Madras High Court
Commissioner Of Income Tax vs Shri Khursheed Anwar on 13 August, 2007
Author: D. Murugesan
Bench: D. Murugesan, P.P.S. Janarthana Raja
JUDGMENT D. Murugesan, J.
1. This Tax Case Appeal is at the instance of the revenue questioning the order of the Income Tax Appellante Tribunal Madras 'B' Bench made in ITA No. 368/Mds/99 dated 31.10.2003 for the assessment year 1996-97.
2. The respondent-assessee filed his return of income for the assessment year 1996-97 admitting a total income of Rs. 74,620/-. He also filed another return of income for the above assessment year admitting the same total income of Rs. 74,620/- and along with the said return, the assessee also enclosed proof for commission received in foreign currency in support of his claim for deduction under Section 80-O of the Income Tax Act. The return was processed under Section 143(1)(a). As the assessee had admitted service charges of Rs. 1,000/- and claimed huge expenses amounting to Rs. 1,76,242/- resulting in net loss of Rs. 1,75,242/-, he was asked to explain the reasons for claiming such huge expenses against the service charges of Rs. 1,000/- received in India. Apart from the above, the assessee was asked to explain as to the nature of commission received to examine the admissibility of the deduction claimed under Section 80-O of the Act. The assessee explained by stating that the expenses included a sum of Rs. 52,500/- towards interest payment on loan taken for the purchase of a property at Romain Rollan Street, Pondicherry and a flat at Bangalore during the assessment year 1992-93, a sum of Rs. 40,339/- towards depreciation on building and a sum of Rs. 8,000/- towards depreciation on dish antenna. After considering the explanation of the assessee, the Assessing Officer disallowed the claim of interest and the depreciation claimed on dish antenna on the ground that they do not relate to the business, but allowed 25% depreciation on building. As regards the claim of deduction under Section 80-O of the Act, the Assessing Officer held that the same is inadmissible. Questioning the said assessment, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) and the said appeal was also dismissed. The assessee again filed an appeal before the Income Tax Appellate Tribunal, Chennai 'B' Bench. By the impugned order dated 31.10.2003, the Tribunal allowed the appeal in part and directed the Assessing Officer to allow the interest claim of Rs. 52,500/-, to allow 50% depreciation on building and the claim of deduction under Section 80-O in favour of the assessee, but disallowed the claim of depreciation on dish antenna. Aggrieved by the above order of the Tribunal, the present appeal has been filed by the revenue on the following substantial questions of law:
(1) Whether in the facts and circumstances of the case, the Tribunal had enough material to hold, and was right in holding that the assessee was entitled to deduction of interest on loans used for purchase of property?
(2) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the commission earned in foreign currency for sale of foreign company's products in India, would be eligible for the benefit of Section 80-O?
3. So far as the first question of law is concerned, it is seen that the assessee has shown the assets in the balance sheet of the business. The Tribunal had also appreciated the contention of the assessee that the building was used for business and therefore no income could be offered as rental. The Tribunal also held that the revenue has not brought any material on record to show that the building was not used for business except stating that the building was not used for business. The said finding of the Tribunal, in our view, is based on the records produced by the assessee. As the finding of the Tribunal being on appreciation of records, we answer the first question of law against the revenue and in favour of the assessee.
4. So far as the second question of law is concerned, it appears that the assessee had claimed deduction under Section 80-O of the Act on the commission received in foreign currency from M/s Baggio Tecnologie s.r.l., Italy on the basis that an exclusive agency agreement entered into by the assessee with the said foreign enterprise for promoting and concluding sales contract in the territory of India.
5. Section 80-O of the Act, as applicable for the assessment year in question, reads as under;
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 enterprise or enterprise by the assessee.
A reading of the above section shows that the assessee must receive commission from the Government of a foreign state or a foreign enterprise any consideration for the use outside India of any information concerning commercial experience or skill under such Government or enterprise.
6. It appears that the assessee had entered into an agency agreement dated 1.11.93 for exclusive agency for promoting and concluding sales contracts in the territory of India in respect of machinery and equipments for the leather industry manufactured by M/s Baggio Technologie s.r.l., Italy. The relevant clause of the agreement reads as under:
This appointment does in no way imply that you are a subordinate or an employee of our Company, since you will undertake to conduct all relevant activities in full autonomy and at your own risk; it nevertheless binds you to conduct - with all due diligence - any activities you think convenient for promoting the sale of our products in the territory allotted to you, but at the same time always in accordance with our production and commercial policy and in compliance with our directions, and you shall send us periodical reports on the market situation, the state of competition and on our customers whom you undertake to visit frequently.
7. It is the contention of the learned Counsel appearing for the assessee that by the said clause, the assessee is under an obligation to send to the foreign enterprise a periodical report on the market situation, the state of competition and on customers whom the assessee undertakes to visit frequently. By virtue of the said agency agreement, the assessee used to provide the said foreign enterprise information concerning the commercial activities and for such information, he was paid the commission.
8. For the purpose of entitlement as to the deduction under Section 80-O, it is for the assessee to satisfy the revenue firstly, as to the receipt of the commission; secondly, that such commission was received from the foreign enterprise outside India; and thirdly, the commission was in respect of the information relating to the commercial transaction. Of course, both the Assessing Officer and the Commissioner of Income Tax (Appeals) had gone into the question that the commission represents the amount within India and not outside India and had consequently disallowed the claim of the assessee. In our opinion, in terms of the Section 80-O coupled with the facts pleaded on the basis of the agreement, the commission that was received by the assessee is from a foreign enterprise namely, M/s Baggio Tecnologie s.r.l., Italy, i.e., outside India. Therefore, the finding of both the Assessing Officer and the Commissioner of Income Tax (Appeals) to disallow the claim of the assessee under Section 80-O on the above ground is unsustainable.
9. However, for the purpose of entitlement as to the deduction under Section 80-O, the assessee must prove by supporting materials the fact that such commission was in fact received for passing of any commercial information to a foreign enterprise. From the order of the Assessing Officer, it is seen that immediately on the claim of deduction under Section 80-O made by the assessee, he was asked to explain the nature of commission received in order to examine the admissibility of the deduction claimed under the said section. In view of the above, the assessee had submitted a reply on 28.3.98. Though in the said reply the assessee has stated that on the basis of the exclusive agency for promoting and concluding sales contract in the territory of India for machinery and equipments for the leather industry manufactured by M/s Baggio Technologie s.r.l., Italy and in view of the said agreement, the assessee had worked with foreign enterprise and the assessee also visits abroad very often, the assessee has not produced any materials except the statement. The benefit under Section 80-O of the Act is not available for the assessee by merely asking. It must be presumed that the claim must be supported by records and materials. In the absence of any materials, the benefit of the said section cannot be claimed as a matter of right, as it is purely a question of fact, which could be considered by the Assessing Officer on the basis of the available records. As rightly contended by the learned Senior Standing Counsel for the I.T. Department, except the said explanation, no records were produced. In fact the Commissioner of Income Tax (Appeals) has rendered a specific finding by observing that the assessee has simply effected the sale of machineries and spares manufactured by M/s Baggio Tecnologie s.r.l., Italy and therefore the assessee had received only sales commission. It was also found by the Commissioner of Income Tax (Appeals) that the sales commission received by the assessee is not for any activities relating to technical or professional services to the principals, extensive market survey and ascertaining the need and preference of tanners in India, visiting foreign countries on behalf of the principals to attend leather trade fair and gathering latest techniques available in the market and pass these information to the principals, which plays a vital role in the manufacture of machines.
10. Learned Counsel appearing for the assessee relied upon a judgment of the Delhi High Court in Commissioner of Income-Tax v. Mittal Corporation to support the claim for deduction under Section 80-O. That was a case where the assessee therein received a commission of income as by agent of foreign enterprise and the assessee claimed deduction under Section 80-O of the Act on the said commission income. For entitlement of deduction, the assessee explained that (i) it was a registered partnership firm and resident in India; (ii) commission was received in convertible foreign exchange; and (iii) it earned income by way of commission in consideration, for the use outside India, of information concerning commercial knowledge, experience or skill made available to foreign enterprises. Of course, the claim of the assessee in that case was accepted by the Delhi High Court solely on the ground that there was no dispute that it was commercial information which the assessee provided to foreign buyers and in consideration thereof, the assessee received commission which was convertible foreign exchange. What is relevant for consideration is as to the availability of materials to sustain the claim for deduction under Section 80-O. Inasmuch as the assessee had not produced any material except the explanation offered, the facts of the said case cannot be pressed into service by the assessee and the said judgment is distinguishable.
11. Per contra, the learned Senior Standing Counsel for the I.T. Department also relied upon a judgment of the Delhi High Court in Anand and Anand v. Commissioner of Income Tax , where the deduction under Section 80-O was disallowed. In our opinion, the said judgment is not in any way useful to the revenue, as that case refers to the case of an Advocate who received certain amount for the professional services rendered in respect of a foreign company. Though a claim was made on the ground that the money was received by way of commission and therefore the assessee was entitled to the deduction under Section 80-O of the Act, it was negatived on the ground that it was received by the assessee as remuneration and not by way of commission to attract the provisions of Section 80-O.
12. Having regard to the above discussions, in our view, as the assessee has not established his claim for deduction by producing the relevant records, the Tribunal has erred in reversing the finding of the Commissioner of Income Tax (Appeals) rendered on the basis that the assessee was not entitled to the benefit in view of the fact that the commission received by the assessee was not for any of the activities mentioned in paragraph 4.1 of the order of the Commissioner of Income Tax (Appeals). There is absolutely no reason adduced by the Tribunal to reverse the said finding. We must also mention here that during the course of arguments, as we found that there were no supporting materials for the claim, we directed the assessee's counsel to produce the materials, if any, available for our perusal. The learned Counsel for the assessee, though had produced the explanation of the assessee dated 28.3.98, he was unable to produce any materials to sustain any of the contentions made in the said letter. In the absence of any materials to show that what was passed on to the foreign enterprise was the information concerning with commercial or technical or scientific aid, merely because an agreement is entered into between the assessee and the foreign enterprise, we are not inclined to accept the claim of deduction under Section 80-O of the Act. Accordingly, the second substantial question of law is answered in favour of the revenue and against the assessee. The tax case appeal is allowed in part. No costs.