Bombay High Court
Stup Consultants Ltd. vs Central Board Of Direct Taxes And Others on 17 September, 1990
JUDGMENT T.D. Sugla, J.
1. The petitioner-company has challenged the legality and validity of the ten order dated July 8, 1986, September 18, 1986, October 14, 1986, and December 1, 1986 (being exhibits F, G, H, I, J, K, M, Q, R, S, and V), passed by the Central Board of Direct Taxes, New Delhi, refusing to approve thirteen agreements referred to in paragraphs 9, 13 and 20 of the petition under section 80-O of the Income-tax Act, 1961.
2. The petitioner's applications for approval of the agreements under section 80-O were rejected by the Board on the ground that the agreements included supply of drawing, designs, etc., for construction projects within the meaning of section 80HHB and, therefore, the agreements were out of the ambit of section 80-O in view of the provisions of section 80HHB(5). Admittedly, the Board did not, as such, examine whether the agreements in question satisfied the conditions laid down for approval in section 80-O of the Act.
3. This approach the Board, in my judgment, is not quite correct. Section 80-O clearly provides that where the gross total income of an assessee includes any income by way of royalty, commission, fees or any similar payment received from the government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent. Invention, design, secret, formula or process, of similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available and the assessee receives convertible foreign exchange outside India under an agreement approved by the Board in this behalf, the assessee will be entitled to a deduction equal to 50% of such income. Therefore. What the Boards is required to examine under section 80-O is -
(i) whether the gross total income of the assessee includes income of the nature referred to in the section;
(ii) Whether such an income is in lieu of or for the use outside India of any patent, invention etc., and
(iii) whether the amount to be received in lieu thereof is received in convertible foreign exchange in India and all this under an agreement.
It is, thus evident that, for the purpose of approving any agreement under section 80-O, the Board has to consider the aforesaid three aspects. This was, admittedly, not done in this case. The orders of the Board are, thus, vitiated and require to be set aside, the Board is, accordingly, directed to consider the application filed by the petitioner for approval of the thirteen agreements afresh according to law. Incidentally, this court took the same view in the case of the petitioner itself in Writ Petition No. 1330 of 1987 by the judgment delivered on March 23, 1990 Gammon India Ltd. v. CBDT [1990] 184 ITR 458.
4. A question was, however, raised as to whether it would be proper for the Board to ignore the overriding provision of section 80HHB(5) in terms of which income of the nature covered by section 80HHB(1)(a) or (b) does not qualify for deduction under any other provisions under the heading 'C' of Chapter VI-A including section 80-O. In this context, it is desirable to mention that section 80HHB was brought into the Income-tax Act by the finance Act, 1983, with effect from April 1, 1983. The Finance Bill, 1982 was introduced in the Lok Sabha on February 27, 1982. As per clause 18 of the Bill, section 80HHB had four sub-sections. Sub-section (5) was introduced subsequently. The relevant portion of the Notes on Clauses as regards insertion of section 80HHB reads as under :
(134 I.T.R. (Statutes section) 114-115) :
"Clause 18 seeks to insert a new section 80HHB in the Income-tax Act relating to deduction in respect of profits and gains from projects outside India. Sub-section (1) of new section 80HHB provides that an Indian company or a non-corporate assessee resident in India will be entitled to a deduction, in the computation of the taxable income, of 25 per cent. of the profits and gains derived from the business of the execution of a foreign by him or 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.
The provisions of this sub-section will apply only where the consideration for the execution of the project or such work is payable in foreign currency.."
5. Clause 48 of the Memo explaining the provisions in the Finance Bill, 1982, reads as under :
(134 I.T.R. (Statutes section) 140) :
"48. Deduction is respect of profits and gains from projects outside India, it is proposed to provide a tax relief on the profits derived by them from foreign contracts. For this purpose, it is proposed to insert a new section 80HHB in the Income-tax Act to provide that where an Indian company or a non-corporate taxpayer resident in India derives any profits and gains from the Business of execution of a project under 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 with a foreign enterprise, he will be entitled to a deduction, in the computation of his taxable income, of 25 per cent. of such profits and gains, subject to certain conditions. This concession will also be available where the assessee undertakes the execution of any work in connection with any foreign project undertaken by any other person."
6. From the Notes on Clauses and Memo explaining the provisions, it is evident that the provisions of section 80HHB were inserted with a view to encourage certain persons to undertake construction and engineering contracts outside India. Contractors falling under section 80HHB were perhaps, not entitled for any relief before the introduction of section 80HHB. The provision also in respect of their foreign earnings, when the Bill finally became an Act. However, sub-section (5) was added to it. There is no indication available as to why sub-section (5) which was not there in the original Bill was eventually inserted. With the addition of sub-section (5), it cannot be disputed that the object for which section 80HHB was originally destined is, to some extent, diluted as an assessee entitled to larger relief under section 80-O or some other section will be entitled to less relief available under section 80HHB. Provided a part or the whole of the income under the agreement also falls under section 80HHB.
7. However, the Legislature has given jurisdiction to administer and apply section 80HHB to the Assessing Officer, whereas the jurisdiction to approve the agreements under section 80-O vests in the Board, if the Board exercises jurisdiction under section 80-O by considering the provisions of sections of 80HHB. The applicant will have no right to challenge the order of the Board by way of appeal or reference. The applicant will be placed in an unenviable position. On the other hand, if the Board considers the application for approval from the point of view of the conditions laid down in section 80-O and leaves it to the Assessing Officer whether or not a part or whole of the income under the agreement also falls under section 80HHB so as to deprive him of the benefit under section 80-O, the assessee will not be prejudiced inasmuch as he, then, will have a right of appeal and reference, etc.
8. In the above view of the matter, in my judgment, it is only appropriate that the Board continues to consider the agreements in question purely from the point of view of section 80-O and grant or refuse approval on that basis. The Board may, if so advised, qualify the approval by making it clear that it will be open to the Assessing Officer to examine whether the whole or a part of the income under the agreement falls under section 80HHB(1), so as to disentitle such income from the benefit under section 80-O. Because, if the Board refuses to approve the agreement, no Assessing Officer will grant relief under section 80-O.
9. In the result, the rule is made absolute in terms of prayer (a). The Board will consider the applications afresh as per directions above. No order as to costs.