1981 (9) TMI 180 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition on account of entertainment expenses.
2. Reduction of disallowance of foreign tour expenses.
3. Allowance of additional weighted deduction under Section 35B of the IT Act on various expenditures.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Entertainment Expenses:
The CIT (Appeals) allowed the expenditure of Rs. 856 on entertainment of foreign customers, qualifying it for weighted deduction under Section 35B, even though it was not permissible under Section 37(2B). This decision was supported by the Special Bench order in the case of J. Hemchand & Co., which held that such expenses could be brought under sub-clauses (i) and (ii) of Section 35B(1)(b).

2. Reduction of Disallowance of Foreign Tour Expenses:
The CIT (Appeals) reduced the disallowance from Rs. 2,316 to Rs. 1,356, allowing Rs. 960 for hotel room rent paid by the partners. This decision was upheld as the expenditure was considered reasonable and necessary for the execution of the business contracts.

3. Allowance of Additional Weighted Deduction under Section 35B:
The CIT (Appeals) allowed weighted deductions on several expenditures, which the Revenue contested:

- Interest and Bank Charges (Rs. 14,000): The CIT (Appeals) allowed this deduction under Section 35B(1)(b)(viii), considering it incidental to the execution of export contracts. However, the Tribunal disagreed, referencing the Special Bench order in J. Hemchand & Co., which held that such expenses are not directly connected with exports and do not qualify under any sub-clause of Section 35B(1)(b).

- Packing Expenditure (Rs. 1,71,976): The CIT (Appeals) allowed this under the second portion of sub-clause (iii) of Section 35B(1)(b). The Tribunal overturned this, stating that packing expenses incurred in India are not eligible for weighted deduction under Section 35B(1)(b)(iii), as supported by the Special Bench order in J. Hemchand & Co.

- Carriage and Transit Insurance (Rs. 2,93,477): The CIT (Appeals) allowed this under the second portion of sub-clause (iii) of Section 35B(1)(b). The Tribunal disagreed, referencing the Kerala High Court judgment in K.E. Kesavan & Co. and the Madras High Court in Kasturi Palayacat Co., which held that such expenses are specifically excluded from weighted deduction.

- Octroi, Handling Charges, etc. (Rs. 85,309): The CIT (Appeals) allowed this under Section 35B(1)(b)(iii). The Tribunal reversed this decision, referencing the Special Bench order in J. Hemchand & Co., which excluded such expenses incurred in India from weighted deduction.

Intervener Case (M/s. Eastman Industries):
The Tribunal also addressed the intervener's claim for weighted deduction on ocean freight (Rs. 1,18,314) and overseas insurance (Rs. 8,389). The Tribunal denied these claims, aligning with the same reasoning applied to M/s. Happy Sound Industries, emphasizing that such expenditures are excluded under Section 35B(1)(b)(iii).

Summary:
- Allowed: Weighted deduction on Rs. 856 for entertainment of foreign buyers.
- Disallowed: Weighted deduction on Rs. 2,93,477 (carriage and transit insurance), Rs. 1,71,976 (packing), and Rs. 85,309 (handling, octroi, and port charges).
- Intervener: Disallowed weighted deduction on Rs. 1,18,314 (ocean freight) and Rs. 8,389 (overseas insurance).
- Other Points: The Tribunal upheld the CIT (Appeals) decision on allowing Rs. 1,158 for entertainment expenses and reducing the disallowance of foreign tour expenses to Rs. 1,356.