Calcutta H.C : Whether, on the facts and in the circumstances of the case and on a correct interpretation of the ss. 37(3A), 37(3B) of the IT Act, 1961, r/w Expln. (c) thereof, the Tribunal was justified in law in holding that since it is not the case of the CIT that the expenditure incurred on the motor cars on running and maintenance is on hire charges for engaging cars plied for hire the view taken by the AO was not incorrect ?

Counsel Appeared

P.K. Mullick & S.K. Mookherjee, for the Appellant : M.S. Syali, R.N. Dutta, Satyen Sethi, for the Respondent

ORDER

Y.R. MEENA, J. :

On applications under s. 256(1) of the IT Act 1961 following questions are referred for our opinion. In R.A. No. 259/Cal/1990 following questions are referred :

“Whether, on the facts and in the circumstances of the case and on a correct interpretation of the ss. 37(3A), 37(3B) of the IT Act, 1961, r/w Expln. (c) thereof, the Tribunal was justified in law in holding that since it is not the case of the CIT that the expenditure incurred on the motor cars on running and maintenance is on hire charges for engaging cars plied for hire the view taken by the AO was not incorrect ?

Whether, on the facts and in the circumstances of the case and in view of the fact that the assessee at the first assessment claimed relief under s. 80-O of the IT Act, 1961, only on the net income from the foreign exchange, the Tribunal was justified in law in allowing the assessee to agitate against the issue whether the relief under s. 80-O of the IT Act, 1961, will be allowed on the gross or net income ?

Whether in view of the insertion of s. 80AB w.e.f. 1st April, 1981 and in view of the decision of the Supreme Court in Distributors (Baroda) Ltd. vs. Union of India & Ors. (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) : TC 24R.516, the Tribunal was justified in holding that two views are possible on the point whether relief under s. 80-O of the IT Act, 1961, will be allowable on the gross income from foreign exchange ?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in cancelling the order of the CIT under s. 263 of the IT Act, 1961 ?”

In R.A. No. 8/Cal/1992 following questions are referred :

“1. Whether, on the facts and in the circumstances of the case and on a correct interpretation of ss. 80-O and 80AB of IT Act, 1961, the Tribunal was justified in law in holding that the deduction under s. 80-O of the said Act would be admissible to the assessee on the gross convertible foreign exchange brought into India without taking into account expenses, direct or indirect, incurred in India ?

2. Whether, on the facts and in the circumstances of the case and in view of the ratio of the decision of the Supreme Court in Distributors (Baroda) Ltd. the Tribunal was justified in law in holding that relief under s. 80-O of the IT Act, 1961, would be admissible to the assessee on gross amount of convertible foreign exchange brought into India without taking into account the expenses incurred to earn the income ?”

Since basic common issue does arise in both the reference applications whether the assessee is entitled for deduction under s. 80-O of the Act on gross amount of convertible foreign exchange brought into India, without taking into account the expenses direct or indirect incurred in India.

The assessee was engaged in the business of consulting and engineering with a number of major engineering projects in India and abroad during the asst. yrs. 1984-85 and 1985-86. In the asst. yr. 1984-85 original assessment was completed on 24th Oct., 1985. The AO allowed deduction under s. 80-O of the IT Act on gross amount of convertible foreign exchange brought into India without taking into account the expenses incurred in India to earn the income.

The AO has also allowed the expenses on motor car repairs and insurance amounting to Rs. 5,93,678 in computing the total income of the assessee-company.

The CIT has examined and on scrutiny of the assessment order dt. 24th Oct., 1985, for asst. yr. 1984-85, he found that AO has allowed excess relief under s. 80-O and AO had also not deducted 20 per cent from expenses on motor car repairs and insurance amounting to Rs. 5,93,678 under s. 37(3A) of the IT Act. According to him the assessment made by the AO was erroneous and prejudicial to the interest of the Revenue. He accordingly issued a show-cause notice under s. 263 of the IT Act, to the assessee and passed the order under s. 263 of the IT Act, directing the ITO to disallow 20 per cent under s. 37(3A) and (3B) and withdraw excess amount allowed under s. 80-O of the Act.

Being aggrieved assessee-company agitated the matter before Tribunal. Tribunal has considered the order passed by the CIT under s. 263 of the Act. According to Tribunal the provisions of s. 37 (3A) and (3B) is not applicable as the expenses on motor car repairs and insurance or otherwise allowable under ss. 30 to 36 of the Act. For claim under 80-O the Tribunal has considered the decision of apex Court in case of Cloth Traders (P) Ltd. vs. Addl. CIT (1979) 10 CTR (SC) 393 : (1979) 118 ITR 243 (SC) : TC 24R.531 and in case of Distributors (Baroda) (P) Ltd. vs. Union of India (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) : TC 24R.516. The decision of Cloth Traders (P) Ltd. (supra) still hold field for purpose of deduction under s. 80-O though in case of Distributors (Baroda) (P) Ltd. the decision in Cloth Traders has been overruled. In case of Distributors (Baroda) (P) Ltd. the judgment was with reference to s. 80M of the Act. Tribunal also held that the provisions of s. 80AB do not override the provisions of s. 80-O. Finally, the Tribunal held that assessee is entitled for deduction under s. 80-O on gross foreign exchange receipts.

In a reference application for the asst. yr. 1985-86 the questions referred are related only to the deduction under s. 80-O whether the deduction should be on gross amount of convertible foreign exchange or whether the expenses incurred in India should be taken into account for relief, the deduction under s. 80-O.

The basic common question for our consideration in both the reference applications is whether the deduction under s. 80-O of the IT Act, 1961 is to be allowed on gross convertible foreign exchange receipt brought into India without taking into account the expenditure incurred in India for earning such income.

Learned counsel for the assessee Shri Syali submits that deduction under s. 80-O should be allowed on convertible foreign exchange received in India. He further submits that after amendment in s. 80-O w.e.f. 1st April, 1972, the basis of deduction under s. 80-O was changed to whole convertible foreign exchange so received and brought in India. Shri Syali further argued that since wordings of s. 80-O is pari materia with s. 99(i)(iv), for a parity of reasoning, the decision of Distributors (Baroda) (P) Ltd. (supra) is not an authority on issue. Since the apex Court has upheld the decisions in CIT vs. Darbhanga Marketing Co. Ltd. (1971) 80 ITR 72 (Cal) : TC 24R.537 and CIT vs. New Great Insurance Company Ltd. (1973) 90 ITR 348 (Bom) : TC 24R.534 in a decision of Cloth Traders (P) Ltd. (supra) that view holds the field even as on date. Shri Syali, therefore, submits that to the extent the decision of the Supreme Court in Cloth Traders (P) Ltd. (supra) has not been overruled by the decision in Distributors (Baroda) (P) Ltd, to that extent the decision of apex Court in Cloth Traders (P) Ltd. (supra) vis-a-vis Darbhanga Marketing Co. Ltd. still holds the field. Therefore, deduction under s. 80-O should be allowed to gross income so received or brought into India.

Shri Syali further submits that the provisions of s. 80AB are also not applicable while allowing the deduction under s. 80-O. Though s. 80AB starts with non-obstante clause, only governs what it covers and cannot govern what the section itself does not deal with. The words ‘convertible foreign exchange received in or brought into India’ is income. The provision of s. 80AB has no further role to play. Therefore, if the convertible foreign

exchange received in India that is income for the purpose of deduction under s. 80-O of the Act, then the words ‘convertible foreign exchange received in or brought into India’ will be superfluous. On this line he submits that the deduction under s. 80-O should be allowed on convertible foreign exchange received in or brought into India without any deduction of the expenditure incurred in India.

7. On the other hand learned counsel for the Revenue Shri Agarwal submits that after decision of the Supreme Court in the case of Distributors (Baroda) (P) Ltd. (supra) no scope is left to the assessee to claim deduction on the gross foreign exchange received in India. The deduction under s. 80-O will be on the net income that is after computing the gross total income in accordance with the provisions of the Act, as provided under s. 80AB of the Act.

The facts are not in dispute that deduction under s. 80-O has been allowed by the Tribunal on the gross foreign exchange received in India by the assessee without taking the expenses incurred in India to earn that income. The issue whether deductions permissible under various provisions of Chapter VI-A of the Act should be on the gross receipts or on the net under taxable income. The issue has been considered by various High Courts and the apex Court regarding deduction under different provisions of Chapter VI-A. Therefore, before we proceed further we would like to quote some observations of the various High Courts and apex Court in this regard.

In case of CIT vs. Darbhanga Marketing Co. Ltd. (supra) the issue before this Court was that whether the gross dividend income exempted from super-tax or the dividend income received by the assessee minus the amount of interest for earning the same is exempted. This Court has taken the view that assessee is entitled for exemption from super-tax on gross dividend income.

In CIT vs. New Great Insurance Co. Ltd. (supra) again raised the issue before the Bombay High Court that whether exemption available in respect of gross dividend under s. 99(1)(iv) Bombay High Court also has taken the same view as taken by this Court that exemption from super-tax is available on the gross dividend income. Thereafter, s. 85A was introduced which provides the exemption from the income-tax and except for minor differences the wording of s. 99 (1)(iv) and s. 85A are similar. Later on the provisions of s. 85A is substituted by s. 80M. Similarly, along with s. 85A, s. 85C was introduced and s. 85C has been substituted by s. 80-O. The decision of Bombay High Court in New Great Insurance Company Ltd. (supra) and decision of this Court in Darbhanga Marketing Co. Ltd. (supra) has been approved by the apex Court in Cloth Traders (P) Ltd. vs. CIT (supra). In the wordings of s. 85A except some minor changes is same as that of s. 80-O as stand during the previous year relevant to the assessment years in question.

In Cloth Traders (P) Ltd. vs. CIT (supra) the issue before the apex Court whether the relief in respect of dividend received from domestic company is available on the actual amounts of dividend received or only to net amount under s. 80M. The apex Court has held the words “such income” cannot have reference to the quantum of the income included but refer only to the category of the income included, viz., income by way of dividends from a domestic company which can only mean the full amount of dividend from an Indian company and the apex Court has approved the decision of Bombay High Court in New India Great Insurance Company Ltd. (supra) and Darbhanga Marketing Company Ltd. (supra) of this Court.

In case of Distributors (Baroda) (P) Ltd. (supra) the apex Court has overruled its earlier decision in Cloth Traders (P) Ltd. (supra) and at p. 141 their Lordships observed as under : “………..The decision in Cloth Traders (P) Ltd. vs. Addl. CIT (1979) 10 CTR (SC) 393 : (1979) 118 ITR 243 (SC) : TC 24R.531 case is inconsistent with that in Cambay Electric Supply Industrial Co. Ltd. vs. CIT 1978 CTR (SC) 50 : (1978) 113 ITR 84 (SC) : TC 25R.306 case. Both cannot stand together. If one is correct, the other must logically be wrong and vice versa. It is, therefore, necessary to resolve the conflict between these two decisions and harmonise the law and that necessitates an inquiry into the correctness of the decision in Cloth Traders’ case. It is for this reason that we have reconsidered and reviewed the decision in Cloth Traders’ case and on such reconsideration and review, we have come to the conclusion that the decision in Cloth Traders’ case is erroneous and must be overturned.” However, their Lordships also observed at p. 137 that whatever might have been the interpretation placed on cl. (iv) of sub-s. (1) of s. 99 and s. 85A, the correctness of which is not in issue before the apex Court, so far as sub-s. (1) of s. 80M is concerned the deduction required to be allowed under that provision is liable to be calculated with reference to the amount of dividend in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee.

13. In CIT vs. Marketing Research Corporation (1987) 61 CTR (Del) 204 : TC 26R.624 the Delhi High Court has considered the issue whether deduction should be allowed under s. 80-O on the net income or on the gross income. Following the decision of the apex Court in case of Distributors (Baroda) (P) Ltd. (supra) Delhi High Court has answered the question in favour of Revenue and against assessee.

14. In CIT vs. M.K. Raju Consultants (P) Ltd. (1999) 239 ITR 232 (Mad) there was issue before the Madras High Court that whether the deduction under s. 80-O should be allowed on gross total income before set off of loss and unabsorbed depreciation of earlier years. Court held, no. Whether the Tribunal was also wrong in further directing that the amounts claimed as unabsorbed depreciation relating to previous years were required to be carried forward, Court answered, yes. While answering this question Madras High Court has followed the decision of the apex Court in case of Distributors (Baroda) (P) Ltd. (supra). No decision under s. 80-O of any High Court, in favour of the assessee, has been brought to our notice, specially after insertion of s. 80AB in the Act.

15. For deduction of tax on royalties, etc., received from certain foreign companies were initially allowed under s. 85C of the Act. The provision of that section was substituted by s. 80-O in the year 1968 and that s. 80-O is further amended by Finance Act, 1971, w.e.f. 1st April, 1972, and also amended by Finance Act, 1974, but made effective from 1st April, 1972. By amendment in 1974 the deduction was reduced from all of such income to an amount equal to fifty per cent of the income so received in, or brought into India.

16. Learned counsel for the assessee Shri Syali emphasized on the fact that in case of Distributors (Baroda) (P) Ltd. the Supreme Court has not overruled the decision in Cloth Traders (P) Ltd. (supra) so far the interpretation given of Bombay High Court in New Great Insurance Company Ltd. (supra) and decision of Calcutta High Court in Darbhanga Marketing Co. Ltd. Their Lordships in the case of Distributors (Baroda) (P) Ltd. (supra) has considered the provisions of s. 80M as exist in the relevant assessment year. Therefore, to that extent the decision of apex Court in Cloth Traders (P) Ltd. (supra) has not been overruled.

17. It is true that in case of Distributors (Baroda) (P) Ltd. their Lordships has observed at p. 129 that they are not concerned with regard to the correctness of the view taken by three High Courts on the interpretation of sub-s. (1) of s. 99, as no similar construction can be placed on s. 80M which is different in material respects from cl. (iv) of sub-s. (1) of s. 99.

18. In Darbhanga Marketing Co. Ltd. (supra) this Court has quoted the words from the language of s. 99 “amounts of any dividend received by it”, “which are included in his total income”, “incomes forming part of the total income” “dividend received” expression “income” but the words in computing the income of the assessee appeared in ss. 80M and 80-O and are not in s. 99(i)(iv) of the Act. Therefore, deduction under s. 80M and 80-O can be allowed on the income computed in accordance with the provisions of the Act and not with reference to full amount of dividend.

The words ‘deduction should be allowed in computing the income of the assessee’ do not find place in s. 99(i)(iv) of the Act. Provisions of s. 80AB of the Act provides in computing the total income of the assessee there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deduction specified in ss. 80C to 80U. Thus, the deduction will be subject to the provisions of this section while computing the income of the assessee, provisions of s. 80AB which is part of this Chapter provides where any deduction is required to be made or allowed under heading “C—Deductions in respect of certain incomes” in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, ‘the amount of income of that nature’ as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be ‘the amount of income of that nature’ which is derived or received by the assessee and which is included in his gross total income.

From the discussion above it is made clear that after insertion of s. 80AB, the argument of Shri Syali has no force that the decision of Bombay High Court in case of New Great Insurance Co. Ltd. (supra) and decision of this Court in case of Darbhanga Marketing Co. Ltd. (supra) has been approved by Supreme Court in its decision in the case of Cloth Traders (P) Ltd. (supra). Therefore, the deduction should be allowed on gross income received in India without taking into account the expenses incurred in India.

The careful reading of the provisions of s. 80AB made it clear that whatever the deductions are allowed in respect of any type of income specified in the various provisions under head ‘C’ Chapter VI-A that will be subject to the provision of s. 80AB. Provision of s. 80AB starts with non obstante clause ‘notwithstanding anything contained in that section for the purpose of computing the deduction under that section the amount of income of that nature as computed in accordance with provisions of this Act’, shall alone be deemed to be amount of income for the purpose of deduction under that section. Thus, though anything contained in that particular section, the deduction shall be allowed on the income, which is computed in accordance with the provisions of this Act. Therefore, the income which is received by way of convertible foreign exchange, it shall be computed in accordance with the provisions of this Act and then only the net income after computation shall be deemed to be the amount of income derived or received by the assessee for the purpose of deduction under s. 80-O.

In R.A. No. 259 (Cal) of 1990 one additional question has been referred for our opinion that is whether on the facts and in the circumstances of the case and on a correct interpretation of s. 37 (3A) and 37(3B) of the Act, 1961, r/w Expln. (c) thereof, the Tribunal was justified in holding that the insurance and repairs are allowable under s. 31 of the Act and, therefore, these expenses are beyond the purview of s. 37(3A) and 37(3B). In an Expln. to s. 37(3A) it is made clear that if the expenses are allowable otherwise under ss. 30 to 36, the provision of s. 37(3A) and 37(3B) are not applicable. Considering the explanation and also the decision of Punjab High Court in CIT vs. Chawla Truck House (1980) 18 CTR (P&H) 84 : (1983) 139 ITR 182 (P&H) : TC 57R.340 cannot be said that view taken by ITO was erroneous. We answer the questions in R.A. No. 259(Cal) of 1990 as under :

In the light of the above discussion we answer the question No. 1 in affirmative i.e., in favour of the assessee and against Revenue. Question No. 2 where the relief under s. 80-O of the IT Act, 1961, should be allowed on the net income from the foreign exchange or on the gross income received in India. We answer this question in negative i.e., in favour of the Revenue and against assessee. Similarly we answer the question No. 3 in negative i.e., in favour of the Revenue and against assessee. Question No. 4 whether the Tribunal was justified in law in cancelling the order of the CIT under s. 263 of the IT Act, 1961, we answer in negative i.e., in favour of the Revenue and against assessee.

The questions referred in R.A. No. 8(Cal) of 1992 we answer the questions as under : Whether the Tribunal was justified in holding that deduction under s. 80-O should be allowed on gross convertible foreign exchange brought into India, without taking into account expenses direct or indirect incurred in India. We answer this question in negative i.e., in favour of the Revenue and against assessee. Question No. 2 also be answered in negative that is in favour of the Revenue and against assessee.

Both the reference applications shall stands disposed of accordingly.

[Citation :243 ITR 10]