Case Note & Summary
This judgment by the Bombay High Court pertains to an Income Tax Reference under section 256(1) of the Income Tax Act, 1961, arising from an appeal by Larsen & Toubro Limited (the assessee) against the order of the Commissioner of Income-tax (Appeals) for the assessment year 1980-81. The Income Tax Appellate Tribunal had dismissed the assessee's appeal, and referred three questions of law for the High Court's opinion. The first question concerned whether the assessee was entitled to weighted deduction under section 35B of the Act in respect of bank interest and bank charges of Rs.28,20,501/- incurred on Export Packing Credit facilities availed from the State Bank of India. The assessee argued that these expenses were incurred for the purpose of export business and thus qualified for the deduction. The High Court, however, upheld the Tribunal's view that interest and bank charges on export packing credit are not expenses wholly and exclusively for export business as required under section 35B, and therefore no weighted deduction is allowable. The second question was whether professional fees of Rs.71,200/- paid by the assessee in respect of its cement project was capital or revenue expenditure. The assessee contended that the fees were for feasibility studies and thus revenue in nature. The High Court affirmed the Tribunal's finding that the fees were incurred for setting up a new cement plant, a capital asset, and hence the expenditure was capital in nature and not deductible as revenue expenditure. The third question was whether Rs.75,00,000/- received by the assessee from B.B.C. Brown Broweri Company Limited, Switzerland under a Memorandum of Settlement dated 12th March, 1979 was a revenue receipt. The assessee argued that the amount was a capital receipt, but the High Court agreed with the Tribunal that it was received in the ordinary course of business as a settlement of trading debts or claims, and thus constituted a revenue receipt taxable under the Act. The High Court answered all three questions in the affirmative, against the assessee, and dismissed the reference.
Headnote
A) Income Tax - Weighted Deduction under Section 35B - Export Packing Credit Interest - The assessee claimed weighted deduction under section 35B of the Income Tax Act, 1961 for interest and bank charges of Rs.28,20,501/- on export packing credit facilities availed from State Bank of India. The Tribunal held that the assessee was not entitled to the deduction. The High Court upheld the Tribunal's decision, holding that interest and bank charges on export packing credit are not expenses incurred wholly and exclusively for the purpose of export business as required under section 35B, and thus no weighted deduction is allowable. (Paras 3-5) B) Income Tax - Capital vs Revenue Expenditure - Professional Fees for Cement Project - The assessee paid professional fees of Rs.71,200/- in respect of its cement project. The Tribunal held it to be capital expenditure. The High Court affirmed, reasoning that the fees were incurred for the purpose of setting up a new cement plant, which is a capital asset, and therefore the expenditure is capital in nature and not allowable as revenue expenditure. (Paras 6-8) C) Income Tax - Revenue Receipt - Settlement Amount - The assessee received Rs.75,00,000/- from B.B.C. Brown Broweri Company Limited, Switzerland under a Memorandum of Settlement dated 12th March, 1979. The Tribunal held it to be a revenue receipt. The High Court agreed, holding that the amount was received in the ordinary course of business as a settlement of trading debts or claims, and thus constitutes a revenue receipt taxable under the Income Tax Act, 1961. (Paras 9-11)
Issue of Consideration
Whether the assessee is entitled to weighted deduction under section 35B of the Income Tax Act, 1961 in respect of bank interest and bank charges on Export Packing Credit facilities; Whether professional fees paid for a cement project is capital or revenue expenditure; Whether amount received under a Memorandum of Settlement is a revenue receipt
Final Decision
The High Court answered all three questions in the affirmative, against the assessee, and dismissed the reference. The Court held that the assessee was not entitled to weighted deduction under section 35B for interest and bank charges on export packing credit; the professional fees of Rs.71,200/- were capital expenditure; and the amount of Rs.75,00,000/- received under the Memorandum of Settlement was a revenue receipt.
Law Points
- Weighted deduction under section 35B of Income Tax Act
- 1961 is not available for interest and bank charges on export packing credit
- Capital expenditure vs revenue expenditure
- Revenue receipt from settlement agreement
