxable under Section 28(iv) but a capital receipt given to improve the export infrastructure. The Tribunal held that the dominant purpose of CCS was to expand export earnings and improve the foreign exchange earning setup, making it a capital receipt.

4. Taxability of Duty Drawback (DBK):
The assessee contended that DBK was not taxable under Section 41(1). The CIT(A) held that DBK was taxable as it was a rebate of duty chargeable on imported or excisable materials used in manufacturing exported goods. The Tribunal upheld the CIT(A)'s decision, stating that DBK was taxable under Section 28(i) or Section 41(1).

5. Taxability of Income from Sale of Import Entitlement (IE):
The assessee argued that IE was a capital receipt. The CIT(A) and Tribunal disagreed, holding that the proceeds from the sale of IE were taxable as revenue receipts. The Tribunal cited several judgments supporting the taxability of IE as a revenue receipt.

6. Taxability of Income Arising from Exchange Rate Difference:
The assessee claimed that the income from exchange rate differences was a capital receipt. The CIT(A) and Tribunal held that such income was taxable as a revenue receipt, relying on Supreme Court judgments in Sutlej Cotton Mills Ltd. vs. CIT and CIT vs. Canara Bank Ltd.

7. Reduction of the Amount of Central Subsidy from the Cost of Fixed Assets for Depreciation and Investment Allowance:
The CIT(A) held that the central subsidy should not reduce the cost of fixed assets for computing depreciation and investment allowance. The Tribunal upheld this decision, citing judgments from the Andhra Pradesh and Madhya Pradesh High Courts.

8. Enhancement of Income by Withdrawing Weighted Deduction under Section 35B:
The CIT(A) refused to enhance the income by withdrawing the weighted deduction under Section 35B. The Tribunal held that the power to make enhancements vests with the first appellate authority, and if the CIT(A) chooses not to exercise this power, the situation cannot be remedied by appeal before the Tribunal.

Conclusion:
The Tribunal's decision provided detailed directions on each issue, confirming or modifying the CIT(A)'s orders based on legal precedents and statutory interpretations. The appeals were partly allowed, with specific directions for recomputation and adjustments.