ORDER
S. BANDYOPADHYAY, A.M. :
In this appeal filed by the assessee against the order of the CIT(A), a large number of grounds have been taken up.
2. Whereas ground No. 1 is of general nature, ground Nos. 2 to 13 relate to computation of engineering fees earned by the assessee during the relevant year. The main activity of the assessee-company is to render technical services to its clients which includes preparations of drawings and designs, supervision, inspection, training and assistance in tender work, etc. The clients are mostly steel plants and other big and small industrial undertakings. Besides the same, the assessee also offers services in the line of computer and software development. Substantial amounts of income were also received by the assessees from investments and interest. Admittedly, the company has been following mercantile system of accounting. The AO mentions in the assessment order that the assessee had disclosed engineering fees amounting to Rs. 32,38,34,188 in its accounts. This statement, is however, not fully correct. On examination and verification of the facts, it is found that the above figure actually represents the total amount of engineering fees allocated to the revenue of the assessee out of its receipts etc., in respect of the major jobs done by the assessee. On the other hand, the CIT(A) has discussed that the total amount of engineering fees on jobs as credited to the P&L a/c of the assessee stood at Rs. 39,38,78,316, the details of which are as below :
Rs.
(a) Engineering fees
23,59,00,018
(b) Report on Job
1,24,04,190
(c) Computer job
7,56,09,980
(d) Licence fees on software
51,250
(e) Income on investment
5,78,76,496
(f) Interest received
1,20,36,382
39,38,78,316
Leaving aside the last three items viz., licence fees on software, income on investment and interest received, the actual engineering fees on jobs as taken into consideration by the assessee during the year may thus be considered to be of the amount of Rs. 32,39,14,188.
2(a). Admittedly, the assessee-company has been following mercantile system of accounting. In preparing its accounts, the assessee has been, for a period of over three decades, following the system of computing the engineering fees on the basis of percentage of completion of contract method. The said method is stated to be approved by the Institute of Chartered Accountants of India (ICAI) through its guidelines contained in accounting standard Nos. 7 and 9 published in December, 1983 and November, 1985 respectively. It is the contention of the assessee that the method followed by it is based on matching principles viz., expenditure incurred to earn the particular income has been reckoned to determine the profit.
2(b). The above method followed by the assessee was being accepted by the Department in past. In asst. yr. 1963-64, however, the validity and applicability of the said method to the assessees case was challenged by the Department. However, the Tribunal, upheld the method adopted by the assessee by its order, dt. 16th February, 1965 in ITA No. 6080/64-65. Thereafter, in asst. yr. 1991-92, once more, the method of the assessee was challenged. It was contended in the assessment that the entire amount of receipts in the particular year constituted the income of the assessee as the said receipts arose out of the contracts entered into by the assessee. The AO thus, instead of taking into consideration the computation of engineering fees as adopted by the assessee, took into consideration the entire receipts of the assessee from engineering contracts (excluding the pure advance amounts) to represent the gross turnover of the assessees business in this line. From the same, the expenses as claimed by the assessee were allowed. This method adopted by the AO in asst. yr. 1991-92 was upheld by the CIT(A). In however, a subsequent order passed under s. 154, the CIT(A) accepted the plea of the assessee that expenses to be incurred in future with regard to the payments received in this year were also required to be allowed. However, in the further appeal taken up by the assessee before the Tribunal, the Tribunal, Calcutta Bench, after making detailed discussions of the method adopted by the assessee, passed its order on 26th September, 1996 in ITA No. 1919 (Cal)/1995 and 1918/Cal/1995 r/w C.O. No. 18 (Cal)/1995, in which the Tribunal concluded that inasmuch as the assessee had been following a regular method consistently over a period of three decades, that the profits of the assessee being ascertainable properly on the basis of the said method, that the method of accounting being a recognised one as approved by the accounting standard Nos. 7 and 9 of the ICAI and finally that on the basis of the facts of the case, the method was squarely and fairly applicable for ascertaining the profits of the business of the assessee, there was no point in disturbing the said method by substituting the AOs own method of considering the actual receipts. For asst. yr. 1991-92, therefore, the Tribunal approved of the computation of income by way of engineering fees as adopted by the assessee.
2(c). When the assessment for the present assessment year was taken up by the AO and the appeal was also disposed by the CIT(A), Bangalore, the abovementioned order of the Tribunal, Calcutta Bench, for asst. yr. 1991-92, had not till then been passed. In the present assessment for asst. yr. 1992-93, the AO discussed the terms of contracts of the assessee with some of its important customers/clients and concluded that the percentage of completed contract method as followed by the assessee is not based on any sound scientific method. The AO held that the assessee-company shows the progress of work to suit its convenience and not on realistic basis and, therefore, the true profits of the company could not be deduced by following this particular method. The AO held that any amount receivable or received by the assessee during the year and as per the contract with its client/customer should be treated as income of the assessee for the year. After discussing the salient features of the contracts of the assessee with some of its important clients/customers, the AO came to the conclusion that the amounts receivable/received by the assessee under those contracts were not to be refunded at any time even if such agreements were to be terminated. He thus argued that the entire amount receivable/received during the year represented the income of the assessee for the year. It is required to mention in this connection that the above finding of the AO is not at all correct. The contracts, which the AO has referred to and discussed in the impugned assessment order, only speak of termination of the contract by the clients/customers. There is no doubt about the fact that in such cases, no question of refund of the fees already received by the assessee would arise. The contracts, are however, entirely silent on what would happen if the assessee rescinds the contract during the middle of its continuance or the assessee is not able to render the service satisfactorily or as desired by the assessee. The payments received by the assessee on periodic basis, in such cases, might have to be refunded, at least partially, to the clients/customers.
2(d). The AO also held that the contention of the assessee of matching principles does not support its cause at all. The AO found out that the total engineering fees receivable or received by the assessee in pursuance of the contracts was of the order of Rs. 40,22,07,539. The AO thus added back the amount of Rs. 7,83,73,351 being the difference between this figure and the figure of Rs. 32,38,34,188 as considered by the AO as having been disclosed by the assessee as engineering fees for this year. It is required to be mentioned in this connection that with regard to this matter also, the AO has not taken into consideration the correct amount. In fact, the amount of Rs. 40,22,07,539 represents the aggregate amount of fees receivable by the company during the relevant year in respect of the major contracts as stated above. So far as the totality of the contracts of the assessee is concerned, the figure is somewhat higher.
3. In the appeal filed by the assessee before the CIT(A), Bangalore, the learned CIT(A) discussed the issue threadbare. He emphasised on the following points :
(i) Whereas the gross amount of engineering fees considered as income for the year by the assessee comes around the figure of Rs. 32,39,14,188, the total expenses of the assessee-company during the year, which can be considered to be mostly attributable to earning of such income, stands at Rs. 38,11,37,156 i.e. at a much higher figure than the gross income. Therefore, the assessee has tailored its gross income to show a gross loss from its engineering contracts.
(ii) Para 7.1 of the accounting standard of the ICAI discusses the applicability of proportional completion method. It states that for practical purposes, when services are provided by an indeterminate number of acts over a specified period of time, Revenue is required to be recognised on a straight-line basis over the specific period unless there is evidence that some other method better represents the pattern of performance. In the instant case, however, the assessee takes into consideration while computing the percentage of proportionate completion, not only quantitative cost factors, but also the quality of each job. The straight-line method, as prescribed by the accounting standard of the ICAI has, thus been deviated from by the assessee.
(iii) The assessee has admitted before the AO, while describing the broad method of computing its revenue that only completed components of jobs assigned to any particular personnel are taken into consideration while evaluating the percentage and not incomplete portion of the jobs. This distorts and underestimates the percentage of completed contracts inasmuch as the costs involved in respect of the incompleted portions of jobs are charged to revenue by the assessee.
(iv) The assessee does not take into consideration work-in-progress in respect of incomplete jobs and hence, this method cannot be considered to be satisfactory and depicting the true picture of profit.
(v) An examination of some of the important contracts ensued by the assessee during the year showed that out of the amounts received/receivable by the assessee during the relevant year, only very small portions were assigned to its revenue during the year, the large amounts of balance receipts being carried over to closing balances. Since the customers/clients of the assessee must be making payments to the assessee after making close examination of the activities of the assessee and being satisfied about its performance, it must be held that the major portion of the amounts received/receivable during the year represent fees payable to the assessee in respect of work already done by it and hence, such portions of the amounts received/receivable should actually constitute the income of the assessee.
(vi) Because of the above distortions in the method of accounting followed by the assessee, it cannot be said that the assessee has truly been following the procedure of proportional completion method as prescribed by the ICAI. The order of the Tribunal for asst. yr. 1963-64 which related to a very simple case of assignment of portion of the receipt over a period of two years only, cannot, therefore, be considered to be applicable to the present year. Accordingly, no proper reliance can be placed on the method of accounting being adopted by the assessee which does not depict the true picture of profits of the assessee during the year.
4. In consideration of all the above facts, therefore, the learned CIT(A) distinguished the facts of the present case from those of asst. yr. 1963-64 as decided by the Tribunal. At the same time again, he did not exactly approve of the method as considered by the AO in determining the income of the assessee by way of engineering fees. It is required to be reiterated once more in this connection that the CIT(A) did not have the benefit of the order of Tribunal for the immediately preceding year i.e. asst. yr. 1991-92.
5. During the course of the discussions of the matter before us, Shri K. R. Pradeep, the learned counsel for the assessee strongly relied on the detailed discussions made by the Tribunal, Calcutta Bench, in its order for asst. yr. 1991-92. He has strongly argued that the facts for the present year are in pari materia with those for asst. yr. 1991-92 and hence, the order of the Tribunal, Calcutta Bench, upholding the validity and applicability of the method of accounting as followed by the assessee in asst. yr. 1991-92 should apply with equal force to the present year also. Shri Pradeep has relied on the order of the Karnataka High Court in the case of CIT vs. Shankaranarayanan Construction Co. (1992) 197 ITR 688 (Kar) in which it has been held that the advance amounts received by the assessee being one engaged in construction activities would normally be held as deposits and not as income. Shri Pradeep has strongly argued that the major portions of the amounts received by the assessee were of the nature of on-going payments, being made periodically, by the clients/customers having very little connection with the actual performance by the assessee-company and hence, they constitute nothing but advances received by the assessee-company which should, in no case, form a part of the income of the assessee.
Shri Pradeep has also further argued that the order of the Tribunal for asst. yr. 1991-92 should have a binding effect on the same issue for the immediately succeeding year in view of similarity of the facts and circumstances. He relies on the judgment of the Madras High Court in the case of CIT vs. L. G. Ramamurthy & Ors. (1977) 110 ITR 453 (Mad), on this issue, in which it has been held as follows :
“No Tribunal of fact has any right or jurisdiction to come to a conclusion entirely contrary to the one reached by another Bench of the same Tribunal on the same facts.”
Shri Pradeep has also brought our notice to the obiter passed by the Madras High Court in the case of CIT vs. S. Devaraj (1969) 73 ITR 1 (Mad) to the following effect :
“Though the doctrine of res judicata may not be applicable to the orders of the Tribunal, it is proper and desirable that when the Tribunal takes a particular view on the scope and effect of a statutory provision, it does not contradict itself and come to a diametrically opposite view later as it would be embarrassing to the Revenue and the assessee in general.”
Reliance has also been placed on the same issue on the judgment of the Supreme Court in the case of Mamaleswar Prodesh AIR 1975 SC 907.
6. Shri B. Aruleppa, the learned Departmental Representative on the other hand, strongly argues that in the method followed by the assessee, the matching principles of revenue and expenses are not being met. By referring to the order of the CIT(A) pointing out the defect by way of not taking into consideration the work-in-progress in respect of incomplete jobs, Shri Arulappa has tried to contend that whereas the expenses relating to the incomplete jobs are being charged to revenue account, the income therefrom is not being taken into consideration.
6(a). Shri Arulappa has also argued that the order of the Tribunal for asst. yr. 1991-92 does not have any binding effect inasmuch as in the said order, the Tribunal had clearly noted that the Departmental authorities had never challenged the method followed by the assessee, whereas in the present case, the CIT(A) has shown that the assessee actually deviated from the method of accounting as prescribed by the ICAI.
6(b). Shri Arulappa has relied on the decision of the Privy Council in the case of CIT vs. Sarangpur Cotton Manufacturing Co. Ltd. (1938) 6 ITR 36 (PC), in which it has been held that the ITO is not bound to accept the profits shown by the assessees accounts even where there is a method of accounting regularly employed by the assessee. On the other hand, the Privy Council had held in the said case that it is the duty of the ITO where there is such a method of accounting, to consider whether the income, profits and gains can be properly deduced therefrom and to proceed according to his judgment on the question. It may be mentioned in this connection that the abovementioned judgment of the Privy Council was passed in the context of a systematic undervaluation of stock by that assessee for “secret reserves”. Thereafter, Shri Arulappa has also referred to the judgment of the Patna High Court in the case of Sri Sukhdeodas Jalan vs. CIT (1954) 26 ITR 617 (Pat) to put forward his argument that it cannot be said that merely because a contract was completed after the accounting year, no profits arose or accrued to the assessee in the accounting year and that in the case of incomplete contract, there is a well-established method of calculating profits accruing in the accounting year which is set out at p. 971 of Batlibois Advanced Accounting. Thereafter, Shri Arulappa has tried to rely on the judgment of the Supreme Court in the case of M. M. Ipoh & Ors. vs. CIT (1968) 67 ITR 106 (SC) at p. 109) to argue that the doctrine of res judicata does not apply so as to make a decision on a question of fact or law in proceeding for assessment in one year binding in another year. Thus, Shri Arulappa has finally argued that because of the defects as mentioned by the CIT(A) in the method of accounting being followed by the assessee, the said method is not acceptable and on the other hand, the method as prescribed by the CIT(A) should be taken into consideration preferentially.
7. In reply, Shri Pradeep, learned counsel for the assessee has strongly averred that the method of computing the profits of a company like the assessee, by applying the percentage completion method is a correct method as prescribed by the ICAI and that the assessee did not deviate from this method. He has referred to the letter of the AO addressed to the assessee dt. 28th March, 1995, in which the AO himself has admitted that the assessee had followed the percentage of completion method. Shri Pradeep has also shown that the AO has acknowledged that even in asst. yr. 1993-94, the assessee followed the same method as in the past. Shri Pradeep has, thereafter, tried to rely on the following decisions to the effect that when proper method of accounting is adopted by the assessee by which the profits of the business can be deduced properly, it does not lie upon the Department to reject the accounts by applying the provisions of s. 145(2) and impose its own method :
(i) Gemini Pictures Circuit Ltd. vs. CIT (1958) 33 ITR 547 (Mad);
(ii) Mizar Krishna Annappa Pai & Co. (1968) 69 ITR 830 (Mys); and
(iii) CIT vs. Chunilal V. Mehta & Sons (P) Ltd. (1971) 82 ITR 54 (SC).
Another important matter to which Shri Pradeep has brought our notice is that he has refuted the statement of the CIT(A) that as against the gross income from engineering fees being Rs. 32,39,14,188 only, the entire expenses of the assessee-company being of the order of Rs. 38,11,37,156 should be considered to be expenses incurred for earning this income and hence, the assessee disclosed huge loss on this account. Shri Pradeep has brought our notice to the fact that as per the accounts, the gross income by way of engineering fees on jobs was Rs. 39,38,78,316 in addition to which there were also other items of receipts like miscellaneous receipts, profit on sale of fixed assets and dividend from foreign subsidiary company etc. So far as the income on investment and interest income earned by the assessee at the figures of Rs. 5,78,76,496 and Rs. 1,20,36,496 are concerned, Shri Pradeep has strongly contended that they also constitute nothing but business income of the assessee inasmuch as they are intimately connected with the business activities of the assessee and hence, the total expenses incurred by the assessee must be considered to be attributable to earning such interest income and income on investment also. In support of this contention, Shri Pradeep has relied on the following decisions :
(i) CIT vs. Govinda Choudhury & Sons (1993) 203 ITR 881 (SC),
(ii) Snam Progetti S.P.A. vs. Addl. CIT (1981) 132 ITR 70 (Del);
(iii) CIT vs. Tirupati Woollen Mills Ltd. (1992) 193 ITR 252 (Cal) and
(iv) CIT vs. Paramount Premises (P) Ltd. (1991) 190 ITR 259 (Bom).
8. If we examine the facts of the present case very minutely, we must conclude that the method being followed by the assessee over a long period of about three decades is not only based on the guidelines issued by the ICAI, but also is a scientific one for arriving at the profits of the assessee in a correct manner. The method taken into consideration by the AO cannot at all be considered to be a satisfactory method inasmuch the amounts receivable by the assessee contain, in many cases to a large extent, advances paid by the clients/customers on the contracts assigned by them to the assessee. It is needless to point out specifically that the advances on account of work to be done in future cannot be considered as revenue of the assessee during the relevant year. In fact, as per the terms of contract with the clients/customers, the payments are required to be made by them in a regular manner over a fixed period. The actual performance by the assessee, on the other hand, in a large number of cases, spills over to a future period or gets deferred for various reasons. In such cases, if the entire income be considered to arise during the period in which the payment continues only, then it will have to be considered that there would be no income arising to the assessee when it performs the balance portion of the contract work after the payment is over. In any case, it has strongly been asserted by the assessee that the terms of payment do not have any connection with the actual performance of the contract work by the assessee-company. This argument on the part of the assessee seems to be a reasonable one and can be accepted.
8(a). A fairly big and complicated contract undertaken by the assessee not only continues over a number of years but is also actually required to be performed by the efforts of a large number of employees of the assessee, each one being assigned a specific job or duty and some times even a number of such jobs or duties. Each job may again be considered to consist of a number of different smaller jobs which constitute the totality of the overall job. From the discussions made by the learned counsel for the assessee and from a study of the detailed method of working out the income of the assessee as filed before the AO, we are made to believe that whenever a particular smaller job is completed by the concerned official of the assessee-company, the value of such job considered quantitatively as well as qualitatively is taken into consideration while determining the percentage of contract completed. In case however, that smaller job remains incomplete, the assessee does not take into consideration the amount of labour spent on such incomplete smaller job, in computing the percentage of completed work. The assessee is not engaged in construction work, where even the minutest work is bound to result in some fruitful, material and concrete culmination of the efforts of the contractor and would thus constitute a part of the completed smaller Job, in computing the percentage of completed work. In the assessees case, it is mostly engaged in providing technical consultancy to its clients/customers. Hence, the efforts on the part of its employees remain mostly abstract and in their own minds as long as they do not materialise in the forms of concrete drawings and designs acceptable to the clients/customers. Therefore, the jobs lying incomplete with the officials of the assessee cannot be considered to have any value at all till they fructify in a concrete manner. Hence, in determining the percentage of completed contract, the assessee can be considered to be right in paying no attention to such incomplete jobs lying with its employees. One argument can be made in this connection that expenses incurred by the assessee by way of salaries paid to the concerned employees, etc., are, however, being regularly debited to its accounts and hence, the expenses will not match with the results obtained. A little consideration of the matter would show that although the expenses might be incurred by the assessee, until positive and concrete results are obtained by way of implementation of the ideas of the officials of the assessee in the form of concrete drawings and designs etc., the assessee cannot be considered to be gaining anything on the revenue side on account of such incomplete jobs. If the efforts of a particular official in carrying on such a job over a number of days ultimately fail, then it cannot at all be said that any portion of the overall contract of the assessee was actually completed by such inchoate efforts, although some costs might have been incurred on that account. The costs having been incurred during the course of the business operations of the assessee are, on the other hand, allowable as revenue expenses. We, therefore, agree with the contentions of the assessee that its method in not considering the incomplete jobs lying with its officials, in the process of determining the percentage of completed contract is a reasonable one.
We feel that the CIT(A) has unnecessarily raised the issue relating to the work-in-progress. There is no doubt about the fact that the work-in-progress, either the opening one or the closing one, is not being depicted by the assessee in its accounts. As discussed above, however, in respect of completed items of job included in the overall contract, due care is stated to be taken while determining the percentage of completed contract and in that way, the work-in-progress may be considered to be embedded in the said percentage of completed contract and hence, the income assigned on that account. The assessee is certainly not carrying on any construction activity on its own. Therefore, the question of separately showing work-in-progress cannot arise. Even in the case of a contractor engaged in construction activity also, if the income be determined in accordance with the percentage of completed contract, we feel that the work-in-progress will duly be taken care of. Hence, we do not find any reason behind the clamour raised by the CIT(A) about non-depiction of work-in-progress in the accounts of the assessee.
So far as the question of the expenses exceeding the gross income by way of engineering fees as alleged by the CIT(A) is concerned, we find much substance in the argument of the learned counsel for the assessee that the expenses pertained to the entire activities of the assessee and looking to the issue from that angle, it cannot be said that the assessee has deliberately considered loss from the engineering contracts, although, we do not rule out a case in which such loss also may arise.
9. Let us now consider the method actually prescribed by the CIT(A) himself for computing the income of the assessee by way of engineering fees. The said method is prescribed in para 10 of his order which is being reproduced below :
“The assessee should submit copies of agreements with each of these principals, all correspondence with each of them and all reports received from respective consulting engineers as regards progress of work in the previous years relevant to the asst. yrs. 1991-92, 1992-93 and 1993-94. The assessee is bound to have put certain claims regarding work/services rendered and progress, on satisfaction regarding the claim of which the principals should have cleared further payment of instalments as agreed. A copy of these should also be available. The assessee might have given an estimate of the work involved from its side in each of the project undertaken at the negotiation stage, justifying its claim of fee, before the agreement was signed. A copy of the same, if available, should also be produced. The assessee should also be produced. The assessee should also give an account of the total manpower estimated for the work and the man-hour actually spent in respect of each work. If the assessee is following weighted man-hour method to account work and fees, proper and factual justification for the same should be given in respect of each of the above listed cases. The AO should examine these and such other details as considered necessary and come to a finding about the closing balance of the work for the relevant previous year. He should also find whether the engineering fees are correctly represented in proportion to the work done in the relevant previous year. If the fees are not representing the work done, he can resort to estimate under/over statement of the fee. He should also examine whether any work in progress (attributable to engineering fees not accounted in respect of work done) is to be included in the computation. In this reckoning he can also take into account the expenditure for work debited in the P&L a/c. On this basis, he can come to a conclusion about the correct engineering receipts and work in progress, if any, to be added on the credit side of the P&L a/c at least so far as it relates to the major concerns listed earlier. Since it is difficult to analyse each of the item in the list provided by the assessee, the AO should also consider whether it is possible to quantify suppression, if any, of fees for job and/or work-in-progress component by projecting the suppression, if any discovered in the cases analysis to the transactions with all principals in that list. He should exclude the work completed by the end of the relevant previous year from the purview of such projection. The issue is, therefore, restored to the files of the AO for reconsideration in the lines suggested above.”
It is evident from a mere perusal of the prescription given by the CIT(A) about computing the income of the assessee from this source that he does not at all dish out a well-defined and practical method for the AO to follow. On the other hand, he discusses certain very broad and vague guidelines which the AO should follow in computing the income by way of engineering fees. Wide latitude has been given to the AO for choosing his own parameters and also methods for determining the income in the process. In short, the directions given by the learned CIT(A) for computing the income of the assessee from this source would lead to a very subjective, personal and variant result. If the above directions be put before a number of persons to whom the job of carrying out the orders of the learned CIT(A) be assigned, they are bound to come out with different results which will be widely at variance with one another. In fact, actually the CIT(A) does not prescribe any method at all. If any one tries to follow the method prescribed by him, one is bound to land in a jungle of non-defined concepts, unguided activities and undesirable analyses of indefinite number of parameters of varied nature, leading to insurmountable difficulties in coming to a definite and clear-cut conclusion. We, therefore, hold that the method prescribed by the learned CIT(A) is not a method at all and cannot be given effect to in an objective manner, in reality. We, therefore, have no hesitation in rejecting the prescriptions of the learned CIT(A).
10. So far as the method prescribed by the learned AO is concerned, similar method was examined in detail by the Tribunal, Calcutta Bench for asst. yr. 1991-92. For the detailed reasons given in the order of that Bench and by following the principle that on similar facts, the earlier order of the Tribunal should generally be followed, we respectfully pursue the line taken up by the Tribunal Calcutta Bench and hold that the method of accounting as adopted by the assessee is not only a proper and scientific one but also leads to computation of profits of the assessee in a true and fair manner. Ultimately, therefore, we reverse the decisions of both the lower authorities and uphold the computation of income by way of engineering fees as adopted by the assessee.
11. In grounds No. 14 to 19, the assessee challenges the action of the AO in denying its claim for deduction under s. 80-O fully, as confirmed by the CIT(A). During the relevant year, the assessee received an amount of Rs. 7,39,74,792 towards engineering fees for services rendered abroad. The assessee claimed deduction on this account at 50 per cent of this amount of receipt in foreign exchange under s. 80-O. The AO found that except for PT Ispat Spangs of Indonesia, all other agreements were approved by the CBDT. Hence, theoretically the AO admitted the claim of the assessee towards allowance of deduction under s. 80-O on the amount of Rs. 7,33,69,952 arrived at by deducting the amount of Rs. 6,04,840 being the receipt towards engineering fees from PT Ispat Spangs, Indonesia. At the same time again, whereas the claim of the assessee was for deduction at the rate of 50 per cent of the total amount, the AO calculated expenses incurred in India out of the overall expenses of the office run by the assessee on proportionate basis to be Rs. 6,95,26,332. Ultimately, the AO allowed deduction of Rs. 19,21,810 being 50 per cent of the resultant figure of Rs. 38,43,620. The same issue was the subject-matter of examination by the Tribunal, Calcutta Bench in asst. yr. 1985-86. By its order dt. 13th September, 1991 in ITA No. 1827(Cal)/1990 for asst. yr. 1985-86, Tribunal, Calcutta after examining the provisions of s. 80-O in detail, along with the relevant circulars issued by the CBDT, came to the conclusion that the said provisions stood at a different footing than those of the other sections covered by Chapter VI-A. The Tribunal, thus held that in view of the speciality of s. 80-O, under which deduction was required to be allowed in respect of the income earned by the assessee by rendering services or receiving royalty, etc., in foreign countries in respect of the income received in convertible foreign exchange in India etc., it was not required to deduct any expense incurred in India from the amount of income thus received in convertible foreign currency. The Tribunal, however, held that all expenses incurred abroad to earn the income will, however, have to be deducted from the gross earnings and the net earnings brought to India in the form of convertible foreign currency will have to be considered for the purpose of allowing deduction under s. 80-O. It is required to be mentioned that the total amount on which the assessee claims deduction under s. 80-O actually represents the net earning of the assessee in the foreign country (after deducting all the expenses incurred in the foreign country).
Similar point was also there in the Departmental appeal for asst. yr. 1991-92, before the Tribunal, Calcutta. In that year, the CIT(A) had allowed the assessees claim. The Tribunal, in its combined order dt. 26th September, 1996 (as mentioned above) in ITA No. 1918(Cal) of 1995 upheld the action of the CIT(A). In doing so, the Tribunal mainly followed its earlier order for asst. yr. 1985-86. So far as asst. yr. 1992-93 is however, concerned, the CIT(A) has not chosen to follow the abovementioned two orders of the Tribunal. On the other hand, he has tried to interpret the provisions of s. 80-O in the way that s. 80-AB would apply to the same and hence, only the net income out of the fees received from services abroad (after deducting proportionate expenses incurred in India) would be eligible for deduction under s. 80-O. It is required to be mentioned in this connection that no separate calculation of the net earnings from the fees received in foreign currencies has been made in the assessment order by attributing certain portions of the expenses incurred in India specifically to such earnings, in the assessment order in the matter of computation of total income of the assessee. Only in the paragraph relating to allowance of deduction under s. 80-O, proportionate expenses have been computed by the AO by applying the ratio of the income earned in the foreign countries to the total gross income earned by the assessee to the overall total expenditure incurred by the company.
12. Shri Pradeep, learned counsel for the assessee has strongly contended in this connection that a subordinate appellate authority is bound to obey the order and directions of the superior Tribunal or authority and hence, the CIT(A) has been wrong in not following the two orders of the Tribunal, Calcutta, as mentioned above. In support of the said contention, he has placed reliance on the judgment of the Supreme Court in the case of Bhopal Sugar Industries Ltd. vs. ITO (1960) 40 ITR 618 (SC), at p. 622). Besides the abovementioned two orders of the Tribunal, Calcutta Bench, Shri Pradeep has brought it to our notice that in the case of J. B. Boja & Co. (P) Ltd., the Tribunal Bombay Bench A, Bombay, by its order dt. 27th June, 1994 in ITA Nos. 1850 & 1851 (Bom)/of 1991 also held that the provisions of s. 80-AB should not be applied to the case of allowing deduction under s. 80-O and that in the matter of allowing deduction under s. 80-O, the total income received by the assessee in the form of foreign exchange is required to be considered.
It is found that while trying to support his case, the CIT(A), in the instant case, has mainly relied on the decision of the Karnataka High Court in the case of CIT vs. HMT Ltd. (1993) 203 ITR 811 (Kar). In the said case, two Karnataka High Court held that for the purposes of s. 80J and 80HH, the profits and gains of new undertakings will not be commercial profits but only such profits as are computed in the manner laid down under the Act in pursuance of s. 80AB as if each undertaking was a separate assessee. Both the CIT(A) in his order and also the learned Departmental Representative have argued before us that in view of the abovementioned judgment of the Karnataka High Court, the provisions of s. 80AB must be considered to be applicable to the case of allowing deduction under s. 80-O also.
Shri Pradeep, learned counsel for the assessee, however, strongly argues that the abovementioned judgment was delivered by the Karnataka High Court with regard to allowance of deductions under ss. 80J and 80HH only and, therefore, the same should not be considered to be applicable to the cases of allowing deduction under s. 80-O. Shri Pradeep has placed reliance on a host of decisions as mentioned below to buttress his point that a decision is only an authority for what it actually decides and not for every observations found therein nor what logically follows from the various observations made in it. By arguing with reference to those judgments, Shri Pradeep contends that it is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context as containing a full exposition of law on a question when the question did not even fall to be answered in that judgment. Shri Pradeep thus finally argues that since the Karnataka High Court judgment as mentioned above did not relate to allowance of deduction under s. 80-O, the said judgment cannot be considered to be having any relevance to the present issue :
(i) State of Orissa vs. Sudhansu Sekhar Misra AIR 1968 SC 647;
(ii) H. H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India AIR 1971 SC 530;
(iii) State of U.P. vs. Synthetics & Chemicals Ltd. (87 STC 289 (SC) and
(iv) State of Haryana vs. Goodyear India Ltd. 76 STC 72 (SC).
Thereafter, Shri Pradeep argues that even if it be considered that the expenses specifically incurred in India towards earning the income by way of rendering engineering fees abroad, would have to be deducted from the same, there is no provision anywhere for deduction of the overall expenses in a proportionate manner. In support of his contention in this regard, he has relied upon the following observation of the Calcutta High Court in the case of CIT vs. United Collieries Ltd. (1992) 203 ITR 857 (Cal) :
“The special deduction under s. 80M of the IT Act, 1961, is allowable only on the net dividend which is arrived at after taking into account the expenditure, if any, incurred for the purpose of earning such dividend. Only the actual expenditure incurred by the assessee in earning the dividend income shall be deducted from the dividend income. There is no scope for any estimate of expenditure being made and no notional expenditure can be allocated for the purpose of earning income unless the facts of a particular case warrant such allocation.”
Shri Pradeep, learned counsel for the assessee, also argues that while asserting the applicability of the provisions of s. 80AA to those of s. 80M in the case of Distributors (Baroda (P) Ltd. vs. Union of India & Ors. (1985) 155 ITR 120 (SC), the Supreme Court at p. 137 of the reported judgment, observed that whatever might have been the interpretation placed on cl. (iv) of sub-s. (1) of s. 99 and s. 85A, the correctness of which was not in issue before the Supreme Court, so far as sub-s. (1) of s. 80M was concerned, the deduction required to be allowed under that provision was liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee.
Shri Pradeep argues that the provisions of s. 99(1)(iv) which are in pari materia with those of s. 80-O were thus saved by the Supreme Court from the applicability of the ratio of the decision in the case of Distributors (Baroda)(P) Ltd. (supra). We are, however, unable to agree with this argument of Shri Pradeep inasmuch as not the provisions of s. 99(1) (iv) but the provisions of erstwhile s. 85C were actually in pari materia with those of s. 80-O. In any case, we, on the other hand, agree with Shri Pradeep that both the cases of Distributors (Baroda) (P) Ltd. (supra) and of HMT (supra) as decided by the Supreme Court and the Karnataka High Court respectively, dealt with the question of applicability of the provisions of s. 80AA to those of s. 80-M. No discussion was made in either of these two judgments, not to speak of passing of any ratio decidendi, on the present issue which is before us viz., the question of allowance of deduction under s. 80-O. Hence, we are of the opinion that these two judgments cannot guide the present issue before us.
The learned Departmental Representative has tried to raise another point that the entire amount of Rs. 7,33,69,952 on which deduction under s. 80-O has been claimed, represents only advance received by the assessee from the foreign constituents and not the actual income of the assessee and hence, the provisions of s. 80-O should not apply to the same. We are unable to agree with this sort of argument. Firstly, the amount under consideration forms a part of the income considered to have been earned by the assessee in this year. Secondly, the matter has not been tried to be argued from this angle by either of the lower authorities. Hence, this fresh point cannot be allowed to be raised by the Departmental Representative before us.
The learned Departmental Representative also relies on the judgment of the Supreme Court in the case of M.M. Ipoh & Ors. (supra) to argue that inasmuch as res judicata is unknown to income-tax, the earlier decisions of the Tribunal would not be applicable to the present year. We are unable to agree with this contention also. On the basis of the same facts, the decision of the Tribunal on the same issue is certainly required to be respected, unless the facts can be distinguished or a definite flaw can be found in the earlier judgment. There is no doubt about the fact that the CIT(A) has tried to find out loopholes in the judgments of the Tribunal for the earlier years under consideration, but he has simply given his arguments, which have all been well-considered in the earlier judgments of the Tribunal. Therefore, finally, respectfully following the said judgments of Tribunal, Calcutta Bench, we reverse the orders of the lower authorities and direct that deduction under s. 80-O be allowed at the rate of 50 per cent on the entire eligible amount of foreign receipts viz., Rs. 7,33,69,952.
13. In grounds No. 20, 21 and 21A, the assessee challenges the observation of the CIT(A) to treat the amount of Rs. 34,68,59,746 as unexplained credit. While dealing with the matter relating to determination of engineering fees towards the income of the assessee, the CIT(A) noted that as per the statement filed before him, the following would be the position with regard to the engineering fees :
Rs.
Opening balance of advance received for job
74,46,31,927
Amount received or receivable during the year
47,58,95,283
Total :
1,22,05,27,210
The above amount was shown to have been dealt with as follows :
Rs.
Amount of fees allocated as work-in-progress
32,39,14,188
Closing balance of advance for jobs
89,66,13,022
Total :
1,22,05,27,210
The CIT(A) noted that as against the abovementioned figure of closing balance of Rs. 89,66,13,022, the printed accounts of the assessee show the figure of Rs. 1,24,34,72,768 to be the closing balance of advance received for jobs. The CIT(A) thus considers the difference between the above two figures being Rs. 34,68,59,746 to represent unexplained credit in the accounts of the assessee for this year. He commented that this is an aspect required to be examined by the AO after calling for explanation from the assessee. He remarked that it is possible that this may have a bearing on the decision in the issue No. 1 (determination of the income from engineering fees) as well.
14. Shri Pradeep strongly contends that the above comment on the part of the CIT(A) is totally unwarranted. He argues that by considering the amount of Rs. 34,68,59,746 as unexplained credit, the CIT(A) has virtually made an enhancement without giving an opportunity to the assessee. It is also contended that there was no power with the CIT(A) to raise this issue inasmuch as this does not arise out of the assessment proceedings and hence, this particular issue was beyond the scope of the CIT(A) to touch. In support of this contention, Shri Pradeep has relied upon the following decisions :
(i) CIT vs. Shappoorji Pallonji Mistry (1962) 44 ITR 891 (SC);
(ii) Sterling Construction & Trading Co. vs. ITO (1975) 99 ITR 236 (Kar) and
(iii) CIT vs. Nirbheram Daluram (1980) 17 (MP) 281 : (1981) 127 ITR 491 (MP).
Further reliance has also been placed in this connection on the judgment of the Tribunal, Bangalore Bench in the case of K. S. Dattatreya vs. Asstt. CIT (1994) 50 ITD 481 (Bang). Shri Pradeep furthermore argues that since as per the observations of the CIT(A) as above, this amount may be liable to be treated as unexplained income of the assessee under s. 68, the virtual enhancement made by the CIT(A) where the relevant issue was not before him and without allowing any opportunity to the assessee, is liable to be struck down.
There is no doubt about the fact that in all of the abovementioned decisions, it has been held that the first appellate authority has no power to enhance the assessment by discovering new sources of income not mentioned in the return of the assessee or considered by the ITO in the order appealed against. However, in the present case, inasmuch as the issue relating to determination of income from engineering fees was there before the CIT(A), if he really discovered some portion of the said fees to represent unexplained credit, the CIT(A), in our view, was entitled to make enhancement of the amount. At the same time again, we feel that before actually making such enhancement, it would be required of the CIT(A) to allow an opportunity of being heard to the assessee. However, in the instant case, the CIT(A) has not exactly directed that the amount under consideration is required to be assessed to tax as unexplained credit. He has merely commented that this aspect requires examination at the end of the AO. At the same time again, he has not exactly remitted the matter back to the file of the AO to deal with this issue, in explicit terms.
15. Without going into the complexity about appropriateness of the remark passed by the CIT(A) as above, we consider that it would suffice if the matter be dealt with on merits. Shri Pradeep has clarified before us that the statement filed before the AO merely contained the details of advances received and appropriation thereof made to income account along with the amount of closing balance left in respect of such contracts where the work had actually commenced in this year. On the other hand, it has been stated that in a number of cases where advances were received by the assessee on jobs but work did not begin in the relevant year, the entire amount of advances remained in the closing balance and that such contracts, the closing balance in respect of which total upto Rs. 34,70,59,746 did not find place in the statement produced before the AO. The reconciliation in this regard, taking into consideration even the jobs of above type (on which advances were received during the year but work did not begin) has been given as below : It is stated that this statement was filed before the AO also but he did not take into consideration the same and make any discussion about these figures in the assessment order :
Rs.
Opening balances of advances in respect of all jobs
74,46,41,927
Advances received/receivable during the year on all such jobs
82,27,45,028
Total :
1,56,73,86,955
Accounted for as :
Appropriation made to the income account
32,39,14,188
Closing balance as appearing in the printed accounts
1,24,34,72,768
Total :
1,56,73,86,956
The total amount received/receivable during the year aggregating to Rs. 82,27,45,028 has thus been bifurcated in the following manner :
Rs.
(a) Advances receivable/received towards jobs performed during the year
47,56,85,282
(b) Advances received on signing of agreements in respect of jobs where no work was commenced during the year
34,70,59,746
Total :
82,27,45,028
On a deeper examination of the matter, we are convinced about the veracity of the assertion made by the learned counsel for the assessee in this regard. From the list of the jobs undertaken in this year on which although advances were received but no work was carried on, totalling to Rs. 34,70,59,746 we find that the items enumerated in the said list do not find place in the other list considered by the CIT(A). However, even in the said list also, there are certain items like item Nos. 74, 141, 161 and 179, where advances are found to have been taken by the assessee on jobs which do not seem to have been started in this year and hence, the entire advances were carried forward towards closing balances. This sort of minor mixing up of items appears to have crept in the accounts. However, there is no actual error or duplication, which has been verified by us. On the whole, therefore, we are satisfied with the reconciliation provided by Shri Pradeep. We, therefore, hold that the amount of Rs. 34,70,59,746 as considered by the learned CIT(A) (with minor modifications) stands well explained and there is no scope to treat the same as unexplained credit. Hence, we knock down the observation of the CIT(A) in this regard and hold that no further examination is required to be made on this account.
16. The assessee claimed the following expenses as revenue expenses incurred in respect of premises taken on lease at its Madras and Calcutta offices as follows :
Rs.
(a) Flush doors, shutters, work tables
2,79,975
(b) Fixing of marblex super PVC tiles
63,934
(c) Fixing of false ceiling
71,602
(d) Marblex tiles for computer centre
1,05,165
(e) Cable ducks, pantry work in computer centre
5,33,394
(f) Civil works on ground floor
79,300
In Calcutta office :
New toilet and pantry works
1,77,296
13,10,716
The AO disallowed the claim of the assessee by commenting that the expenses being of the nature of replacement and repairs expenses towards civil works, furniture, etc., are to be treated as capital expenses. He stated that Expln. 1 to s. 32 clearly treats such expenses as capital expenses. The action of the AO has been upheld by the learned CIT(A).
17. The learned counsel for the assessee has strongly argued in this connection that the expenses were incurred in replacing/renewing some of the existing assets like doors, tiles, etc., in the premises taken by the assessee on lease/tenancy basis. It is thus claimed that such expenses are to be treated as revenue expenses. In support of this argument, reliance has been placed on the following judgments :
(i) CIT vs. Rex Talkies (1984) 148 ITR 560 (Kar);
(ii) Ahmedabad Manufacturing & Calico (P) Ltd. vs. CIT (1986) 162 ITR 800 (Guj);
(iii) Addl. CIT vs. Dalsukhrai Jaidayal (1979) 117 ITR 466 (All) and
(iv) CIT vs. J.K. Industries (P) Ltd. (1980) 125 ITR 218 (Cal).
In accordance with Expln. 1 to s. 32, depreciation is required to be allowed on capital expenses incurred in leasehold premises. That particular Explanation, however, does not determine the character of the expense viz., whether it is of capital or revenue nature. On the other hand, it has been held in a large number of cases, some of which have been relied upon by the assessee as above, that expenses incurred towards replacing/existing assets like plant and machineries or part of building, etc., are required to be allowed as revenue expenses. In that view, the entire expenses incurred at the Madras office being of the nature of replacement and renewal expenses are required to be allowed. The same, however, cannot be said about the expense incurred towards constructing a new toilet and pantry works in the Calcutta office. This is totally a new construction work and should, therefore, be considered to be of the capital nature. We, therefore, uphold the action of the lower authorities in disallowing the claim of Rs. 1,77,296 incurred in the Calcutta office. So far as other expenses under consideration, incurred at the Madras offices are concerned, we reverse the decisions of the lower authorities and direct that the said expenses be allowed as revenue expense. At the same time again, we also direct that if any depreciation be allowed on the same, the same has got to be withdrawn.
18. The other grounds/relating to levy of interest under s. 234B are stated to be merely of the nature of asking for consequential reliefs. Since consequential reliefs are required to be allowed automatically, no specific order in that regard need be passed. Hence, these grounds are being dismissed.
19. In the result, the appeal filed by the assessee is partially allowed to the abovementioned extent.