1986 (2) TMI 111 - AT - Income Tax

Issues Involved:
1. Deduction under Section 80-O of the Income-tax Act, 1961.
2. Application of Section 80HHB of the Income-tax Act, 1961.
3. Investment allowance under Section 32A.
4. Deduction under Section 35B.
5. Disallowance under Section 40(c)/40A(5).
6. Classification as an 'industrial company' for tax purposes.

Issue-wise Detailed Analysis:

1. Deduction under Section 80-O:
The primary issue was whether the assessee, a civil construction company, was entitled to a deduction of Rs. 89,16,19,198 under Section 80-O for profits earned from foreign contracts. The assessee argued that the contracts had been approved by the Board under Section 80-O. However, the IAC held that these contracts fell under Section 80HHB, which deals with the execution of foreign projects, and not under Section 80-O. The Commissioner (Appeals) agreed with the IAC, stating that the execution of foreign projects involves technical services, but the income from such projects should be considered under Section 80HHB. The Tribunal upheld this view, emphasizing that the contracts were for the execution of foreign projects and thus fell under Section 80HHB, making Section 80-O inapplicable due to the overriding effect of Section 80HHB(5).

2. Application of Section 80HHB:
Section 80HHB was introduced to provide a deduction for profits from the execution of foreign projects. The IAC and the Commissioner (Appeals) held that the contracts executed by the assessee were foreign projects under Section 80HHB. The Tribunal agreed, noting that the contracts involved the construction of dams, water supply schemes, and other infrastructure projects, which are covered under the definition of 'foreign projects' in Section 80HHB. The Tribunal also emphasized the non obstante clause in Section 80HHB(5), which precludes the application of any other provision in Chapter VI-A, including Section 80-O, for such income.

3. Investment Allowance under Section 32A:
The assessee claimed investment allowance under Section 32A, which was denied by the IAC on the grounds that the assessee was not an 'industrial company.' The Commissioner (Appeals) directed the IAC to reconsider the claim in light of the Tribunal's decision in Hydle Construction (P.) Ltd. The Tribunal upheld this direction, noting that the matter was still open for consideration by the IAC, who should examine the claim based on the relevant provisions and judicial decisions.

4. Deduction under Section 35B:
The Commissioner (Appeals) admitted a new claim under Section 35B for weighted deduction on export expenses, which was not claimed before the IAC. The Tribunal upheld the Commissioner (Appeals)'s direction to consider the claim, but without the prima facie observation that the assessee's case was covered under Section 35B. The Tribunal emphasized that the IAC should examine the claim based on the materials provided by the assessee.

5. Disallowance under Section 40(c)/40A(5):
The IAC disallowed remuneration paid to directors in excess of Rs. 72,000 under Section 40(c). The Commissioner (Appeals) held that directors working abroad were employees, and their remuneration should be considered under Section 40A(5), which excludes remuneration for work done outside India. The Tribunal upheld this view, noting that the directors were employee-directors and that Section 40A(5) had an overriding effect, making the remuneration for work done abroad non-disallowable.

6. Classification as an 'Industrial Company':
The Commissioner (Appeals) classified the assessee as an 'industrial company' for tax purposes, based on the Tribunal's decision in Hydle Construction (P.) Ltd. The Tribunal reversed this classification, citing the Delhi High Court's decision in Minocha Bros. (P.) Ltd., which held that a construction company could not be considered an 'industrial company' under the definition applicable for the assessment year 1983-84. The Tribunal noted that the revised definition in the Finance Act, 1983, was not applicable for the assessment year in question.

Conclusion:
The Tribunal upheld the denial of the deduction under Section 80-O, affirmed the application of Section 80HHB, directed reconsideration of the investment allowance claim, allowed the new claim under Section 35B to be examined, upheld the non-disallowance of remuneration under Section 40A(5), and reversed the classification of the assessee as an 'industrial company' for the assessment year 1983-84.

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