2007 (4) TMI 280 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of contract receipts and technical consultancy fees.
2. Allowability of expenses incurred for earning the receipts.
3. Treatment of interest income.
4. Application of Supreme Court decisions in relevant cases.
5. Determination of whether the assessment requires setting aside for a de novo assessment.

Issue-wise Detailed Analysis:

1. Taxability of Contract Receipts and Technical Consultancy Fees:
The primary issue was whether the contract receipts and technical consultancy fees received from Gujarat Maritime Board (GMB) and Eastern Generation Ltd. should be treated as income from other sources. The Assessing Officer (AO) considered these receipts as income from other sources, following the Supreme Court's decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. The assessee argued that these receipts were reimbursements for expenses incurred in acquiring technical know-how, which should reduce the project cost. The CIT(A) accepted the assessee's contention, but the ITAT partially disagreed, holding that the receipts were revenue in nature.

2. Allowability of Expenses Incurred for Earning the Receipts:
The CIT(A) allowed the expenses incurred for acquiring technical know-how to be deducted from the receipts, holding that the expenses were directly related to the receipts. The ITAT, however, held that the expenditure incurred for procuring technical know-how was of a capital nature and not deductible as revenue expenditure. The ITAT directed the AO to allow depreciation on the capitalized value of the technical know-how used for the consultancy provided to GMB.

3. Treatment of Interest Income:
The AO treated the interest income from bank FDRs and LCs as income from other sources, following the Supreme Court's decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. The CIT(A) upheld this treatment, and the ITAT agreed, holding that the interest income was rightly taxed as income from other sources.

4. Application of Supreme Court Decisions:
The ITAT considered the applicability of various Supreme Court decisions:
- Bokaro Steel Ltd.: The ITAT held that the decision in Bokaro Steel Ltd. was not applicable as the facts were distinguishable.
- Tuticorin Alkali Chemicals & Fertilizers Ltd.: The ITAT followed this decision for treating interest income as income from other sources.
- Scientific Engineering House (P.) Ltd.: The ITAT applied this decision to hold that the expenditure incurred for procuring technical know-how was of a capital nature and entitled to depreciation.

5. Determination of Whether the Assessment Requires Setting Aside for a De Novo Assessment:
There was a difference of opinion between the Judicial Member and the Accountant Member regarding whether the assessment should be set aside for a de novo assessment. The Judicial Member provided specific directions for allowing expenses and depreciation, while the Accountant Member suggested a de novo assessment. The Third Member agreed with the Judicial Member, subject to verification and determination by the AO. The matter was set aside with a direction to the AO for a fresh determination of allowable expenditure, including specific expenditure narrated by the Judicial Member and subject to the Accountant Member's observations on the allowability of depreciation.

Conclusion:
The ITAT partially allowed the appeals of the Revenue, directing the AO to:
1. Allow specific expenditure directly incurred for providing technical know-how for the development of GMB's ports.
2. Allow depreciation on the capitalized value of the technical know-how used for consultancy provided to GMB.
3. Conduct a fresh determination of allowable expenditure, including verification of specific expenses as directed by the Judicial Member and subject to the Accountant Member's observations.