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Issues Involved:
1. Disallowance of weighted deduction under section 35B(1)(b) of the Income-tax Act, 1961, specifically concerning "interest on packing credit." Issue-Wise Detailed Analysis: 1. Disallowance of Weighted Deduction under Section 35B(1)(b) of the Income-tax Act, 1961: The assessee, a company engaged in the export of diamonds, challenged the disallowance of a weighted deduction on interest on packing credit for the assessment year 1977-78. The Income-tax Officer had disallowed the claim amounting to Rs. 2,03,417, stating that it did not qualify under sub-clause (viii) of section 35B(1)(b) of the Act. The Commissioner of Income-tax (Appeals) upheld this disallowance, relying on the Special Bench decision in J. H. & Co. v. Second ITO (1982) 1 SOT 150 (Bom.). The assessee, represented by Shri Y. P. Trivedi, argued that the Madhya Pradesh High Court's decision in CIT v. Vippy Solvex Product (P.) Ltd. [1986] 159 ITR 487 supported their claim. Trivedi cited the Bombay High Court's ruling in CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589, which mandated that the Tribunal follow the decision of any High Court unless contradicted by a ruling from the Bombay High Court. On the contrary, the Department's representative, Shri S. C. Tiwari, argued that there was a difference of opinion among High Courts on whether expenses incurred in India were eligible for weighted deduction under sub-clause (viii). He cited decisions from the Madras High Court (V. D. Swami & Co. (P.) Ltd. v. CIT (1984) 146 ITR 425) and the Kerala High Court (CIT v. C. Tharian & Sons (1987) 166 ITR 607), which held that such expenses did not qualify if incurred in India. Tribunal's Examination: The Tribunal noted that the Commissioner of Income-tax (Appeals) had not examined the scheme under which Packing Credit Advances were obtained nor considered whether interest paid on these advances fell within any sub-clause of section 35B(1)(b) of the Act. The Tribunal detailed the packing credit scheme, emphasizing that advances were tied to export contracts and subject to strict Reserve Bank of India supervision. The Tribunal acknowledged the Madhya Pradesh High Court's decision in Vippy Solvex Product (P.) Ltd.'s case, which held that interest on packing credit was eligible for weighted deduction under section 35B(1)(b)(viii). This decision was binding as there was no contrary ruling from any other High Court, including the Bombay High Court. Conflicting High Court Views: The Tribunal recognized differing views among High Courts. The Madras High Court required expenses to be incurred outside India for eligibility under all sub-clauses of section 35B(1)(b), while the Kerala High Court dissented, allowing deductions for expenses incurred within India except under sub-clause (iii). The Delhi High Court held that expenses under all sub-clauses except (iii) and (iv) need not be incurred outside India. The Bombay High Court, in CIT v. Eldee Wire Ropes Ltd. (1978) 114 ITR 485, suggested that expenses under all sub-clauses except (iii) could be incurred within India. Tribunal's Conclusion: The Tribunal decided to follow the Madhya Pradesh High Court's ruling, affirming that weighted deduction was allowable for interest on packing credit under section 35B(1)(b)(viii). However, it emphasized that only interest on advances used for their intended export purposes qualified for the deduction. The case was remanded to the Income-tax Officer for verification, with the assessee agreeing to provide necessary bank certificates. Final Decision: The appeal was partly allowed for statistical purposes, directing the Income-tax Officer to verify the facts and allow the claim in line with the Madhya Pradesh High Court's decision.
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