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TMI Blog1989 (2) TMI 138X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of section 80HHB all foreign projects have to be taken together as the term 'foreign project' appearing in the said section would include the plural thereof also. (ii) He perused the records and felt that the income of Rs. 2,55,21,864 had been worked out by the appellant company for different projects in Iraq. The appellant company took into account only the contract receipts in making calculation. It deducted therefrom the contract expenditure and depreciation in respect of individual projects. According to him, no account had been taken of the other expenditure which had been incurred in respect of the projects in Iraq. (iii) According to the CIT, no separate accounts had been filed in respect of projects in foreign countries to show that they have resulted in profit or loss. Even in respect of contracts in Iraq regarding which the assessee has given the calculations of profits he found from the auditor's report dated 10-10-1984 that they did not prepare the Profit & Loss Account in respect of any of these projects. (iv) According to the CIT, under section 80HHB(3)(i) of the Income Tax Act, 1961 deduction is admissible only when the assessee maintains separate acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows : The appellant-company is engaged in the business of executing construction contracts at various sites at Iraq, Saudi Arabia and Algeria. At present, we are not concerned with Algeria. The appellant-company was executing 21 contracts for construction at various sites in Iraq during the relevant previous year corresponding to the assessment year 1984-85. There were 4 construction projects at Saudi Arabia. The appellant-company is following the Mercantile system of accounting. Accounts are prepared on the percentage of completion method. This is one of the recognised methods for accounting construction contracts in accordance with the standard laid down by the Institute of Chartered Accountants of India " AS 7 ". Separate books of account have been maintained in respect of each of its foreign projects. Such accounts were audited by the overseas auditors and trial balances were drawn from the overseas books in respect of each of these projects incorporating all expenses and receipts attributable to the respective projects. Such accounts were sent to the Head Office of the appellant-company in India. The Head Office incorporated these overseas trial balances in the consoli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o grounds as follows : (i) According to the CIT, the ITO was wrong in allowing deduction of Rs. 63,80,466 under section 80HHB. He held that such deduction was required to be calculated with reference to gross total income of the appellant-company as contemplated in section 80AB of the Income Tax Act. The CIT has mentioned in his notice that the gross total income of the appellant-company had been computed at Rs. 1,27,18,749. According to him, 25 per cent of the said amount of Rs. 1,27,18,749 comes to Rs. 31,79,687 only. Therefore, he felt that the ITO was wrong in allowing excessive deduction under section 80HHB to the extent of Rs. 32,00,779. (ii) According to the CIT, the ITO was wrong in allowing relief under section 91 of the Income Tax Act. He observed that the appellant-company had not been taxed in Iraq and Saudi Arabia and both the countries did not quantify the income and tax thereon. Therefore, the CIT felt that unless the Governments of Iraq and Saudi Arabia determine the income by making final assessments from the projects and issue demand notices relief under section 91 of the Income Tax Act, 1961 is not admissible to the appellant-company. 7. At the time of hearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts were duly certified by the overseas auditors and incorporated in the trial balances. Thereafter, such trial balances were sent to the Head Office of the appellant-company in India. The appellant-company converted all these trial balances drawn in foreign currency into Indian currency at the conversion rates as laid down in paragraph 9 of the schedule to audited accounts at page 100 of paper book No. 1. According to Shri Poddar, this exercise of preparing separate profit and loss account and thereafter consolidating the overseas results in respect of foreign projects was carried out by the appellant-company in its consolidation register maintained at the Head Office. He has contended that the Indian auditors have duly checked and certified them. Separate Profit & Loss Accounts were drawn in such consolidation register. The figures therefrom have been taken and filed in the paper book. The final results of different overseas projects have been duly incorporated in the Head Office books of account and the Indian auditors have audited the same. The Indian auditor's certificate is filed at page 85 of Paper Book No. 1. 10. Shri Poddar urged that section 80HHB nowhere requires that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lude its plural form also. There is no doubt that section 13 of the General Clauses Act means to say that singular includes plural also. Such definition applies only if there is nothing repugnant to the subject or context. For instance, the term 'previous year' in the Income Tax Act cannot be construed as previous years because that would be repugnant to the subject or context in which the term 'previous year' is used in the Act. Such a construction would nullify the very definition of the term 'previous year' as appearing in section 2(11) of the Indian Income Tax Act, 1922. Shri Poddar has relied on the judgment of the Supreme Court in the case of Dhandhania Kedia & Co. v. CIT [1959] 35 ITR 400. He has also relied on another judgment of the Supreme Court in Regional Settlement Commissioner v. Sundardas Bhasin AIR 1963 SC 181 wherein the Supreme Court has held that section 13 of the General Clauses Act would not apply because the context in which the word 'building' is used shows that it would not include the plural. The Supreme Court interpreted the word 'building' as a singular, and not including the plural. 13. The heading of section 80HHB uses the expression 'projects' in plur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the provisions of the Foreign Exchange Regulations Act, 1973 within the prescribed time. 14. The appellant-company is required to maintain separate bank accounts in respect of each of the foreign accounts and each foreign project is required to be cleared separately under the Foreign Exchange Regulations Act, 1973 and the rules made thereunder. 15. Section 80AB was introduced in 1980 with effect from 1-4-1981 by the Finance (No. 2) Act, 1980. The purpose and objects of this section are fully explained by the Central Board of Direct Taxes in paragraph 15 of its Circular No. 281, dated 22-9-1980. It is pointed out that both sections 80AA and 80AB were brought on the statute book in order to get over the difficulty caused by the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. The Court in that case held that the deduction admissible for incorporate dividends has to be calculated under section 80M with reference to the gross amount of dividends received by a domestic company from an Indian company, and not with reference to the dividend income as computed in accordance with the provisions of the Income Tax Act, i.e., after makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid section should be allowed on the net figure, or each individual foreign project should be taken separately and deduction under the said section should be worked out with reference to each of them. The CIT is not correct in asking the ITO to calculate deduction under section 80HHB with reference to the gross total income. The deduction under section 80HHB is to be calculated apparently on a plain reading of the section with reference to the profits from each foreign project as per the conditions laid down in section 80A(2). The aggregate amount of deduction under Chapter VIA including section 80HHB shall in no case exceed the gross total income. The aggregate deduction under section 80HHB is subject to the gross total income but is not required to be calculated with reference to such gross total income as observed and directed by the CIT. 18. With regard to relief pertaining to section 91 it is clear that the said section requires the fulfilment of certain conditions. Those conditions are as follows : (i) The appellant-company has to fulfil certain conditions to claim relief under section 91 of the Income Tax Act, 1961. We have to see and consider whether the appellant-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment in a foreign country. Relief is admissible only if it is shown that some tax is paid in the foreign country either by way of deduction or otherwise. 21. It is not disputed that in respect of foreign projects executed in Iraq income accrued or arose in that country. It is also not disputed that an aggregate sum of Rs. 11,72,869 for which deduction was allowed by the ITO under section 91 in this year represented taxes deducted at source by the Government of Iraq in accordance with the tax laws of that country. It is further not disputed that the rate of tax at Iraq is lower than that prevailing in India. There is no dispute that the assessee ultimately paid more taxes in Iraq on completion of final assessment in the year 1987. As per tax laws of Iraq assessments in that country are to be completed only on completion of the projects. In the instant appeal, such assessments were duly completed on 27-11-1987 and pursuant thereto additional taxes had to be paid by the appellant-company in that country over and above the taxes already deducted at source for different projects including the said sum of Rs. 11,72,869. Section 91 also uses the expression " by deduction or otherwise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and assessed in computing the total income of the appellant-company for the year under appeal. The foreign profits on which the appellant-company paid income-tax in Saudi Arabia were assessed and included in its total income in the year under appeal subject to the allowance of depreciation in accordance with the provisions of the Income Tax Act. The appellant-company paid tax in that country during the previous year under appeal to the tune of Rs. 1,22,400 and all other conditions of section 91 were clearly satisfied in that case. There was nothing wrong in the ITO's allowing deduction of the said sum of Rs. 1,22,400 under section 91 of the Income Tax Act. 24. There is no double taxation agreement between the foreign countries i.e., Iraq and Saudi Arabia, and India. Relief under section 91 is certainly allowable in the instant case and the ITO has rightly allowed the same. As we have already stated above, the CIT had no basis for initiation of proceedings under section 263 apparently on the basis of audit objection, but from the facts on record such action can be easily construed. The Calcutta High Court has held in the case of Jeewanlal (1929) Ltd. v. Addl. CIT [1977] 108 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rebate of the earlier years. Therefore, Shri Sahai urged that since in both these case the Court has held that unabsorbed losses and/or depreciation and/or development rebate are required to be set off before granting any deduction under Chapter VIA there is no reason why the current year's losses suffered by the appellant-company in different foreign projects should not be set off against the profits from other foreign projects for the purpose of computing deduction under section 80HHB. 26. According to Shri Sahai, as regards the relief claimed by the appellant-company under section 91 the observations of the Andhra Pradesh High Court in the case of CIT v. C.S. Murthy [1988] 37 Taxman 185 clearly support the Revenue's case. Shri Sahai contended that since in respect of Saudi Arabia no positive income was assessed to income-tax in India there was no doubly taxed income within the meaning of section 91. According to Shri Sahai, taxes deducted at source are not payments of tax and, therefore, the assessee is not entitled to it under section 91 even in respect of the tax deducted at source to the tune of Rs. 11,72,869 by the Government of Iraq while making contract payments to the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unabsorbed business losses should be deducted, or not having regard to the fact that deduction under section 80M failing under Chapter VIA should not exceed such gross total income. This is not the controversy involved in this case. Even the figure of gross total income as referred to by the CIT in his notice under section 263 was Rs. 1,27,18,749 and the deduction under section 80HHB as allowed by the ITO was Rs. 63,80,466 only. In other words, the deduction under section 80HHB in this case does not exceed the so-called figure of gross total income, was referred to by the CIT in his notice. 31. The controversy before the Kerala High Court was related to deduction under section 80HH and the question was whether in computing the deduction of twenty per cent of the profits and gains from newly industrial undertakings in backward areas unabsorbed depreciation or unabsorbed development rebate of such industrial undertakings in respect of earlier years should or should not be deducted. The Court referred to the decision of the Supreme Court in the case of Distributors (Baroda)(P.) Ltd. v. Union of India [1985] 155 ITR 120 and answered the said issue in the negative, that is, in favour ..... 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