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TMI Blog1985 (2) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... nces of the case, the Tribunal was right in holding that for the purpose of computing the capital employed for granting deduction under section 80J of the Income-tax Act, 1961, the value of assets should be taken at the written down value and not at the original cost to the assessee? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability for gratuity of Rs. 56,025 is not an allowable deduction in computing the total income of the assessee even when no provision has been made in the books of account maintained by the assessee ? So far as the first question is concerned, it must be answered in the affirmative and in favour of the Revenue in view of the decision of this court in the case of Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448. So far as the fourth question is concerned, it must also be answered in the affirmative and in favour of the Revenue in view of the decision of this court in the case of CIT v. New Swadeshi Mills of Ahmedabad Ltd. [1984] 147 ITR 163. The next question which falls for consideration is whether for the purpose of computing the capital employed for granting deduction under s. 80J, the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputation period, of the undertaking or of the business of the hotel to which the said section 80J applies, shall first be ascertained in the following manner: (i) in the case of assets entitled to depreciation, their written down value ; (ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee ; (iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business ; (iv) in the case of assets being debts due to the person carrying on the business, the nominal amount of those debts; (v) in the case of assets being cash in hand or bank, the amount thereof. Explanation 1.-In this rule, 'Computation period' means the period for which profits and gains of the industrial undertaking or business of the hotel are Computed under sections 28 to 43A. Explanation 2.-The value of any building, machinery or plant or any part thereof as is referred to in clause (a) or clause (b) of the Explanation at the end of sub-section (6) of section 80J shall not be taken into account in computing the capital employed in the industrial undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it stood at the material time. In the case of an asset entitled to depreciation, the written down value, while in the case of an asset not entitled to depreciation the cost to the assessee, is required to be taken into account in computing the capital employed in the industrial undertaking. The expression " written down value " for this purpose is to be understood in the same sense as defined in s. 43(6) of the Act. There is no ambiguity either in the provision of rule 19A or in s. 80J as amended. Section 80J contemplates the deduction of an amount equal to 6% calculated on the capital employed in the undertaking which is to be computed in accordance with the relevant provisions. Aggregate of the amounts representing the values of the assets has to be ascertained for the purpose of computation of capital employed in the undertaking. Where the capital asset is entitled to depreciation and depreciation has been allowed in computing the profits or gains from the industrial undertaking, for the purpose of determining the income-tax liability, the value of the capital assets should be taken as the written down value. The profits and gains of the industrial undertaking are reduced to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of February, 1973, by a domestic company, being a company in which the public are substantially interested, the provisions of this clause shall have effect as if for the words 'one and one-third times', the words 'one and one-half times' had been substituted. (b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on (i) advertisement or publicity outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business; (ii) obtaining information regarding markets outside India for such goods, services or facilities ; (iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit; (iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities; (v) preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the words "not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit added to what stood originally. We are concerned here with the interpretation of the words underlined by us in sub-clause (iii) of s. 35B(1)(b) of the Act as it stood originally. The said words came up for consideration before the Madras and Madhya Pradesh High Courts. In the case of CIT v. Kasturi Palayacat Co. [1979] 120 ITR 827, the Madras High Court took the view that in subclause (iii) there is an indication that the expenditure should have been incurred outside India. There is a disallowance of part of the expenditure even outside India, if such expenditure related to the carriage of goods to their destination outside India or on the insurance of such goods while in transit. It was held that under s. 35B(1)(b)(iii), only expenditure on the carriage of the goods to their destination outside India or on the insurance of such goods while in transit is not entitled to the allowance. Customs duty paid and the packing charges incurred by the branches abro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... office of the assessee for transportation of goods imported from India from one place to another in the USA fell under the description of expenditure incurred on the carriage of the assessee's goods to their destination outside India and did not qualify for weighted deduction. The Delhi High Court held that the correct interpretation of sub-clause (iii) of s. 35B(1)(b) is that it allows all expenditure on distribution, supply, etc., of goods outside India, except (i) expenditure incurred in India in connection with supply, distribution or provision; and (ii) expenditure on carriage or transit insurance of such goods, wherever incurred. In the case of Swami and Co. Pvt. Ltd. v. CIT [1984] 146 ITR 425, the Madras High Court held that the assessee claimed weighted deduction regarding clearing and forwarding charges paid by the assessee at Madras Port on goods exported to foreign countries. The other expenditure was attestation fees, stamp charges on drafts, export licence fees, bank commission, rents paid for godowns situate in India and various other sundry expenses. All these items of expenditure were incurred only in India and not abroad. There, the Madras High Court held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. It appears to us that there are three prohibitions in sub-clause (iii) of s. 35B(1)(b). Firstly, expenditure incurred in India in connection with distribution, supply or provision outside India of such goods, services or facilities. Secondly, expenditure, whether incurred in India or outside India, on the carriage of such goods to their destination outside India (i.e., freight, etc.) and, thirdly, expenditure, whether incurred in India or outside India, on the insurance of such goods while in transit. Having regard to the provisions of s. 35B(1)(b)(iii) and the decisions referred to above, items like clearing and forwarding charges paid by the assessee in Indian ports on goods exported to foreign countries, expenditure on the carriage of goods to their destination outside India or on the insurance of such goods while in transit are not allowable for weighted deduction under s. 35B(1)(b)(iii) inasmuch as they were incurred in India. We are, therefore, of the view that the Tribunal was right in holding that the expenditure on freight, loading charges, insurance, etc., incurred in connection with export business was not entitled to weighted deduction. We, therefore, answer the sec ..... 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