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1990 (3) TMI 110

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..... deduction u/s. 80-O of the Income-tax Act, 1961, to 25% of income from contract relating to construction of 270 dwelling units for Samawa Cement Factory against 100% claim of the assessee. One of the grounds in Revenue's appeal is that CIT(Appeals) has erred in holding that sec. 80-O of the Income-tax Act applied to the construction work agreement in respect of which approval of the Board has been granted. In appeal of Revenue for asst. year 1982-83 which has arisen out of the giving effect by the ITO, the grievance of the Revenue is that the CIT(Appeals) has erred in allowing deduction of 25% u/s. 80-O without considering the fact that assessee was running under loss and according to sec. 80-A(2) the loss was not allowable. We will deal with the appeals of the assessee and the department with regard to allowability of deduction u/s. 80-O and then we will discuss the latter appeal regarding application of sec. 80-A(2). 3. The facts relating to the first ground are that assessee company entered into an agreement with the Director General, Samawa Cement Public Company, Ministry of Industry, State Organisation of Indl. Design Construction, Republic of Iran for construction of 270 .....

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..... ervices. The contract necessarily includes non-technical aspects like supply of labour, supply of material, supervision of work etc. On the other hand the contract does not involve export of technical know-how and technical services as per detailed note submitted by the appellant and reproduced by him in his order. Therefore, he was of the view that a reasonable proportion of the total income i.e. 25% of net income should be allowed as deduction u/s. 80-O which relates to the construction work done by the assessee abroad. 5. The assessee is aggrieved and came in appeal submitting that the CIT(Appeals) should not have restricted the deduction u/s. 80-O to 25%, rather 100% deduction should have been allowed. Therefore, it pressed the claim for 100% deduction. Against this, the Revenue is in appeal urging that even 25% deduction u/s. 80-O was not permissible. 6. The learned counsel for the assessee Sh. S.E. Dastur referred to the agreement clause and various services rendered by the assessee company with reference to the agreement given at pages 8 to 10. It is also pointed out that this agreement was sent to the CBDT for approval and after going into various clauses and the servic .....

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..... nistering the law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the provident fund satisfies all the conditions under r. 4 of Part A of the Fourth Schedule to the Act, and not sit in judgment over it." It was, therefore, submitted that ITO has no jurisdiction to sit over the judgment of the Board of Direct Taxes and review the case of deduction u/s. 80-O by interpreting various clauses of the agreement in its own manner. It was also pointed out that the Department has not disputed that the assessee has net income and therefore 100% deduction should be allowed. 7. As against this the learned D.R. submitted that the approval of the Board is merely one of the conditions to be satisfied and plain reading of the Act shows that all the conditions laid down in the section had to be cumulatively satisfied. Satisfaction of merely one condition of the section cannot mean the satisfaction of all the conditions. This is clear from the specific condition mentioned in the letter of approval of the Board, according to which all the other conditions mentioned under section 80-O must also be sat .....

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..... he present case. 8. We have considered the rival submissions. In order to decide the controversy between the parties, it will be fruitful to refer to various aspects involved in the construction work as revealed by the agreement : "(1) Designs : In most of the cases, the conceptual designs have to be prepared by the construction companies in conformity with the end use, traditions, rigid British standards and construction methods in use in that particular country. Also, local soil conditions, extreme climatic conditions which are peculiar to that part of the world only, have to be taken into account while carrying out the designing. A very important feature is the system of construction which is being adopted. Various types of prefabrication systems are in use in Western countries in place of the conventional construction methods, which technology Indian contractors at times have to acquire and then adopt to the conditions prevailing in the Middle East. Besides design, detailed engineering drawings, architechtural drawings, water supply and sewage drawings and other technical drawings have to be prepared for the proper execution of the works, to ensure suitability and safety .....

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..... technical services rendered and scientific experience and skill provided can be guaged by taking the example of one construction activity, i.e. Concreting : -- To survey and locate sources of stone, sand and water. Establish suitability by conducting rigorous laboratory tests to check chemical and physical properties of stone and sand ; organic impurities and salt contents of water. -- To extract boulders by drilling and blasting and excavate sand. To install crushing arrangements for converting rocks into aggregates of desired sizes. -- Handling from quarry/crusher heads to the bunkers of the concrete Batching Plants. -- To prepare Design Mix of concrete in laboratory to establish the proportion of aggregate, sand, cement and water contents to be used in the concreting. -- To manufacture concrete in the Batching Plant in the pre-determined proportions. The Batching Plant being highly sophisticated, ensures that the proportions are within close tolerances. -- Carrying of concrete mix from Batching Plant to the work site by truck-mounted Transit Mixers, ensuring the homogeneity of concrete. -- To transfer concrete from Transit Mixer into concrete pumps, and to pump con .....

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..... it mean that it was satisfied that all the conditions precedent to the grant of approval did exist. It is no argument to say that the Board satisfied itself partly, and left the other part to be satisfied by the Income-tax Officer. This argument is only to be stated to be rejected, as the Board, the higher authority in the heirarchy of the authorities under the Income-tax Act, abdicated its function to the lowest authority. The circular letter No. 253 (F. No. 473/15/78-FD) dated 30-4--1979 is relevant in this context and it says : "Attention is invited to the Board's circular No. 187 (F. No. 473/15/73-FTD) dated 23-12-1975 (Clarification 2) on the above subject laying down the guidelines for the grant of approval under Section 80-O. The Board has had occasion to re-examine the aforesaid guidelines and it has been decided to modify the guidelines to the extent indicated below : 1. Para 3(iii) of Circular No. 187, dated 23-12-1975 provided that the agreement should have been genuinely entered into on and after the date when the tax concession was announced by the introduction of the relevant Bill in the Lok Sabha. It has now been decided that approvals under section 80-O would .....

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..... subjective satisfaction of the Board of Direct Taxes, i.e., guidance, principles for granting exemption u/s. 80-O. If the Board has granted the approval after going into various clauses of the agreement, it will not be open to the ITO to review or sit over the decision of a Board of Direct Taxes. If he finds anything radically wrong in the approval, all he can perhaps do is to draw the attention of the Board to such wrongs, but not to deny exemption on that score. Our view is supported by the decision of Bombay High Court in the case of Parrys (Eastern) (P.) Ltd., wherein it was categorically held that once the Central Govt. has granted approval after going into the various requirements of secs. 85C and 80-O, it was not open for the ITO to go into the question of availability of exemption u/s. 80-O, which means that he cannot sit over the decision of Board or the Government as the case may be. 11. Similar view was expressed by the Hon'ble Supreme Court in the case of Gestetner Duplicators (P.) Ltd., wherein it was held that after the Government has granted approval to the provident fund after going into all the conditions laid down therein, the ITO has no jurisdiction to sit ove .....

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..... t Rs. 8,39,850 order dated 14-3-1986 (Less) Income from Samawa Project for construction of 270 houses entitled to deduction u/s. 80-O for separate consideration 1,19,94,574 ------------------------ Balance( - ) 1,11,54,724 ------------------------ Addl : Relief in appeal :-- A. U/s. 35-B (para 6.1 of the appeal order) Gross Amount of --Managing Director's Rs. remuneration 48,000 --Audit fee 35,000 ------------------ Total 83,000 ------------------ Weighted deduction @ 1/3rd allowable @ 75% of total 62,250 i.e. 20,750 Allowable in assessment on 41,500 i.e. 13,833 ------------------ 6,917 B. U/s. 32-A Investment Allowance (para 7.3 of the appeal order) 25% of Rs. 63,12,122 15,78,030 C. U/s. 40A(8) (para 8.1. of the appeal order) Excess disallowed 2,630 D. U/s. 37(2A) (para 9.1. of the appeal order) 5,000 E. U/s. 80-VVA (para 10.2 of the appeal order) 24,500 F. Approach Road (para 11.3 of the appeal order) 1,05,150 17,22,227 -------------------- ------------------------ Sub-Total ( - ) 1,28,76,951 " ------------------------ It was submitted that the assessee is entitled to the deduction u/s. 80-O without taking any loss in any other .....

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..... the application of the provisions of that section to the profits and gains of a single industry. The deduction of 8 per cent is intended to be an index of recognition that a priority industry has been set up and is functioning efficiently. It was never intended that the merit earned by such industry should be lost or diminished because of a loss suffered by some other industry. A distinction must be drawn between a case where the loss or unabsorbed depreciation pertains to the same industry whose profits and gains are the subject of relief under section 80E and a case where the loss or unabsorbed depreciation relates to industries other than the one whose profits and gains constitute the subject of relief. Accordingly, in computing the profits for the purpose of deduction under section 80E of the Income-tax Act, 1961, the loss incurred by the assessee in the man of alloy steels (a priority industry) could not be set off against the profits of the manufacture of automobile ancillaries (another priority industry). The assessee was, entitled to a deduction at 8% on the entire profits of the automobile parts industry included in the total income without deducting therefrom the losses .....

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..... the Act, but before making any deduction under Chapter VI-A, if the gross total income is Nil, then no deduction u/s. 80-O can be allowed. Here we would like to mention that the decision of the Tribunal in I.T. A. No. 629/Del/83 dated 30th January, 1984 has no application because it has not discussed in detail the implication of section 80-O or 80-B(5). On merit so it cannot be of any use to the assessee in spite of the fact that a reference has been refused by the Tribunal against that decision. 15. To sum up we hold that as per the approval granted by the CBDT, the assessee is entitled to deduction u/s. 80-O of the Income-tax Act, 1961 in full 100% provided the other conditions laid down in this behalf in section 80A(2) and other related sections are fully satisfied. As we have held above, as there is loss, in the final computation of total income, the allowance of the claim of the assessee under section 80-O becomes academic. 16. In departmental appeal, there is a ground that the CIT(Appeals) has erred in allowing investment allowance on dumpers. The assessee has claimed that the dumpers are used with the earth moving machinery and, therefore, it is not a transport vehicle .....

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..... Therefore it is entitled to deduction u/s. 32-A. 17. We have considered the rival submissions. In the case of Hydle Constructions (P.) Ltd., the support of which is taken in the decision of Continental Construction Ltd.'s case, the Tribunal in para 44 has held as under : "In the assessment year 1978-79, however, the law was changed. For this year, it was provided that an assessee would be entitled to investment allowance if machinery was used in an industrial undertaking for the business of construction, manufacture or production of any articles or things not being an article or thing specified in the list in the Eleventh Schedule. In other words, except for such machinery which are producing articles or things in the Eleventh Schedule, other machinery which are used for the purposes of business of construction, manufacture or production of any other thing would get investment allowance. Thus, it would appear that the business of the assessee insofar as it is a business of construction, manufacture or production of any articles or things would be eligible for investment allowance. The ITO will, therefore, bear in mind the above requirement of law while satisfying himself the .....

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..... CIT(Appeals), the claim is allowable. 19. We have considered the rival submissions. We find that the ITO has not discussed this matter in detail. Similarly the CIT(Appeals) has not discussed in detail the matter. The Department has pointed out that if for appearance before the Board for approval or sanction u/s. 80-RRA seems to be perfectly correct, therefore, we feel that for the reasons the CIT(Appeals) has not given details in his order, in particular reference to the various expenditure, therefore, we feel that the matter should go back to the file of the ITO to decide the matter afresh, after giving reasonable opportunity to the assessee of being heard. 20. An additional ground is taken by the Department for assessment year 1983-84 where the grievance of the Revenue is that the CIT(Appeals) in entertaining relief u/s. 80-O of the Act has ignored Supreme Court decision in Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1. The learned counsel for the assessee very fairly admitted that in the approval of the CBDT it is clearly mentioned that the permission u/s. 80-O is granted to the assessee up to 31-3-1982. Keeping in view the fact that provisions of sec. 80-HHB came .....

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