ORDER–Allowing deduction under section 80HHB.
Ratio :
Assessing Officer’s order allowing deduction under section 80HHB, calculated at 25 per cent of profits from overseas projects as per audited accounts could not be said as erroneous and prejudicial on the ground that it should be calculated on gross total income.
Held :
Commissioner not justified in holding that deduction under section 80HHB was required to be calculated with reference to gross total income of the assessee as contemplated in section 80AB.
Application :
Also to current assessment years, though quantum of deduction has been changed to 50 per cent of profits.
Income Tax Act 1961 s.80HHB
Income Tax Act 1961 s.263
Revision under s. 263–ERRONEOUS AND PREJUDICIAL ORDER–Relief granted under section 91.
Ratio :
Allowance of relief under section 91 was made when
all the conditions were satisfied hence could not be said as
erroneous and prejudicial order.
Held :
Allowance of relief when all the conditions were
satisfied could not be said to be erroneous and prejudicial to
the interests of revenue merely because the foreign governments
have not determined the income of the assessee by making final
assessments from the projects and issue demand notices as there
is no such requirement in section 91.
Application :
Also to current assessment years.
Income Tax Act 1961 s.91
Income Tax Act 1961 s.263
Revision under s. 263–ERRONEOUS AND PREJUDICIAL ORDER–Relief under s. 91 allowed on satisfaction of certain conditions.
Ratio & Held:
Relief under section 91 when all the conditions were satisfied could not be said to be erroneous and prejudicial to the interests of revenue merely because the foreign governments have not determined the income of the assessee by making final assessments from the projects and issue demand notices as there is no such requirement in section 91.
Application:
Also to current assessment years.
Income Tax Act 1961 s.263
Revision under s. 263–ERRONEOUS AND PREJUDICIAL ORDER–Deduction under s. 80HHB by calculating 25 per cent of profits from overseas projects.
Ratio & Held:
Assessing officer’s order allowed the deduction under section 80HHB by calculating at 25 per cent of profits from overseas projects as per audited accounts was not erroneous and prejudicial to the interests of revenue so as to be revised under section 263, therefore, the Commissioner, not justified in holding that such deduction was required to be calculated with reference to gross total income of the assessee as contemplated in section 80AB.
Application:
Also to current assessment years.
Income Tax Act 1961 s.80HHB
Income Tax Act 1961 s.263
Revision under s. 263–ERRONEOUS AND PREJUDICIAL ORDER–Deduction under section 80HHB.
Ratio:
Where the assessing officer allowed the deduction under section 80HHB by calculating at 25 per cent of profits from overseas projects as per audited accounts, order, was not erroneous and prejudicial to the interests of revenue so as to be revised under section 263.
Held:
Commissioner was not justified in holding that deduction under section 80HHB was required to be calculated with reference to gross total income of the assessee as contemplated in section 80AB.
Application:
Not to current assessment years.
Income Tax Act 1961 s.80HHB
Income Tax Act 1961 s.263
ORDER
T.A. Bukte, Judicial Member
1. The appellant-company has filed this appeal against the order of the CIT, WB-IV, Calcutta, dated 11-3-1988. The CIT perused the assessment record and found that the assessment was erroneous and prejudicial to the interests of revenue on the following two grounds :
(i) That the appellant-company was granted excessive relief under Section 80HHB of the Income-tax Act, 1961 to the extent of Rs. 32,00,779 ; and
(ii) that relief under Section 91 of the Income Tax Act, 1961 was wrongly allowed” to the appellant-company in respect of Rs. 1,22,400 being the tax paid in Saudi Arabia and another sum of Rs. 11,72,869 being the tax deducted at source in Iraq. The CIT(A) gave six reasons to arrive at such conclusions in his order. They are as follows :
(i) According to him, for 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 accounts in respect of profits and gains derived from the execution of foreign projects. Since it appeared from the report of the overseas auditors of the appellant-company that no Profit & Loss Account had been drawn in respect of foreign projects the ITO was clearly wrong in proceeding on the basis of the Profit & Loss statement in this regard.
(v) According to the CIT, the ITO was not correct in taking only the profitable projects, and not taking into account the other foreign projects of the assessee for the purpose of working out the total profit or loss under Section 80HHB/ 80AB. According to him, all foreign projects of the appellant-company should have been taken together to grant relief under Section 80HHB only on the net profit or loss arising in overseas projects, and not by taking only the profitable projects or ignoring the other projects where there were losses.
(vi) According to the CIT, the Governments of Saudi Arabia and Iraq did not deteirmine the assessable income in those countries and the taxes payable thereon. He held that according to the appellant-company’s own calculation there was no assessable profit in India in respect of the projects in Saudi Arabia and, therefore, there was no doubly taxed income on which the assessee could have been allowed any relief under Section 91 even when certain payments were made by it by way of income-tax on the profits assessed to tax in Saudi Arabia. He felt that the rate of tax in Saudi Arabia should have been treated as ‘nil’ and no relief was admissible to the appellant-company in respect of tax paid in Saudi Arabia.
2. According to the CIT, in respect of the projects in Iraq also income has to be determined in respect of all the projects taken together and relief is admissible under Section 91 only to the extent such income is included in the appellant-company’s total income. In that country, taxes were paid by the appellant-company by way of deduction at source. According to him, no final assessment was completed during the previous year relevant to the assessment year 1984-85 by the Government of Iraq. Therefore, in the opinion of the CIT the appellant-company was not entitled to any relief under Section 91 in respect of taxes deducted at source at Iraq.
3. To appreciate the reasons given by the CIT it is necessary to consider the factual and legal aspects of the matter. The factual aspects are 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 consolidation register by converting the overseas accounts prepared in foreign currency into Indian currency.
4. Separate Profit & Loss Account in respect of each of these projects were drawn by the appellant-company in its consolidation register maintained at the Head Office. Such accounts were drawn in Indian currency and the final results thereof were duly incorporated in the final accounts certified by the Indian auditors. The details of the foreign projects have been filed by the appellant-company in Paper Book No. 1 at pages 62 to 67 and in Paper Book No. 2 at pages 1 and 2. The project-wise profit and loss account is drawn in respect of 21 projects at Iraq. The same appears at page 3 of Paper Book No. 2. Similarly, the project-wise profit and loss account was drawn from 4 projects in execution in Saudi Arabia during the relevant previous year. This appears at page 4 of Paper Book No. 2. The consolidated profit & loss account in respect of Indian activities as well as overseas activities is drawn separately for each overseas country accounts. The same has been filed at page 6 of Paper Book No. 2. The final accounts of the appellant-company for the calendar year 1983 corresponding to the assessment year 1984-85 appear at pages 80 to 100 of Paper Book No. 1. All overseas results have been incorporated in it. All these documents were before the assessing officer as well as the CIT.
5. The appellant-company claimed a deduction of Rs. 63,80,466 under Section 80HHB. The said claim is calculated at 25 per cent of Ps. 2,55,21,864 representing profits from overseas projects as per audited accounts. The ITO allowed this claim in making the assessment of the appellant-company for the year under appeal. The appellant-company also claimed deduction under Section 91 in the sum of Rs. 1,22,400 representing taxes paid in Saudi Arabia and an aggregate sum of Rs. 11,72,869 in respect of taxes deducted at source by the Government of Iraq in accordance with its tax laws. Credit for such payment or deduction also has been allowed by the ITO partly through the assessment order dated 10-4-1985 and the balance through the. rectification order dated 21-5-1985 passed under Section 154 of the Income Tax Act, 1961.
6. After perusing the assessment order the CIT issued a notice dated 29-2-1988 under Section 263 of the Income Tax Act and sought to revise the said assessment order on two 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 GIT 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 hearing, it was clarified that the ITO in his assessment order dated 10-4-1985 did not compute the gross total income of the appellant-company in the sum of Rs. 1,27,18,749 at any place whatsoever. On enquiry it was ascertained that this figure was determined by the Audit Department by deducting two sums representing depreciation of Rs. 2,84,76,234 and investment allowance of Rs. 25,52,578 from the sum of Rs. 4,37,47,561 appearing at page 2 of the assessment order. It cannot be said that the CIT initiated proceedings under Section 263 fully relying on the audit objection. However, certain evidence on record indicates that the audit objection motivated the CIT to initiate action under Section 263. The ITO asked for explanation from the appellant-company based on the audit objection received by him. The appellant-company explained by its letter dated 7-8-1987. However, the explanation did not receive any weight and the proceedings under Section 263 were initiated.
8. The appellant-company’s learned representative, Shri N.K. Poddar filed a written explanation dated 10-3-1988. The appellant-company contended that the assessment order framed by the ITO was neither erroneous nor prejudicial to the interests of revenue. The appellant-company requested the CIT to drop the proceedings initiated under Section 263. The CIT did not agree with the submission made on behalf o”f the appellant-company. He passed the order under Section 263 of the Income Tax Act, 1961 on 11-3-1988. He set aside the assessment made by the ITO and directed him to make a fresh assessment by keeping in mind the directions given by him in respect of the claims under Section 80HHB and .91 of the Income Tax Act. He gave reasons to do so as narrated above.
9. The appellant-company’s learned representative, Shri Poddar has argued at a great length. According to him, it is incorrect on the part of the CIT to hold that the appellant-company did not prepare separate profit and loss account in respect of each of its overseas projects. He contended that it is true that such profit and loss accounts were not drawn by the overseas auditors in foreign currency, but the appellant-company has maintained separate accounts of each foreign project. Such separate accounts were audited by the overseas auditors and separate trial balances were prepared. All expenses and receipts attributable to each of the foreign projects 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 separate profit and loss account should be drawn by the overseas auditors in respect of each of the foreign projects. The assessee is an Indian company and its accounts are required to be audited under the Companies Act, 1956. He urged that Section 80HHB(3)(i) of the Income Tax Act clearly lays down that the separate accounts maintained by the appellant-company in respect of each of the foreign projects should be audited by an Accountant as denned in Section 288(2) of the Income Tax Act. ‘Accountant’ means a Chartered Accountant. In the case of the appellant-company Profit & Loss Account has been duly drawn separately in respect of each of the overseas projects. This becomes clear from the Indian consolidation register in Indian currency. The results have been duly incorporated in the final Profit & Loss Account and Balance Sheet drawn therefrom. The results of the Profit & Loss Account in respect of foreign projects have been filed before the ITO and the CIT.
11. We have to define and interpret Section 80HHB in its right perspective. Section 80HHB refers to the expression “foreign project” in singular form as the expression used in Sub-section (2)(a) & (6) is “foreign project”. Sub-section (1)(b) also uses the expression “in pursuance of a contract”. Proviso to Sub-section (1) uses the expression “such project”. Sub-section 3(i) uses the expression “foreign project”. Similarly, Sub-section (5) also uses the expression “execution of a foreign project”. The same section uses the expression “Foreign Projects Eeserve Account” in subsection (3)(iii) and in proviso to Sub-section (3)(iii) as well as in Sub-section (4) of Section 80HHB. The Statute has used the singular form at certain places and the plural form at other places. In other words, the various expressions intended to express the singular sense wherever such sense reflects. The Statute has used the plural sense wherever the plural sense reflects. A reading of Section 80HHB as a whole where different expressions are used in their singular and plural forms separately indicates that the Legislature intended to make a distinction between the singular and plural forms of different expressions.
12. It is not clear from the order of the CIT whether he has relied on the provisions of Section 13 of the General Clauses Act because, according to him, it appeared that the word ‘project’ would include 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 applie’s 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 plural sense but in the operative part of the section the expression used is in both singular and plural senses. One of the conditions laid down in Section 80HHB(3)(iii) is that an amount equal to twenty-five per cent of the profits and gains of a foreign project referred to in Sub-section (1) should be brought by the assessee in convertible foreign exchange into India within the period prescribed therein. This condition can only be implemented in practice when each of the foreign projects is taken separately. If the losses of different foreign projects are set off against the profits of other foreign projects and only the balance is remitted to this country the condition of Section 80HHB(3)(iii) would not be satisfied. The assessee is required under the law to remit twenty-five per cent of the profits and gains of each of the foreign projects in convertible foreign currency. Some of the foreign contracts in any particular case may not be in convertible foreign currency. Such contracts would not qualify for deduction under Section 80HHB. This clearly shows that the intention of the Legislature is that each of the foreign projects for the purpose of deduction under Section 80HHB should be considered separately. The appellant-company is required to satisfy certain conditions in order to claim the said deduction. Those conditions are as follows :
(i) The assessee has a foreign project as defined in Section 80HHB(2)(6). Such a contract is entered into with the Government of a foreign State or any statutory or other public authority or agency in a foreign State or a foreign enterprise.
(ii) The consideration for the execution of such project is payable in convertible foreign exchange.
(iii) The assessee maintains separate accounts in respect of the profits and gains derived from the execution of such foreign project.
(iv) An amount equal to twenty-five per cent of the profits and gains in respect of each of the foreign projects covered by this section is debited to the Profit & Loss Account of the previous year in respect of which deduction is to be allowed and credited to the Foreign Projects Reserve Account for utilisation by the assessee in the prescribed manner.
(v) An amount equal to twenty-five per cent of the profits and gains in respect of each of the foreign projects is brought by the assessee in convertible foreign exchange into India in accordance with 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 Section 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 making the deductions provided under the Act. However, we are not concerned with those sections at this stage. We have referred to those sections because the CIT has referred to Section 80AB.
16. The object and purpose of Section 80HHB is to encourage Indian companies to earn income in foreign currency and to make remittance thereof to India in convertible foreign exchange. The language of this section is more or less similar to the language used earlier by the statute in Section 80E which provides for relief in respect of profits derived from priority industries. Section 80E as it then stood is considered by the Calcutta High Court in CIT v. Belliss & Morcom (I) Ltd. [1982] 136 ITR 481 (relevant portion at page 484). For our purpose it is not necessary to fully interpret or define Section 80E. It is sufficient to say that certain expressions used in Section 80E are also used in Section 80HHB of the Income-tax Act. The words “gross total income” and the words “there shall be a deduction from such profits and gains of an amount equal to eight per cent thereof” are common. The words “there shall” are common in Section 80E as well as Section 80HHB. The term “an amount equal to eight per cent” is used in Section 80E and the term “an amount equal to twenty-five per cent” is used in Section 80HHB(1). Shri Poddar has relied on the judgment of the Calcutta High Court to justify his contention that similar wordj3 have been used in these two sections intending to grant similar relief. He has cited the decision of the Calcutta High Court in Belliss & Morcom (i) Ltd.’s case (supra) as well as the decision of the Mysore High Court in the case of CIT v. Balanoor Tea & Rubber Co. Ltd. [1974] 93 ITR 115. The Supreme Court has clarified this position in the case of CIT v. Canara Workshops (P.) Ltd. [1986] 161 ITR 320. The Supreme Court has held that the profits and gains earned by one priority industry cannot be reduced by the loss suffered by any other industry or industries owned by the assessee. The said case is in pari materia with Section 80HHB which supports fully the appellant-company’s claim.
17. There cannot be any dispute that the appellant-company has satisfied all the conditions laid down in Section 80HHB for claiming deduction. The only dispute is whether the results of all foreign projects should be merged together and whether the benefit of deduction under the said 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 ejaim relief under Section 91 of the Income Tax Act, 1961. We have to see and consider whether the appellant-company has satisfied those conditions as contemplated under the said section. Those conditions are that (i) whether the appellant-company is a resident in India in the year in which relief is claimed, (ii) whether any income has accrued or arisen to the appellant-company outside India during the previous year, (iii) whether the appellant-company has paid income-tax by way of deduction or otherwise in foreign countries in accordance with the Income-tax Laws of those countries having no agreement under Section 90 to avoid double taxation, and (iv) whether the appellant-company is entitled to deduction from the Indian income-tax payable by it of a sum calculated on such doubly taxed income-tax at the lower rate of tax on that country or the Indian rate of tax.
19. The answers to all the above questions must be in the affirmative for the reasons stated below. The Supreme Court took the view in the case of K.V.AL.M. Ramanathan Chettiar v. CIT [1973] 88 ITR 169 that the Scheme of the Act is that although income is classified under different heads and the income under each head is separately computed in accordance with the provisions dealing with that particular head of income, the income which is the subject-matter of tax under the Act is one income which is the total income. The income-tax is only one tax levied on the aggregate of the income classified and chargeable under the different heads ; it is not a collection of distinct taxes levied separately on each head of income. In other words, assessment to income-tax is one whole, and not a group of assessments for different heads or items of income. The word ‘such’ in the phrase “such doubly taxed income” has a reference to the foreign income which is again subject to tax for its inclusion in the computation of income under the Act, and not the same income under an identical head of income under the Act. The income under each head is not subjected to tax separately. It is the total income which is computed and assessed as such and in respect of which tax relief is given for inclusion of the foreign income on which tax has been paid according to the law in force in that country.
20. Section 91 nowhere requires that before granting relief the tax authorities must find out whether the assessment has been completed in the foreign country or not. Relief under the said section is not dependent upon the completion of assessment 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”. It means that the said section also contemplates granting of relief even when payment of income-tax is made by way of deduction at source. Therefore, on a plain reading of Section 91 the assessee was rightly allowed deduction in respect of taxes deducted at source in the sum of Rs. 11,72,869 as above.
22. Now, the question that remains for consideration is regarding the projects in Saudi Arabia. The appellant-company paid a sum of Rs. 1,22,400 by way of income-tax in that country pursuant to proisional assessment. The rate of tax in that country is also less than the rate of tax prevailing in India. The C1T says that while the appellant-company paid income-tax in that country as it was assessed on a positive income in Saudi Arabia, the assessee showed a loss in respect of its activities in that country for the purpose of assessment in India. Such loss arose on account of claim for depreciation under the Income-tax Act, 1961 inasmuch as the figure of net loss included in the gross total income of the appellant-company in respect of its activities in Saudi Arabia is lower than the claim for depreciation made by the appellant-company in respect of its assets installed at the contract sites in Saudi Arabia. It cannot be denied that the fact that loss under the Indian Income Tax Act is assessable is nothing but a negative income as held by the Supreme Court in the case of CIT v. Harprasad & Co. (P.) Ltd. [1975] 99 ITR 118.
23. Section 2(45) of the Income Tax Act, 1961 defines “total income” to mean the total amount of income, profits and gains referred to in Section 5 as computed in the manner laid down in the Income Tax Act. Section 4 captioned “Charge of Income Tax” emphasises that income-tax shall be charged in respect of the total income of the previous year of every assessee. Section 5 lays down the ambit of the total income. Section 6 enumerates the tax heads of income. Prom the charging section it is clear that the words “income, profits and gains” include losses also so that in one sense the profits and gains represent ‘plus income’, whereas the losses represent ‘minus income’. Losses are necessarily to be taken into account in computing total income. The losses as computing in accordance with the provisions of the Income Tax Act, 1961 after allowing depreciation in respect of foreign projects in Saudi Arabia were included and taken into account 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 daring 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 407 that the initiation of proceedings under Section 263 on the basis of audit objection is ab initio void. Shri Poddar drew our attention to two letters dated 24-3-1988 and 5-7-1988 appearing at pages 105 and 104 respectively of Paper Book No. 1. These are letters of the Ministry of Finance, Department of Revenue not accepting audit objections. The Central Board of Direct Taxes made it clear to the Joint Director (RA), Office of the C & AG of India that Section 80HHB speaks of execution of foreign projects undertaken by the assessee. It does not say foreign projects. Therefore, the project-wise calculation done by the ITO was correct and the deduction allowed by the ITO was also correct. The Department of Revenue, Ministry of Finance, Government of India informed the C & AG that relief under Section 91 was properly allowed to the appellant-company in the year under appeal.
25. As against the factual aspects narrated by Shri Poddar and the legal propositions propounded by him the learned Departmental Representative, Shri V. Sahai has proceeded to argue and urge the following contentions :
(i) The overseas auditors did not prepare separate Profit & Loss Account in respect of each of the foreign projects.
(ii) While reiving on the order of the CIT, he has contended that the CIT has pointed out that all indirect expenses were not debited to individual contract accounts.
(iii) According to Shri Sahai, the learned Departmental Representative, it is well-settled that the expressions in singular also include plural. According to him, this is also clear from the marginal heading of Section 80HHB which uses the words “projects outside India”.
(iv) According to Shri Sahai, the decisions of the Calcutta High Court in the case of CIT v. McLeod & Co. Ltd. [1982] 134 ITR 674 and of the Kerala High Court in the case of CIT v. Kerala Solvent Extractions Ltd. [1987] 165 ITR 174 clearly support the Revenue’s case. He has contended that the Calcutta High Court has held that deduction under Section 80M should be computed after setting off the brought forward business losses of the earlier years in accordance with the provisions of Sections 71 and 72. In the Kerala case, it was held that the assesses wa.s not entitled to claim deduction at twenty-five per cent of the current income under Section 80HHB without setting off unabsorbed depreciation and unabsorbed development 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 [19881 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 appellant-company.
27. Shri Sahai proceeded further and contended that the ITO did not make any discussion in his assessment order as to how and why he allowed deduction under Section 91 and under Section 80HHB to the appellant-company. According to him, there is no application of mind by the ITO in making the assessment for the year under appeal and, therefore, the CIT was right in setting aside the assessment.
28. From the facts narrated above we are unable to accept the propositions put forward by Shri Sahai on behalf of the Revenue. Firstly, Section 91 does not contemplate making assessments by foreign countries. Secondly, it further does not contemplate that the taxes deducted at source or paid otherwise need not to be considered for double taxation.
29. In reply, Shri Poddar, the learned representative for the appellant-company has reiterated his earlier contentions and urged that Section 80HHB(1) does not require separate Profit & Loss Account to be prepared by foreign auditors in respect of each of the foreign projects. According to him, the foreign auditors would not have prepared such Profit & Loss Accounts because those would have been in foreign currency only and preparation of separate Profit & Loss Accounts would not be in accordance with Indian laws. Such accounts, even if prepared by foreign auditors, would be of no use to the Indian Income Tax authorities. The appellant-company prepared separate Profit & Loss Account in respect of each of the foreign projects in its Indian books in accordance with Indian laws and in Indian currency. According to him, there was no violation of the provisions of Section 80HHB(3)(i) of the Income-tax Act, 1961.
30. In his further reply, he has urged that neither the CIT nor the Departmental Representative pointed out any item of the so-called indirect expenses which were required to be charged to any of the foreign projects but not so charged. He has submitted that all expenses as were attributable to individual, foreign projects were properly charged to the projects concerned in accordance with the rules laid down in the Accounting Standard 7, appearing at pages 68 to 76 of Paper Book No. 1. He has also contended that none of the decisions cited by the learned Departmental Representative has any relevance. In the case before the Calcutta High Court the question was whether in computing the gross total income unabsorbed business losses should be deducted, or not having regard to the fact that deduction under Section 80M falling 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 of the Revenue. In the present case, such a question does not arise for consideration at all. There is no question of setting of the earlier years’ losses and/or depreciation and/or development rebate against the profits from any particular foreign project with reference to which deduction is claimed in this case under Section 80HHB. The Department’s case to the effect that the losses from some of the foreign projects should be set off against the profits of other foreign projects is not dealt with in the Kerala decision cited by the Revenue. On the other hand, the case of the appellant-company is fully supported and covered by the decision of the Supreme Court supra.
32. The CIT did not raise the question of the alleged non-application of mind by the ITO either in his notice or in his order. The Department cannot make out a new case on this score at this stage. This is the view expressed by the Punjab & Haryana High Court in the case of CIT v. Jagadhari Electric Supply & Industrial Co. [1983] 140 ITR 490. The Court held that once the reasons given by the CIT in passing order under Section 263 are held to be unfavourable there is an end of the matter. The order of the CIT could not be justified by inventing any other new ground which never formed the basis of the order of the CIT under Section 263. The Tribunal cannot substitute its own reasons for upholding the order of the CIT under Section 263. Section 263 is exclusive jurisdiction of the OIT and His satisfaction is the basis for invoking the said provision of the Act holding that the assessment is erroneous and prejudicial to the interests of revenue. From the facts narrated above we cannot arrive at a conclusion that the assessment is erroneous and prejudicial to the interests of revenue.
33. Shri Poddar contended that it is not correct to say that there was no material before the ITO to allow reliefs under the said sections. He urged that the ITO fully applied his mind and took into consideration all necessary statements, details and particulars furnished by the appellant-company to him. He has reiterated that even the Central Board of Direct Taxes in its two letters clearly agreed that the ITO had properly granted the reliefs in the appellant-company’s case. He has distinguished the Judgment of the Andhra Pradesh High Court in the case C. S. Murthy (supra) contending that this decision took into consideration the exemption available to the salaried employees under Section 80RRA only. According to him, this was not a case of business income. The controversy involved in that case was altogether different from the one involved in this case.
34. We have perused the facts on record. We have also gone through the legal position of the appellant-company’s claims as cited before us. We are of the opinion that the appellant-company’s claims are covered by the decisions of the Supreme Court in the cases of K.V.Al.M. Ramanathan Chettiar (supra) and Harprasad & Co. (P.) Ltd. (supra). The true interpretation of Section 80HHB and 91 would mean that the exemptions allowable under the said sections should be allowed if the conditions laid down therein are satisfied. We are satisfied to come to the conclusion that the appellant-company has satisfied the conditions in order to be entitled to the reliefs under Section 80HHB and 91.
35. In the result, the appellant-company succeeds and the appeal is allowed.