TMI Blog1988 (1) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... ference 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amined 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 submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit 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 Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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