M/S.KEC INTERNATIONAL LTD., BOMBAY. vs. C.I.T. CENTRAL-II, BOMBAY.

:1:

IN IN IN THE

THE

THE HIGH COURT OF JUDICATURE AT BOMBAY

HIGH COURT OF JUDICATURE AT BOMBAY

HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL

JURISDICTION

INCOME TAX REFERENCE NO.250 OF 1988

M/s. KEC International Ltd.

Kamani Chambers, 32 R.K. Marg,

Ballard Estate, Bombay 400 038.

..Appellant.

Vs.

The Commissioner of Income Tax,

Central Range-II, Bombay.

..Respondent.

Mr. Nilesh Joshi with L.V. Boomer i/by S. Satpute and

Co. for the Appellant.

Mr.Suresh Kumar for the Respondent.

CORAM : F.I. REBELLO & R.S. MOHITE, JJ.

DATED : 13TH JANUARY, 2009.

ORAL ORAL ORAL JUDGMENT : ( Per R.S. Mohite, J.) JUDGMENT : ( Per R.S. Mohite, J.) JUDGMENT : ( Per R.S. Mohite, J.)

By this reference the following two questions of

law

have been referred by the I.T.A.T.

for the opinion

of this court under Section 256(1) of the Income Tax

Act, 1961.

circumstances of the case and in law, the Income

Tax

Appellate Tribunal was justified in holding

that

following

items

were

not

eligible

for

weighted

deduction u/s.

35B of the Income

Tax

Act,1961? CNR No : HCBM020001241988 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

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a) Insurance- Rs.8,82,300/-

b) Freight- Rs.91,67,940/-

Export

Inspection

Agency

charges-

Rs.1,31,077/-

circumstances

the

case

and

law

the

tribunal

was right in holding that the

revised

rates

depreciation

as per the

Income

Tax

Fourth

Amendment

Rules

1983

inserted

w.e.f.

2.4.1983 will not applicable for assessment year

1980-81?

A third question is also referred to us at the

instance of the department which is as follows:

circumstances

the

case

and

law

the

Appellate Tribunal was justified in holding that

the

weighted

deduction

under

Section

35B(1)(b)(viii)

interest

paid

export

packing credit loans amounting to Rs.11,45,253/-

will

be deductible if on the facts of the

case

and the nature of the loans are similar? Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

:3:

As regards the first question, in so far as it

relates

insurance,

freight and

export

inspection

agency

charges,

the same has already been answered

the

affirmative and in favour of the revenue by various

judgments of this court.

By a judgment of this court in

the

case of M.H.

Daryani Vs.

C.I.T.

reported in

202 M.H.

Daryani Vs.

C.I.T.

reported in

202 M.H.

Daryani Vs.

C.I.T.

reported in

202

ITR ITR ITR

731

731

731

this

court

has

held

that

expenditure

insurance

and

freight

are not eligible

for

weighted

deduction

under

section 35B.

By the judgment

the

case

Dr.

Beck

and Co.

(India)

Ltd.

Vs.

CIT Dr.

Beck

and Co.

(India)

Ltd.

Vs.

CIT Dr.

Beck

and Co.

(India)

Ltd.

Vs.

CIT

reported reported reported

in 206 ITR 311

in 206 ITR 311

in 206 ITR 311 this court has held that export

inspection charges are not deductible under section-35B.

Following these judgments, we answer this question in

the affirmative and against the assessee.

Both the counsel have further agreed that the

second

question is covered by a judgment in the case of

CIT CIT CIT

Vs.

Mirza Ataullaha Baig and anr.

reported in 202

Vs.

Mirza Ataullaha Baig and anr.

reported in 202

Vs.

Mirza Ataullaha Baig and anr.

reported in 202

ITR ITR ITR

Page

291.

Page

291.

Page

291.

In the said case, the

question

before

this

court

was as to whether an amendment raising

the

rate

of depreciation w.e.f.

24.7.1980 would apply

for

the assessment year 1980-81. Holding in the negative,

this court observed as follows.

"The Income tax Act,1961, as it stands amended

on the 1t day of April of any financial year,

applies to the assessment of that year. Any

amendment in the Act or the Rules which comes Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

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into force after the 1st day of April of a

financial year would not apply to the assessment

for that year, even if the assessment is

actually made after the amendments come into

force".

Following the aforesaid decision, we answer the Question

No.2 in the affirmative and against the assessee.

As regards the Question No.3, counsel appearing

for

the revenue brought to our notice a judgment of the

Andhra

Pradesh

High

Court

in the

case

CIT

Vs. CIT

Vs. CIT

Vs.

Coromandel Coromandel Coromandel

Agro

Products Oil Ltd.

reported in

[1998]

Agro

Products Oil Ltd.

reported in

[1998]

Agro

Products Oil Ltd.

reported in

[1998]

230 230 230 ITR

ITR

ITR 335

335

335 in which the Court took a view that interest

paid

bank

"packing loan"

was

not

necessarily

entitled

weighted

deduction

under

Section

35B(1)(b)(viii) and (ix) of the Income Tax Act,

1961.

perusal

of the judgment indicates

that

the

Andhra

Pradesh

High

Court

dealt

within

earlier

decision of the Madhya Pradesh High Court in the case of

CIT CIT CIT

Vs.

Vippy Solvex Product Pvt.

Ltd.

reported

Vs.

Vippy Solvex Product Pvt.

Ltd.

reported

Vs.

Vippy Solvex Product Pvt.

Ltd.

reported

159 159 159 IR

IR 487

487

487 and disagreed with the view taken in the said

case.

While

dealing

with the question

deducting

interest

paid on a "packing credit loan" under

Section

35B(b)(viii), the Andhra Pradesh High Court observed as

under.

"Since

the deductibility of the expenditure

is Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

:5:

sought

to be justified under sub-clause

(viii)

clause

(b) of sub section (1) of section

extracted above, we would confine our discussion

only

that

clause A reading

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

India has incurred and expenditure, not being in

the

nature

of capital expenditure or

personal

expenses

the

assessee,

wholly

and

exclusively,

on performance of service

outside

India

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).

may

noted here that the deduction allowed

under

section

35B

addition

the

general

deduction

permissible

under section 37 of

the

Act.

That

being the scope of the allowability of the

deduction under section 35B of the Act, we shall

now

refer

the export credit

scheme

under

which the assessee has availed of the benefit of

the

"packing

credit loan" in respect of

which

the

amount

interest in question

has

been

paid.

Under

the scheme concessional

rate

of Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

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interest

six per cent , is charged on

such

loans.

For

that purpose sub section

(3A)

section

of the Reserve Bank of

India

Act,

1934, inter alia, authorises the Reserve Bank to

make

over

any

scheduled

bank

State

Cooperative

bank,

loans and advances,

against

promissory

notes

such bank,

repayable

demand

on the expiry of fixed

periods

not

exceeding

one

hundred

and

eighty

days

fulfilment

the

requirements

mentioned

therein.

The

borrowing bank has to furnish

declaration

writing,

inter

alia,

the

effect

that it has granted pre shipment loan or

advance

an exporter or any other person

India

order to enable him to

export

goods

from

India

and that the amount of the loan

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

India.

Under

the

scheme,

referred

to above, an export credit ceiling

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

six

per

cent.

The

expression

"packing

credit"

defined

the

Export (interest subsidy) Scheme , 1968 to mean: Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19 "Any loan or advance granted or any other credit

provided

an institution to an exporter

for

financing the purchase, processing or packing of

goods,

on the basis of letters of credit opened

his

favour

an importer

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

the

exporter

unless

lodgement

of export orders or letters of credit

with

the

institution

has been waived

the

Reserve Bank."

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.

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 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

:8:

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 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 service 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 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

:9:

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.

Now, we shall refer to the judgment of the

Bombay Bench in AADEE Corporation Vs. 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 ready-made

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 profits 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 exporter of

ready-made garments in the free market could not

compete in the international price level unless Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

:10:

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

exporter 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

correction 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

exporter could be treated as expenditure, in our

view it does not satisfy the criteria of clause

(viii) and would not qualify under that clause. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

:11:

The judgment of the Madhya Pradesh High Court in

CIT

Vippy Solvex Product Pvt.

Ltd.

[1986]

159

ITR

487 was relied upon to show

that

the

expenditure of the nature as in the present case

was

held to qualify for deduction under section

355B(1)(b)(viii).

There

the

assessee

was

exporting

deoiled

crakes.

Among

others

claimed

interest

of Rs.3,65,875/- paid to

the

bank

export

packing 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

interest

the

Revenue

and

could

not

sustained

and

thus

revised

the

same.

directed

recomputation

the

income

after

withdrawing

the weighted deduction.

appeal

the

Tribunal

was

the

opinion

that

the

assessee was entitled to weighted deduction.

reference

the Division Bench of

the

Madhya

Pradesh

High Court took note of the finding

fact

recorded

the

Tribunal

that

the

expenditure

was

incurred for promoting

export

sale

and

that

the

assessee

furnished

certificate

from the Bank of Maharashtra to the

effect

that the assessee had maintained with it Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

:12:

export packing credit loan account and

that

advances in that account were given only for the

purchase

raw

materials

for

manufacturing

goods

be exported out of India.

It may

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

raw materials and that credit

was

only given when the contract for supply of goods

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

covered

under that clause,

therefore,

the

expenditure

was

allowed.

In our view

section

35B

does not postulates allowing of expenditure

incurred

purchase

raw

material

for

purposes

export, so we are,

with

respect,

unable

agree

with the view

taken

the

learned

Judges

the

Madhya

Pradesh

High

Court."

Ultimately from the facts before the court, the

Andhra Pradesh High Court held that interest paid by the

assessee to a bank in respect of parking credit loan was

not entitled to a weighted deduction under section Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

:13:

35B(b)(viiui) of the Income Tax Act,1961.

The counsel for the revenue also drew our

attention

judgments of different High Courts

which

have also taken the same view as the Andhra Pradesh High

Court.

In Lukas TVS Ltd.

Vs.

CIT reported in 217 ITR In Lukas TVS Ltd.

Vs.

CIT reported in 217 ITR In Lukas TVS Ltd.

Vs.

CIT reported in 217 ITR

Page Page Page

382,

382,

382,

the

Madras

High Court

took

view

that

interest

paid

on export packing credit paid to a

bank

was

not entitled to a weighted deduction.

Testeels Testeels Testeels

Ltd. Ltd. Ltd.

Vs.

CIT [1994] 205 ITR 230,

Vs.

CIT [1994] 205 ITR 230,

Vs.

CIT [1994] 205 ITR 230, Gujrat

High

Court

considered the question as to whether interest paid on a

loan

given to the assessee by the Central Bank of India

for the purchase of raw material could be deducted under

Section-35B(1)(b)(viii)

and held such interest was

not

deductible.

In taking this view, the Gujrat High Court

dissented from the view taken by the M.P.

High Court in

CIT

Vs.

Vippy Solvex Product Pvt.

Ltd.

(supra).

Walchandnagar Walchandnagar Walchandnagar

Industries Ltd.

Vs.

CIT [1994} 206

ITR

Industries Ltd.

Vs.

CIT [1994} 206

ITR

Industries Ltd.

Vs.

CIT [1994} 206

ITR

328 328 328

(Bom.)

(Bom.)

(Bom.)

this

court

considered a

question

whether

a deduction under Section 35B(i) could be given

to the assessee in respect of the interest paid by it to

the

banks

India

and

shown

the

accounts

"interest

paid on post shipment loans".

This court has

took a view that a weighted deduction was not

permissible on such loans.

Counsel appearing for the assessee relied upon a

judgment

the Madhya Pradesh High Court in

CIT

Vs. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

:14:

Vippy

Solvex Product Pvt.

Ltd.

(supra).

In the

said

case the Madhya Pradesh High Court held that interest on

packing credit loan was deductible as the certificate

issued by the bank showed that the loan was utilised for

the

purpose of raw material and that the loan was given

only

after

the

contract

of supply of

goods

the

foreign

parties

was shown and as the finding

fact

indicated

that

the

expenditure

was

incurred

connection

with the execution of contract for supply of

goods outside India.

The Madhya Pradesh High Court held

that

even incidental expenditure would be covered under

Section 35B(i)(b)(viii) and therefore, such expenditure

on payment of interest was a deductible expenditure.

In our view, the views taken by the Andhra

Pradesh

High

Court, Calcutta High Court,

Madras

High

Court

are

correct.

We concur with the view

taken

Walchandnagar

Industries Ltd.

(supra).

We are not

agreement with the reasoning given by the Madhya Pradesh

High

Court in the case of CIT Vs.

Vippy Solvex Product CIT Vs.

Vippy Solvex Product CIT Vs.

Vippy Solvex Product

Pvt. Pvt. Pvt.

Ltd.

(supra).

Ltd.

(supra).

Ltd.

(supra).

The

very

definition

the

expression

"packing

credit" as advanced in the

Export Interest Subsidy Scheme 1968, indicates that

loan

advance for

the

purpose

purchase

processing

and

packing

of goods.

The

Reserve

bank

requires the lending bank to furnish it a declaration in

writing

that

the

loan was granted

for

pre

shipment

activities.

That necessarily means that the activities

for

which the loan has been granted have to be

carried Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:50:19

:15:

out within India.

Section 35B(1)9b)(viii) operates only

when

there is a performance of services outside

India.

Mere

obtaining

of a packing credit loan or payment

interest

thereon in India cannot be said to entail

the

performance

any service outside India .

The

said

expenditure

would

therefore, not be

deductible.

The

question is therefore, answered in the negative and in

favour of the revenue.

10.

In view of the answers hereinabove, the

reference stands disposed off with no order as to costs.

( R.S. MOHITE, J.)

(F.I.REBELLO, J.)

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