JUDGMENT
Syed Shah Mohammed Quadri, J.
1. In this reference, under section 256(1) of the Income-tax Act, 1961, for short “the Act”, at the instance of the Revenue, the following question of law is referred to this court for opinion, viz. :
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in directing that the assessee was entitled to weighted deduction under section 35B in respect of the interest of Rs. 8,17,921 paid to the bank on packing credit loan ?”
2. The question relates to the assessment year 1980-81 and arises out of the order of the Tribunal in R.A. No. 138/Hyd of 1986, dated December 13, 1985.
3. The assessee is a public limited company. It is engaged in the business of export of oil cakes. It exported oil cake to West Germany and claimed deduction, inter alia, under section 35B of the Act. The assessee availed of the facility of “packing credit loan” on which it paid interest of Rs. 8,17,921 to banks. The claim for deduction of the said amount of interest was rejected by the Income-tax Officer in the order of assessment dated August 10, 1983. On appeal to the Commissioner of Income-tax (Appeals) the said amount was allowed as deduction under sub-clause (viii) of clause (b) of sub-section (1) of section 35B of the Act by order dated December 22, 1983. The Revenue’s appeal to the Income-tax Appellate Tribunal was allowed in part; the Tribunal observed that full facts were not available to satisfy whether the ratio of the judgment of the Special Bench of Bombay Tribunal in AADEE Corporation v. ITO [1983] 15 TTJ 56 (Bom) would be applicable to the facts of the case on hand and remanded the case to the assessing authority to satisfy himself whether the ratio of the decision of the Bombay Bench of the Tribunal would be applicable to the facts of the case and if so to allow the claim of the assessee. Thus, the Tribunal disposed of the appeal on December 13, 1985. It is from that order that the abovesaid question of law has arisen.
4. Mr. S. R. Ashok, learned standing counsel for the Revenue, contends that the Tribunal erred in adopting the reasoning and ratio of the decision of the Bombay Bench when the full facts were not before it and directing the assessing authority to determine the facts and apply the Bombay Bench judgment to the facts of the case.
5. Mr. S. Ravi, learned counsel appearing for the assessee-respondent, has argued that the Union of India, with a view to promote the export, have amended the Reserve Bank of India Act, 1934, and framed the Export Credit (Interest Subsidy) Scheme, 1968 (for short “the Scheme”), to provide various incentives to exporters, therefore, the interest paid by the assessee on the loan obtained from the bank under the said scheme is an allowable deduction under section 35B of the Act.
6. To appreciate the rival contentions of learned counsel, it would be appropriate to note the scope of section 35B here. This provision was inserted by the Finance Act, 1968, with effect from April 1, 1968, and it was on the statute book till it was omitted by the Direct Taxes (Amendment) Act, 1987, with effect from April 1, 1989. Since the question arises out of the order of assessment for the year 1980-81, it would be necessary to refer to the said provision, as it stood then, in so far as it is relevant for our purpose, which reads as follows :
“35B. Export markets development allowance. – (1) (a) Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th day of February, 1968, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in clause (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year :
Provided that in respect of the expenditure incurred after the 28th day of February, 1973, but before the 1st day of April, 1978, by a domestic company, being a company in which the public are substantially interested, the provisions of this clause shall have effect as if for the words ‘one and one-third times’, the words ‘one and one-half times’ had been substituted.
(b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on – ……
(viii) performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities;
(ix) such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed.
Explanation 1. – In this section, ‘domestic company’ shall have the meaning assigned to it in clause (2) of section 80B.
Explanation 2. – For the purposes of sub-clause (iii) and sub-clause (viii) of clause (b), expenditure incurred by an assessee engaged in the business of –
(i) operation of any ship or other vessel, aircraft or vehicle, or
(ii) carriage of, or making arrangements for carriage of, passengers, livestock, mail or goods,
on or in relation to such operation or carriage or arrangements for carriage (including in each case expenditure incurred on the provision of any benefit, amenity or facility to the crew, passengers or livestock) shall not be regarded as expenditure incurred by the assessee on the supply outside India of services or facilities.”
7. Since the deductibility of the expenditure is sought to be justified under sub-clause (viii) of clause (b) of sub-section (1) of section 35B, extracted above, we would confine our discussion only to that clause. A reading of the above provision, leaving such portions as are not relevant for the present discussion, shows that where an assessee, being a domestic company or a person other than a company who is resident in India has incurred any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, wholly and exclusively, on performance of services 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 shall be allowed a certain deduction). It may be noted here that the deduction allowed under section 35B is in addition to the general deduction permissible under section 37 of the Act.
8. That being the scope of the allowability of the deduction under section 35B of the Act, we shall now refer to the export credit scheme under which the assessee has availed of the benefit of the “packing credit loan” in respect of which the amount of interest in question has been paid. Under the scheme concessional rate of interest of six per cent. is charged on such loans. For that purpose sub-section (3A) of section 17 of the Reserve Bank of India Act, 1934, inter alia, authorises the Reserve Bank to make over to any scheduled bank or State co-operative bank, loans and advances, against promissory notes of such bank, repayable on demand or on the expiry of fixed periods not exceeding one hundred and eighty days on fulfilment of the requirements mentioned therein. The borrowing bank has to furnish a declaration in writing, inter alia, to the effect that it has granted a pre-shipment loan or advance to an exporter or any other person in India in order to enable him to export goods from India and that the amount of the loan or advance drawn and outstanding at any time is not less than the outstanding amount of the loan or advance obtained by the borrowing bank from the Reserve Bank of India. Under the scheme, referred to above, an export credit ceiling on the rate of interest at six per cent. has been imposed. Thus it follows that those who obtain loans under the said scheme will be entitled to avail of the benefit of the loan at lesser rate of six per cent. The expression “packing credit” is defined in the Export Credit (Interest Subsidy) Scheme, 1968, to mean :
“Any loan or advance granted or any other credit provided by an institution to an exporter for financing the purchase, processing or packing of goods, on the basis of letters of credit opened in his favour by an importer of the goods outside India, or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order for export from India having been placed on the exporter unless lodgement of export orders or letters of credit with the institution has been waived by the Reserve Bank.”
9. The proviso appended to the definition clause enjoins that the maximum period for which any loan or advance may be granted, or any other credit facility may be provided, by way of “packing credit” shall not exceed one hundred and eighty days or such extended period as the Reserve Bank may allow in terms of paragraph (5)(i) of the Scheme.
10. There can be no doubt that to encourage export, certain categories of exporters will be entitled to avail of the benefit of the scheme including “packing credit advance” on fulfilment of the conditions enumerated therein. But that is entirely a different matter. Section 35B(1)(b)(viii) provides yet another benefit to the exporter. Section 35B is not intended to provide deduction of all expenses incurred including interest paid on such loans by the person who became eligible to “packing credit advance” in connection with export of goods. It has already been noticed that the phraseology of the said provision is so designed as to permit deduction of an expenditure which is not in the nature of capital expenditure nor personal expenses of the assessee but is an expenditure incurred wholly and exclusively on the items enumerated in clause (b) thereof including the expenditure incurred on the performance of services outside India in connection with or incidental to the execution of any contract for the supply outside India of such goods, services or facilities. These two benefits, viz., benefit of packing credit loan on concessional rate of interest under the scheme and the export markets development allowance, the benefit of deduction under section 35B, are different and distinct. It may be that in some cases the assessee will be entitled to get both the benefits but availing of one benefit does not automatically entitle the assessee to avail of the other benefit. Indeed it appears to us that a domestic company or a person who has not availed of the “packing credit advance” could still be entitled to the benefit of section 35B. Similarly, a person who avails of the benefit of the scheme may not, in given circumstances, be entitled to the benefit of export markets development allowance under section 35B.
11. Now, we shall refer to the judgment of the Bombay Bench in AADEE Corporation v. ITO [1983] 15 TTJ 56 (Bom) which has been adopted by the Tribunal in the order from which the above question has arisen. In that case the assessee carried on business in export of readymade garments and availed of “packing credit”. It paid interest on “packing credit” amounting to Rs. 12,13,150 for the year 1977-78 and Rs. 16,37,667 for the year 1978-79. Its claim to have those amounts deducted for purposes of computation of profit under section 35B was rejected by the Income-tax Officer. He succeeded before the Commissioner (Appeals) who held that the expenditure fell within the ambit of section 35B(1)(b)(viii). The Revenue went in appeal before the said Tribunal. The Tribunal noted that the assessee being an exported of readymade garments in the free market could not compete in the international price level unless the price level was reduced and it was in that connection that the bank was directed to advance funds on export contract. It took the view that the interest was expenditure incurred for enabling the export of the goods, because an exported would reduce its cost price for competing in the international market, so such loss would be in the nature of expenditure as it arose in the course of performance of the contract for sale of goods outside India and would be an expenditure falling under clause (viii). We are not persuaded to accept the reasoning and the approach of the Bombay Tribunal. We have already pointed out above that to enable the assessee to claim benefit of export markets development allowance under section 35B, the expenditure should be incurred on performance of services outside India in connection with or incidental to the execution of any contract for supply outside India of such goods, services or facilities. On the facts of the case before the Bombay Bench, we are unable to see that there was any performance of service within the meaning of clause (viii). Even assuming that the loss sustained by such an exported could be treated as expenditure, in our view it does not satisfy the criteria of clause (viii) and would not qualify under that clause.
12. The judgment of the Madhya Pradesh High Court in CIT v. Vippy Solvex Product Private Ltd. war relied to show that the expenditure of the nature as in the present case was held to qualify for deduction under section 35B(1)(b)(viii). There the assessee was exporting deoiled cakes. Among others he claimed interest of Rs. 3,65,875 paid to the bank on export packing credit as allowable deduction. The Income-tax Officer allowed the deduction but in exercise of his power under section 263 of the Act the Commissioner held that the order of the Income-tax Officer was erroneous in so far as it was prejudicial to the interests of the Revenue and could not be sustained and thus revised the same. He directed recomputation of the income after withdrawing the weighted deduction. On appeal the Tribunal was of the opinion that the assessee was entitled to weighted deduction. On a reference the Division Bench of the Madhya Pradesh High Court took note of the finding of fact recorded by the Tribunal that the expenditure was incurred for promoting export sale and that the assessee furnished a certificate from the Bank of Maharashtra to the effect that the assessee had maintained with it 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. It may be noticed that the Madhya Pradesh High Court proceeded on the finding of fact recorded by the Tribunal that the certificate issued by the bank showed that all those credits were given for purchase of raw material and that credit was only given when the contract for supply of goods to the foreign parties was shown and those findings of fact indicated that the expenditure was incurred in connection with the execution of the contract for supply of goods outside India and noted that even incidental expenditure would be covered under that clause, therefore, the expenditure was allowed. In our view section 35B does not postulate allowing of expenditure incurred on purchase of raw material for purposes of export, so we are, with respect, unable to agree with the view taken by the learned judges of the Madhya Pradesh High Court.
13. It is then submitted that the judgment of the Division Bench of this court in CIT v. Navabharat Enterprises (P) Ltd. (No. 1) has liberally construed the provisions of section 35B(1)(b)(viii) so it may be held that the expenditure in question falls under the said provision. In the case, the assessee claimed weighted deduction of Rs. 2,05,211 paid to the export credit guarantee insurance corporation for information furnished to the assessee regarding the creditworthiness of the foreign purchaser and also for providing a guarantee for payment of amounts by such foreign purchaser. Though the claim of the assessee was rejected at the first instance by the Income-tax Officer, it was allowed by the Commissioner of Income-tax as well as the Tribunal. On a reference, the High Court held that the payment made to the export credit guarantee corporation would ensure the financial capacity of the foreign buyer to fulfil the commitment of deferred payment and insulate the assessee against the risk of non-recovery from the foreign buyer and as such it falls under sub-clause (viii) of section 35B(1)(b) so the assessee was entitled to weighted deduction under that section. The learned judges observed that it was not necessary that the person or corporation rendering services should be situated outside India. It is evident that in that case the question of allowability of interest under sub-clause (vii) did not fall for consideration; the contention was that as the corporation rendered service within India, the benefit of sub-clause (viii) would not be available. This court held that so long as the service was rendered outside India it was immaterial that the person rendering service was within India. We do not think that that judgment is in any way helpful to the assessee.
14. The view taken by us has the support of the Madras High Court in CIT v. Southern Sea Foods (P.) Ltd. and Lucas TVS Ltd. v. CIT ; the Bombay High Court in Walchandnagar Industries Ltd. v. CIT ; the Calcutta High Court in Brooke India Ltd. v. CIT [1992] 193 ITR 390 and the Gujarat High Court in Testeels Ltd. v. CIT .
15. For the above reasons, we answer the question in the negative, that is, in favour of the Revenue and against assessee.
16. The reference is accordingly answered, but in the circumstances of the case there shall be no order as to costs.
