Commissioner Of Income-Tax v. Asian Cable Corporation Ltd. (No. 2)

J.P Devadhar, J.:— This review petition is preferred by the Department against the order of the Division Bench dated December 12, 2002, in Income-tax Reference No. 530 of 1987 (Commissioner Of Income-Tax v. Asian Cables Corporation Ltd. (No. 1) (No. 1), [2003] 262 ITR 535).

Facts:

2. Income-tax Reference No. 530 of 1987 (see [2003] 262 ITR 535) related to the assessment years 1979-80 and 1980-81. That reference was made at the behest of the Department. In that reference, two points arose for determination, viz., whether the value of work-in-progress should be treated as part of capital employed for the purposes of section 80J of the Income-tax Act, 1961, and secondly, whether deduction under section 80-0 should be calculated on the gross fees received by the assessee. These were the two questions referred to the Division Bench. Question No. 1 was answered in favour of the assessee in view of the judgment of the Supreme Court in the case of CIT v. Alcock Ashdown and Co. Ltd., [1997] 224 ITR 353. Question No. 2, which related to section 80-0 was also answered in favour of the assessee on the following concession made by learned senior counsel appearing for the Department in the following terms (page 537):

“At the final hearing of this reference, Mr. Desai, learned counsel appearing on behalf of the Revenue, fairly stated that the bare reading of section 80-0 of the Income-tax Act makes it clear that gross income is to be taken into account and not the net income for the purpose of calculation of deduction under section 80-0 of the Income-tax Act. In this view of the matter, question No. 2 is answered in the affirmative and in favour of the assessee.”

3. By this review petition, the Department now states that the above concession made by learned senior counsel was erroneous. In the circumstances, the Department has prayed for modification of the judgment dated December 12, 2002, in Income-tax Reference No. 530 of 1987 (see [2003] 262 ITR 535) qua question No. 2, which, as stated above, related to deduction under section 80-0 of the Act.

4. The respondents waive service. With the consent of the learned advocates appearing on behalf of the respective parties, the review petition was taken up for final hearing.

Facts in Income-tax Reference No. 530 of 1987 qua question No. 2:

5. As stated above, Reference No. 530 of 1987 (see [2003] 262 ITR 535) relates to the assessment years 1979-80 and 1980-81. During the assessment year 1979-80 in question, the assessee claimed deduction under section 80-0 on gross earnings. The assessee carried on business of manufacturing cables. The assessee claimed relief under section 80-0 on Rs. 61,678 at 100 per cent, of gross receipts by way of market service fees received from a foreign company by the name Dodge International. According to the Income-tax Officer, the assessee failed to give details of the amount of expenditure incurred for earning such fees. Therefore, the Income-tax Officer estimated 50 per cent, of the amount as expenditure incurred for earning these receipts and consequently, allowed deduction to the tune of Rs. 30,839 under this specific head. Being aggrieved, the assessee went in appeal to the Commissioner (Appeals). The assessee submitted in appeal that it was entitled to deduction under section 80-0 on the gross amount. The assessee claimed that the gross amount stood exempted under section 80-0. In view of the judgment of the Madras High Court in the case of Addl. CIT v. Isthmian India Maritime (P.) Ltd., [1978] 113 ITR 570, the Commissioner (Appeals) allowed the deduction on the gross amount of fees. It was held that for the purposes of section 80-0, one has to take into account actual amount received by the assessee and not the amount computed by way of net income after deducting the expenditure. Consequently, the appellate authority allowed full deduction of Rs. 61,678 instead of Rs. 30,839. This order has been confirmed by the Tribunal. Consequently, the matter has come before us at the instance of the Department.

Arguments:

6. Mr. R.V Desai, learned senior counsel appearing on behalf of the Department, stated that the above concession was made by him through error. He submitted that the controversy involved in this case is settled by the judgment of the Calcutta High Court in the case of CIT v. M.N Dastur and Co. (P.) Ltd., [2000] 243 ITR 10. He submitted that in that case, income was received by way of convertible foreign exchange and it was held by the Calcutta High Court that such income was to be computed in accordance with the provisions of the Income-tax Act and then only the net income, after computation, constituted the amount of income derived or received by the assessee for the purposes of deduction under section 80-0. He also relied upon the judgment of the Delhi High Court in the case of Commissioner Of Income-Tax. v. Chemical & Metallurgical Design Co. Ltd, [2001] 247 ITR 749 [FB], the ratio of which is identical to the judgment of the Calcutta High Court in the case of M.N Dastur and Co., [2000] 243 ITR 10.

7. Mr. Mistry, learned counsel appearing on behalf of the assessee, on the other hand, argued that in this case, we are concerned with the assessment year 1979-80. He contended that the section, as it stood at the material time, inter alia, stated that where the gross total income includes income by way of royalty, commission, fees and such income stood 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 the assessee then, there shall be allowed, in accordance with and subject to the provisions of section 80-0, a deduction of the whole of the income so received in India or brought into India in computing the total income of the assessee. Mr. Mistry contended that during the assessment year in question also, gross total income was defined under section 80B(5) to mean the total income computed in accordance with the provisions of the Act. Mr. Mistry, therefore, argued on behalf of the assessee that the law, as it stood during the assessment year in question, clearly contemplated gross earnings as the basis for deduction under section 80-0 of the Act. Mr. Mistry further contended that his above interpretation was accepted by the Bombay High Court in the case of Commissioner Of Income-Tax v. New Great Insurance Co. Ltd., [1973] 90 ITR 348. He contended that the Bombay High Court was concerned with a case of dividend. In that matter, three insurance companies had received total dividend amounting to Rs. 3,49,952. The Department took the view that the total amount was not exempted under section 99(1)(iv) or under section 85A. According to the Department, the proportionate amount of the total expenditure of the management has got to be deducted from the gross receipt of dividend earned in order to arrive at the net figure of dividends, which alone got exempted under the aforestated two sections. The Tribunal negatived the stand of the Department and it took the view that the income by way of dividend should be construed as the gross income from dividend, without any deduction for expenses. According to Mr. Mistry, the judgment of the Bombay High Court in New Great Insurance Co. Ltd.'s case, [1973] 90 ITR 348 would apply to the present case before us. He further submitted that the above judgment of the Bombay High Court in New Great Insurance Co. Ltd.'s case, [1973] 90 ITR 348 came for consideration before the Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India, [1985] 155 ITR 120 wherein the judgment of the Bombay High Court in the case of New Great Insurance Co. Ltd., [1973] 90 ITR 348 was not disturbed and the view of the Bombay High Court to the effect that the entire amount of dividend was exempt continued to remain in force and was applicable even during the assessment year in question. Mr. Mistry contended that we are concerned with the assessment year 1979-80 and the assessment year 1980-81 when section 80A was very much in force and, therefore, in the present case, this court was right in accepting the concession made by learned counsel for the Department that section 80-0 deduction was to be computed on the basis of gross receipt during the assessment year in question. Mr. Mistry submitted that it is true that subsequently, the Legislature has introduced section 80AA by the Finance (No. 2) Act, 1980 with retrospective effect from April 1, 1968. He contended that in this case we are concerned with the assessment year 1979-80, by which time, section 80AA was already in force. He submitted that notwithstanding the provisions of sections 80a, 80aa and 80b(5), the view of the Bombay High Court in New Great Insurance Co. Ltd.'s case, [1973] 90 ITR 348 was approved by the Supreme Court in the case of Distributors (Baroda) (P.) Ltd., [1985] 155 ITR 120 and, therefore, there was no need to change the order under review. Mr. Mistry further contended that under the circumstances, the review petition ought to be dismissed.

Reasons:

8. We find merit in this review petition of the Department. By the Finance (No. 2) Act, 1980, which came into force with effect from April 1, 1981, deductions under Chapter VI-A were made relatable to the income included in the gross total income. Section 80-0 begins with the expression “Where the gross total income of an assessee includes any profits and gains derived from industrial undertaking”. The expression “gross total income” is defined under section 80B(5) to mean the total income computed in accordance with the provisions of the Act, before making any deduction under Chapter VI-A. (emphasis supplied by us). Therefore, what is included in the gross total income is not only the category of income, but also the quantum of income. In the case of Distributors (Baroda) (P.) Ltd., [1985] 155 ITR 120, the Supreme Court has laid down that the expression “gross total income” in section 80B(5) referred to the total income computed in accordance with the Act before making any deductions under Chapter VI-A and what is included in the gross total income was a particular quantum of income belonging to the specified category. On a bare reading of section 80-0 along with section 80b(5), it is clear that even prior to the Finance (No. 2) Act, 1980, Parliament had clearly intended to say that what is included in the gross total income, was not only a specified category of income, but a particular quantum of income belonging to that specified category. In the case of H.H Sir Rama Varma v. CIT, [1994] 205 ITR 433, the Supreme Court has held that section 80AB was enacted to declare the law as it always stood in relation to the deductions under Chapter VI-A. Therefore, in any view of the matter, it is clear that gross receipts cannot constitute the basis of deduction under section 80-0 of the Act. We do not find any merit in the argument of Mr. Mistry that the judgment of the Bombay High Court in the case of New Great Insurance Co. Ltd., [1973] 90 ITR 348 stood approved by the judgment of the Supreme Court in Distributors (Baroda) (P.) Ltd.'s case, [1985] 155 ITR 120. On the contrary, the Supreme Court has clarified that they do not wish to comment on the validity of the judgment of the Bombay High Court in the case of New Great Insurance Co. Ltd., [1973] 90 ITR 348, as the Supreme Court was not dealing with section 99(1) and that they were dealing with section 80M of the Act, which was different in all respects from section 99(1). Lastly, we may point out that section 80AB of the Act did not come for interpretation when the Bombay High Court decided the case of Commissioner Of Income-Tax v. New Great Insurance Co. Ltd., [1973] 90 ITR 348. Therefore, that judgment of the Bombay High Court will not apply to this case.

9. For the above reasons, we allow the review petition in terms of prayer clause (a).

10. Consequently, question No. 2, quoted hereinbelow, is answered accordingly:

Question No. 2 Answer Whether the Tribunal was justified in law in holding that deduction under section 80-O should be calculated on the gross fees received by the assessee? In the negative, i.e, in favour of the Department and against the assessee.

Conclusion:

11. Mr. Mistry, learned counsel appearing on behalf of the assessee, expressed an apprehension that our above answer to question No. 2 may involve the assessee completely losing the matter before the Department. In this connection, he submitted that in this case, the fees were earned abroad and to earn those fees, certain expenditure was also incurred abroad, but what the Department has done is that they have also taken into account the head office expenses and consequently, they have reduced the special deduction under section 80-0, which has been set aside by the Tribunal on the basis that the gross receipt was exempt under section 80-0. Mr. Mistry contended that now since the court has taken the view that the net income, after deducting the expenditure, should be taken into account to compute special deduction, the Department may revive the order of the Income-tax Officer, which was set aside by the Tribunal, particularly because the Income-tax Officer had taken into account the proportionate head office expenditure. In our view, the apprehension expressed on behalf of the assessee is ill-founded. In this case, as stated above, the Tribunal erred in stating a principle of law on interpretation of section 80-0 that the entire gross fees was exempt under section 80-0. Therefore, the Department came by way of reference to this court by way of question No. 2 quoted above. The grievance of the Department was on the proposition of law laid down by the Tribunal because, according to the Department, special deduction under section 80-0 was to be computed on net income and not on gross receipt of fees. Therefore, in our advisory jurisdiction, we are only required to answer the question of law, as referred to us by the Tribunal, which involved interpretation of section 80-0. In this case, the Income-tax Officer has stated in its order that the assessee was required to give details of expenditure incurred for earning such fees and that the assessee had failed to submit those particulars and, therefore, the Income-tax Officer estimated 50 per cent, of the amount of total fees as expenditure incurred to earn the total fees amounting to Rs. 61,678 and accordingly, the Income-tax Officer granted deduction, not for the full amount of Rs. 61,678 but only for Rs. 30,839. Whether this estimation by the Income-tax Officer was right or wrong is not the question before us. In the circumstances, we cannot go into that aspect of the matter. Moreover, that aspect of the matter involves facts, which are not before us. The Department came to this court only on the question of interpretation of section 80-0, which we have answered in favour of the Department. Therefore, we are not required to go into the question of what constituted the net income for the purposes of section 80-0. Essentially, such questions depend upon the factual matrix, which we do not possess in this case. Lastly, we may mention that an erroneous concession was made by senior counsel appearing on behalf of the Department because in this case, as in several other old references, we are faced with a difficult situation, viz., that the Commissioner (Appeals) as well as the Tribunals decide the matters on the basis of their judgments for the earlier years, which are neither extracted in the present paper book nor annexed to the paper book in the present reference.

12. Accordingly, the review petition is allowed in terms of prayer clause (a) and consequently, question No. 2 quoted above is answered in the negative, i.e, in favour of the Department and against the assessee.