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TMI Blog2007 (4) TMI 292X X X X Extracts X X X X X X X X Extracts X X X X ..... s below, are like this. The assessee is proprietor of a well known law firm by the name of Nishith Desai Associates. As observed by the Assessing Officer in the assessment order, Nishith Desai Associates is a research based law firm and it renders highly specialised services to its clients worldwide in various fields of international law". In the course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed a sum of Rs. 1,37,78,521 as deduction under section 80RRA. This claim was, by way of filing a revised return, reduced to Rs. 1,28,49,406. The reduction was an account of reducing the foreign exchange earnings by Rs. 12,45,472, representing direct expenses incurred by the assessee to earn these foreign exchange earnings. On a perusal of records, the Assessing Officer noticed that the assessee has earned different types of professional receipts - namely professional receipts in Indian Rupees, professional receipts in foreign exchange (eligible for deduction under section 80 RRA), professional receipt in foreign exchange (not eligible for deduction under section 80RRA), other income, out of pocket reimbursements. The Assessing Officer also noted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. It was in this background that he proceeded to bifurcate the entire expenses incurred by assessee in India in the same ratio in which the assessee had his earnings eligible for deduction under section 80RRA. In addition to the direct expenses by the assessee, he allocated Rs. 1,16,94,720, out of the total expenditure incurred of Rs. 3,56,41,706, by thus allocating 34 per cent of total expenditure. The deduction under section 80RRA was thus held admissible only to the extent of Rs. 40,73,377, as against Rs. 1,28,49,406 claimed by the assessee. Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the CIT(A). The CIT(A) agreed with the Assessing Officer in principle that a portion of indirect expenses incurred by the assessee is also to be reduced from the eligible foreign exchange earnings, to arrive at the amount eligible for deduction under section 80RRA. He, however, also held that in view of the weakness of Indian currency and the fact that a lot of expenses incurred by this research based law firm are not directly relatable to any earnings, an estimated deduction of 10 per cent from the eligible professional earnings will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Supreme Court, in the case of CBDT v. Aditya V. Birla [1988] 170 ITR 137 took note of the contention of the assessee that the object of section SO RRA was three fold - first, earning of foreign exchange for India, second, bringing that currency by Indian nationals from abroad to India, third, and improve the status of Indians abroad and increasing the market of Indian technicians. Their Lordships, having taken note of this contention, observed that "it appears to us to be plausible objects in the present socio economic context". One of the dominant object of introduction of section 80RRA, therefore, indeed was earning of foreign exchange by Indians abroad and repatriation of the foreign exchange so earned to India. Their Lordships also noted that connotations of the expression 'remuneration' are wider than 'salary'. It is thus indeed possible, and in fact it will be more logical, to view the deduction under section 80RRA as focussed on bringing in foreign exchange in India. Let us not forget that this section was introduced at a time when foreign exchange reserves were a cause of concern, and foreign exchange earnings by Indians was far more important for Indian economy. The vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge earnings, is the actual and direct expense incurred for that purpose. The concept of averaging of costs is not recognised for this purpose. Revenue's reliance on Hon'ble Supreme Court's judgment in the case of Continental Construction Ltd. is of no avail in this context. In that case, Their Lordships were in seisin of the question whether a composite contract and earnings from the same can be segregated or not. In the case before us, eligible foreign exchange earnings are not a part of some composite contract; these are for independent activities. In this view of the matter, the gross professional earnings in foreign exchange are to be reduced only by the direct costs incurred by the assessee for the purpose of earning eligible remuneration. As there is no finding by the Assessing Officer to the effect that there are any other direct costs incurred for the purpose of such earnings, the reduction of professional earnings by an amount of Rs. 12,45,472, as offered by the assessee suo motu, does not call for any disturbance. We direct the Assessing Officer to accept the same. Accordingly, while we uphold the grievance of the assessee, the grievance raised by the revenue is rejected. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual expenditure incurred by the assessee in US office for earning the eligible remuneration, we deem it fit and proper to remit the matter to the file of the Assessing Officer for the limited purposes of verification as to which of the expenses by US office can be said to be directly related to earning of remuneration eligible for deduction under section 80RRA. The assessee shall give details of such expenses as were incurred by the assessee for the said purpose, and furnish such reasonable particulars as the Assessing Officer may requisition. The Assessing Officer shall give due opportunity of hearing to the assessee before passing the fresh order, and shall decide the matter by way of a speaking order. In case the assessee can demonstrate that actual expenditure is less than 50 per cent of US office expenditure as allowed by the CIT(A) on ad hoc basis, the assessee will get relief accordingly. The appeal for the assessment year 2002-03 is thus allowed for statistical purposes. 1. To sum up, assessee's appeal for the assessment years 2000-01 and 2001-02 is allowed, assessee's appeal for the assessment year 2002-03 is allowed for statistical purposes, and revenue's appeal for the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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