Income Tax Appellate Tribunal - Delhi
Telecommunications Consultants India ... vs Deputy Commissioner Of Income Tax on 11 February, 1999
ORDER
B. M. Kothari, A.M.
1. The only ground raised by the appellant company in this appeal is reproduced hereunder :
"Deduction allowed under s. 32AB has been wrongly proportionately reduced from the contribution of foreign project while giving the benefits under ss. 80HHB and 80-O."
2. The appellant company is a Government of India's enterprise under the administrative control of Ministry of Telecommunication, Government of India. The company is a prime multi disciplinary consultancy organisation providing full range of consultancy, design, engineering services in all the fields of telecommunications in India as well as abroad. The company also undertakes computer software projects and have deputed a number of software experts to the countries abroad. The assessee claimed deductions under ss. 80HHB and 80-O of IT Act, 1961 in relation to income derived from various foreign projects undertaken by the company. It also claimed deduction under s. 32AB of the IT Act, 1961.
3. The Dy. CIT (Asst.), Special Range-2, New Delhi, completed the assessment under s. 143(3) for asst. yr. 1989-90 on 27th March, 1992. The assessee claimed deduction under s. 32AB of the Act in respect of plant and machinery purchased during the year under consideration. The AO observed that since the profit/income from projects eligible for benefit of deduction under ss. 80-O and 80HHB is included in gross total income, the proportionate amount of deduction allowable under s. 32AB has to be reduced against income eligible for deduction under ss. 80-O and 80HHB in order to arrive at to profits/income from such foreign projects entitled for benefit of relief under ss. 80-O and 80HHB. The AO observed that the assessee purchased plant and machinery worth Rs. 2,62,14,911. The deduction under s. 32AB has, however, been claimed at Rs. 1,46,42,208 being 20 per cent of the profits of eligible business determined at Rs. 7,32,11,041 which includes the profit of projects entitled for deduction under ss. 80HHB and 80-O of the Act. The AO, therefore, held that the deduction of Rs. 1,46, 42,208 allowed under s. 32AB of the Act is required to be allocated to ss. 80-O and 80HHB projects in the ratio of profit of Indian projects and ss. 80H and 80HHB projects. The AO accordingly allocated the same as under :
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"Project Profit Allocation of deduction
under s. 32AB
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(a) Indian project 2,01,01,909 29,39,943
(b) 80-O project 2,78,58,170 40,74,311
(c) 80HHB projects 5,21,56,260
(as per original working) 76,27,954
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1,46,42,208
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4. The assessee preferred an appeal before the CIT(A) challenging the quantum of deduction under ss. 80-O and 80HHB by wrongly deducting the proportionate amount of benefit allowed under s. 32AB against the income eligible for grant of deduction under ss. 80-O and 80HHB. The CIT(A) confirmed the action of the AO. The present appeal by the assessee is directed against the said findings of the AO.
5. The learned counsel for the assessee contended that out of Rs. 1,46,42,208, only Rs. 18,04,235 of s. 32AB claim is related to s. 80HHB projects. He submitted that assets purchased at foreign projects eligible for deduction under ss. 80-O and 80HHB are charged directly to the project expenditure. The plant and machinery purchased by the assessee on which the deduction under s. 32AB has been claimed relates only to Indian projects (except to the extent of Rs. 18,04,235) and, therefore, the amount of deduction allowable under s. 32AB cannot be allocated and charged against income from foreign projects eligible for grant of deduction under ss. 80-O and 80HHB. He also invited our attention towards statement of significant accounting policies and practices annexed to and forming part of the accounts of the appellant company for the relevant year ended on 31st March, 1989, to corroborate this contention. The same is reproduced hereunder :
"Assets purchased as foreign projects are charged directly to the project expenditure and the residual value of the asset on the last date of the accounting year is taken as work in progress. The residual value of assets is taken in the first year 67 per cent, 2nd year 34 per cent and 3rd year onwards one unit of the relevant currency as notional value. Transfer of assets from one project to another is done on residual value on the date of transfer. The sale of assets is treated as other income of the project."
6. The learned counsel then invited our attention to the details submitted at p. 1 of the paper book which are also reproduced hereunder :
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Project Profit Eligible Machinery Deduction u/s.
machinery charged in project 32AB allocated
expenditure by Dy. CIT
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Indian 2,01,01,909 1,48,29,253 -- 29,39,943
projects | |
s. 80HHB 5,34,56,260 |- 2,69,14,911 76,27,954
projects | |
s. 80-O 2,78,50,170 | 40,74,311
projects
--
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1,46,42,208
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7. The learned counsel invited our attention towards provisions of s. 80HHB which provide for grant of deduction @ 50 per cent of profits and gains derived from the business of execution of a foreign project undertaken by the assessee in pursuance of a contract entered into by him with the Government of a foreign State or any statutory or other public authority or agency in a foreign state or a foreign enterprise. Likewise, he drew our attention to the provisions of s. 80-O of the Act which provide that where the gross total income of an assessee includes any income received from the Government of a foreign State or foreign enterprise in consideration for the use outside India of any patent, invention, design or registered trade mark and such income is received in convertible foreign exchange in India, a deduction of an amount equal to 50 per cent of the income so received in, or brought into India will be allowed while computing the total income of the assessee. He submitted that the deduction under s. 80HHB is allowable @ 50 per cent of the eligible profits and gains from projects outside India. Deduction under s. 80-O is allowable to the extent of 50 per cent of the income by way of royalty, etc., received in or brought into India in convertible foreign exchange. The quantum of deduction allowable under ss. 80HHB and 80-O are thus not required to be computed on the amount of gross total income as computed in accordance with the provisions of IT Act but it is allowable on the eligible profits and gains from projects outside India and in respect of royalties, etc. received from certain foreign enterprises. The deduction allowable under s. 32AB is restricted to 20 per cent of the gross total income as defined in s. 80B(5) of the Act.
8. The learned counsel further submitted that the provisions of s. 80AB also does not in any manner support the action of the AO of reducing the amount allowable under ss. 80HHB and 80-O by allocating the amount of deduction allowable under s. 32AB and thereby reducing the amount eligible for deduction under ss. 80HHB and 80-O. The purpose of s. 80AB is only to prescribe the limit or restricting the various deductions allowable under Chapter VI-A so that the aggregate amount of various deductions do not exceed the gross total income.
9. The learned counsel also placed reliance on the following judgments to support the appellant's claim :
(a) CIT vs. Tarun Udyog (1991) 191 ITR 688 (Ori);
(b) Punjab Con-Cast Steel Ltd. vs. Asstt. CIT (1994) 49 ITD 430 (Chd); and
(c) Munchur Industries (P) Ltd. vs. ITO (1987) 27 TTJ (Del) 43 : (1986) 19 ITD 468 (Del).
10. He strongly urged that the deduction under ss. 80HHB and 80-O as claimed by the appellant should be allowed.
11. The learned Departmental Representative submitted that deduction under ss. 80-O and 80HHB is allowable only on net income to be computed as per the provisions of the Act, which necessarily implies that deduction allowable under s. 32AB should be proportionately reduced from the income eligible for grant of deduction under ss. 80HHB and 80-O. He placed reliance on the judgments in Distributors (Baroda) (P) Ltd. vs. Union of India (1985) 155 ITR 120 (SC), CIT vs. P. V. Narayanan (1998) 233 ITR 330 (Ker) and CIT vs. Marketing Research Corpn. He strongly supported the order of the CIT(A).
12. We have carefully considered the submissions made by the learned representatives of the parties. We have also gone through all the judgments cited by the learned representatives and have also perused the details submitted in the compilation.
13. The provisions of s. 32AB, inter alia, provide that where an assessee, whose total income includes income chargeable to tax under the head 'Profits and gains of business or profession' has, out of such income utilised any amount during the previous year for purchase of any new machinery or plant without depositing any amount in the deposit account mentioned in cl. (a) of s. 32AB(1), shall be entitled to deduction of a sum equal to the amount so utilised for purchase of new machinery or plant or a sum equal to 20 per cent of the profits of eligible business or profession as computed in the accounts of the assessee computed in accordance with s. 32AB(5), whichever is less. In the present case, the deduction allowed under s. 32AB has been restricted to 20 per cent of the profits of eligible business determined at Rs. 7,32,11,041 as mentioned on p. 5 of the assessment order. It is, therefore, clear that profits of projects entitled for deduction under ss. 80HHB and 80-O have also been taken into consideration while computing the limit of deduction allowable under s. 32AB to the extent of 20 per cent of the profits of the eligible business chargeable to tax under the head 'Profits and gains of business or profession'. Even according to the chart furnished by the assessee at p. 1 of the p. book, the total income from Indian project was Rs. 2,01,01,909. The 20 per cent of the profits from Indian project comes to Rs. 40,20,380 only. If the income from projects eligible for ss. 80HHB and 80-O is excluded while computing the amount of deduction allowable under s. 32AB, such deduction under s. 32AB would have been restricted to only Rs. 40,20,380 which has been allowed by the AO to the tune of Rs. 1,46,42,208 by computing the ceiling of 20 per cent on total profits of eligible business including the income from foreign projects which qualifies for deduction under ss. 80HHB and 80-O.
14. It may be relevant to reproduce the provisions of s. 80AB hereunder :
"Where any deduction is required to be made or allowed under any section except s. 80M included in this Chapter under the heading 'C-Deductions in respect of certain incomes' in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income."
15. The aforesaid provisions clearly provide that notwithstanding anything contained in the relevant sections, which in the present case are ss. 80HHB and 80-O, the amount of income of that nature as computed in accordance with the provisions of IT Act, 1961 (before making any deduction under Chapter VI-A) shall alone be deemed to be amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.
16. It is, therefore, clear that for computing the quantum of deduction allowable under ss. 80HHB and 80-O or any other section appearing in Chapter VI-A, those provisions will have to be r/w s. 80AB of the Act.
17. The relevant extracts from the provisions of ss. 80HHB and 80-O are also reproduced hereunder :
Provisions of s. 80HHB :
"(1) Where the gross total income of an assessee being an Indian company or a person (other than a company) who is resident in India includes any profits and gains derived from the business of -
(a) the execution of a foreign project undertaken by the assessee in pursuance of a contract entered into by him, or
(b) the execution of any work undertaken by him and forming part of a foreign project undertaken by any other person in pursuance of a contract entered into by such other person, with the Government of a foreign State or any statutory or other public authority or agency in a foreign state, or a foreign enterprise, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to 50 (fifty) per cent thereof."
18. Provisions of s. 80-O "Where the gross total income of an assessee, being an Indian company or a person (other than a company) who is resident in India, includes any income received by the assessee from the Government of a foreign state or foreign enterprise in consideration for the use outside India of any patent, invention, design or registered trade mark under an agreement approved in this behalf by the Chief CIT or the Director General and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed in accordance with and subject to the provisions of this section, a deduction of an amount equal to fifty per cent of the income so received in, or brought into, India, in computing the total income of the assessee."
19. The learned counsel placed reliance on decision of Tribunal in the case of Munchur Industries (P) Ltd. vs. ITO (supra) in which it was held that deduction under s. 80-O is allowable to the extent of net income earned in rendering the foreign services, etc. and in case the receipt in convertible foreign exchange is less than that amount, that receipt in foreign exchange has to be deducted. The Tribunal has further held that this is subject to limits placed in s. 80AB. The deduction under s. 80-O will be further limited to the gross total income arrived at without allowing the deduction under s. 80-O. The facts of that case did not involve question relating to determination of quantum of deduction allowable under s. 80-O in a case where deduction under s. 32AB has been allowed by keeping in view the 20 per cent ceiling of total profits of eligible business including the profits from foreign enterprises eligible for deduction under s. 80-O. Therefore, the said decision is clearly distinguishable. On the other hand, the Tribunal has clearly held that deduction allowable under s. 80-O will be subject to the limits placed under s. 80AB of the Act.
20. The learned counsel also relied upon the judgment of Hon'ble Orissa High Court in the case of Tarun Udyog (supra). That case relates to grant of relief under s. 80HH of the Act. The Court held that relief under s. 80HH should be allowed on the profits of the industrial undertaking before deducting the investment allowance allowed under s. 32A. The provisions of s. 80AB have not been discussed in the said judgment nor the relevant assessment year to which the claim under s. 80HH relate, has been mentioned in the said judgment. It, therefore, appears that the said judgment relates to a period prior to introduction of s. 80AB which was inserted by the Finance (No. 2) Act, 1980, w.e.f. 1st April, 1981.
21. The learned counsel also relied upon the decision of Tribunal in the case of Punjab Con-Cast Steel Ltd. vs. Asstt. CIT (supra). In that case, it was held that the claim under s. 32AB has been made in respect of cast iron foundry, SMS-V and rolling mill on which no deduction under s. 80-I has been claimed, the question of reducing the assessee's claim under s. 32AB for the purpose of computing relief under s. 80-I does not arise. The various judgments rendered by different High Courts in relation to interpretation of s. 80AB were not brought to the notice of the Tribunal or such judgments have been rendered subsequently by the High Courts, which will be discussed in the subsequent paras. Therefore, the aforesaid decision of Tribunal, Chandigarh Bench, also does not support the assessee's contention.
22. It may be pertinent to refer to the judgment of the Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. vs. Union of India & Ors. (supra). The Hon'ble Supreme Court has, inter alia, held as under :
"Therefore, the words 'such income by way of dividends' must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of plain grammar, that the words 'such income by way of dividends' must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. That would obviously be the income by way of dividends computed in accordance with the provisions of the Act."
23. The Hon'ble Supreme Court in the aforesaid judgment considered the provisions of ss. 80A(2), 80AA and 80M.
24. In a subsequent judgment, the Hon'ble Supreme Court in the case of H. H. Sir Rama Varma vs. CIT (1994) 205 ITR 433 (SC), has held that on the parity of reasoning in the case of Distributors (Baroda) (P) Ltd. (supra), it must be held that s. 80AB was enacted to declare the allowability as it always stood in relation to the deductions to be made in respect of income specified under the head "C" of Chapter VI-A. The manner of deduction specified under s. 80AB accords with the interpretation placed upon s. 80T by the Hon'ble Supreme Court in the said judgment. The long-term capital losses brought forward from earlier assessment years have to be first set off against the long-term capital gains of the current assessment year before the deduction contemplated by s. 80T of the Act is to be allowed. The Hon'ble Supreme Court held that the relief under s. 80T is to be given only for the amount of long-term capital gains of the current assessment year after the long-term capital loss of the earlier years brought forward is set off.
25. The Hon'ble Rajasthan High Court in the case of CIT vs. Vishnu Oil & Dal Mills (1996) 218 ITR 71 (Raj), has held as under :
"Held, that for the determination of the relief under s. 80HH, the total income of the assessee has to be worked out after deducting unabsorbed losses and unabsorbed depreciation and the income eligible for deduction will be the net income as computed in accordance with the provisions of the Act and not the gross income."
26. Similar view was taken by the Hon'ble Rajasthan High Court in the judgment in the case of CIT vs. Rajasthan Co-operative Spg. Mills Ltd.
27. The Hon'ble Delhi High Court in the case of CIT vs. Marketing Research Corpn. (supra), following the judgment of the Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. (supra) held that for the purpose of s. 80-O, the deduction has to be computed not on the basis of gross income but on the basis of net income.
28. The Hon'ble Kerala High Court in the case of CIT vs. P. V. Narayanan (supra), following the judgment of Rajasthan High Court in the case of Vishnu Oil & Dal Mills (supra) held that for determination of the relief under s. 80HH, the total income of the assessee had to be worked out after deducting depreciation and investment allowance, etc. The matter was remanded to the Tribunal to decide the matter afresh after taking into consideration the provisions of s. 80AB as also the decision of Rajasthan High Court in the case of Vishnu Oil & Dal Mills (supra).
29. On a careful consideration of the aforesaid facts, judgments and discussions, we are of the view that the CIT(A) has rightly confirmed the view taken by the AO. In order to determine the maximum amount of deduction allowable under s. 32AB, the AO has accepted the assessee's contention that the ceiling of 20 per cent is to be computed on the total profits of eligible business or profession including the income from foreign projects qualifying for deduction under ss. 80-O and 80HHB. It is, therefore, clear that part amount of deduction allowed under s. 32AB is attributable to income from foreign projects eligible for deduction under ss. 80-O and 80HHB. It is, therefore, necessary to allocate the amount of deduction allowed under s. 32AB between the Indian income and income from foreign projects eligible for deduction under ss. 80-O and 80HHB in order to meet the requirement of s. 80AB. The proportionate basis of such allocation adopted by the AO is reasonable and justified. The provisions of s. 80AB clearly provides that for the purposes of computing the deduction allowable, inter alia, under ss. 80HHB and 80-O, the amount of income of the nature as described in ss. 80HHB and 80-O will have to be computed in accordance with the provisions of IT Act. The proportionate amount of deduction allowed under s. 32AB will, therefore, have to be deducted for computing the amount of income of the nature eligible for grant of deduction under ss. 80HHB and 80-O. In our view, the order of the CIT(A) is perfectly valid and justified. We do not find any justification to interfere with the view taken by the CIT(A).
30. In the result, the appeal is dismissed.