Madras H.C : The appellant was not entitled to the deduction under Section 80-O of the Income Tax Act,1961 for the assessment year in question

High Court Of Madras

TVS Berg Ltd. vs. CIT

Assessment Years : 1993-94 And 1994-95

Section : 80-O

P. Jyothimani And P.P.S. Janarthana Raja, JJ.

Tax Case Appeal Nos. 895 & 1138 Of 2005

December 13, 2011

JUDGMENT

P. Jyothimani, J. – The above Tax Case Appeals have been filed under Section 260A of the Income Tax Act, 1961 by the assessee in respect of the assessment years 1993-94 and 1994-95 respectively, challenging the impugned orders of the Income Tax Appellate Tribunal, Chennai Bench ‘C’, by which the Tribunal has dismissed the appeals filed by the assessee against the common order of the Commissioner of Income Tax (Appeals-I), holding that the assessee is merely a contractor and the payments/receipts in pursuance of the services done by it are the payments not in the nature as prescribed in Section 80-O of the Income Tax Act, thereby rejecting the claim of the assessee under Section 80-O in respect of the said assessment years, upholding the decision of the authorities below.

2. The above said appeals were admitted on the following substantial questions of law:

1. Whether the Hon’ble Tribunal was right in law and on facts in holding that the appellant was not entitled to the deduction under Section 80-O of the Income Tax Act,1961 for the assessment year in question?

2. Whether the Hon’ble Tribunal was right in law and on facts in holding that the appellant was merely a contractor and the payments received by it in pursuance of the services rendered by it were not payments in the nature prescribed in Section 80-O of the Income Tax Act,1961?

3. Whether the Hon’ble Tribunal was right in law and on facts in holding that the appellant company had not rendered any service outside India for the purposes of claiming deduction under Section 80-O of the Income Tax Act, 1961 especially when Explanation ( iii) to Section 80-O clearly provided that services rendered or agreed to be rendered outside India shall include services rendered from India?

3. The assessee claimed deduction under Section 80-O of the Income Tax Act, 1961 (in short, ‘the Act’) to the extent of Rs. 1,00,45,950.00 for the assessment year 1993-94 and Rs. 2,40,58,578.00 for the assessment year 1994-95, on the basis that the said amounts relate to the assessee furnishing drawings of plant and machinery to the American Company M/s. EI Du Pont-De Nemours, the Company situated at New York. The Assessing Officer, while making assessment under Section 143(3) of the Act, disallowed the claim of deduction under Section 80-O of the Act, against which the appeal preferred by the assessee before the Commissioner of Income Tax (Appeals), came to be dismissed and the second appeal before the Tribunal was also dismissed. Thereafter, the above Tax Case Appeals have been filed on the above mentioned substantial questions of law.

4. The assessee, who entered into an agreement with the above said foreign Company to draw the plans and designs for the plant and machinery to be used in USA as per the specifications and terms and conditions under the agreement, in its turn engaged a sub-contractor from Bombay, viz., M/s. Sri Chemtex Engineering India Ltd., Nirlon House, 254-B, Dr. Annie Beasant Road, Worli, Bombay 400 025. It was the stand of the Department that the main condition of the agreement between the assessee and the foreign company was that the assessee will act as an agent of the foreign company by having 40% share in the total contract and will act as a supervisor by having all other benefits in the joint venture. Therefore, according to the Revenue, assessee acted only as a contractor to the foreign company by sending the drawings and designs and plans prepared by its sub-contractor at Bombay and therefore, it cannot claim the design as its own, emanating from Indian sources. In other words, it has been the contention of the Revenue that the assessee has no right over the property as it was acting as an agent for executing the contract on the direction of the foreign company. Relying on the judgement of the Hon’ble Supreme Court in Petron Engg. Construction (P.) Ltd. v. Central Board of Direct Taxes [1988] 41 Taxman 294 /[1989] 175 ITR 523 , it was contended that the assessee was not entitled for deduction under Section 80-O of the Act, it being a mere contractor and the deduction under the said provision is available only with gross total income of an assessee being an Indian company which includes any income by way of royalty fees or commission, similar payments received by the assessee from the company of the foreign state or a foreign enterprise in consideration for the use outside India of any patent, innovation, model, design etc.

5. It is the contention of the learned senior counsel appearing for the appellant that for application of Section 80-O in respect of deduction, services rendered or agreed to be rendered outside India includes the service rendered from India and the service may be in the nature of technical or professional and that it must be rendered to a foreign company or enterprises. According to him, the agreement entered by the appellant/assessee with the foreign company dated 2.1.1992, in its scope of work clearly provides for the engineering services to be rendered to the foreign company. It is his further contention that for the purpose of rendering such service by an Indian Company to a foreign company to be used in a foreign country, it is not necessary that the assessee in India must itself be a technical expert and even if such Indian company being a sub-contractor of some other company in India, obtains the technical know-how under a joint agreement, such assessee will also be entitled for the benefit under Section 80-O of the Act. He has also brought to the notice of this Court that by virtue of the services rendered by the appellant/assessee Company to the foreign company in the financial years relevant to the said assessment years it has shown the income received, and therefore, that itself is sufficient for giving deduction under Section 80-O of the Act and according to the learned senior counsel, all the authorities below have failed to take note of the said legal position that while the deduction claimed under Section 80-O is absolute, the deduction to which the assessee is entitled under Section 80-AB is qualified.

6. It is his further contention that even in the judgement of the Supreme Court relied upon by the Tribunal in the impugned order reported in Continental Construction Ltd. v. CIT [1992] 195 ITR 81/ 60 Taxman 429, the Apex Court has made it very clear that the benefit to be conferred under Section 80-O cannot be given an unduly narrow interpretation, holding that even in cases where the services have been done through the medium of its employees or other personnel engaged by the assessee that would not deter the assessee to obtain the benefit conferred under Section 80-O of the Act and therefore, according to him, the Tribunal has committed a grave error.

7. He would also rely upon the judgement of this Court reported in CIT v. Chakiat Agencies (P.) Ltd., [2009] 314 ITR 200 (Mad), to substantiate his above said contention.

8. He would also submit that the basic purpose of introduction of Section 80-O is to spread by Indian assessees, any patent, invention etc., which includes information for use outside India and in that process, they not only receive income, but also augment foreign exchange for the benefit of the country as opined by the Hon’ble Apex Court in the judgement reported in Central Board of Direct Taxes v. Oberoi Hotels (India) (P.) Ltd., [1998] 231 ITR 148/ 97 Taxman 453 (SC).

9. On the other hand, it is the contention of the learned Senior Central Government Standing counsel appearing for the Department that, it is not as if the assessee is a person of technical know-how, it only passed on whatever expertise or information which the assessee has received from the sub-contractor in Bombay, who is an expert, to the foreign company under the agreement dated 02.01.1992 and in that process the assessee only acts as an agent of the foreign company and therefore, whatever benefit he would receive from the foreign company cannot be said to be the benefit received for the information or technical know-how, and it can be at the most a reimbursement from the foreign company by its agent in the name of the assessee in respect of its contract with the Indian Company at Bombay. He would submit that all the three authorities have concurrently found that the appellant/assessee is not entitled for the deduction under Section 80-O of the Act and therefore there is nothing to interfere with the orders.

10. We have heard the learned senior counsel for the appellant/assessee and the Senior Central Government Standing Counsel for the Revenue and given our anxious thoughts to the issue involved in these cases.

11. On facts, it is not in dispute that the assessee/appellant has entered into an agreement with the foreign company M/s. EI DU PONT de Nemours & Company on 02.01.1992. Under the said agreement, the scope of work is as follows:

‘Contractor shall, except to the extent otherwise expressly stated herein, furnish all labor, supervision, materials, tools, equipment, facilities, and services to properly and efficiently do all things necessary to provide engineering services for DU PONT in accordance with General scope of services, Exhibit ‘A’ dated December 10, 1991 attached hereto and made a part hereof.

Such scope of services may be modified from time to time by mutual written agreement.’

It also includes the services effected.

12. A reference to the said agreement also shows that the foreign company was aware that the assessee being referred to as a contractor in the said agreement, had entered a contract with Chemtex Engineering of India Ltd., and the foreign company has agreed to reimburse to the assessee, all payments made by the assessee to its sub-contractor, viz., Chemtex Engineering of Indian Ltd. in the form of compensation, and the relevant portion is as follows:

‘DU PONT agrees to reimburse contractor for all payments properly made by contractor to that contract between Chemtex Engineering of India Ltd., and contractor dated 1st February, 1992, which is incorporated herein by reference.’

The agreement also contains the terms of payment and the general scope of service to be effected by the contractor as explained in Exhibit ‘A’ annexed to the said agreement. The general scope of services is as follows:

‘Exhibit ‘A’

General Scope of Services

Contractor is being engaged as a design/engineering contractor to support E.I. Du Pont De Nemours Engineering in providing design for its facilities. Required services include, but are not limited to, economic evaluation, scope development, production engineering, preparation of specifications, drafting, and preparation of lump sum bid packages.

The Contractor will be responsible for timing, cost and technical adequacy of all work assigned to assure adequacy. This will not negate the Contractor’s responsibility for organizing, managing, and implementing the assigned work so that project objectives related to cost, schedule, and technical criteria are met.

General procedures will be developed to cover various aspects of the Contractor-Du Pont interaction. This will be a joint, on-going effort. After the procedures are in place, each work assignment will be reviewed to insure that the applicable procedures are followed.

The Resident Du Pont Manager will function as the Contract Administrator and approve any procedure change and be kept informed on the over all aspects of all work under the agreement. Detailed technical and cost control surveillance will be carried out by Du Pont project personnel especially responsible for each work assignment.

Contractor shall provide Du Pont every four weeks with a report of cost elements to include, but not limited to, the following:

-Reproduction, Travel, Miscellaneous, Billed Labor, Manpower, Overtime, International Communications.’

That apart, there are various general conditions involving the engineering and design services, which form part of the said agreement.

13. For the assessment year 1993-94, the assessee claimed a sum of Rs. 1,00,45,950/- as deduction while for the assessment year 1994-95, the claim of deduction was made to the extent of Rs. 2,40,58,578/- being 100% of the gross receipts of Rs. 4,81,17,155/- from the foreign principal. The assessing officer, after referring to the agreement between the assessee and the foreign company, has referred to certain explanatory note stated to have been filed by the assessee on 27.03.1996, to show that the contract was ‘strictly on no profit no loss situation’. The note which is being relied upon by the assessing officer was called for by us and we find that the assessee has agreed to work on ‘no profit no loss basis’ due to the worst period of foreign exchange position of Government of India which is exposed by a reading the entire paragraph, viz.,

‘The contract was finalized during the worst period of Foreign exchange position of Government of India. Economy was just then liberalized with new measures announced by the Government. TVSB agreed to the above no loss/no profit situation as it was entitled for export benefits under Government of India regulations.’

Therefore, in our view, the said explanatory note, which has been relied upon by the assessing officer, has no meaning. In fact, it is relevant to note that the assessing officer, after explaining various facts has also come to a conclusion that the American Company has reimbursed the cost. The portion in that regard is as follows:

‘Here we have to examine whether the assessee has done any services as stated in the early part of the Section viz. selling of patent, invention, design or similar property’ What the assessee has presently done is that it entered into an agreement with its corporate partner in America to draw out certain designs for the American Company whether the assessee itself does it or a sub-contractor is immaterial. The American Company has reimbursed the cost.’

In spite of the same, holding that it will not amount to profit for service charged, the assessing officer has disallowed the deduction.

14. The Commissioner, Income Tax (Appeals) has also considered that the assessee was only acting as an agent for executing the works specified and directed by the foreign company and the work was executed by Chemtex Engineering of India Ltd., Bombay and the information of the Bombay company was passed on to the foreign company through the appellant and therefore, the assessee acted only as an agent. It is also relevant to extract the relevant portion from the order of the appellate authority, which is as follows:

‘All drawings, designs etc. prepared for Dupont shall be the exclusive property of Dupont and on completion of agreement, all such property should be returned to Dupont. This would show that the appellant company had not right over the properties but was acting only as an agent for executing such work as specified and directed by the company. The work was executed by Chemtex Engineering Limited, Bombay. The information necessary for drawing and designs was passed on to the Bombay Company through the appellant. The appellant company invoiced Dupont in U.S. dollars equivalent to the bill raised by Bombay Company in Indian rupees. It has to be noted that the appellant has functioned only as an agent without any independent right in India.’

Ultimately, the appellate authority has come to the conclusion that the assessee has not rendered any service outside India and works were got executed in India, in the following words:

‘The appellant company has not rendered any service outside India. The entire work was got executed in India.’

which in our view is totally opposed to the provisions of Section 80-O of the Act, especially second proviso and explanation annexed to that and it is this finding which has been confirmed by the Tribunal in its impugned order.

15. Now, we may refer to Section 80-O of the Act, which, as stood during the relevant time is as follows:

“80-O, Deduction in respect of royalties, etc., from certain foreign enterprises.- Whether the gross total income of an assessee, being an Indian company [or a person (other than a company) who is resident in India], includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee, or in consideration of [technical or professional services] rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with an subject to the provisions of this section, a deduction of an amount equal to fifty per cent of the income so received in, or brought into, India, in computing the total income of the assessee.

Provided that such income is received in India within a period of six months from the end of the previous year, or where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief Commissioner or Commissioner may allow in this behalf.

Explanation.- For the purposes of this section,-

(i) ‘convertible foreign exchange’ means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the law for the time being in force for regulating payment

(ii) ‘foreign enterprise’ means a person who is a non-resident;

(iii) services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India.’ (Emphasis supplied)

16. In the above said section, in the second proviso, explanation (iii) makes it abundantly clear that the services include even if they are rendered or agreed to be rendered outside India, from India, but the only exclusion is that the services shall not be rendered in India. On the facts of the present case, it is very clear that even assuming that the assessee has acted as an agent of the foreign company under the agreement, the services of the assessee in transferring the technical know-how of another company in Bombay were rendered from India to be used in the foreign country for earning foreign exchange and the same were never rendered in India. It is only when such services were rendered outside India there could be foreign exchange which would be earned by the company. On the above said admitted facts, there is absolutely no doubt in our mind that even if the petitioner is to be treated as an agent of the foreign company, when it has rendered service and obtained the amount from the foreign source either by way of reimbursement or by any other mode, which would certainly earn foreign exchange, the assessee ought to have been allowed the deduction under Section 80-O of the Act.

17. In fact, one of the Circulars issued by C.B.T.D. viz., Circular No.700 dated 23rd March, 1995 has been brought to the notice of this Court by the learned senior counsel for the assessee, in which the Government of India has made it clear that the benefit of Section 80-O would be available to a person rendering service even if the foreign recipient of the services utilizes the benefit of such services in India. The said circular is as follows:

‘Subject: Deduction under Section 80-O of the Income-tax Act, 1961 – Clarification regarding.

Section 80-O of the Income-tax Act, 1961 provides for a deduction of 50 percent from the income of an Indian resident by way of royalty commission, fees or any similar payment from a foreign Government or enterprise:

(a) in consideration for the use outside India of any patent, invention, model, design, secret formula or process, etc.,: or

(b) in consideration of technical or professional services rendered or agreed to be rendered outside India to such foreign Government or enterprise.

In either case, the requirement is that the income should be in convertible foreign exchange.

It has been clarified in Explanation (iii) to section 80-O that services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India.

A question has been raised as to whether the benefit of section 80-O would be available if the technical and professional services, though rendered outside India, are used by the foreign Government or enterprise in India.

The matter has been considered by the Board. It is clarified that as long as the technical and professional services are rendered from India and are received by a foreign Government or enterprise outside India, deduction under section 80-O would be available to the person rendering the services even if the foreign recipient of the services utilizes the benefit of such services in India.

The contents of this circular may be given wide publicity and brought to the notice of all the subordinate authorities under your charge for information and necessary action.’

18. The purpose of Section 80-O of the Act and the avowed object cannot be explained in a better manner than the wordings of the Hon’ble Apex Court in the Central Board of Direct Taxes v. Oberai Hotels India Pvt. Ltd. [1998 (231) ITR 148] wherein the Supreme Court has held as follows:

‘Basic purpose of Section 80-O is the spread by an Indian assessee of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill of the assessee for use outside India and it that process to receive income to augment the foreign exchange resources of the country.’

19. It is interesting to note that when an argument was advanced that the benefit of Section 80-O should be applicable only to the assessee who shall directly receive from the foreign enterprise and not by canalization and that there is some lacuna in the legislation, the Hon’ble Apex Court in Petron Engineering Construction (P.) Ltd. (supra), by relying upon an observation made by Lord Denning, rejected the said contention and held that there is no lacuna under Section 80-O of the Act and the legislature has not provided the canalization. It is useful to extract the following paragraphs of the judgement of the Supreme Court:

‘Lastly, it is argued on behalf of the appellants that Section 80-O should be construed as permitting canalisation and if so construed, the appellant-Company will be entitled to the benefit of the section. On the other hand, it is the contention of Dr. Gauri Shankar that in view of the specific mandate of Section 80-O that the income of the assessee shall be directly received from the foreign enterprise, the question of canalisation does not arise. In other words, it is submitted that canalisation is not contemplated by Section 80-O. In reply to the contention of Dr. Gauri Shankar, Mr. Rajagopalan submits that it is a lacuna on the part of the Legislature in not providing for canalisation in fulfilment of the objectives referred to above. In support of his contention, much reliance has been placed by him on the observation of Lord Denning in the decision in Seaford Court Estates Ltd. v. Asher [1949] 2 K.B. 481. In that case, Lord Denning observed as follows:

A Judge, believing himself to be fettered by the supposed rule that he must look to the language and nothing else, laments that the draftsmen have not provided for this or that, or have been guilty of some or other ambiguity. It would certainly save the judges trouble if Acts of Parliament were drafted with divine prescience and perfect clarity. In the absence of it, when a defect appears a judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament, and he must do this not only from language of the statute, but also from a consideration of the social conditions which gave rise to it, and of the mischief which it was passed to remedy, and then he must supplement the written word so as to give “force and life” to the intention of the legislature.

The above observation of Lord Denning does not, in our opinion, help the appellants. The entire observation is based on a defect appearing in the provision of a statute. In our view, there is no defect in the provision of Section 80-O. It may be that the Legislature has not provided for canalisation, but that cannot be said to be a lacuna or a defect in the provision. Whether canalisation should be permitted or not, is absolutely a matter for the Legislature. It is not incumbent on the Legislature to provide for canalisation, although it has been frankly conceded by Dr. Gauri Shankar that canalisation is desirable and a reasonable one. In the circumstances, in view of the plain language of the section, we do not think that we can construe the section as providing canalisation, that is to say, income by way of royalty, commission etc. need not be received directly from the Government of a foreign State or a foreign enterprise, but through another Indian company. This is not the intention of the Legislature.

20. This court in Chakiat Agencies Pvt. Ltd. (supra) by following the Supreme Court judgement in Oberai Hotels cited supra, has held, based on the circulars of the Central Board of Direct Taxes dated 23.3.1995 and subsequent clarification, as follows:

“15. The CBDT in Circular No. 700 dt. 23rd March, 1995 clarified Section 80-O by stating that as long as the technical and professional services are rendered from India and are received by foreign Government or enterprise outside India, deduction under Section 80-O of the Act would be available to the person rendering the service, even if the foreign recipient of the service utilises the benefit of such services in India.”

21. Even in the judgement of the Hon’ble Apex Court relied upon by the Tribunal in the impugned order in Continental Construction Ltd. (supra), the Hon’ble Apex Court has made it abundantly clear that even the contractor who executes the work through the medium of employees or the other personnel engaged by the assessee is entitled for the benefits. The following portion of the judgement is relevant.

“But, even assuming that there could be some difference of opinion on the above issue, there can be no doubt at all that, under the contract, technical services were rendered by the assessee to the foreign Government. In our opinion, the attempt of Sri Ahuja to differentiate technical services rendered to the assessee by its employees and technicians from technical services rendered by the assessee to a foreign constituent and urge that the latter alone can qualify for relief under Section 80-O on the ground that the project in question was a turnkey project which has succeeded before the High Court, proceeds on an unduly narrow interpretation of the section. In our view, the assessee was undoubtedly rendering services to the foreign Government by executing the water supply project. These services were no doubt technical services, as they required specialised knowledge experience and skill for their proper execution. The argument seems to be that the services in the present case will not be covered by the section because there was no privity of contract between the employees of the assessee who contributed their technical skill and the foreign Government. We think this argument cannot be accepted. The assessee is a company and any technical services rendered by it can only be through the medium of its employees, skilled and unskilled, and, even if the contract had not related to a turnkey project, the assessee’s employees would have been answerable only to the assessee and none else though, perhaps, in such an event, the other party to the contract may have retained a larger degree of control and supervision in the execution of the contract Even where the contractor is an individual or firm and not a company, a contract of this magnitude can be executed only through the medium of employees or other personnel engaged by the assessee. The facts that, physically speaking, it is only such employees that render services and that, so far as they are concerned, they render services only to their employer and not to the other contracting party are in no way inconsistent with, or repugnant to, the notion that, so far as the foreign Government is concerned, it looks only to the assessee for the rendering of the technical services under the contract. The High Court has pointed out that a person who manufactures a television set ordered by another cannot be said to render technical services to the latter. In our view, that analogy is not apposite in the context of a contract of the nature, magnitude and specialisation with which we are concerned. Where a person employs an architect or an engineer to construct a house or some other complicated type of structure such as a theatre, scientific laboratory or the like for him, it will not be incorrect to say that the engineer is, in putting up the structure, rendering him technical services even though the actual construction and even the design thereof may be done by staff and labour employed by the engineer or architect. Where a person consults a lawyer and seeks an opinion from him on some issue, the advice provided by the lawyer will be a piece of technical service provided by him even though he may have got the opinion drafted by a junior of his or procured from another expert in the particular branch of the law. Sri Ahuja tried to negative this line of thinking by urging that “professional services” have been brought within the scope of Section 80-O only by an amendment by the Finance (No. 2) Act, 1991 and that, too, w.e.f. 1-4-1992 which is proposing to substitute the word “technical or professional services” in place of the word “technical services” now used in the section. It seems to us that this amendment may be only of a clarificatory nature. The expression “technical services” has a very broad connotation and it has been elsewhere in the statute also so widely as to comprehend professional services : vide Section 9(1)(vii), referred to earlier. But we need not digress on this aspect for two reasons. Firstly, whatever may be the position regarding other “professional services”, there can hardly be any doubt that services involving specialised knowledge experience and skill in the field of constructional operations are “technical services”. The Board’s guidelines, to which reference is made later, specifically say so. Secondly, the question whether “professional services” would be “technical services” or not has no impact on the point we are trying to make viz. that in order to say that a person is rendering such services to another, it is not necessary that the services should be rendered by the former personally and not through the medium of others. For the reasons discussed above, we have come to the conclusion that, under the contracts in question, the assessee had made available technical information to the foreign Government for use outside India and had also rendered technical services to the foreign Government outside India.”

Therefore, it is clear that the authorities below have failed to consider the issue in its proper prospective and especially, the Tribunal has failed to take note of the second proviso and explanation No.(iii), as mentioned above. Even, theoretically the sub-contractor is entitled for the benefit under Section 80-O of the Act and to that extent the impugned order of the Tribunal in denying such right of the assessee, is stand set aside.

22. Looking the matter in any angle, on the facts of the present case, we are of the considered view that the rejection of the claim of the assessee for deduction under Section 80-O of the Act by all the authorities, is not sustainable. However, the learned Standing Counsel appearing for the Revenue made an alternative submission that there is no positive income of the assessee and hence, he is not entitled to deduction under Section 80-O the Act. For the assessment year 1993-1994, the Commissioner of Income-tax (Appeals) has given a finding in paragraph 2.3, which reads as follows:

“2.3 During the hearing of the case, the assessing officer held the view that Section 80AB is squarely applicable while computing deduction under Section 80-O. He would also take the view that the decision of the ITAT in 4- ITD 51 is not squarely applicable to the facts of the case.”

Further, the Commissioner of Income-tax (Appeals), in paragraph 2.7 held that there is no need to go into the provisions of Section 80AB of the Act. For the assessment year 1994-1995, there is a specific finding given by the assessing officer that there is no positive income and therefore, the assessee is not eligible for deduction. On an appeal, the Commissioner of Income Tax (Appeals) also mentioned that the assessee has no positive income. Therefore, the learned counsel appearing for the Revenue vehemently contended that when there is no positive income, the assessee is not entitled to the relief under Section 80-O of the Act. The learned counsel appearing for the assessee submitted that the Tribunal has not considered that issue and there is no proper examination by the authorities below and requested the Court to remand the matter to the assessing officer to decide the issue in respect of computation of the relief. The Apex Court in the case of A.M. Moosa v. CIT [2007] 294 ITR 1 / 163 Taxman 741 (SC) considered the scope of Section 80AB and in paragraph 10 it has held as follows:

“Section 80-AB is also in Chapter VI-A. It starts with the words ‘where any deduction is required to be made or allowed under any section included in this Chapter’. This would include Section 80-HHC. Section 80-AB further provides that ‘notwithstanding anything contained in that section’. Thus Section 80-AB has been given an overriding effect over all other sections in Chapter VI-A. Section 80-HHC does not provide that its provisions are to prevail over Section 80-AB or over any other provision of the Act. Section 80-HHC would thus be governed by Section 80-AB. Decisions of the Bombay High Court in CIT v. Shirke Construction Equipments Ltd. [2000] 246 ITR 429 / 112 Taxman 311 (Bom.) to the contrary cannot be said to be the correct law. Section 80-AB makes it clear that the computation of income has to be in accordance with the provisions of the Act. If the income has to be computed in accordance with the provisions of the Act, then not only profits but also losses have to be taken into consideration.

23. Further, the Apex Court in the case of CIT v. Shirke Construction Equipment Ltd. [2007] 291 ITR 380/ 161 Taxman 212 (SC) considered the earlier judgment reported in IPCA Laboratory Ltd. v. Dy. CIT [2004] 135 Taxman 594/ 266 ITR 521 (SC) and in paragraph 8, it has held as follows:

9. Para 14 of the said judgment of this Court in IPCA Laboratory Ltd. which answers the questions, is extracted below: (Page 530)

‘Section 80-AB is also in Chapter VI-A. It starts with the words ‘where any deduction is required to be made or allowed under any section included in this Chapter’. This would include Section 80-HHC. Section 80-AB further provides that ‘notwithstanding anything contained in that section’. Thus Section 80-AB has been given an overriding effect over all other sections in Chapter VI-A. Section 80-HHC does not provide that its provisions are to prevail over Section 80-AB or over any other provision of the Act. Section 80-HHC would thus be governed by Section 80-AB. Decisions of the Bombay High Court and the Kerala High Court to the contrary cannot be said to be the correct law. Section 80-AB makes it clear that the computation of income has to be in accordance with the provisions of the Act. If the income has to be computed in accordance with the provisions of the Act, then not only profits but also losses have to be taken into consideration.’

In view of the principles enunciated in the above cited decisions of the Apex Court, we are of the view that the computation of income has to be made in accordance with the provisions of the Income Tax Act and the income includes not only the “profits”, but also the “losses” and therefore, we direct the assessing officer to compute the income in accordance with the provisions of the Income Tax Act.

24. Accordingly, the impugned orders of the Tribunal as well as the appellate Commissioner and the assessing officer are set aside and the matter is remanded to the assessing officer to reconsider the entire case by giving benefit under Section 80-O of the Act to the assessee, however, subject to the provision of Section 80-AB of the Act. The appeals stand allowed and the matter is remanded to the assessing officer to pass fresh orders by giving benefits to the assessee under Section 80-O of the Act in accordance with law. No costs.

[Citation : 347 ITR 516]

Leave a Comment

Scroll to Top
Malcare WordPress Security