Income Tax Appellate Tribunal - Delhi
Munchur Industries (P.) Ltd. vs Income-Tax Officer on 20 August, 1986
Equivalent citations: [1986]19ITD468(DELHI)
ORDER
K.C. Srivastava, Accountant Member
1. This is an appeal by the assessee against the order of the Commissioner (Appeals) and relates to the assessment year 1981-82. The assessee-company is engaged in manufacture and sale of agricultural implements, X-Ray machines, etc. In addition to this, the assessee had rendered some technical services to an enterprise in German Democratic Republic under three agreements with the same party. The assessee received in all Rs. 46,28,856 as service charges, foreign allowance and expenses on staff as stipulated in the three agreements. These agreements had been approved by the board for the purposes of Section 80-O of the Income-tax Act, 1961 ('the Act'). The assessee-company had received Rs. 14,66,103 in convertible foreign exchange and the balance had been received in Indian rupees.
2. Before the ITO, the assessee claimed that it should get the deduction of Rs. 14,66,103 under Section 80-O. The ITO was, however, of the view that under Section 80-O read with Section 80AB of the Act the assessee was entitled for a deduction of only that amount which would be arrived at after deducting the proportionate expenses from the amount of Rs. 14,66,103 received in convertible foreign exchange. The ITO was of the view that net income alone was eligible for deduction and with effect from the assessment year 1981-82 only the income which is received in convertible foreign exchange minus expenses incurred in earning such income could be deducted under Section 80-O. The ITO referred to the stipulations in the letters of approval granted by the Board which were as under:
2. The income allowable as a deduction for the assessment year 1981-82 and onwards would be the income computed after accounting for expenses incurred in earning such income, i.e., net income.
3. The actual deduction to be allowed will, however, be such portion of the income which has been 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 in accordance with law for the time being in force for regulating payment and dealings in foreign exchange.
4. The grant of deduction from the total income will be subject to your fulfilling the other conditions laid down in the Act in this behalf. The amount eligible for deduction will be determined by the Income-tax Officer at the time of assessment.
3. The ITO found that in this work for which a total receipt of Rs. 46,28,855 were received by the assessee he had incurred expenses to the extent of Rs. 22,29,123 and, thus, the overall net income was only Rs. 23,99,732. The ITO was of the view that as this net income had been arrived at after deducting the expenditure, the net income relatable to the receipt by way of convertible foreign exchange could be determined by deducting proportionate expenses from such receipt. He arrived at this proportionate figure at Rs. 7,06,033. Deducting this amount from the receipt of Rs. 14,66,102 the ITO arrived at the figure of Rs. 7,60,069 which he held as deductible under Section 80-O.
4. In appeal before the Commissioner (Appeals), the assessee challenged the working by the ITO. The contention of the assessee before the Commissioner (Appeals) was that the assessee was entitled to deduction of the entire amount which was received in convertible free foreign exchange, i.e., an amount of Rs. 14,66,102. This was, however, further limited to the limits laid down under Section 80AB. According to the assessee, there was no legal justification for reducing the deduction available under Section 80-O proportionately on the basis of the total expenditure incurred by the assessee. The contention of the department before the Commissioner (Appeals) was that the amount received in free convertible foreign exchange was not the net income but is the amount received in foreign exchange, and the amount deductible should be arrived at after deducting expenditure incurred for earning this income.
5. The Commissioner (Appeals) agreed with the view taken by the ITO, as according to him, the convertible foreign exchange was not the net income but only a gross receipt of a particular type. The Commissioner (Appeals) held as under :
The contention of the appellant being that the remaining expenditure debited to the penal account was incurred solely for earning income in India irrespective of the fact that the expenditure may indirectly pertain to earning of the receipt from the 3rd country. The appellant has shown an amount of Rs. 42,95,948 as sales in the profit and loss account in India. The contention that the remaining expenditure debited in the penal account was incurred in connection with the sales effected in India and income earned in India was obviously accepted by the department. The only dispute between the department and the appellant being the apportionment of admitted contract expenditure incurred for earning the income in respect of contract undertaken in foreign country. If the contention of the appellant is accepted it will amount to the fact that the entire expenditure amounted to Rs. 22,29,123 as per statement filed, incurred for earning the gross receipts from the foreign country will pertain to the earning of only the rupee portion received by the appellant which is included in the gross receipts. Obviously, such an interpretation is not acceptable. The appellant has stated earlier that it was entitled to receive payments in Indian currency as well as in foreign currency. This is part of one contract. For earning both components that is amount receivable in Indian rupee and amount receivable in the foreign currency, the appellant incurred the expenditure amounting to Rs. 22,29,123. The expenditure incurred for earning both the components, have, therefore, to be apportioned in the same proportion, in order to arrive at net income received in convertible foreign exchange entitled to deduction under Section 80-O. The language used in Section 80-O refers to such income which is received in convertible foreign exchange in India and not the gross amount without deducting the expenditure for earning such income. Keeping in view the above facts and the detailed discussion in the assessment order by the ITO, I hold that the ITO was justified in arriving at the amount deductible under Section 80-O at Rs. 7,60,069 against the claim made at Rs. 14,66,103.
6. The learned counsel for the assessee submitted before us that the interpretation placed by the learned ITO and upheld by the learned Commissioner (Appeals) was not. correct. He pointed out that under the provisions of Section 80-O the 100 per cent of income earned under the contracts approved in this regard was deductible. He, however, submitted that the further condition in Section 80-O was the such income is received in convertible foreign exchange in India. It was contended by the learned counsel that it is true that under Section 80-O only the net income which is included in the gross total income could be deducted but only to the extent such income had been received in convertible foreign exchange in India. In the present case the net income was Rs. 23,99,732. and as the receipt in convertible foreign exchange in India was less than this amount of net income, the whole of such receipt in convertible foreign exchange was deductible. He conceded that the limits laid down under Section 80AB are applicable and the assessee cannot get a deduction of an amount which is more than the gross total income itself. The learned counsel submitted that the ITO and the learned Commissioner (Appeals) have read with Section 80-O some provision which is not there, and the interpretation placed by them does not follow from the language of the provision. He pointed out that what the ITO has done was to add a particular condition that the convertible foreign exchange could be reduced by the proportionate amount of expenditure before deducting the amount under Section 80-O. This, according to him, was not warranted.
7. The learned departmental representative has relied on the order of the learned Commissioner (Appeals) as well as the order of the ITO and submitted that the assessee cannot get a deduction of the gross amount of convertible foreign exchange but only the net income which was included in that gross amount received in convertible foreign exchange.
8. We have considered the facts of the case and we have also gone through the agreements and approvals given by the Board under Section 80-O. Section 80-O reads as under :
80-O. Where the gross total income of an assessee, being an Indian company, includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign state or a foreign enterprise in consideration for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee, or in consideration of technical services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, under an agreement approved by the Board in this behalf, 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 the whole of the income so received in, or brought into, India in computing the total income of the assessee :
Section 80AB reads as under :
80AB. Where any deduction is required to be made or allowed under any section (except Section 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.
It may be noted that the provisions of Section 80-O have undergone some modifications over a number of years. With effect from 1-4-1972 the additional requirement of limiting the deduction to the receipts in convertible foreign exchange in India was placed and before that this condition was not there and the whole of income was deductible. After this modification the net income was fully deductible but only to the extent that such income is received in convertible foreign exchange in India. But for this condition regarding receipt in convertible foreign exchange the amount deductible in the present case could have been Rs. 23,99,732. However, after this restriction the amount deductible is Rs. 14,66,102 which was received in convertible foreign currency. There is no question of allocating the expenditure to the various currencies in which those expenses have been received. The interpretation placed by the ITO or the Commissioner (Appeals) does not follow from the language of the provision itself. As the amount received in convertible foreign exchange was lesser than the net income, this amount received in convertible foreign exchange itself was a part of such income and, thus, it was deductible under Section 80-O. The reasoning given by the learned Commissioner (Appeals) that the whole of the expenditure could not be related to Rupee payment is not convincing. What the law provides is the total deduction of the net income earned in rendering the foreign service, etc., and in case the receipt in convertible foreign exchange is less than that amount that receipt in foreign exchange has to be deducted. This, however, could be subject to the limits placed in Section 80AB. In other words, the deduction under Section 80-O will be further limited to the gross total income arrived at without allowing the deduction under Section 80-O. The learned counsel for the assessee has submitted that even if the two interpretations were possible, the interpretation in favour of the subject should be preferred. We are of the view that the claim of the assessee is acceptable on the basis of the language of the provision itself and it was not necessary to invoke the principles of benefit of interpretation to the subject. The ITO has made much of the stipulation in the letter of approval granted by the Board but in our view, that does not warrant the interpretation placed by the ITO. The letter of approval only states that the actual deduction to be allowed will be such portion of the income which has been received in convertible foreign exchange in India and it only means that if the convertible foreign exchange received in India is less than the net income that amount itself would be allowed as a deduction but if that amount was more than the net income the deduction has been limited to the net income itself. The other requirement for deducting the net income is in terms of Section 80AB and that restriction is only with reference to the net income which cannot exceed the gross total income.
9. We, therefore, set aside the orders of the lower authorities on this issue and direct the ITO to work out the deduction under Section 80-O by limiting the deduction to Rs. 14,66,102 but in this case as the gross total income is lower, the deduction under Section 80-O/80AB should be adopted as the figure of the gross total income itself.
10. The next ground is against; the disallowance of Rs. 15,987 out of sales promotion expenses claimed by the assessee. This ground had not been seriously pressed by the learned counsel though he has given the details of these expenses in the paper book. We find that there is no scope for interference in the position.
11. In the result, the appeal is allowed in part.