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Home Case Index All Cases Income Tax Income Tax + HC Income Tax - 1999 (7) TMI HC This

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1999 (7) TMI 31 - HC - Income Tax

Issues:
1. Interpretation of section 35B of the Income-tax Act, 1961 regarding weighted deduction for foreign branch expenditure.
2. Determination of whether interest payments to depositors should be considered as expenditure for the purpose of section 35B(1)(b) of the Act.
3. Classification of consultancy fees as capital or revenue expenditure.

Analysis:

*Issue 1: Interpretation of section 35B of the Income-tax Act, 1961 regarding weighted deduction for foreign branch expenditure*

The case involved a bank claiming the benefit of section 35B of the Income-tax Act for expenditure incurred on its branch in Bangkok. The Income-tax Officer disallowed a portion of the claimed expenditure, considering gross interest paid to customers as not qualifying for deduction. However, the Tribunal disagreed, allowing the deduction on gross interest payments to depositors. The High Court held that the entire interest paid to depositors should be considered as expenditure for the purpose of section 35B(1)(b) of the Act. The court emphasized that the section refers to "any expenditure," focusing on the outgoing amount without requiring deductions based on income received.

*Issue 2: Determination of whether interest payments to depositors should be considered as expenditure for the purpose of section 35B(1)(b) of the Act*

The court clarified that the interest payments made by the bank to its depositors at the foreign branch should be regarded as expenditure incurred for providing services to customers. It rejected the argument to set off interest receipts against interest payments, emphasizing that once the expenditure is incurred, it qualifies for weighted deduction under section 35B. The court highlighted that the use of the term "any expenditure" indicates a focus on the actual outgoing amount without deductions based on income received.

*Issue 3: Classification of consultancy fees as capital or revenue expenditure*

Regarding consultancy fees, the Income-tax Officer considered the cost of the consultant's report as capital expenditure due to suggested reorganization changes. However, the Tribunal overruled this view, stating that obtaining the report aimed at improving business efficiency and did not lead to starting a new line of business. The court agreed that the consultancy fees were revenue expenditure, necessary for updating business knowledge and organization methods. It concluded that the expenditure on consultancy fees was of revenue character, not capital, entitling the assessee to costs.

In conclusion, the court ruled in favor of the assessee on both issues, allowing weighted deduction for foreign branch expenditure and classifying consultancy fees as revenue expenditure.

 

 

 

 

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