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Issues Involved:
1. Whether the deduction under section 80RRA of the Income-tax Act, 1961, is to be allowed on a gross basis or on a net basis. 2. If the deduction under section 80RRA is to be allowed on a net basis, what are the principles governing the allocation of expenses incurred which are to be reduced from the gross receipts. Detailed Analysis: Issue 1: Gross Basis vs. Net Basis for Deduction under Section 80RRA The primary issue is whether the deduction under section 80RRA should be allowed on the gross remuneration or the net remuneration. The Tribunal referred to the case of Mukesh M. Shah v. ITO [2005] 92 ITD 349 (Mum.), where it was concluded that "remuneration" is the compensation paid for services rendered and there is no concept of adjusting expenditure against such remuneration. The Tribunal noted that the language of section 80RRA differs from other sections like 80-O, which allows deductions from 'income' rather than 'remuneration'. The Tribunal also observed that the purpose of section 80RRA is to encourage earning and repatriation of foreign exchange. Therefore, the Tribunal held that the deduction under section 80RRA should be allowed on gross remuneration, reduced only by direct expenses incurred to earn that income. Issue 2: Allocation of Expenses for Net Basis Deduction The secondary issue is the allocation of expenses if the deduction is to be allowed on a net basis. The Assessing Officer had allocated a portion of indirect expenses incurred by the assessee to the eligible foreign exchange earnings, while the CIT(A) estimated a flat rate of 10% for such expenses. The Tribunal, however, held that there is no justification for allocating expenses on an estimated or notional basis without evidence that such expenses were actually incurred for earning that income. The Tribunal referred to the Special Bench decision in Punjab State Industrial Development Corpn. Ltd. v. Dy. CIT [2006] 102 ITD 1 (Chd.), where it was held that only actual expenditure incurred should be considered. The Tribunal concluded that only direct costs incurred for earning the eligible foreign exchange earnings should be deducted from the gross professional earnings. The Tribunal directed the Assessing Officer to accept the reduction of professional earnings by the amount of Rs. 12,45,472, as offered by the assessee. Specific Assessment Years: Assessment Year 2000-01: - The Tribunal upheld the assessee's claim that only direct expenses should be reduced from the gross professional earnings to arrive at the net remuneration eligible for deduction under section 80RRA. - The appeal filed by the assessee was allowed, and the revenue's appeal was dismissed. Assessment Year 2001-02: - The Tribunal held that the deduction under section 80RRA should be allowed in respect of gross foreign exchange earnings reduced by direct expenses. - The Tribunal did not approve the disallowance of deduction by reducing 10% of Indian office expenses on an estimated basis. - For the US office expenses, the Tribunal agreed that no part of the expenses should be reduced for the initial year as the office was not operational. - The appeal filed by the assessee was allowed. Assessment Year 2002-03: - The Tribunal directed the deletion of the disallowance by reducing gross eligible earnings by 10% of expenses in India. - The matter was remitted to the Assessing Officer for verification of actual expenses incurred by the US office directly related to earning the eligible remuneration. - The appeal was allowed for statistical purposes. Conclusion: - The assessee's appeals for the assessment years 2000-01 and 2001-02 were allowed. - The assessee's appeal for the assessment year 2002-03 was allowed for statistical purposes. - The revenue's appeal for the assessment year 2000-01 was dismissed. Pronounced in the open court on 10-4-2007.
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