Delhi High Court
Arvind Construction Co. (P.) Ltd. vs Inspecting Assistant Commissioner. on 9 March, 1990
Equivalent citations: [1990]33ITD581(DELHI)
ORDER
Per J. P. Bengra, J. M. - There is an appeal of the assessed as well as of the Department against an order of the CIT (Appeals) pertaining to assessment year 1982-83 and appeal by the Department against an order of the CIT (Appeals) whereby he has allowed deduction of 25% u/s 80-O in spite of the fact that assessed was running under a loss (the order of CIT (Appeals) has arised out of the order of the ITO giving effect to the order of the CIT (Appeals) u/s 250 of the Income-tax Act). There is another appeal of the Department against an order of the CIT (Appeals) pertaining to assessment year 1983-84. Since the issues involved in all these appeals are common, therefore, for the sake of convenience, these appeals are being disposed of by a single order.
2. The grievance of the assessed in its appeal for assessment year 1982-83 is that the CIT (Appeals) wrongly restricted the deduction u/s 80-O of the Income-tax Act, 1961, to 25% of income from contract relating to construction of 270 dwelling units for Samawa Cement Factory against 100% claim of the assessed. One of the grounds in Revenues appeal is that CIT (Appeals) has erred in holding that Sec. 80-O of the Income-tax Act applied to the construction work agreement in respect of which approval of the Board has been granted. In appeal of Revenue for assessment year 1982-83 which has arisen out of the giving effect by the ITO, the grievance of the Revenue is that the CIT (Appeals) has erred in allowing deduction of 25% sec. 80-O without considering the fact that assessed was running under loss and according to sec. 80-A (2) the loss was not allowable. We will deal with the appeals of the assessed and the department with regard to allow ability of deduction u/s 80-O and then we will discuss the latter appeal regarding application of sec. 80-A (2).
3. The facts relating to the first ground are that assessed company entered into an agreement with the Director General, Samawa Cement Public Company, Ministry of Industry, State Organisation of Indl. Design & Construction, Republic of Iron for construction of 270 dwelling units for Samawa Cement Factory on 29-12-1980. The CBDT vide its order F. No. 473/41/82-FTD dated 7-10-1983 granted approval to the said agreement. During the year under consideration the assessed company earned net profit of Rs. 1,28,32,888 from this project and after deduction of proportionate expenses of Rs. 8,38,314 claimed deduction u/s 80-O of Rs. 1,19,94,574. The company had remitted a sum of Rs. 2,35,68,670 to India during the period 9-2-1981 to 25-6-1985. The Income-tax Officer examined the scope of Sec. 80-O and concluded that the requirements of Sec. 80-O were not fulfillled by the appellant company inasmuch as it had not rendered any technical services or provided any technical know-how outside India. He was of the view that this contract was in respect of construction of houses which did not involve use of technical know-how or technical skill. If at all any technical services were rendered by the employee of the assessed company, they were rendered to the appellant company itself and not w. e. f. 1-4-1983 under which 25% of income earned from construction contract is exempted. According to him, claim u/s 80-O is composite one and no part thereof can be considered in isolation for the grant of the deduction, all these conditions are required to be satisfied simultaneously and cumulatively for the entitlement of deduction. The approval by the CBDT is one of the conditions but it is necessary that Minister introducing Finance Act, 1966, it was mentioned that the object of this provision is to encourage Indian Companies to export technical know-how and skill particularly to developing countries in order to expand their business activities and to augment foreign exchange resources. He has discussed various provisions of Section 85-C, 80-O, 80-MM and 80-HHB with reference to the clause of agreement and then came to the conclusion that the assessed is not entitled to deduction u/s 80-O in spite of the fact that the approval has been granted by the Central Board of Direct Taxes.
4. On appeal, the CIT (Appeals) after referring to the various clauses of agreement in his order was of the view that the Board has given approval u/s 80-O to a composite contract involving various types of services. The contract necessarily includes non-technical aspects like supply of labour, supply of material, supervision of work etc. On the other hand the contract does not involve export of technical know-how and technical services as per detailed note submitted by the appellant and reproduced by him in his order. Therefore, he was of the view that a reasonable proportion of the total income i. e. 25% of net income should be allowed as deduction u/s 80-O which relates to the construction work done by the assessed abroad.
5. The assessed is aggrieved and came in appeal submitting that the CIT (Appeals) should not have restricted the deduction u/s 80-O to 25%, rather 100% deduction should have been allowed. Therefore, it pressed the claim for 100% deduction. Against this, the Revenue is in appeal urging that even 25% deduction u/s 80-O was not permissible.
6. The learned counsel for the assessed Sh. S. E. Dastur referred to the agreement clause and various services rendered by the assessed company with reference to the agreement given at pages 8 to 10. It is also pointed out that this agreement was sent to the CBDT for approval and after going into various clauses and the services to be rendered to Iraq Government, the Board of Direct Taxes had granted the approval for exemption u/s 80-O. In this connection he invited our attention to the approval of the Board at page 32 of the paper book, where the Board had granted approval for exemption u/s 80-O up to asst. year 1982-83. It is pointed out that in giving approval to assessed the Board had not restricted the exemption to any proportion. Board was categorical that this exemption is available up to the relevant assessment year. Inviting our attention to the provisions of sec. 80-O it was submitted that according to the provisions of sec. 80-O what is required is that the assessed should render technical services or agree to render technical services outside India to such Government or enterprise by an assessed under an agreement approved by the Board in this behalf and that since approval had been granted by the Board after going into various clauses of the agreement, the ITO had no jurisdiction to sit over the decision of the Board. It is pointed out that it will be contemptuous if the ITO is given power to review the approval granted by the CBDT. In this connection reliance was placed on the decision of Bombay High Court in the case of CIT v. Parrys (Eastern) (P.) Ltd. [1989] 176 ITR 449/42 Taxman 62 wherein it was laid down that the Central Government found that Stankoimport was a foreign company, that the said letter was an agreement, and that it required that the assessed should furnish to Stankoimport what were technical services. These essential requirements are common to section 85-C and section 80-O. The Central Government having found in respect of the assesseds application under section 85-C that the three essential and common requirements were met, the Additional Commissioner ought not to have proceeded to hold to the contrary. The Central Government was better equipped than be to decide whether or not Stankoimport was a foreign company and whether the services that were required to be furnished by the assessed to Stankoimport were technical services. Hence, the commission of Rs. 4,59,000 was wholly exempt from tax under section 80-O. Reliance was also placed in the case of Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR 1 (SC), wherein it was laid down that :
"It would be conductive to judicial discipline and the maintaining of certainty and uniformity in administering the law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the provident fund satisfies all the conditions under r. 4 of Part A of the Fourth Schedule to the Act, and not sit in judgment over it."
It was, therefore, submitted that ITO has no jurisdiction to sit over the judgment of the Board of Direct Taxes and review the case of deduction u/s 80-O by interpreting various clauses of the agreement in its own manner. It was also pointed out that the Department has not disputed that the assessed has net income and therefore 100% deduction should be allowed.
7. As against this the learned D. R. submitted that the approval of the Board is merely one of the conditions to be satisfied and plain reading of the Act shows that all the conditions laid down in the section had to be cumulatively satisfied. Satisfaction of merely one condition of the section cannot mean the satisfaction of all the conditions. This is clear from the specific condition mentioned in the letter of approval of the Board, according to which all the other conditions mentioned under section 80-O must also be satisfied. Thus the approval granted by the Board was conditional and qualified. According to him, there are other conditions mentioned in Section 80-O which are referred to in the approval letter of the Board; though not specifically mentioned which have necessarily to be satisfied before granting deduction u/s 80-O. Thus the argument of the learned D. R. was that the ITO has not only jurisdiction to look into whether the conditions mentioned for the grant of relief u/s 80-O are satisfied or not, but has a duty to do so imposed by the Board. In this connection our attention was invited to the provisions of Section 80-O and the various conditions laid down in it. It is then pointed out that there was no separate contract for rendering of technical services by assessed company to the foreign Government enterprises. The employees of the assessed company did not render any technical services to the foreign Government or enterprises. The services rendered in the execution of civil construction contract were not technical but may be semi technical and certainly unskilled services. The payments were thus not in the nature of payments related to the technical services. It is further pointed out that deduction u/s 80-O could not be granted to the assessed because Section 80-HHB were introduced w. e. f. assessment year 1983-84. Reliance was placed on the decision of Tribunal in the case of ITO v. Continental Construction Co. Ltd. [1986] 15 ITD 753 (Delhi), where the Tribunal has held that relief u/s 80-O cannot be considered in view of provisions of Section 80-HHB in spite of the approval of the Board. It is also pointed by the learned D. R. that the approval of the CBDT is not for all the time to come. In subsequent year he can go into a question of availability of deduction u/s 80-O. Therefore, it is clear that the Board was not necessarily satisfied with the conditions if the agreement before granting of approval. It had granted approval subject to reviewing the applicability of exemption u/s 80-O with reference to various clauses of agreement which was subject matter of review by the ITO. In reply the learned counsel for the assessed Shri Dastur submitted that the case of Continental Construction Co. Ltd., referred to above, related to the applicability if sec. 80-O after introduction of section 80-HHB. Therefore, this decision is not applicable to the facts of the present case.
8. We have considered the rival submissions. In order to decide the controversy between the parties, it will be fruitful to refer to various aspects involved in the construction work as revealed by the agreement :
"(1) Designs :
In most of the cases, the conceptual designs have to be prepared by the construction companies in conformity with the end use, traditions, rigid British standards and construction methods in use in that particular country. Also, local soil conditions, extra climatic conditions which are peculiar to that part of the world only, have to be taken into account while carrying out the designing.
A very important feature is the system of construction which is being adopted. Various types of prefabrication systems are in use in Western countries in place of the conventional construction methods, which technology Indian contractors at times have to acquire and then adopt to the conditions prevailing in the Middle East. Besides design, detailed engineering drawings, architectural drawing, water the proper execution of the works, to ensure suitability and safety of the structures. Based on the engineering drawings, detailed estimation of the various items and quantities of work involved have to be calculated and worked out.
Thorough and total planning programming for the execution of stage-wise, by the use of PERT/BAR CHARTS, have to be plotted for the timely completion of the work.
(2) Materials Investigation :
Proper selection and evaluation of basic construction materials is vital to achieve the objectives. This requires the Construction Companies to conduct investigation, analysis and tests of various types of material, e. g. stone aggregate, sand and solid available in desert, marshy and rock areas. These materials have to be fully tested in laboratories equipped with sophisticated instruments by trained/skilled personnel under the guidance and directions of competent engineers. Proper selection of materials is necessary from the point of view for achieving the high standard of quality demanded by the authorities. This work involves setting up of properly equipped laboratory for various purposes, such as :
(i) testing of the soiled to determine & ensure its load-bearing capacity vis-a-vis the structural design;
(ii) testing of materials to be incorporated in the work/structure;
(iii) preparation of mix designs for the concrete/other materials to be used in the various items of work;
(iv) testing the strength of concrete used in the works/structures."
(3) Technical Services :
Comprehensive specifications and standards of materials incorporated in the works are to be ensured. The technical knowledge, experience and skills of the Indian Construction Companies combined with the latest technologies and equipment in use in the international arena, provide most up-to-date construction skills, systems and designs, in line with the knowledge and skill of the other international construction companies, as most of the contracts are awarded on the basis of Global tenders.
(4) Selection & use of proper equipment :
Vast strides have since been made in techniques and methods in the construction industry by going in for heavy organisation in all spheres, involving use of right type of highly sophisticated equipments and machineries, which are procured from various countries in the works, for the proper operation and maintenance whereof, highly skilled technician and engineers are employed.
The extend of technical services rendered and scientific experience and skill provided can be gauged by taking the example of one construction activity, i. e. Concreting :
- To survey and locate sources of stone, sand and water, Establish suitability by conducting rigorous laboratory tests to check Chemical and physical properties of stone sand, organic impurities and salt contents of water.
- To extract boulders by drilling and blasting and excavate sand. To install crushing arrangements for converting rocks into aggregates of desired sizes.
- Handling from quarry/crusher heads to the bunkers of the concrete batching Plants.
- To prepare Design Mix of concrete in laboratory to establish the proportion of aggregate, sand, cement and waster content top be used in the concreting.
- To manufacture concrete in the Batching Plant in the pre-determined proportions. The Batching Plant being highly sophisticated, ensures that the proportions are within close tolerances.
- Carrying of concrete mix from Batching Plant to the work site by truck - mounted Transit Mixers, ensuring the homogeneity of concrete.
- To transfer concrete from Transit Mixer into concrete pumps, and to pump concrete through pipes under pressure, into the from works which is designed and prepared according to the nature of the structure.
- To apply curing compound over the concrete to ensure fuller strength.
Another example is that of Masonry with the use of Concrete Hollow Blocks :
1. The Design of Mix for hollow block is a very important feature. The quantities of cement, stone chips, sand and water have to be very carefully proportioned from the joint of view of strength of blocks and the economy in production. The extensive tests are carried out in the laboratory and also in the field, by concrete technologies, which is a time consuming process.
2. Manufacture of hollow blocks is done by sophisticated plants which are integrated units, consisting of concrete batching plant, Block making machine and steam curing chambers. The Blocks are manufactured by a combined process of vibration of concrete and its compressed under high pressures. The manufactured blocks have then to be cured in special chambers, by the use of steam, under controlled temperatures and pressures - in order to achieve full strength. This is done under the supervision of highly qualified Engineers and Technicians.
3. The handling of Block in the Plant and at the work site is done by Fork - lifts equipped with special handling attachments.
4. Hollow block need to be laid very carefully by highly skilled masons, as the area available for placing one Block over the other is restricted on account of the hollow spaces inside the blocks. The space inside the Block is designed to entrap air inside the walls which provide very good thermal insulation properties to the wall which is very essential in the extreme climatic conditions in the Middle East."
9. From the perusal of the above, there is no gain-saying of the fact that rendering of technical services to the Republic of Iraq for construction of dwelling units for Samawa Cement Factory under agreement dated 29-12-1980 was involved. Therefore, it is not correct to say that the assessed company was not rendering any technical services. Besides, the conditions for the availability of deduction u/s 80-O are mentioned in the provision itself. Before granting approval u/s 80-O, the Board is required to be satisfied that the assessed fulfillls all the conditions laid down for the grant of exemption u/s 80-O, when the Board granted approval it mean that it was satisfied that all the conditions precedent to the grant of approval did exist. It is no argument to say that the board satisfied itself partly, and left the other part to be satisfied by the Income-tax Officer. This argument is only to be stated to be rejected, as the Board, the higher authority in the hierarchy of the authorities under the Income-tax Act, abdicated its function to the lowest authority. The circular letter No. 253 (F. No. 473/15/78-FTD) dated 30-4-1979 is relevant in this context and it says :
"Attention invited to the Boards circular No. 187 (F. No. 473/15/73-FTD) dated 23-12-1975 (Clarification 2) on the above subject laying down the guidelines for the grant of approval under Section 80-O. The Board has had occasion to re-examine the aforesaid guidelines and it has been decided to modify the guidelines to the extent indicated below :
1. Para 3(iii) of Circular No. 187, dated 23-12-1975 provided that the agreement should have been genuinely entered into on and after the date when the tax concession was announced by the introduction of there relevant Bill in the Lok Sabha. It has now been decided that approvals under section 80-O would not be denied on this ground. In other words, para 3(iii) of the circular, dated 23-12-1975 may be treated as deleted.
2. In para 3(ix) of the said circular, it was mentioned that consideration for use of trade-mark would be outside the scope of section 80-O. It has now been decided that payments made for the use of trade-marks are of the nature of royalty, and, therefore, fall within the scope of section 80-O.
3. It was also stated in para 3(ix) of the said circular that in the case of a composite agreement which specified a consolidated amount as consideration for purposes which included matters outside the scope of section 80-O, the Board may not approve such an agreement for the purposes of section 80-O, if it was not possible to properly ascertain and determine the amount of the consideration relatable to the provision of the know-how or technical services etc. qualifying for section 80-O. Thus, the benefit of section 80-O could be denied to the entire amount of royalty, commission, fees, etc., receivable under such an agreement. It has since been decided that in such case approval would be granted by the Board subject to a suitable disallowance for the non-qualifying services, after taking into consideration the totality of the agreement, so that the balance of the royalty/fees, etc., which is for the services covered by section 80-O can be exempted."
The direction No. 3 or the instructions as are may choose to call it is very clear and specific about the intention of the Government namely that in the case of composite agreements, which contain both technical and non-technical services, the Board is not to deny approval, but grant approval subject to disallowance of a suitable percentage for non-technical services. Thus the object to grant exemption rather than to deny. Thus, when the Board granted approval to the agreement, it means that the Board was fully satisfied that the services rendered by the assessed were purely technical services within the meaning of sec. 80-O, and that no part of the kind of examination was left to the ITO. The approval granted by the Board was thus conclusive in all respect.
10. The Board has thus given clear direction while granting approval that is was satisfied that the assessed was entitled for deduction u/s 80-O with reference to various clauses of the agreement and services rendered by him. It is the subjective satisfaction of the Board of Direct Taxes, i. e. guidance, principles for granting exemption u/s 80-O. If the Board has granted the approval after going into various clause of the agreement, it will not be open to the ITO to review or sit over the decision of a Board of Direct Taxes. If he finds anything radically wrong in the approval, all he can perhaps do is to draw the attention of the Board to such wrongs, but not to deny exemption on that score. Our view is supported by the decision of Bombay High Court in the case of Parrys (Eastern) (P.) Ltd. (supra), wherein it was categorically held that once the Central Govt. has granted approval after going into the various requirements of secs. 85C and 80-O, it was not open for the ITO to go into the question of availability of exemption u/s 80-O, which means that the he cannot sit over the decision of Board or the Government as the case may be.
11. Similar view was expressed by the Hon'ble Supreme Court in the case of Gestetner Duplicators (P.) Ltd. (supra), wherein it was held that after the Government has granted approval to the provident fund after going into all the conditions laid down therein, the ITO has no jurisdiction to sit over the decision of the Government. If the ITO is given power to review the order of the board of Revenue, it will certainly lead to anarchy. Besides this, were feel that the action of the ITO in reviewing the approval granted by the CBDT smacks contempt of authority of the Board of Revenue. We are of the opinion that the assessed was entitled to deduction u/s 80-O as per the approval of the Board of Direct Taxes and it cannot be argued that the assessed was not rendering technical services. Therefore, the assessed company was entitled to deduction u/s 80-O at 100% of it. The CIT (Appeals) was also in way sat over the approval of the Board and therefore wrong in restricting the deduction to 25% by relying on the unsubstantiated fact that the assessed was also rendering services like supply of labour, supply of material, supervision of work, etc. by overlooking the fact it was also formed part of rendering of technical services. We, therefore, set aside the order of the CIT (Appeals) on this issue
12. The next point that arises as to whether the assessed is entitled to deduction u/s 80-O in spite of the fact that he had returned loss from other units of the assessed company notwithstanding the provisions of sec. 80-A (2) of the Income-tax Act. This is the grievance of the Revenue in its Appeal No. 3160/Del/86. this ground has arisen out of the order of the ITO giving effect to the order of the Commissioner of Income-tax (Appeals) u/s 250 of Income-tax Act. The submission of the Department was that if there is no income, the deduction u/s 80-O is not permissible and because of sec. 80-A (2) even carry forward is allowable. In this connection reliance was placed on the decision of Bombay High Court in the case of CIT v. Mercantile Bank Ltd. [1988] 169 ITR 44; and Madras High Court decision in the case of CIT v. Rambal (P.) Ltd. [1988] 169 ITR 50. Therefore, it was pointed out that even if the assessed is entitled from deduction u/s 80-O in this particular year he is not entitled to deduction since he has returned loss from other units. The question of allow ability, therefore, becomes academic.
12.1 The learned counsel for the assessed referred to Annexure II of the paper-book at page 9, attached in its appeals, which reads as under.
"Statement showing computation of appeal effect of order u/s 250 of Income-tax Act :
Rs.
Income assessed as per assessment order dated 14-3-1986 8,39,850 (Less) Income from Samawa Project for construction of 270 houses entitled to deduction u/s 80-O for separate consideration 1,19,94,574 Balance (-) 1,11,54,724 Addl : Relief in appeal :-
A. U/s 35-B (para 6.1 of the appeal order) Rs.
Gross Amount of Managing Directors remuneration 48,000 Audit fee 35,000 Total 83,000 Weighted deduction @ 1/3rd allowable @ 75% of total 62,250 i.e. 20,750 Allowable in assessment on 41,500 i.e. 13,833 6,917 B. U/s 32-A Investment Allowance (para 7.3 of the appeal order) 25% of Rs. 63,12,122 15,78,030 C. U/s 40A (8) (para 8.1. of the appeal order) Excess disallowed 2,630 D. U/s 37(2A) (para 9.1. of the appeals order) 5,000 E. U/s 80-VVA (para 10.2 of the appeal order) 24,500 F. Approach Road (para 11.3 of the appeal order) 1,05,150 17,22,227 Sub-Total (-) 1,28,76,951"
It was submitted that the assessed is entitled to the deduction u/s 80-O without taking any loss in any other activity. Referring to the annexure it is submitted that what will be carried forward would be investment allowance of Rs. 56,95,000. This shall be allowed to be carried forward. It is also submitted that the expression where the gross total income includes any profit & gains attributable to any priority industry is descriptive of the type of income of profits which will be entitled to relief and the expressions such profit must relate to the quality of profit, i. e. to say profit of the priority industry, it would be improper to interpret the section in such a manner as would run contrary to the legislative intent. The section enjoins that the deduction should be allowed on the profit of priority industry without deducting there from any loss arising in another business. It is also pointed out that the views taken by the Calcutta High court in the case of CIT v. Belliss & Morcom (I) Ltd. [1982] 136 ITR 481, was approved by the decision of Supreme Court in the case of CIT v. Canara Workshops (P.) Ltd. [1986] 161 ITR 320/27 Taxman 262.
13. In reply the learned D. R. submitted that act contains no separate deductions into all units otherwise it will lead to confusion and calculation of various gross incomes and various deductions. Our attention was invited to the provisions of sec. 80-A an submitted that it is not possible.
14. We have considered the rival submissions. In this case the assessed has suffered losses in other units established in India, but he has earned an income of Rs. 1,19,94,574 from Samawa Project. The assessed wants deduction u/s 80-O in spite of loss another units. The Supreme Court in the case of Canara Workshops (P.) Ltd. (supra) in which it approved the Calcutta High Court decision in the case of Belliss & Morcom (I) Ltd. (supra), held as under :
"In the application of section 80E of the Income-tax Act, 1961, the profits and gains earned by one priority industry (mentioned in that section) cannot be reduced by the loss suffered by the any other industry or industries owned by the assessed. Each industry must be considered on its own working only, when adjudging its title to the deduction u/s 80E. It cannot be allowed to suffer because it keeps company with some other industry in the hands of the assessed. It makes no difference that the other industry is also a priority industry.
The object in enacting section 80E is properly served only by confining the application of the provisions of that section to the profits and gains of a single industry. The deduction of 8 per cent is intended to be an index of recognition that a priority industry has been set up and is functioning efficiently. It was never intended that the merit earned by such industry should be lost or diminished because of a loss suffered by some other industry. A distinction must be drawn between a case when the loss or unabsorbed depreciation pertains to the same industry whose profits and gains are the subject of relief under section 80E and a case where the loss or unaccounted depreciation relates to industries other than the one whose profits and gains constitute the subject of relief.
Accordingly, in computing the profits for the purpose of deduction under section 80E of the Income-tax Act, 1961, the loss incurred by the assessed in the manufacture of alloy steel (a priority industry) could not be set off against the profits of the manufacture of automobile ancillaries (another priority industry). The assessed was entitled to a deduction at 8% on the entire profits of the automobile part industry included in the totals income without deduction there from the losses in the alloy steel manufacture."
According to this decision if there are two priority industries, the profits of one priority industry cannot be set off against the loss of another priority industry and the first priority industry is entitled to the deduction at 8% of its profits allowable u/s 80-E. The submission of the learned counsel for the assessed was that section 80E should be read by substituting section 80-O. First it is difficult to read the decision of the Supreme Court substituting section 80-O for section 80-E, as the object and purpose of both are dissimilar. Even if we read like that, the ratio is that where there are two priority industries and in one there is a profit and in another there is a loss, then the profit of one unit cannot be set off against the loss of another unit for giving exemption u/s 80-E. The facts are different in the present case. Here the assessed had only one priority industry established in Iraq. The other units are not the priority industries in which he has suffered losses. Therefore, the facts of the present case are distinguishable from the facts of the case referred in the decision of Calcutta High Court & Supreme Court. Therefore the ratio of those cases cannot be applicable. Secs. 80-A (1) & (2) lay down that in computing the total income of an assessed, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to 80U. Then there is sub-sec. (2) where it is mentioned that the aggregate amount of the deductions under this chapter shall not, in any case, exceed the gross total income of the assessed. The scope of these sections was considered by the Hon'ble Bombay High Court in the case of Mercantile Bank Ltd. (supra) wherein the decision of Bombay High Court in case of CIT v. Indokem (P.) Ltd. [1981] 132 ITR 125 was followed and it was held that the tax authorities in computing the total income of an assessed :
"On the facts, that the Tribunal was not justified in allowing deductions under sections 80L and 80-M before setting off the business losses for the years in question against the gross total income of the assessed."
Similar view was expressed by the Hon'ble Madras High Court in the case of Rambal (P.) Ltd. (supra). Therefore it is amply clear that the gross total income is the income computed under the provisions of the Act, but before making any deduction under Chapter VI-A, if the gross total income is Nil, then no deduction u/s 80-O can be allowed, Here we would like to mention that the decision of the Tribunal in I. T. A. No. 629/Del/83 dated 30th January, 1984 has no application because it has not discussed in detail the implication of section 80-O or 80-B (5). On merit so it cannot be of any use to the assessed in spite of the fact that a reference has been refused by the Tribunal against that decision.
15. To sum up we hold that as per the approval granted by the CBDT, the assessed is entitled to deduction u/s 80-O of the Income-tax Act, 1961 in full 100% provided the other conditions laid down in his behalf in section 80A (2) and other related section are fully satisfied. As we have held above, as there is loss, in the final computation of total income, the allowance of the claim of the assessed under section 80-O becomes academic.
16. In departmental appeal, there is a ground that the CIT (Appeals) has erred in allowing investment allowance on dumpers. The assessed has claimed that the dumpers are used with the earth moving machinery and, therefore, it is not a transport vehicle rather it is a machinery. So the investment allowance was claimed The ITO was of the view that the dumpers are mere road transport vehicles and no investment allowance is allowable u/s 32A of the I. T. Act.
16.1 On appeal, the learned CIT (Appeals) placing his reliance on the decisions of Calcutta High Court in the case of Orissa Minerals Development Co. Ltd. v. CIT [1979] 117 ITR 434 and discussing various headings on machinery and plant was of the view that earth moving machinery employed in heavy construction work includes the dumpers, and therefore investment allowance is allowable. The learned D. R. on the other hand submitted that it is only a road transport vehicle and therefore no investment allowance can be allowed on dumpers. It is submitted that best test is a functional test. The assessed company did not manufacture, produce or process anything. Construction company does not come within the definition of industrial company. Therefore, the assessed is not entitled to investment allowance. In this connection reliance was placed on the decision of Tribunal in the case of Continental Construction Ltd. (supra). Where this issue had cropped up specifically and the Tribunal after considering the decision of Special Bench of the Tribunal in cases of ITO v. Hydle Construction (P.) Ltd. [1983] 6 ITD 575 (Delhi) held that the assessed was not entitled to investment allowance because it does not comes within the definition industrial company. As against this the learned counsel for the assessed submitted that there is a difference between industrial company and industrial undertaking. It is the industrial undertaking, is entitled for investment allowance. Every industrial company need not to be the industrial undertaking which is eligible for benefit u/s 80-J, 80-HH on the manufacture or production of articles. Attention was invited to the paragraph 44 of the Special Bench of the Tribunal and submitted that for industrial undertaking the investment alliance, according to this decision is allowable. Reliance was also placed on the decision of Tribunal in the case of Naveen Mechanised Construction Co. (P.) Ltd. v. First ITO [1983] 3 ITD 456 (Bang.) and ITO v. Agarwal Stone Industries [1987] 21 ITD 622 (Jp.) and another decision in 26 TTJ 378. It is submitted that construction company may not be said to be an industrial company, but it is an industrial undertaking. Therefore it is entitled to deduction u/s 32-A.
17. We have considered the rival submissions. In the case of Hydle constructions (P.) Ltd. (supra), the support of which is taken in the decision of Continental Construction Ltd.s case (supra), the Tribunal in para 44 has held as under :
"In the assessment year 1978-79, however, the law was changed. For this year, it was provided that an assessed would be entitled to investment allowance if machinery was used in an industrial undertaking for the business of construction, manufacture or production of any articles or things not being an article or thing specified in the list in the Eleventh Schedule. In other words, except for such machinery which are producing articles or things in the Eleventh Schedule, other machinery which are used for the purposes of business of construction manufacture or production of any other thing would get investment allowance. Thus, it would appear that the business of the assessed insofar as it is a business of construction, manufacture or production of any articles or things would be eligible for investment allowance. The ITO will, therefore, bear in mind the above requirement of law while satisfying himself the assesseds eligibility by fulfillling the other conditions given in section 32A. Subject to the above clarification the direction of the Commissioner (Appeals) insofar as it relates to the assessment year 1978-79 will stand while his direction in the assessment year 1977-78 will be vacated."
It has distinguished between an industrial undertaking and industrial company and it is held that industrial undertaking is entitled to deduction. Therefore, the investment allowance cannot be refused only on this ground that assessed is not an industrial company. It is still entitled for deduction u/s 32A. However, we would like to mention here that department has not challenged this aspect in his grounds of appeal, but has raised during arguments. So far as allow ability of investment allowance on dumpers are concerned, in a similar case in Prescription Engineering Co. where the company was engaged in earth moving mud etc., the tippers which had a similar function like dumpers was allowed deduction. In the case of Agarwal Stone Industries (supra), the investment allowance was allowed on dumpers by the Tribunal itself. Therefore respectfully following the decision of the Tribunal we are of the opinion that assessed was entitled for investment allowance and the CIT (Appeals) has rightly allowed the same.
18. The last ground in Revenues appeal for asst. year 1982-83 is regarding allow ability of expenditure u/s 80-VV. The grievance of the Revenue in this appeal is that CIT (A) has erred in directing that entire amount of Rs. 24,500 be excluded from disallowance u/s 80-VV when the assessed company itself admitted that some of the payments related to Income-tax matter. The ITO has disallowed the claim of the assessed u/s 80-VV in para 13 of its order, where various types of payments were mentioned, but no reasons were recorded. The CIT (Appeals) has discussed this matter in para 10, referring the note of the assessed and deleted the addition. The learned D. R. submitted that if we go through the letter of the assessed, a reference is made of proceedings in Workmen Compensation Act u/s 80-RRA. It is submitted that the assessed had appeared before the Board for granting deduction u/s 80-RRA. Therefore this amount cannot be allowed. For other amount he has supported the order of the ITO.
18.1 The learned counsel for the assessed submitted that keeping in view the note given by the CIT (Appeals), the claim is allowable.
19. We have considered the rival submissions. We find that the ITO has not discussed this matter in detail. Similarly the CIT (Appeals) has not discussed in detail the matter. The Department has pointed out that if for appearance before the board for approval or sanction u/s 80-RRA seems to be perfectly correct, therefore, we feel that for the reasons the CIT (Appeals) has not given details in his order, in particular reference to the various expenditure therefore, we feel that the matter should go back to the file of the ITO to decide the matter afresh, after giving reasonable opportunity to the assessed of being heard.
20. An additional ground is taken by the Department for assessment year 1983-84 where the grievance of the Revenue is that the CIT (Appeals) in entertaining relief u/s 80-O of the Act has ignored Supreme Court decision in Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1. The learned counsel for the assessed very fairly admitted that in the approval of the CBDT it is clearly mentioned that the permission u/s 80-O is granted to the assessed up to 31-3-1982. Keeping in view the fact that provisions of sec. 80-HHB came into operation w. e. f. 1-4-1983. Therefore, he did not submit any more on this ground. In view of the fact that the approval was granted up to 31-3-1982 for exemption u/s 80-O and the provisions of sec. 80-HHB came into operation w. e. f. 1-4-1983 pertaining to the relevant assessment year under consideration, therefore, the Departments appeal has to be allowed and the decision of CIT (Appeals) has to be set aside. We, therefore, set aside the order of CIT (Appeals) for this year and restore back the order of the ITO.
21. In the result assesseds appeal for the asst. year 1982-83 is allowed and that of the Department stands allowed for statistical purposes only.