2012 (8) TMI 400 - HC - Income Tax

Interest on packing credit paid to bank for export orders secured - allowability of weighted deduction u/s 35(B) - Held that - This interest on packing credit is not paid in respect of any services rendered outside India and consequently would not stand covered within the ambit of Section 35B(1) (b)(viii). See KEC International Ltd. Vs. CIT (2009 (1) TMI 5 - BOMBAY HIGH COURT) - Decided in favor of Revenue.

Summary

Issues:
1) Reference under Section 256(1) of the Income Tax Act 1961 for the assessment year 1980-81.
2) Allowability of weighted deduction under Section 35(B) of the Act for interest paid on packing credit.

Analysis:
1) The judgment pertains to a reference under Section 256(1) of the Income Tax Act 1961 for the assessment year 1980-81. The respondent-assessee was absent despite being served with the statement of the case back in August 2008. The court proceeded with the reference due to the service of notice upon the respondent. The Income Tax Appellate Tribunal had referred a question of law regarding the allowance of the claim of the assessee under Section 35(B) of the Act, specifically related to interest on packing credit paid to the bank for export orders secured by the assessee.

2) The respondent assessee, engaged in the business of manufacturing, sale, and export of plastic and polyester articles/films, had claimed the benefit of weighted deduction under Section 35(B) of the Act for the assessment year 1980-81. The Tribunal allowed the claim based on a decision of the Madhya Pradesh High Court in CIT Vs. Vippy Solvex Product Pvt. Ltd. 159 ITR 487, as it was the only relevant decision at that time. However, the Bombay High Court, in a previous case of KEC International Ltd. Vs. Commissioner of Income Tax, held that interest on packing credit for export does not qualify for weighted deduction under Section 35(B) of the Act.

3) The Bombay High Court further referred to decisions by the Madras High Court and the Andhra Pradesh High Court, which also disallowed the deduction for interest paid on packing credit loans for export. The Court explicitly disagreed with the Madhya Pradesh High Court's decision in Vippy Solvex Product Pvt. Ltd. Consequently, the Court answered the question raised in the reference negatively, in favor of the revenue and against the respondent assessee. No costs were awarded in this matter.