Commissioner of Income Tax vs M.K. Raju Consultants (P.) Ltd.

R. Jayasimha Babu, J.—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 u/s 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 ?

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.

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 u/s 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.

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 u/s 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 u/s 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.

A Constitution Bench of the apex court in the case of Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, , 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 u/s 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. Vs. Additional Commissioner of Income Tax , Gujarat-I, , that the amount of the dividend to be deducted from the gross

total income u/s 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. Vs. Additional

Commissioner of Income Tax , Gujarat-I, .

In the case of H.H. Sir Rama Varma Vs. Commissioner of Income Tax, Kerala, , the Supreme Court dealt with a case concerning the amount

of relief properly admissible to the assessee u/s 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 u/s 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) Pvt. Ltd. Vs. Union of India (UOI) and Others, 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.

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.

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,

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.

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.

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 u/s 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

u/s 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.

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.