Delhi High Court
Income-Tax Officer vs Continental Construction Co. Ltd. on 27 February, 1986
Equivalent citations: [1986]15ITD753(DELHI)
ORDER
Per Shri K. C. Srivastava, Accountant Member - These are cross-appeals, one by the assessed and the other by the department, directed against the order of the Commissioner (Appeals) and relates to the assessment year 1983-84. Though several grounds have been taken by both the parties, the major ground has been taken by the assessed stating that the Commissioner (Appeals) erred in not allowing the claim of the assessed for a deduction of Rs. 89,16,19,198 made under section 80-O of the Income-tax Act, 1961 (the Act). We proceed to deal with this ground first.
2. The assessed is a civil construction company and according to the details furnished by it, it has execution large number of projects overseas and in India. In India its projects include dams, irrigation and hydle project, water supply and sewerage project, marine and harbor works, air-ports, etc. The overseas projects executed by the assessed included dam and irrigation hydle projects in Libya, fibre board factory at Abu Sukhair in Iraq and several water supply and sewerage projects at different places in Iraq. The big project executed by the assessed-company has been Karkh Water Supply Project, Baghdad, having a total value of 534 million dollars.
3. The assessed-company claimed before the assessing officer that profits earned in respect of foreign contracts were exempted under section 80-O. The details of profits work-wise as noted by the IAC who made the assessment were as under :
"Profits Amount (in Rs.) West Bank as per Unit P & L a/c.
1,79,19,557.95 Amar -do-
11,29,874.29 Nassiriyah -do-
40,83,758.31 Karkh -do-
77,84,29,446.40 Diwaniyah -do-
6,36,85,435.84 Sulaimaniyah -do-
77,51,151.61 Wadi Ghan -do-
1,86,19,973.74 Total 89,16,19,198.11"
It was submitted by the assessed that the contracts had been approved by the Board of different times. Whereas in respect of 5 contracts the Boards approval had been accorded in the earlier years, the contracts in respect of the Karkh Project and Diwaniyah Project were approved on 28-10-1983.
4. At this stage we may state that though before the IAC and the learned Commissioner (Appeals) it had been brought out that approval of contracts of Wadi Ghan, Sulaimaniyah, Nassiriyah and West Bank were for the year or inception onwards, the other 3 contracts were approved for specified period only. For example, the Amara contract had been approved for the assessment years 1979-80 to 1982-83 as it was only for this period that the company has asked for the exemption.
5. In respect of Karkh and Diwaniyah the approval given by the Board was for the assessment year 1982-83 only and the first letter of approval issued on 28-10-1983 had drawn the attention of the assessed to the provisions of section 80HHA of the ACt and it was stated that from 1-4-1983 that section would be operative. This was the position even before the learned Commissioner [Appeal] and there has been considerable discussion in the assessment order as well as first appellate order about the meaning and significance of the Boards approval limiting it to the assessment year 1982-83 only. However, before us, the position has changed and our attention has been drawn to a subsequent order of approval issued by the Board on 31-7-1985. By this revised letter of approval, the Board changed the language of the approval had made it applicable to the assessment years 1982-83 and onwards. In other words, the approval of these two contracts namely, Karkh Water supply works and diwaniyah Sewerage Scheme, was also brought at per with the other approvals where the approval referred to the first year and mentioned that the approval was for later years as well. We have mentioned these facts at this stage so that we may avoid to go into the controversy which finds place in the order of the IAC and the order of the learned Commissioner [Appeals] on this issue.
6. The Learned IAC then proceeded to make a reference to the provisions of section 80HHB of the act and he particularly referred to sub section [5] of that section. The IAC held that in respect of contracts which had been approved earlier as well as the two contract which were being considered for the first time in this year, the matter had to be considered in view of the new provision brought on the statute book in the form of section 80HHB. The IAC referred to the language of the Boards approval and held that the approval was subject to the other conditions being fulfillled and it was further subject to the amendments in the income tax law. The IAC held that considering the a language of section 80HHB, all the contracts under considering dealt with the execution of some foreign projects undertaken by the Diwaniyah project as far as the assessed was concerned, was only a civil buildings contract and the assessed had to act according to the specification and details furnished by the Baghdad authorities. Similarly, according to him, was the position regarding the Diwaniyah Sewerage Project. The IAC was of the view that the detailed drawings were provided to the assessed and if the assessed was to modify such drawing it was to be approved by the engineers of Baghdad authorities.
The IAC also found that the other projects At Amara, Nassiriyah, Sulaimaniah and West Bank were identical and they were for the construction, execution, completion and maintenance of the works and supply of all machinery, equipments and instruments for carrying out the work. He was of the view that total consideration was for the execution of the whole work and details of drawings and specifications were furnished by the Iraq authorities to the assessed-company. According to him the architectural and supervisory parts of the execution of theses works was vested with the representatives of the Government of Iraq. According to hi, the personnel sent from India were either engineers or accountants, stenographer, store-keepers, fitters, plumbers, etc. He gave similar finding regarding the Libyan Project called Wadi Ghan Project. Here again the drawings and specifications were prepared by the Libyan Government and the assessed was under strict supervision of the Libyan authorities. He was, therefore, of the view that the consideration was for executing the work and not for providing any technical know-how or rendering any technical services.
7. The IAC did not accept the plea of the assessed that all these contracts were covered under section 80-O and that was clear from the approval given by the Board. The IAC pointed out that these projects fall under section 80HHB. The consideration for the works done could not be considered under any provision in Chapter VI-A, sub-Chapter C, starting from sections 80H to 80TT of the Act. The assessing officer was of the view that as the legislative prohibition in section 80HHB (5) was absolute, it could not be overridden by the Board. The IAC further observed that the provisions of section 80-O were never applicable to the agreements entered into by the assessed with foreign Governments and that the earlier approval of the Board may have been given in absence of complete information facts. After analysing the provisions of sections 80-O, 80MM and 80-HHB, the IAC proceeded to consider various case laws and the circulars of the Board. He particularly referred to Circular No. 187, dated 23-12-1975 [1970] 102 ITR 83 (St.). He also referred to the guidelines issued by the Board for approval under section 80-O and pointed out that the consideration in the contract should be for providing technical know-how or rendering technical services. He referred to the applications given by the assessed to the Board and found that the assesseds statement that it was rendering a technical service or providing technical know-how was wrong. The so-called technical personnel were not qualified to render any technical service and the contracts were for constructing various projects or for providing materials and labour. According to him only very small number of personnel sent abroad, were technical persons and the others were non-technical persons. According to the IAC, the facts given in the applications were motivated and not borne out by the contracts. Thus, the IAC came to the conclusion that the activities of the assessed fell under section 80HHB and, therefore, these could not be considered under any other provisions including section 80-O. He also found that the conditions under section 80HHB had not been satisfied by the assessed and he was not entitled for deduction under that section.
8. Before the Commissioner (Appeals) it was contended of behalf of the assessed that after the grant of approval by the Board under section 80-O, the assessing officer was bound to give effect to that approval. It was also submitted that for the assessment year 1983-84 both the provisions were applicable and, therefore, the assessed was entitled to get larger benefit. It is not necessary to consider the plea of the assessed regarding the restriction of the approval to a particular year as the Board itself has accepted the other position and the department does not seriously challenge it now. On behalf of the assessed, reliance has been placed on the observations of Delhi High Court in the case of J. K. (Bombay) Ltd. v. CBDT [1979] 118 ITR 312 and CIT v. Indian Institute of Public Opinion Co. (P.) Ltd. [1982] 134 ITR 23. In the former case, their Lordships had observed that it was for the Board to carry out the object of section 80-O in the light of the policy of the Government. The Commissioner (Appeals) was of the view that the Boards orders under section 80-O have to read and taken as they were sand the authorities under the Income-tax Act could not question the correctness of the Boards orders and judgment.
9. Though before the Board the assessed had raised a question stating that section 80HHB was not applicable to the assessment year 1983-84, but before us, this argument has not been pressed into service by the learned counsel for the assessed. We, therefore, do not discuss this part of the order of the Commissioner (Appeals). He submitted that the position before us is that the provisions of section 80HHB were in force with effect from 1-4-1983 and they were, therefore, applicable for the assessment year 1983-84.
10. On behalf of the department, it had been submitted before the learned Commissioner (Appeals) that sub-section (5) of section 80HHB was a proviso to the entire sub-Chapter C of Chapter VIA as it controls and carves out an exception to the entire sub-Chapter. It was submitted that if a particular consideration fell under section 80HHB and it was in respect of execution of foreign project, section 80HHB alone was applicable. It was also submitted that while section 80-O dealt with all types of technical assistance, section 80HHB refers to income from execution of foreign projects as defined in that section. It was submitted that this was a specific section and, therefore, it must prevail over a general section. The Commissioner (appeals) agreed with the submission of the department and he was of the view that wherever a foreign project is executed, it is not possible that there will be no rendering of technical services. It was only because execution of the foreign project involves technical competence that the countries were coming for ward to take help from other countries where such personnel were available. At this stage, we may reproduce the finding of the learned commissioner (Appeals) on this matter :
"2.14 I am in complete agreement with the arguments advanced by Mr. Kapila, senior departmental representative, in the context of the norms regarding import of technical know-how in the underdeveloped or developing countries. It is difficult to visualise a foreign project which does not involve rendering technical services as an essential part of the contract or project. If it did not involve rendering technical services, those countries would not go in for global tenders and import of services from other countries. Section 80-O deals with a wider field of export of technical know-how, both as to the nature of the activities and the nature of income derived from those activities. Section 80HHB deals with one such aspect, viz., the income derived from foreign projects. This section covers the cases of corporate as well as non-corporate assesseds whereas after its amendment with effect from 1-1-1975 section 80-O was applicable to corporate sector only. For the corporate sector, in the cases of foreign projects as defined in section 80HHB, relief under section 80-O was admissible prior 1-4-1983 to the extent of the income derived from the activities specified in that section, e.g. rendering of technical services, etc. As a result of the amendment inserting section 80HHB, and the provisions of sub-section (5) thereon in particular, consideration of relief under section 80-O was completely ruled out in such cases."
The Commissioner (Appeals) further observed that the assessed had not mispresented the facts before the Board and in this connection, he referred to the reference by the Board to section 80HHB for the years 1983-84 on wards for the two new contracts which came up for consideration is this year for the first time. The Commissioner (Appeals) further observed that while executing the foreign project, there may or may not be any income as contemplated in section 80-O. The Commissioner (Appeals) referred to the various approvals granted and pointed out that this was subject to the amendments in the law and other conditions laid down in the Act. He further observed that the earlier approvals granted by the Board could not override the specific provisions of law brought in through the amendment even if the approval letters did not contain the stipulation that the approval was subject future amendments to the Income-tax Act though such a mention has been invariably made in all the letters of approval. The Commissioner (Appeals) referred to the amendment made in section 80-O from 1-4-1975 as a result of which the benefit under that section was withdrawn from non-corporate assesseds. He pointed out that even in the cases, where approvals had been granted earlier in the case of non-corporate assesseds, they could not get the benefits in later years.
11. The learned Commissioner (Appeals) was of the view that both the sections had to be read together and when we came to sub-section (5) of section 80HHB, one had to find whether it was covered under that section. Once an activity is found to be covered under section 80HHB, the consideration of section 80-O was barred by the statute. He further observed that where both sections are found to be applicable, benefit to the assessed has to be limited as applicable under section 80HHB.
12. There was some controversy before Commissioner (Appeals) regarding the payment being under convertible foreign currency but that controversy has not been pressed before us.
13. Before the Commissioner (Appeals) it was submitted that the work done by the assessed could not be brought under foreign projects as given in section 80HHB and in all these contracts the essential was the rendering of technical services by the assessed. It was submitted that the assessed was not carrying on any construction contract as such and in all these works, the assessed had to supply technical designs and, had to render technical services while executing the contract. On this basis a special argument was advanced in respect of the Karkh contract and it was contended that without prejudice to the generality of the assesseds claim, the Karkh contract was a contract of rendering technical services and that part of the contract should be bifurcated and should be covered under section 80-O. The Commissioner (Appeals) referred to the approval and the contention made on behalf of the revenue that in the construction of any road, dam, bridge or any other such structure, rendering of technical assistance was an invariable part. He then proceeded to consider the details of the Karkh Project and reproduced in detail the nature of that work and the work which the assessed had to carry on. He pointed out that the tender was to be accepted for the whole work and no part of the contract could be bifurcated. Under the agreement, the contractor had give a design report, a functional planned details of plans, outlined drawings of civil works, drawings of major installations, their location and size, outlined drawings of civil works, post-contract services and organisation, manpower requirement and training. He found that the work comprised first stage development of the water supply scheme, supplying potable water to the West Bank city of the area of Baghdad whereas the pipelines were to be constructed to full capacity. The pumping plan and the scheme of water treatment was to to be for the first stage capacity. Raw water was to be abstract from the River Tigris at a point from 30 km. north of Baghdad, pumped through a nearby treatment works and storage was be be provided by the north reservoir and other reservoirs. The works comprised head works, transmission pipelines, reservoir works, trunk pipelines and included pumping installations, standby generating installation, water treatment installation, electrical systems, building services, drainage pumping installation, sewage and waste disposal plants, etc. After giving the above details from the contract, the Commissioner (Appeals) observed that it appeared to be a turn-key project and it was to be treated as a whole. The consideration was one whole and it cannot be bifurcated. In view of the the Commissioner (Appeals) held that the execution of this project was covered under section 80HHB and in view of section 80HHB (5) it cannot be considered under any other provision of sub-Chapter C of chapter VIA. According to him the attempt to bifurcate the project and the consideration in payments for technical services, payments for technical operations, payments for labour and payments for materials, etc., was entirely futile and it has to be treated as a contract for executing a foreign project. The Commissioner (Appeals), therefore, held that the emphasis laid down by the counsel for the assessed on the Karkh Project was of no avail.
14. Considering all the above facts the commissioner (appeals) came to the conclusion that all the contracts in respect of which the assessed had received income in this year were covered under section 80HHB and, therefore, notwithstanding the approval granted by the Board under section 80-O, the income from these foreign projects was to be considered under section 80HHB and not under section 80-O. Regarding the assesseds alternative submission about section 80HHB, the Commissioner (Appeals) set aside the order of the IAC (Assessment) so that the matter could be considered in that light afresh.
15. Extensive submission have been made before us by the learned counsel for the assessed, Shri R. Ganesan, and the learned advocate, Shri B. B. Ahuja, on behalf of the department. After taking us through the various applications and approvals under section 80-O, the learned counsel for the assessed particularly drew our attention to the amendment made by the Board in its original order in the Karkh and Diwaniyah Works. He submitted that though this modified order has been passed after the order of the Commissioner (Appeals) it throws light on the understanding of the Board about such contracts. Though he made a cursory reference to all the contracts,, he drew or specific attention to the Karkh contract and submitted that it was highly sophisticated technical work involving highly qualified and technical engineers and all the experience and technical know-how of the assessed was rendered to the Iraqi authorities in execution of this contract. In this connection, he referred to the qualification of the people sent for the execution of the contract and also drew our attention to the details which have been furnished before the Board. He pointed out that even preparation of tenders was highly technical and sophisticated work and it was not an ordinary work of construction. He submitted that though there was a preliminary study by the Iraqi authorities about the technical aspect of the whole project, the assessed was responsible not only for giving the detailed drawings but also for looking into of the other technical aspects like study of the topography, the various geological and other surveys and then to plan the whole work. It was contended by him that under this contract, the assessed is rendering all technical assistance and giving all technical know-how while executing the project of constructing the water works.
16. The learned counsel submitted that all the contracts from which the income has been derived by the assessed have been approved by the Board under section 80-O. He referred to the history of section 80-O and also referred to the guidelines issued by the Board for the purpose of grant of approval by the Board. These guidelines were issued in December 1975. He pointed out to paragraph 3(B) of the guidelines which provided that the technical services rendered or agreed to be rendered to the foreign party should relate to productive fields such as mining, generation or distribution of electricity or constructional, industrial or manufacturing operation or engineering services. It was also provided that services such as those relating to management, organisation, sales, finance and accounts were not to qualify for this purpose. It was also laid down that agreements for recruitment or mere supply of technical personnel from India for service outside India, were not eligible for approval. It was further provided in sub-clause (ix) of that paragraph that in a case of composite agreement specifying a consolidated amount as consideration for purchases which include matters outside the scope of section 80-O, the amounts of consideration relating to provision of technical know-how or technical services have to be determined by the ITO separately at the time of assessment after due appreciation of relevant facts. Where it was not possible to determine the amount of consideration as relatable to the provision of know-how or the technical services qualifying for section 80-O the Board may not approve such an agreement for the purpose of section 80-O. The Board had also clarified that in ca case of fraud or misrepresentation the order shall be revoked. The grant of deduction from the gross total income under section 80-O was subject to fulfillling the other conditions laid down in the section in this behalf. The actual amount of deduction was to be determined by the ITO. It was also clarified that approval granted for non-corporate assessed with cease to be operative from 1-4-1975. By a later clarification issued in 1979, the Board stated that in case of composite agreements, the approval may be granted by the Board subject to suitable disallowance for non-qualifying services after taking into consideration the totality of the agreement.
17. The learned counsel for the assessed pointed out that in all the approvals granted by the Board only in one the Board had referred to the disallowance and other agreements had been approved without any condition. He referred to the speech of the Finance Minister while explaining the objects of section 80-O and submitted that the provision should be considered in the light of the intention with which it was introduced. It was also pointed out that in the assessment year 1978-79 when there was a proposal for disallowing a part of the income form exemption under section 80-O, the IAC had deleted the addition. It may be mentioned that the Finance Minister while introducing section 80HHB, had stated that with a view to strengthening the competitiveness of our construction contractors who had undertaken projects outside India, exemption of 25 per cent of the profits derived by them from such foreign contracts was contemplated. A reference was also made to the Notes on clauses at the Bill stage before the Parliament.
18. On the basis of the basic facts given above, the learned counsel submitted that the assessing officer could not sit in judgment or the approval granted by the Board under section 80-O and the Board itself approves he contract and cannot restrict it to any specific year. He also submitted that the entire activity of the assessed fell under section 80-O and even if it was considered to partly fall under section 80HHB, the assessed should be given the benefit under section 80-O as it gives him a larger deduction. In this connection, he pointed out that the power of the Board for approval has been the subject-matter of the consideration by the Delhi High Court, and the High Court in the case of J. K. (Bombay) Ltd. (supra), where the High Court observed that the Board was the primary authority in giving meaning to the words technical services and they have to construe these words not only as a question of law but in case of doubt or ambiguity or with a view to implementing the objects of section 80-O and in the light of policy consideration, they have also to exercise the judgment of their own in doing so. A reference was also made to the decision of the Delhi High Court in the case of Indian Institute of Public Opinion Co. (P.) Ltd. (supra), where it was held that the contract as such was to be approved and there was not to be a repeated approval of the same agreement for every assessment year. A reference was also made to the case of E. P. W. Da Costa v. Union of India [1980] 121 ITR 751 (Delhi) and the decision in the case of Simon Carves India Ltd. v. CBDT [1979] 120 ITR 172 (Delhi). The later case related to the provisions of section 80MM. In the later case it was held that a reasonable view expressed by the Board on a question of fact or of judgment would not ordinarily be reviewed by the Courts.
19. A reference was also made to the decision in the case of Ghai Lamba Catering Consultants (P.) Ltd. v. CBDT [1980] 124 ITR 301 (Delhi), where the approval had not been granted by the Board as it was of the view that the agreement was nothing but a joint venture. As against this, reference was made to the decision in the case of Oberoi Hotels (India) (P.) Ltd. v. CBDT [1982] 135 ITR 257 (Delhi), where it was held that the management of the managing agency is not the same thing as managing a modern hotel for a foreign company. In such a case, it was rendering of technical assistance and it was held that the assessed-company was entitled to approval under section 80-O. A reference was also made to the decision of the Bombay High Court in the case of Eastman Consultants (P.) Ltd. v. CBDT [1981] 132 ITR 637, where it was held that mere supply particulars or biodata of various Indians willing to work abroad and their selection or recruitment, is a situation falling far too short of requisites necessary for attracting the benefits of section 80-O.
20. In the background in the above case law, the learned counsel submitted that the assessed-company was not only constructing water works project but the amount of planning, use of technical competence and experience which was necessary in laying down the details of the project and the use of highly qualified technical personnel for rendering technical assistance by the actual construction work showed that the essence of the contract was rendering of technical assistance and not merely executing a foreign project. In this connection, a reference was made to the Karkh contract as that was the most important project involving the largest amount of profit in this year. The learned counsel took us through the general requirements of the Karkh Water Supply Scheme. He referred to the following parts of the contract which throw light on nature of work :
"4.1 The contract comprises all survey and site investigation for and the functional planning, general design, manufacture, supply installation, construction, setting to work, commissioning and testing complete of all works requires for the first stage of the Karkh Water Supply Scheme, including mechanical and electrical plant and services, pipelines, and civil and building works, from the point of abstraction at the river Tigris intake to the connections of the proposed primary feeder systems to the existing distribution networks in the various supply areas. The contract also includes operation of the various works for a period of three months after issue of the certificate of completion, training the employers personnel for operation for a period of one year after the issue of the certificate completion.
4.2 The works shall include but not be limited to :
(i) Such survey (both typographical and hydrographical) and site investigation as is necessary in the opinion of the engineer for the purposes of design by the contractor.
(2) The functional planning, layout and general design of the works, including for future stage of the scheme where specified.
(3) The detailed design and development, manufacture, testing at places of manufacture, painting, packing, delivery, supply, erection, setting to work, commissioning, testing and painting after erection, of all plant required for the works, including but not limited to pumping equipment, standby generating equipment, electrical equipment, water treatment plant, machinery, apparatus, station pipe work, materials, articles and ancillaries of all kinds required for installations of the highest possible operative standards and for compliance with the standards prescribed in the specification and with the particulars and guarantees entered by the contractor in the Schedules (Vol. IV).
(4) The detailed design and construction of all civil works, including structures, buildings, buildings services, pipelines, drainage systems, roads and general site works.
(5) Setting plant and installations to work, commissioning and carrying out site tests to prove compliance with prescribed standards and with the duties and guarantees entered by the contractor in the Schedules, as a precedent to the issue of the certificate of completion.
(6) Operating the works for a period of three months after the issue of the certificate of completion.
(7) Supervising operation of the works for the remaining nine months of the period of maintenance.
(8) Training the employers personnel for the operation and maintenance of the works during the period of erection, setting to work and commissioning (prior to the issue of the certificate of completion) and during the period of maintenance.
(9) Maintenance of the works during the period of maintenance.
4.3 ** ** ** 4.4 The civil works shall comprise the design, supply and construction of all works forming the permanent works other than plant and shall include but not be limited to :
-all associated structures and buildings for pumping installations, stand-by generating stations, treatment works, process units and ancillary works and buildings;
-building works and finishes, furniture and fittings;
-building services including domestic water, soil and waste systems and including pipe work of any size and description and all materials with all necessary fittings, specials, valves storage tanks, made-up tanks, sinks, sanitary fixtures and appliances, plumbing and the like;
-all pipelines and interconnecting pipework (excluding station pipework and pipework within the below process units and ancillary structures), including pipes and specials of all materials, fittings, valves,, hydrants, pipe protection, and pipe chambers;
-all drainage, overflow, sewerage, effluent and waste systems;
-roads and general site works including pavements, hard-standings, service water and fire fighting systems, elevated storage, irrigation systems, landscaping, fencing, entrances, guardhouses and watch-towers;
-all other works whether specified or not specified in the contract or whether specified therein in part, incompletely or incorrectly, or explicitly described or only implied therein, necessary for completion of the works and the operation thereof, and as required under the terms of the contract.
4.5 The drawings furnished by the employer as forming part of the tender documents are contained Vol. VI.
Proposals shown on the drawings are in outline only and are based on information available prior to preparation of the tender documents. All levels indicated or proposed are provisional, and may need to be revised subject to the results of survey and site investigation carried out by the contractor. Nevertheless, the contractor shall follow such proposals to the maximum possible extent in preparing his own proposals consistent with his own experience and with the particulars and guarantees given by him in the Schedules.
4.6 (a) General The design of the works shall be an integral part of the contract. Such design shall include typographical survey, hydrographical survey (as necessary), site investigation and technical appraisal, functional plants and general designs, schematics, detailed designs, perspectives, and working drawings for both plant and civil works, together with any and all other studies, investigations, computations, analyses and evaluations necessary to comply with the requirements of the specification.
Functional plans and designs shall be based on the proposals submitted with the contractors tender, subject to such modifications as the employer and the engineer may require under the terms of the contract.
All designs, drawings and documents relating to design of the works shall submitted by the contractor to the engineer for review and approval. Submissions shall be accompanied by corroborative information and computations as necessary.
The contractor shall carry out the works only in accordance with approved designs, drawings and documents."
It was pointed out that the technical assistance was rendered while actually constructing the various parts of the project and engagement of the assessed was mainly because he was in a position to render technical assistance.
21. The learned counsel for the assessed then took us through the provisions of section 80HHB and submitted that the introduction of this section cannot take away the benefit available to the assessed under section 80-O in view of the approval, granted by the Board and particularly in view of the modified order issued by the Board on 31-7-1985. In this connection, he referred to the provisions of section 35B of the Act where it is provided to allow weighted deduction in respect of some export development expenses. It was submitted by him that according to subsection (2) of section 35B where a deduction is allowed in respect of any expenditure under 35B (1) deduction is not allowable in respect of such expenditure under any other provision of the Act for the same or any other assessment year. He pointed out that this sub-section only clarifies that where weighted deduction is allowed the questing of allowance of expenditure itself under section 37 of the Act does not arise. Where, however, an expenditure is held not to be eligible under section 35B, the expenditure can be considered for allowance under other sections including section 37. A reference was also made to the other provisions in sub-Chapter C of Chapter VIA. Referring to the provision of section 80QQ (2), it was submitted that the deduction under that section has to be allowed with reference to the gross total income as reduced by the deductions under other sections referred to in sub-section (2). A reference was made to sub-section (3) of section 80P which reads as under :
"(3) In a case where the assessed is entitled also to the deduction under section 80HH or section 80HHA or section 80HHB or section 80HHC or section-80-I or section 80J or section 80JJ, the deduction under sub-section (1) of this section, in relation to the sums specified in clause (a) or clause (b) or clause (c) of sub-section (2), shall be allowed with reference to the income, if any, as referred to in those clauses included in the gross total income as reduced by the deductions under section 80HH, section 80HHA, section 80HHB, section 80HHC, section 80-I, section 80J and section 80JJ.
It was contended that even where the deductions allowable under section 80HHB the assessed is entitled to deduction under section 80P after allowing the other deductions as given in that sub-section of section 80P. He, thus, submitted that there was no complete exclusion of other sections where the provisions of section 80HHB are found applicable.
22. The learned counsel submitted that under the guidelines issued by the Board, it was open to the Board to indicate in its approval order the exclusion of profits on material or any other aspect not covered under section 80-O. He pointed out that except the project in Libya the Board has not placed any condition while approving the other contracts, though all the facts had been placed before the Board. The learned counsel vehemently submitted that as far as the contracts relating to the Karkh Water Supply Works and Diwaniyah Project were consented, the Board had himself first made a reference to section 80HHB, for the assessment year 1983-84 but on representation by the assessed, the Board had made the approval applicable to the assessment years following the assessment year 1982-83 as well. He, therefore, submitted that the Boards modified orders relating to the Karkh and diwaniyah works clearly pointed out to the facts that the Board considered that deduction under section 80-O was still available to the assessed notwithstanding the introduction of section 80HHB. The learned counsel submitted that section 80-O and section 80HHB operated in different fields and in all the contracts which have been approved by the Board, it has been accepted that the assessed was rendering technical assistance or imparting technical know-how as required under section 80-O. The learned counsel submitted that the order of the Board is a quasi-judicial order which has been passed after considering all the aspects of the matter and the representation made by the assessed. In this connection, a passing reference was made to section 9(1) (vi) of the Act where it is laid down that income by way of royalty is payable in respect of information used or services utilised for the purpose of business carried on outside India. A reference was also made to the proviso of that section.
23. The learned counsel argued that the approvals granted by the Board and particularly in the case of Karkh and Kiwazniyahg Projects created estoppel in the eyes of law. As having approved the contract under section 80-O, it was not open to the Board or any authority working under it to hold that deduction under section 80-O is not allowable to the assessed. In this connection, reference was made to the decision of the Supreme Court in the case of Motilal Padampat sugar Mills Co. Ltd. v. State of Uttar Pradesh [1979] 118 ITR 326. In this case, the Supreme Court observed that where the Government makes a promise knowing or intending that it cannot be acted on by the promise and, in fact, the promise acting in reliance on it alters his position, the Government would be bound by the promise. It was further held that such a promise would be enforceable against the order at the instance of the promise. The court further observed that the doctrine of promissory estoppel is an equitable doctrine and, therefore, it must yield when equity so requires. According to the learned counsel in the present case, the approval granted by the Board created an estoppel for taking the stand that deduction under section 80-O was not applicable in view of the provisions of section 80HHB. He submitted that it was particularly so in the case Karkh and Diwaniyah Projects where the modified approval order had been issued after the Board had considered the implications of section 80HHB, as applicable to the assessment year 1983-84.
24. The learned counsel for the assessed drew parallel for interpretation to the provisions of section 40A (7) of the Act and the observations of the Honble Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585. At page 600 their Lordships have observed that where over riding effect is given the intention should be carried out by giving to the intention a reasonable meaning. It was submitted by the learned counsel that the intention behind introduction of section 80HHB was not to deny the benefits which were available under other provisions particularly when the Board after thorough scrutiny had approved the contracts and in the case of the two contracts of Karkh and diwaniyah, they had done so after even taking the provisions of section 80HHB into consideration. The learned counsel, therefore, submitted that the benefit under section 80-O should be made available to the assessed in respect of these contracts. It was also submitted by the learned counsel that he has referred to the provisions of the Karkh Contract in detail as that was the major contract and his submission was that the others were also having the sane nature.
25. Shri B. B. Ahuja, the learned counsel for the revenue, submitted that we have to consider the position of the assesseds clam in the light of the law which is applicable for the assessment year 1983-84. He pointed out that the assessed is not a consultant and is not passing on any technical know-how about construction, as such, the assessed-company was a construction contractor though it cannot be denied that it had requisite experience and skill of executing sophisticated and complicated work contracts. In this connection, he referred to the agreement between the assessed signing as a contractor and the Iraqi authorities signing as the employer. The language of the basic contract is as under :
"Whereas the employer is desirous that certain works should be executed, viz., Karkh Water supply Scheme contract for State I works and has accepted a tender by the contractor for the execution, completion and maintenance of such works; now this agreement witness as follows :
3. In consideration of the payments to be made by the employer to the contractor as hereinafter mentioned, the contractor hereby covenants with the employer to execute complete and maintain the works in conformity in all respects with the provisions of the contract."
It was pointed out that the terms works and contract price are defined in the conditions of contract in part 2 of the contract. The definition of works is as under :
(e) Works means all the works to be executed in accordance with the provisions of the contract including in design, manufacture, delivery, supply, installation, construction, setting to work, commissioning, site testing, operation and maintenance, as the case may be."
The definition of drawings and plant as as under :
"(k) Drawings means the drawings referred to in the contract documents and any modification of such drawings approved in writing by the engineer and such other drawings as shall be furnished by the contractor and approved in writing by the engineer or furnished by the engineer."
"(q) Plant means machinery, apparatus, station, pipework, materials, articles and all things of mechanical and electrical kind to be provided under the contract other than contractors equipment."
It was contended by the learned counsel that the contract did not include merely designing of the work but also manufacture, delivery, supply installation, construction, setting to work, commissioning, operations and maintenance. Thus, it included all the stages of the project and in fact, it was a turn-key project under which the assessed had agreed to execute this foreign project under the overall supervision of the Iraqi authorities. No doubt, apart from the survey and other studies carried on by the employers, the assessed as the contractor had to made his own survey and submit his own designs and drawings wherever those given by the employers were not found to be suitable. The responsibility of the assessed-company was from designing to execution as well as later maintenance of the whole works. In this connection, the learned counsel drew or attention to the provisions of section 80HHB. He submitted that the income which has arisen to the assessed is from the execution of foreign projects undertaken by him in pursuance of these contracts. He pointed out that foreign project was defined in the section of mean the construction of any building, road, dam, bridge or other structures outside India. The learned counsel submitted that the construction of modern projects, dam and other big structures require high degree of engineering skill and experience in doing such works. He, however, submitted that it has to be found from the contracts whether the assessed was executing the foreign project as such or was rendering any technical service as contemplated in section 80-O. In the connection, he made reference to the Karkh contract and submitted that it clearly provided in part one of the contract that the tender was for design, manufacture, delivery, supply construction and installation of the Karkh Water Supply Scheme. The details of the work were also given and in para 1.15, it is made clear that tender for the whole of the works was to be accepted and a tender for a part only was not acceptable. He contended that the reading of the various parts of the contract clearly shows that it was a works contract. It was pointed out that while actual work was to be undertaken, it was provided that no work shall be covered or put out of view without the approval of the employers, engineers, representatives. Even where the work is covered, the engineer could ask for the uncovering or making openings for inspection. He referred to the general requirements as given in part 4 (it is already reproduced above) and submitted that the contract was for executing the whole work from beginning to the end and it was not possible to divide the work in various parts or to separate the works from the use of technical skill or rendering of technical assistance. He also submitted that the consideration under the contract was one whole though it was laid down that at various stages of the completion of the parts of the works, the payments were to be made. He pointed out that the design of the work was to be integral part of the work and along with it, it became necessary for the assessed to carry on the various surveys and analyses. He contended that it was not possible on the reading of the contract and its various provisions that any part of consideration was for rendering of any technical assistance or giving of any technical know-how and the whole consideration was for the execution of the works and the works were not doubt covered under the term foreign projects as given in section 80HHB.
26. The learned counsel for the revenue further referred to the other contracts and pointed out that the contract in Libya was for the construction of a dam and the others related to drainage work, sewerage work or some other work of constructing structures and in this connection, he referred to the nature of work,, as was evident from the paper book filed by the assessed. In this connection, it was pointed out that the assessed in his letter to the Board written on 4-8-1981 in respect of Amanat-Al-Asima Baghdad Water Supply Scheme had stated that the contract was for civil construction and know-how and the sue of materials and equipments was part of these services. It had further been stated that skilled engineers had been sent for executing the above contract. He further referred to the letter dated 24-12-1981 (page 101 of the paper book) wherein it was stated that the tenders were for design, manufacture, delivery, supply., construction and installations, complete in a single contract of works required for stage 1 of the Karkh water Supply Scheme. It was submitted that the contention of the assessed as the execution of foreign projects of such magnitude will certainly involve technical competence and technical skill as well as experience. He further submitted that the contention total consideration for the project, was of no avail as the basic contract was for works and the execution of the project and if any technical assistance was given, it was merely incidental. It was, therefore, contended by the learned counsel for the assessed that in determining the issue, one has to determine whether the contract was essentially a works contract or was essentially a contract for rendering any technical services which was the main purpose and the construction was merely incidental.
27. Then the learned counsel proceeded to consider the difference between the provisions of section 80-O and 80HHB. In this connection, he referred to, the submissions made by the assessed before the Board in its letter dated 28-10-1982 :
"It may he submitted that section 80-O is clearly distinguishable from section 80HHB of the Income-tax Act. Section 80HHB does not take away the concession given to an assessed under section 80-O of the Income-tax Act which mentions about deductions in respect of royalty, commission, fees or any similar payment received by the assessed 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. Section 80HHB extends the concession to a person in connection with the execution of a project undertaken by the assessed in pursuance of a sub-contract. Foreign project covered by section 80HHB may be for construction of any building, road, dam, bridge or other structure outside India or assembly or installation of any machinery or plant outside India on the execution of such other work of whatever nature as may be prescribed. Section 80-O and section 80HHB thus cover two different fields of activity and do not override each other and in no case before assessment year 1983-84. In case an assessed can establish that the project executed by an assessed involves the use outside India of any patent, invention, model design, engineering or constructional services, the assessed would be entitled to the concession referred to in section 80-O of the Income-tax Act."
28. He also referred to the arguments advanced before the Board in the assesseds letter dated 2-12-1983 which was a representation after the issue of the first order approving the contract of the Karkh Water Supply Scheme. He contended that there was no force in the submissions made by the assessed that under section 80HHB only such contracts were covered which had been entered into after 1-4-1983. He pointed out that the section itself was applicable for the assessment year 1983-84 and it refers to the income arising to the assessed in that assessment year from a particular kind of activity. It was immaterial when the contract was executed or signed. He contended that though the approval given is important only for the first year what has to be seen in each year is whether the law as it took in that year has made any special provision for treating such income. He further pointed out that the assesseds submission that the new provision of section 80HHB cannot take away the benefit available to the assessed under section 80-O is misplaced as the Legislature has supreme power of taxing or exempting a particular kind of income arising to the taxpayers. The learned counsel further pointed out that by the orders of approval given by the Board, it could not be referred that there was any promise by the Government to exempt the income arising in the hands of the assessed. He submitted that the submissions made by the learned counsel about there being any promissory estoppel in this case, was misconceived. There is no estoppel against statute and it was open to the Legislature to enact laws for the purpose of administering the Act for exempting or bringing to charge any particular income. He submitted that the observations of the Honble Supreme Court in the case of Motilal Padampat sugar Mills Co. Ltd. (supra) were not at all applicable to the circumstances of this case, and if the assessed had any grievances against any directions of the Board, the remedy was before the High Court in writ and not in these appellate proceedings.
29. The learned counsel further submitted that under section 80-O, the first requirement was that the nature of receipt should be royalty, commission, fees or any similar payment and it did not include any profit arising to the taxpayer. He contended that the residuary term any similar payment should have the same nature as of royalty, commission and fees, and it does not contemplate that the assessed will receive a full consideration of the contract to incur expenses and make a profit or loss. It was, therefore, contended that provisions of section 80-O were not at all applicable to the assessed. Apart from this, the assessed has not claimed in applications that it was receiving any fees for use of patent, invention, model, design, secret formula or process or information concerning industrial, commercial or scientific knowledge. In all the applications, the assessed has made it clear that the consideration for these services was nil and in other words the assessed did not claim to be covered under this part of section 80-O. In the applications, the assessed has tried to bring itself under the second part of the section which refers to the technical services rendered or agreed to rendered outside India to a foreign Government or a foreign enterprise. He submitted that the essence of all the contracts was not rendering of technical services as such but only the execution of the construction contracts. In one of these contracts, there is any mention of any part of the consideration as related to such technical services rendered by the assessed. In all these contracts, the consideration is one whole for the execution of the works and such execution of work would be squarely covered under section 80HHB.
30. The learned counsel for the revenue then refereed to the approvals granted by the Board. He submitted that in his submission the Board may have committed an initial mistake in approving the contracts under section 80-O. It was clear from these contracts that they did not refer to the rendering of any technical service but only to the execution of the various projects abroad. In respect of the approval granted by the Board for the Karkh Project and Diwaniyah Project, the Board had first confined the approval to the assessment year 1982-83 and had referred to section 80HHB for the assessment year 1983-84 onwards. Later on, the Board realised that the approval has to be of the contract and it cannot be confined to a particular year and, therefore, modified order was issued though belatedly in 1985 after the Commissioner (Appeals) had already passed his orders. He submitted that this modification of the original order has to be interpreted in the manner in which the Board meant it to be interpreted. The Board was of the view that the approval has to be for the initial year and not for each year separately. The Board was further of view that it was for the ITO to see whether the benefit which was granted for the assessment year 1982-83 could still be available to the assessed for the assessment year 1983-84 having regarding to the insertion of provisions of section 80HHB. In this connection, the learned counsel drew our attention to the letter written by the Board clarifying the position to the Commissioner. This letter was written on 24-9-1985 and in this letter it is stated that it is for the assessing officer to satisfy himself about the other provisions of the Act and if it is found that some income or receipt fell for consideration under other provisions the assessing officer could make the assessment accordingly and there was no automatic deduction under section 80-O. It was for the assessing officer to work out the quantum of deduction and notwithstanding the approval under section 80-O, the ITO could consider the claim under section 80HHB, if he found that it was covered under that section. The Board had also clarified that there was no modification of the earlier approval and there was no ignoring of the provisions of section 80HHB. In view of the above position it was it was submitted that the learned counsel for the assessed was not correct when he tried to interpret the second order in respect of the Karkh and Diwaniyah Projects as accepting the position that the income would be exempted under section 80-O notwithstanding the provision of section 80HHB for the assessment year 1983-84 onwards.
31. The learned counsel for the assessed then made his submissions about sub-section (5) of section 80HHB. That sub-section reads as under :
"(5) Notwithstanding anything contained in any other provision of this Chapter under the heading C. Deductions in respect of certain incomes, no part of the consideration or of the income comprised in the consideration payable to the assessed for the execution of a foreign project referred to in clauses (a) of sub-section (1) or of any work referred to in clause (b) of that sub-section shall quality for deduction for any assessment year under any such other provision."
It was contended by him that the language of the sub-section is unambiguous and it makes this sub-section to be a proviso to all the sections falling in sub-Chapter C of Chapter VIA of the Act. This Chapter dealt with deductions in respect of certain incomes and it is provided that no part of the consideration or of the income comprised in the consideration payable to the assessed for the execution of a foreign project in clause (a) or clause (b) of sub-section, (1) of section 80HHB could be taken to qualify for deduction for any assessment year under any such other provision. He submitted that this sub-section made it clear that once it is found that a consideration or income was received for execution of foreign project, the deduction as provided in section 80HHB along will be applicable and deduction under any other section of sub-Chapter C could not be available to the assessed. The learned counsel contended that there was no contradiction in interpreting the sub-section in this manner by making as reference to section 80P (3). He submitted that section 80P refers to the income of a co-operative society and sub-section (3) merely provides that after all the deductions under the various section referred to in. sub-section (3) of section 80P have been allowed, the assessed can be allowed deduction under section 80P also. It was pointed out by him that under section 80P, there is a blanket exemption in respect of any income of the co-operative society to the extent of Rs. 20,000. He, therefore, submitted that there was no contradiction as pointed out by the learned counsel for the assessed. He further contended with reference to the Karkh contract that the whole payment contemplated in the contract was for the work as a whole, and there is no stipulation that a part of the consideration is for executing the project and another part for any other services. He submitted that there could be a case where there are more than one contract, one contemplating a payment for the actual consideration and the other for rendering technical services by submitting design, formulate and other such properties. In that case the consideration gets bifurcated. However, in the present case in none of the contracts it was possible to bifurcate the consideration. It was, therefore, contended by him that the consideration fell wholly to be considered under section 80HHB and, therefore, wholly excluded from consideration under any other section in the chapter. The learned counsel further submitted that the reference by the learned counsel for the assessed to section 54E and section 91 of the Act has no relevance to the issue which was before us.
32. Making further submissions about the indivisibility of the contract, the learned counsel for the revenue referred to the decision of the Supreme Court in the case of State Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1959] SCR 379. That was the case under the Madras General Sales Tax Act, 1939, which arose in the case of a building contractor. Their Lordships held that in a building contract, the agreement between, the parties is that the contractor should construct the building according to the specifications contained in the agreement and in consideration thereof received payment as provided therein and in such an agreement there is neither a contract to sell materials used in the construction nor does property pass therein as movable. Their Lordships further held that in a building contract which is one, entire and indivisible, there is no sale of goods and, therefore, sales tax could not be imposed on the supply of materials used in such a contract treating is as a sale. The learned counsel drew our attention to the observations of the Court at page 418 and page 423. He contended that in the same manner in the present contract which was indivisible, it was not possible to hold that any part of the consideration was for the technical services rendered as the whole consideration was for the execution of the construction work. A reference was also made to the decision of the Madras High Court in the case of Richardson & Cruddas Ltd. v. State of Madras [1965] 16 STC 827 where again their Lordships considered the case of the building contractor vis-a-vis the Madras General Sales Tax Act. Their Lordships held that if the amount payable as provided in the contract is one consolidated sum and could not be split up in part as the price for the materials supplied and in specific part as remuneration for their work and work done, the contract is a works contract. Their Lordships, however, observed that it all depended on the terms of the contract and the intention of the parties.
33. The learned counsel then referred to the decision of the Bombay High Court in the case of Otis Elevators Co. (India) Ltd. v. State of Maharashtra [1969] 24 STC 525. In this case also their Lordships held that it is essential to find out the intention of the parties from the tenure and terms of the contract and where the services rendered and the work undertaken in execution of a contract is of a complicated and highly technical nature requiring considerable experience and in execution of such contract any apparatus, or article manufactured by the contractor is use, it would be difficult to hold that mere use of the material or the ultimate passing of the property in the article or parts as a result of the execution of the contract will make it possible to sever the agreement in two parts, one for the sale of the goods and the other for services rendered. The two are so intimately concerned that severance is not possible for such case. Similar observations have been made in the case of Ram Singh & Sons Engg. Works 43 STC 195 and by the Madras High Court in the case of State of Madras v. Voltas Ltd. [1963] 14 STC 446. The learned counsel submitted that in the present case also, the position was the same and it was not possible to split up the agreement in such a manner so as to bifurcate the consideration for the execution of the construction work and for rendering of the technical services.
34. The learned counsel submitted that while interpreting the statute, particularly taxing statue, no equitable consideration should be brought in in. He relied on the observations of the Supreme Court in the case of CST v. Modi Sugar Mills Ltd. AIR 1961 SC 1047. The court observed that the taxing statute cannot be interpreted on any presumption of assumption and the Court must look squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed. The Court cannot import provisions into statute so as a supply deficiency. The counsel submitted that in the present case the provisions of sub-section (5) of section 80HHB were clear and the consideration and receipts in the hands of the assessed fell squarely to be considered only under that section.
35. Reverting to the Boards approval the learned counsel for the revenue submitted that the assessed had made some wrong representation of facts before the Board. He also submitted that the approval was subject to the amendments in law and the application of mind by the ITO. He further submitted that the Board was a approving authority but it was not the final word as far as the assessment was concerned as the assessment was to be made by the assessing officer in accordance with law. The Board has approved the contract as according to the understanding of the Board, there was some technical assistance being provided by the assessed-company under the contract. However, while actually working out the income, it was for the assessing officer to see whether there was any other provision which has taken away the benefit from the a assessed or has reduced the quantum of such benefit. He pointed out that section 80-O does not show that the decision of the Board about the exemption of income is final, and the jurisdiction of the ITO to take into consideration the provisions of section 80HHB has not been taken away by the approval granted by Board. He also submitted that the mention of the assessment years is immaterial and once the contract is approved the ITO has to satisfy himself about the computation of income. He submitted that there could be cases where after the contract has run for sometime, there is gap in a year in rendering of technical assistance or technical services, in that case the question of exemption would not arise. also The learned counsel referred to the decisions as referred to by the learned counsel for the assessed and submitted that each case depended on its own facts and terms and this case does not apply to the case of the assessed. The learned counsel, however, made a specific reference to the decision of the Delhi High Court (which was referred to by the learned counsel for the assessed also) in the case of Simon carves India Ltd. CBDT [1979] 120 ITR 172. He submitted that though that case was under section 80MM, he pointed out that in a particular case, there can be a provision for separate consideration for design and know-how and in that case, the matter can be decided accordingly. The learned counsel also submitted that other cases cited are not relevant for the facts of this case. The learned counsel referred to the decision of Delhi High Court in the case of Bombay Conductors Electrical Ltd. 1 Excise & Customs cases page 17. It was held by the Court that in tax laws there is hardly any law for applicability of promissory estoppel as there is no contract in taxation. Taxation is an expression of unilateral will of the Legislature, and there are no promises and no contractual obligations. He pointed out that in this case the High Court had considered the decision of the Supreme Court in the case of Motilal Padampat Sugar Mill Co. Ltd. (supra) as well as the later decision in Jit Ram Shiv Kumar v. State of Haryana AIR 1980 SC 1285 where some reservation was expressed about the earlier judgment. The learned counsel further referred to the decision of the Delhi High Court in the case of CWT v. Mettles (P.) Ltd. [1985] 156 ITR 569 where also it was held that there was no estoppel against the statute and where a wrong view is taken in one year, it was open for the revenue to take correct view in the other year.
36. The learned counsel submitted that the use of the words notwithstanding anything contained in any other provision of the Chapter under the heading C makes it obligatory first to find out whether the case falls under section 80HHB or not. Once it falls under that section, the deduction of benefit under other sections is barred. As it is not a case for application of section 80-O, the question of giving the better benefit to the assessed does not arise. He submitted that there was no conflict between the two provisions and, therefore, no question of harmonious construction arose.
37. In reply the learned counsel for the assessed reiterated the points stated by hi but with more emphasis on certain aspects. He submitted that profit as such was not excluded from the provisions of section 80-O and in the case of Oberois Hotel (India) (P.) Ltd. (supra) also they were in receipt of the profit and not merely of fees or commission. Referring to the approval granted by the board, he submitted that the Board had approval was in accordance with the known policy of the Board. He submitted that the nature of the contract was such that technical assistance and technical services were to be rendered while executing the construction work. He contended that whatever may be the position of the appellate authorities, the assessing officer could not go behind the order of the Board and could not hold go behind the order of the Board and could not hold that the exemption could not be available to the assessed notwithstanding the existence of the approval order. He pointed out that even the quantum of income eligible for exemption had not been reduced by the Board as done in some other cases. It was submitted that the order of the Board was final, it had to be applied.
38. Regarding section 80HHB the learned counsel relied on the submissions made before the Board and also to the facts that after once referring to that provision, the Board had granted approval. He further submitted that clarification given by the Board to the Commissioner should be ignored as that was a communication to one part only. He submitted that the Board could not have granted the approval unless the Board was certain that some technical services have been rendered under the contracts and if the Board was of the view that there were two types of activities covered under the contract, the Board itself would have indicated the bifurcation of the contract and its consideration. By not doing so the Board had accepted the position that he whole consideration under the contracts was covered under section 80-O.
39. We are very carefully considered the arguments advanced by the learned counsel for the assessed and the learned advocate appearing on behalf on the department. The question involved is entirely new and has not been considered up to now either by any Bench of a High Court or by any Bench of the tribunal. Such problems arise when the taxpayer finds a larger benefit is indicated in another section which is found applicable. In the present case all the contracts under consideration have been approved by the Board with reference to section 80-O. Most of these contracts were approved in earlier years and assessments had also been made on the basis of such approvals. Except in one case neither the Board nor the assessing officer in making the final assessment had bifurcated the considerations falling under section 80-O and not falling under that section. The claim of the assessed has been that the payment made to him was in consideration of technical services rendered or agreed to be rendered outside India. It was with reference to this claim that the the approval has been granted. The action of the Board in this regard must have been taken in accordance with the policy laid down for this purpose. In the guidelines issued by the Board in 1975, it had been stated that technical services may be rendered in relation to constructional, industrial or manufacturing operations or engineering services. From that it would appear that if some constructional operation was undertaken and it required some technical assistance., which is rendered it would be covered under this section. However, in practice it appears from the approvals placed before us that the Board has been approving the contracts as such in the earlier years, without any distinction between the extent of technical services and other activities under the contract. Though the learned counsel for the revenue has submitted that the Board might have committed any initial mistake in approving such contracts which were essentially contracts of works and not of technical assistance, we do not agree with him as it was for the Board essentially to lay down the policy and to interpret the scope of deduction under section 80-O. If the Board had adopted a liberal interpretation and had approved such contracts as a whole, it was a matter of policy and we cannot subscribe to the contention that this as done as a mistake. Before us there is no dispute now that the approval was of the contract and the mention of the assessment year to which such approval was of the contract and the mention of the assessment year to which such approval was applicable was redundant. After the approval orders regarding the two contracts of Karkh water Supply Scheme and the Diwaniyah Scheme have been rectified by the Board and their approval has been made applicable to the initial year and the years thereafter, this controversy has no relevance except in the case of Amara Work where the approval was for the assessment years 1979-80 to 1982-83. In this particular case, the assessed in its application had asked for exemption for this period as they expected the work to finish in this period. However, the work extended beyond 1982-83 and, thus, some consideration was received in this year as well. In these circumstances, we are of the view that the non-mention of the later assessment years in the approval order cannot come in the way of grant of deduction in respect of the income from this work, provided nothing else comes in the way of the assessed for grant of such deduction. Before us also there is no dispute regarding the payments having been made in convertible foreign exchange. To, this extent the controversies before us are limited. There is also no controversy about the application of section 80HHB for the assessment year 1983-84 and though this point was raised before the Commissioner (Appeals), it was not pressed before us and no submission have been made on these lines.
40. The main point before us is the scope of section 80HHB, particularly sub section [5] of that section. We have further to determine the effect of that section on the exemption which might have been available to the assessed under other section particularly section 80-0. This has to be considered in the light of the approvals granted by the board. Though there were as many as 7 contracts involved in the computation of income in this year, the major submissions have been made in respect of karkh and Diwaniyah works. Firstly, this is so because these works involved the highest amount of payments and profits and secondly because in these works, there has been a modification of original approval and later clarification give by the board. The manner in which the contracts for theses works were approved and then modified after the order of the Commissioner [appeal] and then a submission is made that there was nothing much in the approval granted by the board does not throw good light on the manner in which this matter has been handled at the level of the board. We will now proceed to considered the nature of the contracts with special reference to contract of Karkh work as the learned counsel for the assessed has made reference to this contract alone before us. Before we do so we may first briefly consider the legal position.
41. As already stated above while dealing with the arguments of the parties, section 80HHB, was introduced with effect from 1-4-1983, and the main purpose was to encourage the Indian building contractors. The definition of foreign projects is wide enough to included any contract for construction and it does not exclude any such work on the basis of its being sophisticated or highly complicated. The construction of roads, dams, bridges and other such structures in the modern day world requires highest degree of technical competence and experience of doing such work in the face of ever changing modern technology available on the basis of global tenders. The section provides that wherever such work is executed by the assessed and income is earned 25 per cent of such income is deductible under this section on the fulfillling of certain conditions by the assessed. Sub section (5) provides that the consideration or the income comprised in the consideration payable to the assessed for the execution of a foreign project is eligible for deduction under that section and under on other section finding place in sub chapter C of chapter VIA. This sub chapter refers to the deduction in respect of certain payments. The language of sub section [5] of section 80HHB is very absolute in its terms and it makes section 80HHB as the first provision to be considered for allowance of deduction under this sub chapter and if it if found that the whole consideration or the income comprised in the consideration is payable to the assessed for the execution of a foreign project than the other part of considered would not be hit buy this provision of law and that can be considered for deduction under other sections. For this purpose it is necessary to take into consideration the terms of the contract and to find out whether the contract was for the execution of a foreign project undertaken by the assessed or not.
42. As against this section 80-0 provides for deduction in respect of roulettes, commissions fees and any similar payments received from certain enterprises for either use of any patent, invention secret formula etc. or for rendering technical services outside India. The deduction which was available in the year under consideration was whole of the income as against only 25 per cent of income which is provide in section 80HHB. The section contemplates that the agreement between the Indian company and the foreign enterprise should be approved by the Board in this behalf. A plain reading of this section shows that there should be a receipt of royalty commission, fees or any similar payment either for use outside India of any patent, invention secret formula etc. or rendering of any technical service outside india. Admittedly in the present case, there is no claim under the first part of the section and the claim was that the assessed company was receiving payments in consideration of technical services rendered outside India. In the light of these two provision now we have to ascertain whether the case of the assessed would fall under section 80HHB or section 80-O.
43. We have already extracted some parts of the contracts and the terms of agreement and from these extracts it appears that the contract was for execution of Karkh water supply scheme contract stage 1. As already stated above works has been given a definite meaning for interpreting the contract as it means all the works to be executed in accordance with the provision of the contract including the design manufacture, delivery, supply, installation, constriction setting to work, commissioning, site testing, operations and the maintenance, as the case may be. Form of agreement also makes it clear that the consideration of the payment to be made by the employer to the contractor was for executing, completing and maintaining works in conformity, in all respects, with the provisions of the contract. The general specification of the work to be done gives the details about headworks, making of the transmission pipelines, reservoir works, trunk pipelines, etc. The tender document itself had given some geological hydrological and other information for assisting the contractor at the time of tendering but this information was not guaranteed by the employer and the contractor had to make use of and interpret the same on his own responsibilities. The contract comprised all surveys and site investigation and also detailed design, manufacture, supply etc., of all the works including mechanical plant and services, pipelines and civil and building works from the point of abstraction at the river Tigris intake to the connections of the proposed primary feeder systems to the existing distribution networks in the various supply areas. The surveys, planning, designing and actual construction as well as installations were part of the whole contract and the assessed company had to perform all theses functions and after completion of the work, had to commission it and had to operate the works for a period of three months after the issue of certificate of completion. The various surveys and design reports are contemplated as a part of the contract. The contract also contemplated training the employers personnels for the operation and maintenance of the whole of the work and had also to conduct studies on water treatment process to optimise operations.
44. Schedule 11 to the contract refers to the consideration of the work. Though the lump sum price is indicated for different works but the overall consideration is for the work as a whole and it is made clear even before the tender were given that the contract could not be bifurcated and it could not be given in parts. Separate payments are not contemplated for the surveys done, designs made and the other studies carried on. They are made an integral part of the work. The assessed company had to give proposals of execution of the works and had to submit a preliminary work programme showing the starting and completion, datas for each complex and major installation including construction of the preliminary works, submission of functional plant and general designs and periods for manufacture, delivery, erection etc. of all works required, including plant and civil works pipelines and services. The price schedules were deemed to cover all expenses, costs risks and all materials necessary for the contractor to execute, operate and maintain the works.
45. The perusal of the contract and its various parts very clearly shows that it was a contract for commissioning of a turn key project for the Karkh Water Supply Scheme. It is true that for executing this work, it was absolutely essential for the contractor to have necessary technical competence and they had to use highly experienced technical personnels for this purpose. From the very nature of the work, it is clear that the execution of the project involved a high degree of technical competence as well as expertise and experience. However, reading the contract as a whole the intention of the parties was only to get the whole project being made available on a turn key basis according to the general specifications said down by the Baghdad authorities. It is not possible in this contract either to separate one part from the other or to bifurcate a part of considered for any particular service. We have already considered the various case laws including certain decisions of the Honble Supreme Court in the case of Ganon Dunkerley and co Ltd. [supra] and Ram singh and sons Engg. works [supra]. which throw light on interpretation of such contracts. Various High Court have also considered similar questions throwing light on the nature of contracts. Applying these principles, it appears that this is an indivisible and integrated contract for the whole work and has to be treated as such.
46. In view of the above discussion, it appears to us that the income which arises to the assessed in this year is from the execution of a foreign project within the meaning of section 80HHB and it cannot be said that income from rendering of technical services under the contract. Maybe, that rendering of technical services was a part of the whole contract but when we are considering two different provisions applicable in the same assessment year, we have to find the nature of the services rendered by the job executed. That brings us to the provisions of section 80HHB [5]. As already noted above, this sub section starts with the non obstinate expression and the use of this expression makes it clear that where the consideration or the income is related to the execution of foreign projects, the benefit under section 80HHB has to be allowed to the assessed and no other benefit contemplated in sub-chapter C or Chapter VIA can be extended to the assessed. The Supreme Court in the case of Shri Sajjan Mills Ltd. [supra] had considered the scope of such non obstinate expression. As observed by their Lordships it is necessary to appreciate the purposes and object intended to be achieved by the sub section in order to arrival at the true meaning of the provision. This sub section has definitely an overriding effect and, therefore, once we come to the conclusion that the consideration and the income arising to the assessed falls under section 80HHB, the claim of the assessed under any other section in that sub chapter cannot be considered. The very fact that the legislature though it fit to introduced this sub section while introducing this section in the Act shows that the legislature was aware about the possibility of the consideration and income covered under section 80HHB to be also partly covered under other provisions of the sub chapter. This sub section however, prohibits the deduction under any other sub section 80HHB and partly under section 80-O the whole consideration and the income is related to the execution of the project and, therefore, it is not possible to hold that the assessed company would still be eligible for deduction under section 80-O, we do not agree with learned counsel for the assessed that provisions like 80P (3) would become unworkable with this interpretation of section 80HHB. Section 80P deals with the case of co-operative society. It is provided in sub-section (3) of that section that where an assessed is entitled to deduction under various sections including section 80HHB, first those deductions would be allowed and then only deduction under section 80P shall be allowed. This sub section of section 80P does not contemplate any refers to the income which is arrived at after deducting the other specified deductions. In other words where there is an exemption of income of a co-operative society up to a particular limit that benefit would not be lost to such co-operative societies. That is merely a machinery section and does not throw light on the interpretation of section 80HHB (5).
47. This brings us to the question of the approvals granted by the Board not only in respect of the earlier contracts but also in respect of these two contracts of Karkh and Diwaniyah works where at the grant of approval, the Board was aware of the provisions of section 80HHB. We have to determine the issue on the basis of legal interpretation and we have to ascertain as to which provision of law is applicable in the case of the assessed. As far as the earlier contracts are concerned they were approved in earlier years and the Board must have granted these approvals in accordance with their general policy. These approvals were, however, subject to any amendment in the Act and this was made clear in the letters of approval. Even if it was not so stated the law has to be interpreted for each assessment year. The fact that an approval was granted in respect of 5 contracts in earlier years, cannot come in the way of proper application of provisions of 80HHB, particularly sub section (5) of that section. It is true that section 80-0 continues to be on statute book. In an appropriate case, it may be found that there is a contract for rendering of technical services part from the execution of the project and a separate consideration is contemplated for such technical services. In such as case provisions of section 80-0 would still be applicable. it is not possible to accept the contention of the learned counsel for the assessed that there is some promissory estoppel as a result of the approvals granted by the Board. As already pointed out above there is no promise at the time of grant of approval and the assessment in each assessment year has to be made in accordance with the provision of law which are applicable for that assessment year. The principle of promissory estoppel does not apply to taxing statutes and it has been clearly held by the Honble Delhi High Court after considering the principles laid down by the Supreme Court in some cases where this principle was considered. There is no promise or contact at the time of approval granted by the Board and the question of estoppel therefore does not arise in such a case. It is true that in respect of Karkh and diwaniyah project confusion which has arisen in this case could have been avoided. In the first approval letter the Board confined the approval to the assessment year 1982-1983 and referred to section 80HHB for the subsequent years. ON representation by the assessed the matter was considered for almost tow years and meanwhile the assessment was also made and the first appellate authority also decided the matter. It was only in July, 1985 the the Board rectified their earlier order removing the reference to section order was likely to give an impression that the rectification has been made in view of the representation made by the assessed about the scope and application of section 80HHB. This impression was not only created in the minds of the assessed but also led to some misunderstanding in the mind of the Commissioner. When he sought a clarification, the Board stated that in spite of approval under section 80-if the income does not satisfy the requirements of that section, the assessed would not be entitled to such deduction. In this letter, it was also stated that the mention of the assessment years in the approval orders was redundant. We have referred to this clarification given by the Board only because the letter as his own. There is no doubt that the first qualified approval followed by the modification of that approval coupled with this thinking on the part of the Board as given to the Commissioner does indicate that the position was not clear in the mind of the authorities who approved or modified the approval of the contracts. Be that as it may, we have to consider the matter from the angle of law as it stands and we cannot deiced on the basis of some misunderstanding or confusion which might have been created at some stage.
48. It is not necessary for us to go into the decision of the Delhi High Court and the other High Court relating to section 80-0 as each case was decided on its own facts and in none of these cases there was any construction of any structure or execution of any project. Here the matter is being decided in the light of the specific provision of section 80HHB which became application for this year and the non obstinate expression used in sub-section (5) of that section. We have referred only to the Karkh construction as it was only in respect of this contract that detailed reference was made before us the works executed under other contracts would also clearly fall under the term foreign project and the income and consideration for execution of such projects would fall under section 80HHB. The fact that in earlier years deduction had been allowed under section 80-0 in the light of boards approval could not be relevant in this year when a separate specific section which was applicable only from this assessment year is being considered.
49. To concluded this point, we would hold that the income and consideration received by the assessed in the assessed in the execution of all the seven contracts in general and the Karkh Work in particular fell under the provisions of section 80HHB as the contracts were for execution of foreign projects. We further hold that in view of the provisions of section 80HHB (5) the claim of the assessed under section 80-0 cannot be considered in spite of the approval orders of the Board. This ground in the assesseds appeal has, therefore, to be rejected and the conclusion arrived at by the learned Commissioner (Appeals) is upheld.
50. The second ground in the assesseds appeal is in respect of deduction by way of investment allowance under section 32A of the Act, There is ground in the departmental appeal also about this question. whereas the assessed has stated that the Commissioner [Appeals] erred in not allowing his claim the department has questioned the correctness of the directions of the Commissioner [Appeals] that the claim under section 32A should be examined in the light of order of the Special Bench of the Tribunal in the case of ITO v. Hydle Construction (P.) Ltd. [1983] 6 ITD 575 (Delhi). The IAC while making the assessment denied the claim of the assessed for investment allowance on the basis of ground given by him in the earlier years and the reason given by him is that the assessed is not an industrial company. When the matter came before the Commissioner (Appeals), he found that the matter had not at all been considered by the IAC by a speaking order. Before the Commissioner (Appeals) reference was made to the order of the Special Bench of the Tribunal in the case of Hydle Construction (P.) Ltd. (supra). The Commissioner (Appeals) found that the question had been considered by the Special Bench in respect of the assessment years 1977-78 and 1978-79 and in the light of the discussion in that order the Commissioner (Appeals) directed the assessing officer to follow the observations of the Special Bench of the Tribunal.
51. As the learned Commissioner (Appeale) had merely set aside this matter for reconsideration by the assessing officer, the ground taken by the assessed does not appear to be correct as there was no disallowance by submitted that instead of setting aside the matter, the Commissioner (Appeal). The learned counsel for the assessed only submitted that instead of setting aside the matter, the Commissioner (Appeals) should have the claim. The learned counsel for the department on the other hand submitted that the claim of the assessed should have been rejected by the commissioner (Appeals). In this connection he referred to the decision of the Delhi High Court in the case of CIT v. Minocha Bros. (P.) Ltd. 1986. It was submitted that the Honble High Court had held that a company carrying on construction work could not be considered to be an industrial company.
52. We have considered the rival submissions and we find the this matter has not been considered either by the assessing officer or by the Commissioner [Appeals] who has merely set aside the matter for being considered in detail having regard to the decision of the Special Bench of the assessing office and it is open to the assessed to make out a case for grant of investment allowance and for the assessing officer to take a view having regard to the decision of the courts as well as the orders of the Tribunal. Section 32A does not in terms, lay down the conditions that investment is allowable only to an industrial company and what is required is given in sub section (2) of that section. Besides a small scale industrial undertaking for the purpose of business of manufacturing or production of any article or thing, it is also allowable if the machine is used in any industrial undertaking for the purpose of business of construction, manufacture or production of any article or thing not belong an article or thins specified in the 11th Schedule. There has been no application of mind by the assessing officer to these provision of any article or thing not being an article or thing specified in the 11th Schedule. There has been no application of mind by the assessing officer to these provisions and in these circumstances the order of the Commissioner (Appeals) setting aside this matter for fresh consideration was justified. The Assessing officer, will however, be free to consider not only the decisions of the Special Bench of the Tribunal but also the decisions of the Courts as may be available to him. In view of the matter the grounds taken by the assessed as well as by the department on the question of investment allowance are rejected.
53. Though the assesseds appeal refers to several other grounds, they have not been pressed before us and the only submission made before us is regarding the charge of interest under section 215 of the Act. We find that the Commissioner [Appeals] has already given direction for this purpose and no further relief is due to the assessed on this point. In respect of ground No. 5(ii) the assessed has objected to the disallowance under section 40(c) /40A (5) of Rs. 7,62,49,230 payable to the India based directors but the learned counsel for the assessed has not made any submissions before us and has stated so before us. We find the order of the Commissioner (Appeals) on this issue to be in order and this ground is also rejected.
54. This takes us now to the departmental appeal.
55. The first ground in the departmental appeal is against the directions of the commissioner (Appeal) for consideration of the assesseds claim under section 35B of the Act. There was no such claim before the assessing officer and it was submitted before the Commissioner (Appeals) that he had not made claim under section 35B as he was expecting the whole income to be exempted under section 80-0. In that case, there could have been no question of any deduction under section 35B. The Commissioner (Appeals) found force in this submission and directed that the claim of the assessed should be examined for determining the weighted deduction to which he may be entitled. However, while doing so, the learned Commissioner (Appeals) observed that the case of the assessed is prima facie covered by the provisions of section 35B insofar as the technical services were exported.
56. The learned counsel for the department submitted that this ground taken before the commissioner [appeals] should be have been admitted as there was no such claim before the assessing officer. He also submitted that in this regard there was no material on record and in view of this, the principles laid down by the Supreme Court in the case of Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1 were applicable. In the alternative it was submitted that the Commissioner (Appeals) should not have held that the assesseds case is prima facie covered under section 35B. It was cannonaded that there was no material in the order of the Commissioner (Appeals) to give this finding.
57. The learned counsel for the assessed on the other hand submitted that the assesseds claim before the Commissioner [Appeals] was rightly admitted for consideration as it could not have been made before the ITO as according to the assessed there would not have been any income so as to claim weighted deduction under section 35B, It was further submitted that substantial materials had been placed before the assessing officer from which one could find that services were being rendered abroad and the expenses were being incurred in that connection.
58. Having considered the submissions we are of the view that in the special circumstances of this case, the Commissioner (Appeals) was right in directing the consideration of the assesseds claim under section 35B. but he was not justified in observing that the assessed had a prima facie case, the matter should be left to the ITO for deciding on the basis of materials. It is for the assessed to make out a case that in the course of his business some expenses were incurred for exporting services also contended that the matter was again before the commissioner (Appeal). We, however, modify the directions given by the Commissioner (Appeals) by stating that the assesseds case should be examined in the light of the provisions of section 35B as applicable for this assessment year and on the basis of materials which may support the assesseds claim Subject to this modification in the observations of the Commissioner (Appeals) we decline to interfere with his directions.
59. The next ground relating to the claim for investment allowance has already been considered by us while dealing with the assesseds appeal.
60. The third ground in the departmental appeal objects the deletion of Rs. 6,33,93,340 which had been made under section 40(c) being the remuneration paid to the directors in excess of the limits prescribed under section 40(c). The IAC had not discussed this matter in any detail and had disallowed the whole of the claim in respect of directors remuneration as was in excess of the limit of Rs. 72,000 for each director. Before the Commissioner (Appeals) the assessed did not dispute the disallowance made in respect of the directors posted in India. They were being paid an annual remuneration of Rs. 60,000 plus percentage of commission. The amount which was in excess of the limits was admitted to be disallowable before the Commissioner (Appeals). However, in respect of 6 directors, who were looking after the companys work outside India, remuneration was being paid in U. S. dollars and in the case of two director namely Shri M. S. Wassi and Shri C. K. Verma. some commission was also being paid. The total of such payments came to Rs. 6,49,56,646. It is an admitted position that the remuneration of each of the directors was more than the limits laid down in any of the sections, i.e. 40(c) or 40A (5). It was contended on behalf of the assessed that these directors were employees of the company and were looking after the different works being carried on in Iraq or Libya. It was contended that in their case the provisions of section 40A (5) should be applied and if the provisions of that section are applied, sub-clause (b) of that section 40A (5) has also to be kept under consideration. Clause (b) provides that clause (a) shall not apply to any expenditure or allowance in relation to any employee in respect of any period of his employment outside India. It was, therefore, contended that the remuneration being paid to these employees was outside the purview of section 40A [5] and the excess over Rs. 72,000 cannot be disallowed.
61. The Commissioner (Appeals) considered the decision of the Kerala High Court in the case of CIT v. Travancore Chemical Mfg. Co. [1982] 133 ITR 818 and held that the directors working abroad were the employees of the company. He further held that section 40A has to be applied notwithstanding anything to the contrary contained in any other provision of the act. From this he concluded that this section would override the provisions of section 40(c) as far as the employees of company including its directors were involved. The Commissioner (Appeals) further found that in section 40A there was a reference to section 40(c) (i) and a reference is also made where employee is a director. He proceeded to refer to clause (b) of sub-section (5) of section 40A and found that the provision of the section do not apply to the remuneration paid for the work done outside India. The learned Commissioner (Appeals) found a rational behind this as the price structure in India and outside India was different. On this basis he held that for this purpose provisions of section 40A (5) are applicable and the remuneration paid for work done outside India has not to be considered for disallowance. He, therefore, deleted the disallowance made by the assessing officer.
62. The learned counsel for the department has submitted before us that section 40A (5) applies to employees in general whereas section 40(c) was specifically applicable to directors. He pointed out that in section 40(c) there was no exclusion for the remuneration for any period of work outside India. He referred to the order of the Tribunal in the case of Geoffrey Manners & Co. Ltd. v. ITO [1983] 3 SOT 269 (Bom.) (SB). in this r egard. The learn counsel, however, did not dispute that these person s were employee-directors and services were being rendered by them o utside India. 63. The learned counsel for the assessed, however, submitted that all these directors were employees as would be evident form the contract of their employment and they were being paid in US dollars. It was also submitted that the Special Bench of the Tribunal had con sidered this issue in the case of ITO v. Sapt Textile Products (India) Ltd. [1981] 1 SOT 269 (Bom.). It had been held here that in considering the question as to whether the remuneration in the case of director employee falls to be considered under section 40(c) or 40A (5) it was not possible to hold that it must fall only under one of them and not both as if they are mutually exclusive. The Bench had also referred to various provisions which brought those two provisions nearer to each other. The special Bench had also held that whereas the provisions of section 40A (5) are applicable for other purposes, where the limits of remuneration have to be considered with reference to the limits of perquisite, the position in the case of directors is different from the case of other employees. Whereas in the case of employees only one fifth of the salary could be allowed as perquisite, in the case of directors only the overall monetary limit is to be kept in view.
64. The learned counsel for the assessed also pointed out that section 40A [5] started with a non obstante expression and should, therefore, be given precedence.
65. Having considered the rival submissions we are of the view that the Commissioner [Appeals] has rightly held that in making disallowance out of the remuneration paid to the directors, the remuneration for the period of employment outside India has to be left out. There is no conflict or contradiction between sections 40[c] and 40A [c] and 40A [5] and the later sub section itself refers to the former section for the purpose of working out the over all allowance. The exclusions provided in section 40A [5] are applicable to section 40[c] also and, therefore, the question which has to be answered in this case is whether it was the case of a director simplicitor or on employee director. In the case of an employee director clause [b] of section 40A [5] has to be taken into consideration. Though there is no dispute before us that these directors were employees of the company, we have ourselves perused the agreements and from them it is clear that they were employee directors of the company. In view of this, application of section 40A [5] was correct. It was held by the Gujarat High Court in the case of CIT v. Bharat Vijay Mills Ltd. [1981] 128 ITR 633 that section 40A has an overriding effect and within the framework of that section the limits of allowance and conditions of disallowance have been laid down. We would, therefore, uphold the order of the learned Commissioner [Appeals] on this question and dismiss the ground taken by the department.
66. The last ground in the departmental appeal objects to the directions of the Commissioner (Appeals) for treating the assessed company as an industrial company for determining the rate of tax. The assessing officer had not treated the assessed company, as an industrial company and has levied the tax accordingly. The Commissioner (Appeal), however, allowed the claim of the assessed on the basis of the order of the special Bench of the Tribunal in the case of Hydle Construction (P.) Ltd. (supra). The learned counsel for the revenue submitted that in the case of Hydle business was carrying out civil construction work like tunnels, power house etc. It could be treated as an industrial company, if on facts it is found that the company is engaged in manufacturing or processing of goods. It was submitted that this decision of the Special Bench cannot be followed in the light of the decision of the Delhi High Court in the case of Minocha Bros. (P.) Ltd. (supra). That was also a company engaged in the business of construction. The question arose whether that company could be treated as an industrial company as defined in the Finance Act for the purpose of determining the rate of tax. The Court held that a company engaged in the construction business could not be held to be an industrial company. A reference was made to the definition of industrial company which means a company which is mainly engaged in the business of generation or distribution of electricity or any form of power or in the construction of ships or in the manufacture or processing of goods or in mining. The Court held that such a construction company could not be said to be a manufacturer of good or a processor of goods. Referring to the use of bricks and other building materials and making of articles like doors and windows, the Court observed that they were not the object of the business and construction was was the main object. making of RCC blocks or a door was only a step towards making the whole building. The Court, therefore, held that such a construction company could not be held to be an industrial company. It was contended that as the definition, as is applicable for this year, continues to be the same, the assessed company should not be treated as an industrial company.
67. In this connection a reference was made to the amendment proposed in the definition in the Finance Act, 1983 but it was pointed out that it was applicable only for the assessment year 1984-85 and not for the year 1983-84. The mention in the Finance act, 1983 was for the purpose of payment of advance tax and for that purpose industrial company was redefined to include other activities like carriage by road or inland waterways of passengers or goods or in the execution of projects which meant a project of construction of a building, road, dam, bridge or other structure or assembly or installation of any machinery or plant.
68. The learned counsel for the assessed, however, relied on the order of the special bench of the Tribunal in the case of Hydle Construction (P.) Ltd. (supra) and submitted that even for the assessment year 1983-84, the revised definition given is applicable.
69. We have considered the rival submission and we are of the view that having regard to the decision of the Delhi High Court in the case of Minocha Bros. (P.) Ltd. (supra) this ground has to be decided against the assessed. As held by the Honble High Court, a construction company could not be considered to be an industrial company for there a sons given in that decision. No doubt, there has since been an amendment of the expression industrial company but it is not applicable for the assessment year 1983-84 and the mention in the Finance Act, 1983 was for the purpose of collection of advance tax. A company of the nature of the assessed company would become an industrial company under the revised definition. However, for the assessment year 1983-84 the claim of the assessed has to be rejected. The order of the Commissioner (Appeals) in this regard is, therefore, reversed.
70. In the result, the assesseds appeal is rejected and the departmental appeal is allowed in part.