1992 (1) TMI 5 - SC - Income Tax

Section 80O - deduction - royalty received in Foreign Exchange - we hold that the assessee was entitled to the relief under section 80-O - approval granted by the Board under that section was right and proper - for the assessment year 1983-84 the assessee does not qualify for deduction on the terms of that section as the contract receipts are fully covered by the provisions of section 80HHB

Issues Involved:
1. Applicability of Section 80HHB vs. Section 80-O of the Income-tax Act, 1961.
2. Validity of the Central Board of Direct Taxes (CBDT) approval under Section 80-O.
3. Indivisibility of the contract and apportionment of consideration.
4. Effect of Section 80HHB(5) on the applicability of Section 80-O.
5. Role and jurisdiction of the CBDT in granting approval under Section 80-O.

Issue-wise Detailed Analysis:

1. Applicability of Section 80HHB vs. Section 80-O of the Income-tax Act, 1961:

The primary issue was whether the income arising from the assessee's contracts with foreign governments should be governed by Section 80HHB or Section 80-O of the Income-tax Act, 1961. Section 80-O provides deductions for royalties, fees, or similar payments received from foreign enterprises for the use of patents, technical services, or information. Section 80HHB, introduced by the Finance Act, 1982, provides deductions for profits and gains from projects executed outside India.

The court found that the assessee's contracts involved the execution of foreign projects, which included construction and installation activities. The contracts were not merely for providing technical services or information but for the execution of comprehensive projects. Therefore, the income derived from these contracts fell under the purview of Section 80HHB rather than Section 80-O.

2. Validity of the Central Board of Direct Taxes (CBDT) approval under Section 80-O:

The assessee had obtained CBDT approval for its contracts under Section 80-O. However, the CBDT later issued a clarification modifying the approval to indicate that Section 80HHB would apply from the assessment year 1983-84 onwards. The court noted that the CBDT's approval under Section 80-O was valid for the assessment year 1982-83 and earlier years but not for subsequent years due to the introduction of Section 80HHB.

The court emphasized that the CBDT's approval does not override the statutory provisions. The approval granted by the CBDT was subject to the conditions laid down in the Act, and the introduction of Section 80HHB meant that the income from the contracts had to be assessed under this new section for subsequent years.

3. Indivisibility of the contract and apportionment of consideration:

The court examined whether the contracts could be bifurcated to attribute part of the consideration to technical services or information and claim deductions under Section 80-O for that part. The contracts were found to be indivisible and comprehensive, involving various activities such as design, construction, installation, and commissioning of projects.

The court held that it was not feasible to apportion the consideration for different components of the contract. The entire consideration was for the execution of the foreign projects, which fell under Section 80HHB. Therefore, the assessee could not claim deductions under Section 80-O for any part of the consideration.

4. Effect of Section 80HHB(5) on the applicability of Section 80-O:

Section 80HHB(5) explicitly states that no part of the consideration received for the execution of a foreign project shall qualify for deduction under any other provision of the Act. This provision was introduced to clarify that income derived from foreign projects would be eligible for deductions only under Section 80HHB and not under any other sections, including Section 80-O.

The court affirmed that the statutory interdict in Section 80HHB(5) prevails over the approval granted under Section 80-O. Even if the CBDT had approved the contracts under Section 80-O, the introduction of Section 80HHB and its sub-section (5) meant that the income from these contracts could not qualify for deductions under Section 80-O for the assessment year 1983-84 onwards.

5. Role and jurisdiction of the CBDT in granting approval under Section 80-O:

The court discussed the role of the CBDT in granting approvals under Section 80-O. The CBDT's approval is necessary for claiming deductions under Section 80-O, but it is not conclusive on the merits of the claim. The Assessing Officer retains the responsibility to determine whether the income qualifies for deductions under the section based on the statutory provisions.

The court emphasized that the CBDT's approval facilitates the process but does not absolve the Assessing Officer from examining the eligibility of the claim. The approval is subject to the conditions laid down in the Act, and any subsequent statutory amendments, such as the introduction of Section 80HHB, must be taken into account.

Conclusion:
The Supreme Court affirmed the High Court's judgment that the income from the assessee's contracts with foreign governments was governed by Section 80HHB and not Section 80-O for the assessment year 1983-84 onwards. The CBDT's approval under Section 80-O was valid for earlier years but did not override the statutory provisions introduced by Section 80HHB. The contracts were indivisible, and the entire consideration was attributable to the execution of foreign projects, making Section 80HHB applicable. The court also clarified the role of the CBDT and the Assessing Officer in granting and assessing claims for deductions under Section 80-O.

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