Madras High Court
Commissioner Of Income-Tax vs M.K. Raju Consultants (P.) Ltd. on 11 February, 1998
Equivalent citations: [1999]239ITR232(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT R. Jayasimha Babu, J.
1. At the instance of the Revenue, the following question has been referred for our decision by the Income-tax Appellate Tribunal, Madras Bench :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the deduction under Section 80O should be allowed on the total income before set-off of unabsorbed depreciation of the earlier years and that the assessee is entitled to carry forward the unabsorbed depreciation relating to the assessment years 1977 78 and 1978-79 ?"
2. The assessment year with which we are concerned is the year 1979-80. The assessee is a firm of consultants which had received income by way of fees for work done outside India. Its claim before the Assessing Officer was for the deduction of the entire income received by it by way of fees from abroad, from its gross total income, and, therefore, of the amount of loss and unabsorbed depreciation for 1977-78 and 1978-79 and carry forward of the unabsorbed depreciation. The Income-tax Officer negatived the claim so made. The Commissioner of Income-tax on appeal and the Income-tax Appellate Tribunal, on further appeal, took the view that 100 per cent. of the fee receipts from abroad received by the assessee should be deducted from its gross total income, before determining the amount of tax payable on the assessee's business income, and having found that the assessee would not have any income that could be subjected to tax in that year, directed the Assessing Officer to permit carry forward of all the losses and unabsorbed depreciation for the assessment years 1977-78 and 1978-79.
3. Learned counsel for the Revenue submitted that the Tribunal has clearly erred in law in holding that the expenses relating to the earning of the fees abroad are not to be deducted before computing the amount on which tax is to be paid, and in holding that 100 per cent. of the receipts from abroad are to be deducted from the gross total income. The assessee claimed the right to make the deduction under Section 80O of the Income-tax Act, 1961, which occurs in Part "C" of Chapter VI-A of the Act. That Section was introduced with effect from April 1, 1968, and it initially provided for deduction of 60 per cent. of such fees received from abroad from the gross total income of the assessee for the relevant year. By the amending Act of 1971 (Finance (No. 2) Act, 1971), the words "whole of the income" were substituted in place of 60 per cent. After the assessment year with which we are now concerned, had come to an end, the section was further amended in the year 1984 reducing the amount of the permissible deduction to 50 per cent, of such income.
4. Section 80B of the Act defines some of the terms used in Chapter VI-A of the Act. "Gross total income" is defined as meaning the total income computed in accordance with the provisions of the Act before making any deduction under Chapter-VI-A or under Section 80O of the Act. By the Finance (No. 2) Act of 1980, Sections 80AA and 80AB were introduced. Section 80AA deals with the manner of computation of deduction under Section 80M, while Section 80AB deals with deductions to be made with reference to the income included in the gross total income for the purposes of two other sections in Chapter VI-A. Section 80AB provides that the amount of the income of the nature specified in the various sections in Chapter VI-A excluding Section 80M, shall be made in accordance with the provisions of the Act, before making any deductions under Chapter VI-A and it is only the amount so computed that would be deemed to be the income of that nature derived or received by the assessee and which is included in his gross total income.
5. A Constitution Bench of the apex court in the case of Distributors (Baroda) Pvt. Ltd. v. Union of India [1985] 155 ITR 120, while considering a challenge to the constitutional validity of Section 80AA of the Act in so far as it was given retrospective operation from April 1, 1968, held that Section 80AA was merely declaratory of the law as it always was since April 1, 1968. Section 80AA as noticed earlier deals with the manner of computation of income under Section 80M of the Act. The assessee had contended, relying upon the decision of a smaller Bench of the apex court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT, [1979] 118 ITR 243, that the amount of the dividend to be deducted from the gross total income under Section 80M of the Act was the gross dividend received by the assessee without computing the same in accordance with the Act and deducting from the gross receipt by way of dividend the expenses incurred by the assessee for the purpose of earning the dividend. The Constitution Bench rejected the argument so advanced by the assessee and held that the amount to be deducted from the gross total income for the purpose of Chapter VI-A is the dividend income computed in accordance with the provisions of the Act, and not the gross amount received by way of dividends. The court expressly overruled the decision rendered by a smaller Bench in the case of Cloth Traders (P.) Ltd. .
6. In the case of H.H. Sir Rama Varma v. CIT [1994] 205 ITR 433, the Supreme Court dealt with a case concerning the amount of relief properly admissible to the assessee under Section 80T of the Act, which provision also occurs in Chapter VI-A of the Act. The court held that the deduction that can properly be claimed by the assessee under Section 80T of the Act is the amount of the capital gains determined in accordance with the provisions of the Act after making such deductions as were permissible. The court held that even though Section 80AB of the Act had not been given retrospective operation, nevertheless it was merely clarificatory in nature and applied to the earlier assessment years as a whole in so far as the computation of the deductions under Chapter VI-A of the Act was concerned. The court, after referring to the decision of the Constitution Bench in the case of Distributors (Baroda) P. Ltd. [1985] 155 ITR 120 observed thus (page 440): "On a parity of reasoning, it must be held that Section 80AB was enacted to declare the law as it always stood in relation to the deductions to be made in respect of the income specified under the head 'C' of Chapter VI-A."
7. Section 80O of the Act is one of the provisions contained in Chapter VI-A of the Act under the head "C" and is a provision to which Section 80AB applies. Section 80AB as observed by the apex court is merely declaratory and has declared the law as it always stood in relation to the deductions under all of the provisions on Chapter VI-A, excluding Section 80M from the time, those Sections were introduced.
8. Section 80AB of the Act specifically provides that the deduction that can be claimed under the provisions of Chapter VI-A excluding Section 80M, is the amount determined in accordance with the provisions of the Act. It is, therefore, not the gross amount or the total receipt that is to be deducted but it is only the income derived under the head for which the deduction is sought, and as computed in accordance with the provisions of the Act, that would be eligible for deduction,
9. In the case of the assessee, the fee that it had received from abroad constituted its gross receipts from fees and the "income" from fees was required to be computed in accordance with the provisions of the Act, for deducting from the gross receipts, such amounts as were required to be deducted under the provisions of the Act, and it would only be the amount so determined that would constitute income from tees for the purpose of Section 80-O of the Act.
10. Unlike Sections 80M and 80T, Section 80O of the Act uses the expression "whole of the income". Though the word "whole" apparently conveys an intention that the entire amount is to be deducted, having regard to the legislative history of the section, it is clear that the term "whole" was meant to denote 100 per cent., as prior to its amendment in 1972 it provided only for 60 per cent. (sic) of the income being deducted and after the further amendments effected in the year 1984, the deduction was limited to 50 per cent. The "income" referred to in this section is the income computed in accordance with the provisions of the Act.
11. The Tribunal was, therefore, clearly in error in holding that the assessee was entitled to the deduction of the gross amount of the fees received by it for the work done by it abroad under Section 80O of the Act, and in further directing that the amounts claimed as unabsorbed depreciation relating to the assessment years 1977-78 and 1978-79 were required to be carried forward. The Income-tax Officer had properly computed the income by way of fees and in finding that after making the deductions required to be made under the provisions of the Act, the amount eligible for deduction under Section 80O of the Act was "nil". He had also rightly deducted the amount of the business loss of earlier years and unabsorbed depreciation from the gross total income of the assessee, and had found that the assessee had, after making all such deductions, a taxable income of Rs. 67,625.
12. Our answer to the question that has been referred to us, is therefore in the negative, in favour of the Revenue and against the assessee, The Revenue is entitled to its costs, which we quantify in the sum of Rs. 1,000.