WALCHANDNAGAR INDUSTRIES LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this reference under S. 256(1) of the IT Act, 1961 ("the Act"), the Tribunal has referred the following two questions at the instance of the assessee :

(2.) THE assessee is a limited company engaged in the business of manufacture and sale of sugar, alcohol products, plastic goods, industrial machinery, etc. The relevant assessment year is 1975 76. The assessee also exports its products outside India. The export turnover of the assessee during the relevant previous year was to the tune of Rs. 5 crores. The assessee claimed export markets development allowance ("weighted deduction") under S. 35B of the Act in relation to expenditure of Rs. 1,97,21,549. The ITO allowed the claim of the assessee in respect of some of the items only. The claim of the assessee in respect of some of the remaining items was allowed on appeal by the CIT(A) and on further appeal, by the Tribunal. However, the disallowance of claim of the assessee for weighted deduction in respect of a sum of Rs. 20,55,145, being interest paid by the assessee to banks in India on loans which were utilised for giving credit to foreign buyers, described in the accounts of the assessee as "interest paid on post shipment loans"and a sum of Rs. 26,100 being professional charges for designing the export contract was upheld both by the CIT(A) and the Tribunal on the ground that these expenditures did not meet the requirements of s. 35B(1) of the Act. Hence this reference at the instance of the assessee.

(3.) IN the instant case, the admitted position is that the interest was paid on loans obtained by the assessee from banks in India for the purposes of its business. The contention of the assessee is that the amount borrowed from the banks was used by it for giving credit to foreign buyers. Such activity, according to him, falls within sub cl. (viii) of S. 35B(1)(b) of the Act. We have carefully considered the submissions of the counsel for the assessee. The expenditure was incurred by way of interest on loans obtained by the assessee from the banks in India for the purposes of its business. It is difficult to understand as to how such expenditure can be termed as "expenditure incurred wholly and exclusively on performance of service outside India in connection with or incidental to the execution of contract of supply outside India of goods of the assessee". The expenditure was clearly an expenditure on loans obtained in India. It had nothing to do with performance of any service outside India in connection with the contract of supply of goods by the assessee outside India. The fact that the amount of loan was utilised for giving deferred payment facilities to the foreign buyers will not make it an expenditure incurred on performance of service outside India. The payment of interest to the banks has no nexus with performance of any service outside India. Moreover, it is for the assessee, who claims deduction under S. 35B(1) of the Act, to satisfy the authorities by producing requisite material that the particular expenditure was covered by any of the sub clauses of cl. (b) thereof. In the event of his failure, no weighted deduction can be allowed to him.