Vildirect: IncomeTax-caselaws-1988-VIL-62-ITAT-

1988-VIL-62-ITAT-

Equivalent Citation: ITD 025, 073,

Income Tax Appellate Tribunal BOMBAY

Date: 04.01.1988

SAMIR DIAMONDS EXPORT PVT. LIMITED.

INCOME TAX OFFICER

BENCH

Member(s) : CH. G. KRISHNAMURTHY., Y. UPADHYAY., R. L. SANGANI.

JUDGMENT

Per Shri R. L. Sangani, Judicial Member-In this appeal for the assessment year 1977-78, the assessee has challenged disallowance of weighted deduction under section 35B(1)(b) of the Income-tax Act, 1961 in respect of expenditure incurred on several items. However, at the time of hearing of this appeal, Shri Y. P. Trivedi, the learned counsel for the assessee, expressly stated before us that the assessee wanted to press the ground relating to disallowance in respect of only one item, which has been described as 'interest on packing credit' and that the assessee did not want to press grounds pertaining to disallowance in respect of all the remaining items. Consequently, the only point that survives for decision is whether disallowance of weighted deduction under section 35B(1)(b) of the Act in respect of expenditure by way of interest on packing credit was justified.

2. On this question, there was difference of opinion amongst Benches of the Tribunal at Bombay. Consequently, the president constituted this special Bench under section 255(3) of the Act for disposal of this appeal.

3. The assessee is a company carrying on business of export of diamonds. The Assessment year is 1977-78 for which the relevant previous year ended on 30-6-1976. One of the items of expenditure on which weighted deduction was claimed by the assessee before the Income-tax Officer was interest on packing credit. The amount on which the said weighted deduction was claimed was Rs. 2,03,417. The provision under which said claim was made was sub-clause (viii) of section 35B (1)(b) of the Act. The Income-tax Officer rejected the claim with the following observations :

"This expenditure also does not fall in the description of sub-clause (viii) and does not qualify for weighted deduction. This cannot by any means be considered as expense on performance of services outside India in connection with execution of contracts. No weighted deduction is available on this. The CIT (A) for A. Y. 1976-77 has also rejected the appeal on the point and the same argument apply for this years also."

4. In the appeal filed by the assessee against the disallowance of said claim, it was submitted before the Commissioner of Income-tax (Appeal) that a Bench of the Tribunal had held that weighted deduction was allowable on interest on packing credit and that said item said decision should be followed. The learned Commissioner of Income-tax (Appeal) rejected the said contention and held that the said item did not qualify for weighted deduction in view of the decision of the Special Bench of the Tribunal in the case of J. H. & Co. v. Second ITO (1982) 1 SOT 150 (Bom.). The assessee has now come in further appeal and the ground raised in the memo of appeal is that the learned Commissioner of Income-tax (Appeals) had erred in upholding the disallowance of weighted deduction in respect of expenditure of Rs. 2,03,417 on interest on packing credit.

5. Shri Y. P. Trivedi, the learned counsel for the assessee, relied on the recent decision of the Madhya Pradesh high Court in CIT v. Vippy Solvex Product (P.) Ltd. [1986] 159 ITR 487 wherein the point in controversy has been decided in favour of the assessee. He referred to the decision of Bombay High Court in CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589, wherein it was held that if on a point there was a decision of a High Court, a Bench of the Tribunal at Bombay was bound to follow the said decision until a contrary view had been taken in a decision of Bombay High Court which was binding on the Bench. On the basis of this decision, it was submitted that we are bound to follow the said decision of the Madhya Pradesh High Court as there is no decision of any other High Court Including Bombay High Court on this point. He also relied on the decision of the Tribunal in which this point has been decided in favour of the assessee. He made particular reference to the decision of the Tribunal in the case of Rajesh Industries [IT Appeal No. 2057 (Bom.) of 1987] wherein this point was decided in favour of the assessee and applications for references were rejected by the Tribunal under section 256(1) of the Act and by the High Court of Bombay under section 256(2) of the Act. It was submitted that rejection of application under section 256(2) of the Act by the High Court in the case of Rajesh Industries indicated that the view taken by the Tribunal in favour of the assessee in said case was approved by the Bombay High Court.

6. On merits also, according to him, the claim was allowable under sub-clause (viii) of section 35B(1)(b) of the Act. He, accordingly, submitted that this point should be decided in favour of the assessee.

7. Shri S. C. Tiwari, the learned authorises representative of the department submitted that the abovementioned decision of Madhya Pradesh High Court has proceeded on the assumption that expenses incurred and paid in India were eligible for weighted expenses incurred and paid in India were eligible for weighted deduction under sub-clause (viii) of section 35B(1)(b) of the Act. However, on this point there was difference of opinion amongst High Courts. He relied on the decision of Madras High Court in V. D. Swami & Co. (P.) Ltd. v. CIT (1984) 146 ITR 425 and decision of the Kerala High Court in CIT v. c. Tharian & sons (1987) 166 ITR 607 in which, according to him, it has been laid down that expenditure which had been incurred in India would not be eligible for weighted deduction under certain sub-clauses including sub-clause (viii) of section 35B(1)(b) of the Act. He submitted that since there was difference of opinion amongst High Courts on the point whether an expenditure incurred in India was eligible for weighted deduction under sub-clause (viii) of section 35B(1)(b), we were not bound to follow the decision of Madhya Pradesh High Court and that it would be open to us to follow the decisions of other High Courts and hold that weighted deduction on expenditure by way of interest on packing credit was not eligible for weighted deduction under sub-clause (viii) of section 35B(1)(b) of the Act on the ground that it was incurred in India. He drew our attention to a decision of the Tribunal in which this point has been decided against the assessee. He further submitted that on merits the expenses did not come under sub-clause (viii) of section 35B(1)(b) of the Act. He pleaded that rejection of application under section 256(2) of the Act by the Bombay High Court would not necessarily mean that the Bombay High Court had agreed with the view expressed by the Tribunal in the case of Rajesh Industries. His alternate submission was that even if we follow the decision of Madhya Pradesh High Court referred to above, the claim in question would not be allowable unless the facts were verified and it was found on verification that the funds obtained under the scheme of packing credit had been utilised in the manner in which they had been utilised in the decision of Madhya Pradesh High Court and as such the matter would be required to be restored to the Commissioner of Income-tax (Appeals) for verification.

8. In reply, Shri Y. P. Trivedi, the learned counsel for the assessee, referred to the decision of the Bombay High Court in CIT v. Eldee Wire Ropes Ltd. (1978) 114 ITR 485 in support of the plea that expenses wherever incurred, either in India or outside were eligible for weighted deduction under sub-clause (viii) if other conditions in said sub-clause were fulfilled and according to him other conditions had been fulfilled as far as item under consideration was concerned. He, therefore, submitted that claim for weighted deduction in respect of item under consideration should be held to be allowable.

9. Shri Ajay Thakore who appeared for M/S. Universal Ferro & Allied Chemicals, as intervener, adopted the arguments made by Shri Trivedi.

10. We have considered the rival submission. As already stated, the learned Commissioner of Income-tax (Appeals) has relied solely on the decision of the Special Bench of the Tribunal in the case of J. H. & Co. He has not examined the scheme under which Packing Credit Advances are obtained and has not applied his mind to the question whether interest paid on those advances would come within the ambit of any of the sub-clauses in section 35B(1)(b) of the Act. We have perused the decision of the Special Bench of the Tribunal in the case of J. H. & Co. and we find that the special Bench in said case had not considered this item at all. Consequently, the Commissioner of Income-tax (Appeals) was not justified in rejecting the claim solely on the basis of the decision in the case of J. H. & Co. We shall now proceed to examine the scheme regarding Packing Credit Advances.

11. Under this scheme the assessee first enters into contract with foreign buyers for sale of the diamonds. Thereafter he approaches the concerned bank for providing facilities under the Packing Credit Scheme. The concerned bank then advances amounts on the basis of export contracts entered into by the assessee with foreign buyers. The advances are made available after irrevocable letter of credit is opened in favour of the assessee by the foreign bank. Copies of letter of credit, export contracts and other connected documents are submitted to the concerned bank. The advances received by the assessee under the packing credit scheme get repaid by relations of the sale proceeds. The interest that is charge on advances in this account is at concessional rate. The entire scheme of giving advances in packing credit account is operated under the strict supervision of Reserve Bank of India. If after receipt of advances in the packing credit account in respect of particular export order, shipment is not effected by the exporter, the advances are recovered with interest which is then charged at penal rate.

12. It is not disputed before us that as far as the decision of the High Court are concerned, the only direct decision on the point involved in this appeal is that of Madhya Pradesh High Court in Vippy Solvex Product (P.) Ltd.'s case. In that case, the assessee who was engaged in the business of manufacture and export of deoiled cakes and who had claimed weighted deduction on interest paid on advances if the export packing credit account of the bank, furnished a certificate from the bank stating that the assessee had maintained with the bank an export packing credit loan account and that advances in that account were given only for the purchase of raw materials for manufacturing goods to be exported out of India and that those advances are made available only when the party submitted a copy of the export contract entered into with the foreign party. It was further mentioned in said certificate that the said account was quite different from the normal cash credit account as the rate of interest on the amount in this account was 11 per cent per annum whereas the interest in normal cash credit account was 17 per cent per annum and further that loan given in the export packing credit loan account was at the rate of 100 per cent of the cost of raw materials unlike 65 per cent in the case of normal hypothecation cash credit account. The High Court held that expenditure was incurred in connection with the execution of a contract for the supply of goods outside India and as such the assessee was entitled to weighted deduction under section 35B(1)(b)(viii) of the Act.

13. The High Court analysed the provisions of sub-clause (viii) of section 35B(1)(b) of the Act and observed that sub-clause (viii) envisaged performance of service outside India in connection with or incidental to the execution of any contract for the supply outside India of such goods, services or facilities. It was further observed that the said sub clause contemplated that expenditure incurred in connection with the services rendered outside India or expenditure incurred in connection with or incidental to the execution of any contract for the supply outside India of such goods or services would be covered under said sub-clause. It was also observed that the findings of fact recorded by the Tribunal on the basis of the said certificate clearly indicated that all the advances in the account in question were given for the purchase of raw materials and that advances were given only when the contract for supply of goods to the foreign party was shown and as such the said findings of fact clearly indicated that the said expenditure was incurred in connection with the execution of contract for supply outside India of the goods. The High Court considered it significant that even incidental expenditure would be covered under said sub-clause in view of the language used therein. This decision is thus in favour of the assessee. There is no other decision of any High Court directly on this point taking a contrary view. In these circumstances, we are bound to follow this decision.

14. The decisions on which Shri Tiwari, the learned Departmental representative has placed reliance are not directly on the point whether expenditure on interest on advances in packing credit account was eligible for weighted deduction under sub-clause (viii) of section 35B (1)(b) of the Act. It is true that there is difference of opinion among High Courts on the point whether expenditure under sub-clause (viii) of section 35B(1)(b) should have been incurred outside India in order to be eligible for deduction. The view of the Madras High Court as reflected in CIT v. Southern Sea Foods (P.) Ltd. (1983) 140 ITR 855 and V. D. Swami & Co. (P.) Ltd.'s case is that such expenditure should have been made outside India in order to attract the provisions of all sub-clauses of section 35B(1)(b) of the Act. The Kerala High Court in C. Tharian & Sons' case, has dissented from the decision of the Madras High Court in the case of Southern Sea Foods (P.) Ltd. and has held that in order to be eligible for weighted deduction under all sub-clauses except sub-clauses (iii) the expenditure should have only been incurred outside India and that payment need not necessarily have been made outside India. The third view is reflected in the decision of the Delhi High Court in CIT v. Jay Engg. Works (1984) 149 ITR 297 which has been expressly dissented from by the Kerala High Court in the case of C. Tharian & Sons The view of the Delhi High Court in the case of Jay Engg. Works is that as far as all the sub-clauses except sub-clauses (iii) and (iv) were concerned, the expenditure need not necessarily have been incurred outside India and payment need not necessarily have been made outside India. None of these decisions relates to the point of eligibility of weighted deduction in respect of expenditure on interest in packing credit account. As far as the Bombay High Court is concerned, the decision in Eldee Wire Ropes Ltd.'s case is significant. In this decision, there is an observation to the effect that as far as sub-clauses other that sub-clause (iii) were concerned, the expenditure to be eligible for weighted deduction need not have been incurred outside India. The said observation is as follows :

"It would appear that where the Legislature desired to exclude the expenditure incurred in India for the purposes of giving benefit of weighted deduction to the assessee it expressly did so by specifically mentioning such exclusion in the sub-clause, for example in sub-clause (iii). It must follow that where this was not done the expenditure can be incurred by the assessee either outside India or in India. It must pertain to the purposes mentioned in various sub-clauses, which purposes are indicated as pertaining to various activities outside India."

Thus, the view of the Bombay High Court in respect of the expenditure incurred on items mentioned in all the sub-clauses barring sub-clause (iii) is that the said expenditure would be eligible for weighted deduction even if the same has been incurred in India. Consequently, as far as the view of the Bombay High Court is concerned, it is not in any way in conflict with the view of the Madhya Pradesh High Court in the decision in Vippy Solver Product (P.) Ltd.'s case which is to the effect that as far as expenditure sub-clause (viii) was concerned such expenditure, in order to be eligible for weighted deduction, need not have been incurred outside India. In view of the said decision of the Bombay High Court we do not accept the submission of the learned Departmental Representative to the effect that we should not follow the above decision of the Madhya Pradesh High Court because of the fact that the Madras High Court and Kerala High Court have held that in order to be eligible for weighted deduction the expenditure under all the sub-clauses should have been incurred outside India.

15. It was submitted by the learned Departmental Representative that the decision of the Bombay High Court in the case of Eldee Wire Ropes Ltd. was a decision rejecting the application under section 256(2) of the Income-tax Act, 1961 and that the decision rejecting the application under section 256(2) should not be construed as a decision affirming the view taken by the Tribunal in the decision against which application under section 256(2) has been filed. We are unable to accept this submission. When an order rejecting an application under section 256(2) of the Act is a speaking order and reasons in support of the view are given in said order, said order of the High Court would be a binding authority of the proposition which is affirmed in said order. Consequently, the view expressed in the above decision of the Bombay High Court to the effect that the expenditure on items falling under all sub-clauses barring sub-clause (iii) would be eligible for weighted deduction irrespective of the fact whether such expenditure had been incurred outside India of in India would be binding on us.

16. We may mention that a Bench of the Tribunal in the case of Rajesh Industries for the assessment year 1977-78 decided on 4-7-1980 had taken the view on this point in favour of the assessee and the department filed application under section 256(2) of the Act in ITA No. 205/Bom. /83, seeking reference of the question whether the Tribunal was justified in allowing the assessees claim for weighted deduction on the expenditure incurred on band interest on packing credit facilities on the ground that the items would fall under sub-clause (viii) of section 35B (1)(b) of the Income-tax Act, 1961. The High Court by order dated 4-7-1980 rejected the application under section 256(2) of the Act. This rejection is reported in the September 1984 issue of Bombay Chartered Accountants Journal. While rejecting the said application no reasons have been given. However, the fact remains that the view expressed by the Bench of the Tribunal in the case of Rajesh Industries in favour of the assessee on the point under discussion has become final as far as the Tribunal is concerned. For the reasons given above, we follow the decision of the Madhya Pradesh High Court in the case of Vippy Solvex Product (P.) Ltd. and hold that weighted deduction was allowable on expenditure incurred on interest on advances in packing credit account under section 35B(1)(b)(viii) of the Income-tax Act, 1961.

17. We have already stated that under the scheme for giving advances in the packing credit account, interest at the penal rate is liable to be recovered if the shipment is not effected by the exporters and the amount is not utilised for the purposes for which the same was advanced in connection with exports. That part of the interest which is recovered on such advances as are not utilised for the purpose for which they were given under the scheme would not be eligible for weighted deduction. Consequently, in every case when the claim for weighted deduction on interest on advances in packing credit account is made by the assessee, the Income-tax Officer shall have to verify the facts in order to ascertain whether any part of the interest relates to advances which were not utilised for the purposes for which they were given under the scheme relating to packing credit. The learned counsel for the assessee fairly conceded that this aspect of the matter required verification and as such the same should be restored to the Income-tax Officer for verification. In the course of arguments, he submitted that the assessee would produce a certificate from the concerned bank in this regard. After the hearing was over a certificate dated 9-10-1987 from the Bank of India was produced before us. We restore the matter to the Income-tax Officer for verification of facts in the light of the principle laid down by the Madhya Pradesh High Court in the abovementioned decision with direction to allow the claim in conformity with said decision.

18. In the result, the appeal shall be treated as partly allowed for statistical purposes.

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