1997 (11) TMI 130 - AT - Income Tax

Summary

Issues Involved:
1. Exclusion of interest from bank and miscellaneous income from the computation of deduction under Section 80-I.
2. Inclusion of CCS and engineering service fees in the computation of deduction under Section 80-I.
3. Eligibility for deduction under Section 80-O for engineering service fees.
4. Disallowance of claim for liquidated damages.

Issue-wise Detailed Analysis:

1. Exclusion of Interest from Bank and Miscellaneous Income from the Computation of Deduction under Section 80-I:

The assessee contended that the CIT(A) was not justified in excluding interest from bank and miscellaneous income from the computation of deduction under Section 80-I of the Act. The assessee argued that there was no net income from interest, as the financial expenses exceeded the interest income. The assessee also claimed that the interest received on margin money deposited with banks for securing guarantees was integral to the industrial undertaking's activities. The Tribunal noted that the P&L account showed a net outflow of Rs. 6,42,175 on account of interest, indicating no assessable interest income. Consequently, the Tribunal directed the AO not to exclude the interest income of Rs. 6,44,587 while computing the deduction under Section 80-I, as there was no income assessable to tax.

Regarding miscellaneous income, the assessee argued that it was derived from handling machinery and parts as part of project work, forming an integral part of the business activities. The Tribunal found that the AO and CIT(A) had not verified this claim and directed a fresh examination of the issue, allowing the assessee to substantiate its claim.

2. Inclusion of CCS and Engineering Service Fees in the Computation of Deduction under Section 80-I:

The Revenue challenged the inclusion of CCS and engineering service fees in the computation of deduction under Section 80-I. The CIT(A) had allowed the deduction, reasoning that engineering services were directly related to the manufacturing activity, and CCS had a direct nexus to the production of goods exported. The Tribunal upheld the CIT(A)'s findings, agreeing that the engineering services involved preparing detailed drawings and designs, which constituted manufacturing or producing an article or thing. Similarly, CCS was paid to compensate for un-rebated indirect taxes and freight disadvantages, directly linked to the production of exported goods. The Tribunal found the CIT(A)'s decision well-founded and upheld the inclusion of CCS and engineering service fees in the deduction under Section 80-I.

3. Eligibility for Deduction under Section 80-O for Engineering Service Fees:

The assessee claimed deduction under Section 80-O for engineering service fees earned in foreign exchange. The AO had disallowed the claim, arguing that the services were not rendered outside India, and the activity amounted to the sale of drawings and designs. The CIT(A) sustained the disallowance, stating that the conditions under Section 80-O were not fulfilled. The Tribunal, however, found that the assessee provided technical and professional services to a US company, preparing revised and detailed designs for export orders. Citing a similar case (Capt. K.C. Saigal vs. ITO), the Tribunal held that the services rendered from India qualified for deduction under Section 80-O, and directed the AO to allow the deduction, subject to other conditions.

4. Disallowance of Claim for Liquidated Damages:

The assessee claimed a provision for liquidated damages based on a contract with Birla Jute & Ind. Ltd., which stipulated damages for delayed equipment supply. The AO disallowed the claim, noting no demand from the customer and the subsequent reversal of the provision. The CIT(A) upheld the disallowance, considering the liability contingent. The Tribunal found that further inquiry was needed to ascertain the facts, particularly whether the damages automatically accrued from the contract or were negotiable. The Tribunal set aside the CIT(A)'s order on this point and remanded the matter to the AO for a fresh decision, directing full opportunity for the assessee to substantiate its claim.

Conclusion:

The Tribunal partly allowed the assessee's appeal, directing the AO not to exclude the interest income from the deduction under Section 80-I, upholding the inclusion of CCS and engineering service fees, allowing the deduction under Section 80-O for engineering service fees, and remanding the issue of liquidated damages for further examination.