2004 (10) TMI 538 - AT - Income Tax

Summary

Issues Involved:
1. Entitlement to deduction under section 80-O of the Income-tax Act.
2. Computation of deduction under section 80-O on net income versus gross receipts.
3. Disallowance of telephone expenses due to personal use.

Analysis:

1. Entitlement to Deduction under Section 80-O:
The main grievance of the assessee in all appeals pertains to the denial of deduction under section 80-O. The assessee, an individual operating under Leather Machinery Corporation, claimed to have provided technical and professional services to foreign companies, which included market surveys, information on competition, and other specialized knowledge related to the leather machinery industry. The assessee argued that these services were rendered from India and the income received in convertible foreign exchange should qualify for deduction under section 80-O.

The Assessing Officer (AO) disallowed the claim, stating that the services were rendered in India, as evidenced by expenses related to advertisements and fairs, and payments to local agents. The AO also noted that the assessee engaged in sales and maintenance of machinery, which were incidental to the commission business.

For assessment year 1997-98, despite additional evidence provided by the assessee, the AO followed the reasoning from earlier years and denied the deduction.

The CIT(A) upheld the AO's decision, concluding that the services were more akin to sales promotion and not the provision of technical knowledge or skill to a foreign enterprise.

Upon appeal, the Tribunal considered the nature of services provided by the assessee, including technical information and market insights, which were utilized by foreign enterprises. The Tribunal noted that the CBDT Circular No. 700 clarified that services rendered from India and received by a foreign enterprise outside India could qualify for deduction under section 80-O, even if the services were used to sell products in India. However, since the assessee's remuneration was based on sales in India and included other services like spare parts sales and maintenance, the Tribunal directed the AO to apportion the income attributable to the supply of information and allow deduction accordingly.

2. Computation of Deduction under Section 80-O on Net Income versus Gross Receipts:
Ground No. 5 in ITA Nos. 701 and 702 addressed whether the deduction under section 80-O should be computed on net income or gross receipts. The Tribunal referenced the Full Bench decision of the Hon'ble Delhi High Court in CIT v. Chemical & Metallurgical Design Co. Ltd., which held that the deduction should be allowed on net income after deducting expenses. Consequently, this ground was dismissed.

3. Disallowance of Telephone Expenses Due to Personal Use:
Ground No. 6 in ITA Nos. 701 and 702 pertained to the disallowance of telephone expenses for personal use. The AO had disallowed Rs. 6,582 and Rs. 659 for assessment years 1995-96 and 1996-97, respectively. The Tribunal found the disallowance justified and confirmed the orders of the revenue authorities, dismissing this ground of appeal.

Conclusion:
The appeals were partly allowed for statistical purposes. The AO was directed to reassess the quantum of deduction under section 80-O by apportioning the income attributable to the supply of information to foreign enterprises and other services. The computation of deduction on net income and disallowance of telephone expenses were upheld.