IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE25H DAY OF MARCH2015R PRESENT THE HON’BLE MR. JUSTICE N.KUMAR AND THE HON’BLE MR. JUSTICE B.SREENIVASE GOWDA I.T.A.No.879/2008 c/w I.T.A.Nos.882/2008, 907/2008, 909/2008, 880/2008, 881/2008, 904/2008, 905/2008, 108/2009, 109/2009, 210/2009, 211/2009, 209/2009, 333/2009, 334/2009 & 363/2009 In ITA No.879/2008: BETWEEN : M/s Wipro Limited 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore - 560 035 Rep. by Sri P.V.Srinivasan Authorised Signatory ...APPELLANT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) AND : The Deputy Commissioner of Income Tax Central Circle 1 (3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore 560 001. …RESPONDENT (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) - 2 - This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.468/BNG/2006, for the assessment year 2001-2002, praying to: I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.468/BNG/2006, dated 30.05.2008 in the interest of justice. In ITA No.882/2008: BETWEEN : M/s Wipro Limited 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore - 560 035 Rep. by Sri P.V.Srinivasan Authorised Signatory ...APPELLANT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) AND : The Deputy Commissioner of Income Tax Central Circle 1 (3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore 560 001. …RESPONDENT (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.426(BANG)/2006, for the assessment year 2001-2002, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.426(BANG)/2006, Dated 30-05-2008 in the interest of justice.-. 3 - In ITA No.907/2008: BETWEEN :
1. The Commissioner of Income Tax Central Circle, C.R.Building, Queens Road, Bangalore The Deputy Commissioner of Income Tax Central Circle 1(3), C.R.Building Queens Road, Bangalore.
2. ...APPELLANTS (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) AND : M/s Wipro Ltd., Doddakannelli, Sarjapur Road Bangalore …RESPONDENT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in Ita.No.468/BANG/2006, for the assessment year 2001-02, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.468/BANG/2006, Dated 30.05.2008 confirming the order of the Appellate Commissioner and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore, in the interest of justice and equity.-. 4 - In ITA No.909/2008: BETWEEN :
1. The Commissioner of Income Tax Central Circle, C.R.Building, Queens Road, Bangalore The Deputy Commissioner of Income Tax Central Circle 1(3), C.R.Building Queens Road, Bangalore.
2. ...APPELLANTS (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) AND : M/s Wipro Ltd., Doddakannelli, Sarjapur Road Bangalore. …RESPONDENT (By Sri Venkataraman, Senior counsel for Dr.R.B.Krishna, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 in arising out of order dated 30.05.2008 passed ITA.No.426/BANG/2006, for the assessment year 2001-02, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.426/BANG/2006, dated 30.5.2008 confirming the order of the Appellate Commissioner and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore in the interest of justice and equity.-. 5 - In ITA No.880/2008: BETWEEN : M/s Wipro Limited 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore - 560 035 Rep. by Sri P.V.Srinivasan Authorised Signatory ...APPELLANT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) AND : The Deputy Commissioner of Income Tax Central Circle 1 (3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore - 560 001. …RESPONDENT (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.469/BNG/2006, for the assessment year 2002-2003, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.469/BNG/2006, Dated 30.05.2008 in the interest of justice.-. 6 - In ITA No.881/2008: BETWEEN : M/s Wipro Limited 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore 560 035, Rep. by Sri P.V.Srinivasan authorised signatory. ...APPELLANT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) AND : The Deputy Commissioner of Income Tax Central Circle 1 (3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore 560 001. …RESPONDENT (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.427/BANG/2006, for the assessment year 2002-2003, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.427/Bng/2006, Dated 30-05-2008 in the interest of justice. In ITA No.904/2008: BETWEEN :
1. The Commissioner of Income Tax Central Circle, C.R.Building, 2.-. 7 - Queens Road, Bangalore The Deputy Commissioner of Income Tax Central Circle 1(3), C.R.Building Queens Road, Bangalore. ...APPELLANTS (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) AND : M/s Wipro Ltd., Doddakannelli, Sarjapur Road Bangalore. …RESPONDENT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.469/BNG/2006, for the assessment year 2002-03, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.469/BNG/2006, Dated 30.05.2008 confirming the order of the Appellate Commissioner and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore, in the interest of justice and equity. In ITA No.905/2008: BETWEEN :
1. The Commissioner of Income Tax Central Circle, C.R.Building, Queens Road, Bangalore 2.-. 8 - The Deputy Commissioner of Income Tax Central Circle 1(3), C.R.Building, Queens Road, Bangalore. ...APPELLANTS (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) AND : M/s Wipro Ltd., Doddakannelli, Sarjapur Road Bangalore. …RESPONDENT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.427/BNG/2006, for the assessment year 2002-2003, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.427/BNG/2006, Dated 30-05-2008 confirming the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore, in the interest of justice and equity. In ITA No.108/2009: BETWEEN : M/s Wipro Limited 76R & 80P, Doddakannelli Sarjapur Road, Bangalore 560 035 Rep. by P.V.Srinivasan as authorised signatory ...APPELLANT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) - 9 - AND : The Deputy Commissioner of Income Tax Central Circle 1(3), 3rd Floor Central Revenue Buildings Queens Road, Bangalore 560 001. …RESPONDENT (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 31.10.2008 passed in ITA No.817/BANG/2007, for the assessment year 2003-2004, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.817/BANG/2007, dated 31/10/2008 in the interest of justice. In ITA No.109/2009: BETWEEN : M/s Wipro Limited 76R & 80P, Doddakannelli Sarjapur Road, Bangalore 560 035 Rep. by its P.V.Srinivasan as authorised signatory ...APPELLANT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) AND : The Deputy Commissioner of Income Tax, Central Circle (3), 3rd Floor, - 10 - Central Revenue Building Queens Road, Bangalore 560001. …RESPONDENT (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) . . . . This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 31.10.2008 passed in ITA No.624/BANG/2007, for the assessment year 2003-2004, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.624/BANG/2007, Dated 31/10/2008 in the interest of justice. In ITA No.210/2009: BETWEEN :
1. The Commissioner of Income Tax C.R.Building, Queens Road, Bangalore The Deputy Commissioner of Income Tax Central Circle-1 (3), C.R.Building, Queens Road, Bangalore.
2. ...APPELLANTS (By Sri E.R.Indrakumar, Senior Counsel for Sri E.Sanmathi, Adv.) AND : M/s Wipro Ltd., Doddakannelli, Sarjapur Road, Bangalore. …RESPONDENT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) - 11 - This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 31.10.2008 passed in ITA No.624/BANG/2007, for the assessment year 2003-2004, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.624/BANG/2007, Dated 31/10/2008 in the interest of justice. In ITA No.211/2009: BETWEEN :
1. The Commissioner of Income Tax C.R.Building, Queens Road, Bangalore The Income Tax Officer Central Circle-1 (3), C.R.Building, Queens Road, Bangalore.
2. ...APPELLANTS (By Sri E.R.Indrakumar, Senior Counsel for Sri E.Sanmathi, Adv.) AND : M/s Wipro Ltd., Doddakanneli, Sarjapur Road, Bangalore. …RESPONDENT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 31.10.2008 passed in ITA.No.817/BANG/2007, for the assessment year 2003-04, praying to I) Formulate the substantial questions of law - 12 - stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.817/BANG/2007, Dated 31-10-2008 and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore, in the interest of justice and equity. In ITA No.209/2009: BETWEEN :
1.
2. The Commissioner of Income Tax C.R.Building, Queens Road, Bangalore The Deputy Commissioner of Income Tax Central Circle-1 (3), C.R.Building, Queens Road, Bangalore. ...APPELLANTS (By Sri E.R.Indrakumar, Senior Counsel for Sri E.Sanmathi, Adv.) AND : M/s Wipro Ltd., Doddakanneli, Sarjapur Road, Bangalore. …RESPONDENT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 31.10.2008 passed in ITA.No.1178/BANG/2007, for the assessment year 2003-04, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1178/BANG/2007, Dated 31-10-2008 and confirm the order of the Appellate Commissioner confirming the order passed by the Deputy - 13 - Commissioner of Income Tax, Central Circle-1(3), Bangalore, in the interest of justice and equity. In ITA No.333/2009: BETWEEN : M/s Wipro Limited Rep. by Authorised Signatory P.V.Srinivasan, 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore-560035. ...APPELLANT (By Sri E.R.Indrakumar, Senior Counsel for Sri E.Sanmathi, Adv.) AND : The Deputy Commissioner of Income Tax, Central Circle 1(3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore-560001. …RESPONDENT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.01.2009 passed in C.O.No.77/BNG/2007, for the assessment year 2004-2005, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in C.O.No.77/BNG/2007, dated 30-01-2009 in the interest of justice and equity.-. 14 - In ITA No.334/2009: BETWEEN : M/s Wipro Limited Rep. by Authorised Signatory P.V.Srinivasan, 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore-560035. ...APPELLANT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) AND : The Deputy Commissioner of Income Tax Central Circle 1(3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore-560001. …RESPONDENT (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.01.2009 passed in ITA No.1072/BNG/2007, for the assessment year 2004-2005, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1072/BNG/2007, Dated 30-01-2009 in the interest of justice and equity. In ITA No.363/2009: BETWEEN :
1. The Commissioner of Income Tax C.R.Building, Queens Road, 2.-. 15 - Bangalore The Deputy Commissioner of Income Tax Central Circle-1(3), C.R.Building Queens Road, Bangalore. ...APPELLANTS (By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) AND : M/s Wipro Ltd., Doddakanneli, Sarjapur Road Bangalore. …RESPONDENT (By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.) This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.01.2009 passed in ITA No.1072/BNG/2007, for the assessment year 2004-2005, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1072/BNG/2007, dated 30-01-2009 confirming the order of the Appellate Commissioner and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle – 1(3), Bangalore, in the interest of justice and equity. These I.T.As coming on for hearing, this day, N.Kumar J., delivered the following:
JUDGMENT
These batch of appeals filed by the assessee and the revenue/department arise out of the orders passed by the - 16 - Bangalore Bench of the Income Tax Appellate Tribunal in the case of the assessee-company, M/s Wipro Limited for the assessment years 2001-02, 2002-03, 2003-04 and 2004-05. The assessee is the appellant in ITA Nos. 879/2008, 880/2008, 881/2008, 882/2008, 108/2009, 109/2009, 333/2009 and 334/2009. The revenue is the appellant in ITA Nos. 907/2008, 909/2008, 904/2008, 905/2008, 209/2009, 210/2009, 211/2009 and 363/2009.
2. The assessee-company is a public limited company, listed in India and US engaged in the business of software exports, computer peripherals, IT enabled services, manufacture and sale of vegetable oils, soaps, leather products, hydraulic cylinders and tippers, and manufacture of reagents as well as marketing and support of medical equipment and other related businesses. The business of the company is carried on through the various business units or divisions of the company. It is the case of the assessee that it runs each business unit as an independent profit center. Accordingly separate accounts are maintained for each - 17 - business unit. The accounts of the assessee are compiled on the basis of consolidation of all accounts maintained at the business unit levels.
3. The facts of the case for each assessment year are set out in brief as under: Assessment Year 2001-02 - ITA Nos. 879 & 882/2008; 907 & 909/2008 The appellant filed its return of income for the assessment year 2001-02 on 30.10.2001 disclosing a total income of Rs.135,51,15,000/- after claiming deduction under Section 10A of the Income Tax Act (for short, hereinafter referred to as the ‘Act’) to the extent of Rs.620,17,27,569/-.
4. The case for assessment year 2001-02 was selected for scrutiny and notice u/s 143(2) was issued on 09.11.2001. The assessee moved a rectification application u/s 154 for having wrongly claimed deduction u/s 80HHC at 100% instead of 80%. Rectification order was passed on - 18 - 19.02.2002 and the income was determined at Rs.114,72,43,817/- u/s 143(1) read with Section 154. Notice u/s 142(1) was issued on 21.12.2001 with a questionnaire. Further notices u/s 142 (1) were issued on various dates beginning from 7.10.2003 to 8.3.2004. The assessee- company filed written replies along with enclosures from time to time. The return furnished on 30.10.2001 was processed u/s 143(3) of the I.T.Act on 24.03.2004 and order was passed after making certain allowances/ disallowances. The total income of the assessee-company was determined at Rs.598,69,89,110/- for assessment year 2001-02. The demand, after making adjustments for interest, advance tax and tax refunded, was quantified at Rs.261,45,68,657/-.
5. Assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. which was disposed-off by the CIT(A) vide order dated 20.03.2006. Aggrieved by the said order, both the assessee and the Department preferred separate appeals before the ITAT. The ITAT, vide common order dated 30.05.2008 disposed of the appeals.-. 19 - Assessment Year – 2002-03 - ITA Nos. 880 & 881/2008; 904 & 905/2008 6. The assessee-company filed its return of income for the assessment year 2002-03 on 31.10.2002 disclosing a total income of Rs.112,73,48,342/- after claiming deduction u/s 10A of the Act to the extent of Rs.808,17,76,941/-. The case was selected for scrutiny and notice u/s 143(2) was issued on 03.01.2003. Notice u/s 142(1) was issued on 05.11.2003 with a questionnaire. Further notices u/s 142(1) were issued on various dates beginning from 25.01.2005, 08.02.2005, 14.03.2005 and 15.03.2005. The assessee- company filed written replies along with enclosures from time to time. Assessment u/s 143(3) was completed and order dated 31.03.2005 was passed after making certain allowances/ disallowances. The total income of the assessee- company was determined at Rs.717,81,57,770/- for assessment year 2002-03. The demand, after making certain adjustments for interest, advance tax and tax refunded, was quantified at Rs.261,66,03,694/- for AY200203. 7.-. 20 - Assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. which was disposed-off by the CIT(A) vide order dated 20.03.2006. Aggrieved by the said order, both the assessee and the Department preferred separate appeals before the ITAT. The ITAT, vide common order dated 30.05.2008 disposed of the appeals. Assessment Year 2003-04 – ITA Nos. 108 & 109/2009; 210 & 211/2009 8. The assessee-company filed its return of income for the assessment year 2003-04 on 27.11.2003 disclosing a total income of Rs.164,86,92,630/- after claiming deduction u/s 10A of the Act to the extent of Rs.763,34,75,604/-. The assessee had claimed relief under Double Taxation Avoidance Agreement u/s 90 in the return amounting to Rs.20,99,63,631/-. The assessee also claimed TDS of Rs.9,55,12,095/- and advance tax payment of Rs.69,40,50,000/-. The assessee claimed refund of Rs.39,36,31,184/-. The return of income was processed u/s 143(1) on 15.07.2004 and the case was selected for scrutiny - 21 - and notice u/s 143(2) was issued on 15.07.2004. A questionnaire was issued on 16.8.2005 calling for certain details and the compliance was fixed on 22.8.2005. The assessee-company also had international transactions with Associated Enterprises, which were referred to the Transfer Pricing Officer for determination of arms’ length price, who passed an order u/s 92CA. Assessment u/s 143(3) was completed and orders dated 28.03.2006 for assessment year 2003-04 was passed after making certain allowances/ disallowances, re-computation of deductions u/s 10A and 80-IB leading to a taxable income of Rs.740,10,34,452/.
9. Assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. which was disposed-off by the CIT(A) vide order dated 29.03.2007. Aggrieved by the said order, both the assessee and the Department preferred separate appeals before the ITAT. The ITAT, vide order dated 31.10.2008 disposed of the appeals. Assessment Year 2004-05 – ITA No.333 & 334/2009; 363/2009 - 22 - 10. The assessee-company filed its return of income for the assessment year 2004-05 on 31.10.2004 disclosing a total income of Rs.134,86,47,530/- after claiming deduction u/s 10A of the Act to the extent of Rs.881,34,08,342/- The assessee-company also had international transactions with Associated Enterprises, which were referred to the Transfer Pricing Officer for determination of arms’ length price. As per the return filed the tax payable was Rs.48,38,27,302/-. The assessee also claimed TDS of Rs.6,02,14,066/- and advance tax payment of Rs.59,50,80,000/-. The assessee claimed refund of Rs.17,12,21,725/-. The return of income was processed u/s 143(1) on 31.01.2005 and the case was selected for scrutiny and notice u/s 143(2) was issued on 14.02.2005. A questionnaire was issued on 27.04.2006 calling for certain details and the compliance was fixed on various dates beginning from 19.05.2006. The assessee- company filed written replies along with enclosures. Assessment u/s 143(3) was completed and orders dated 29.12.2006 for assessment year 2004-05 was passed after - 23 - making certain allowances/ disallowances, re-computation of deductions u/s 10A and 80-IB leading to a taxable income of Rs.846,77,24,943/-.
11. Assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. which was disposed-off by the CIT(A) vide order dated 09.07.2007. Aggrieved by the said order, the Department preferred an appeal before the ITAT. The assessee filed a Memorandum of Cross Objections. The ITAT, vide order dated 30.01.2009 disposed of the appeal and the Cross objections. Assessment Year 2003-04 – ITA No.209/2009; 12. There are two more substantial questions of law arising out of the order dated 26.09.2007 passed by the Commissioner u/s 263 of the Act. Assessee filed an appeal to the ITAT in ITA No.1178/2007 and ITAT disposed-off the appeal vide order dated 31.10.2008. Against the order of the ITAT, department has filed an appeal in this Hon’ble Court u/s 260A of the Act. Substantial questions raised therein are connected with this batch of appeals.-. 24 - 13. Several substantial questions of law do arise for consideration in these batch of appeals. Some of the substantial questions of law are already answered either in favour of the revenue or in favour of the assessee in the very assessee’s case. Some of the substantial questions of law are already answered by the Apex Court. However, some of the substantial questions of law do arise for consideration for the first time in these appeals. They are now first taken up for consideration. Substantial question of law No.1 [Question of law No.(e) in ITA No.879/2008, 880/2008 and 334/2009; Question of law No.(d) in ITA No.108/2009 (Assessee’s appeal)]. “Whether the Tribunal was right in holding that credit for income tax paid in a country outside India in relation to income eligible for deduction under section 10A would not be available under section 90(1)(a)?.” [Question of law No.18 in ITA Nos. 210 & 211/2009 (Department’s Appeal)]. - 25 - “Whether the appellate authorities were correct in reversing the finding of the AO that the credit for taxes paid in foreign countries being income which falls u/s 10A of the Act does not fall part of the total income to the extent of 90% for which deduction is allowable as it falls under Chapter III and does not therefore partake the nature of total income chargeable to tax as per provisions of section 4 of the Act and therefore not entitled to?.” 14. The assessee-company is engaged in the business of export of computer software including services for on-site development of software through its permanent establishment (PE) in many countries such as USA, UK, Canada, Japan, Germany. The assessee computes the profits attributable to the PEs, pays the applicable income taxes on such profits and files the returns of income as required by the domestic tax laws in the respective countries. The clients in some countries withhold tax at source from the consideration payable to the assessee- company which is regarded as the final tax in such - 26 - countries. The assessee being an Indian Company as defined in Section 2(26) of the Act and is a tax resident in India in terms of Section 6 of the Act, it is, therefore, liable to tax in India on its worldwide income including the profits attributable to its Permanent Establishments in foreign countries and also the incomes which are subjected to withholding tax in foreign countries.
15. The assessee-Company claims that it is entitled to relief of such income taxes paid in the foreign jurisdiction. The entitlement to relief of foreign tax is governed by the relevant Double Taxation Avoidance Agreements (DTAAs) with the foreign countries or specified territories as the case may be. For the assessment year 1990-91 in the case of Wipro Infotech Limited (the assessee’s erstwhile wholly owned subsidiary which since merged with the assessee company with effect from 01.04.1994) full credit for foreign taxes was granted by applying Article 25 of the India-US DTAA even though 50% deduction of the eligible income under Section 80-O of the Act was allowed. The said relief - 27 - was granted by the CIT(A) which the Department has accepted. Since the claim for foreign tax credit is an entitlement like any other pre-paid tax, no revised return as contemplated under Section 139(5) was required. The limitations of the domestic tax law, if any, would also not apply where relief is to be allowed as per the provisions of DTAA.
16. By a letter dated 10.02.2004, request was made to allow tax credit of Rs.24,94,67,448/- at the fag end of the assessment proceedings which was erroneously not claimed earlier. Therefore, the assessee raised a claim for tax credit for the tax paid in foreign countries. The assessing authority relying on Section 139(5) of the Act held that the claim is not admissible at this juncture. Section 139(5) of the Act defines the mandatory requirements and the time limit for rectification and the assessee has not filed any revised return for claim of tax credit with reference to income computed under Section 10A.-. 28 - 17. Thereafter, the Assessing Authority proceeded to decide the claim on merits also. Insofar as assessment year 2001-02 is concerned, as the assessee has not filed any detailed break-up of the income being taxed in India and other countries, he has held that he is not in a position to allow tax rebate at this juncture. However, in the assessment order passed for the assessment year 2002-03, where break-up figures were furnished, he has discussed this question at length. After considering the said break-up figures, the assessing authority held that the assessee’s claim of foreign tax credit is on the ground that the entire earnings in respect of claim under Section 10A has been included in computing the total income. Section 10A which is appearing under Chapter III refers to “incomes which do not form part of total income”. It is, therefore, clear in the first instance income falling under Section 10A did not form part of total income of the assessee in India. Since Section 10A falls under Chapter III, it does not therefore partake of the nature of total income chargeable to tax as per the - 29 - provisions of Section 4 of the Act. In the second instance, no tax was paid on this income. The credit is being claimed under the provisions of Section 90, which is applicable for the grant of relief in respect of income on which have been paid both income tax under this Act and Income Tax in the foreign country. The issue of credit under Section 90 clearly does not arise. Then, after referring to agreements with various countries and after referring to the judgments on which reliance was placed it was held the claim made by the assessee for foreign tax credit is not admissible. The assessee has also made a claim for tax relief against the State Taxes paid in USA and Canada. A perusal of the DTAA with USA and Canada shows that the claim is admissible only for the taxes paid under the Income Tax Act in India and Federal tax in USA and Canada. Therefore, the claim for relief for the State Taxes paid is not admissible. The assessee’s claim is only admissible for the income for which deduction has been rejected under Section10-A i.e., - 30 - for the unit at Bangalore and a proportionate claim for the foreign tax payment is being considered.
18. Against the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals). The CIT(A) relying on the Judgment in the assessee’s case itself for the assessment year 1990-91 as well as 2000-01 where foreign tax credit was allowed, allowed the claim of the assessee for all the years, setting aside the order passed by the assessing authority.
19. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal. The Tribunal taking note of Section 90(1)(a) prior to its amendment held the word “paid” has been defined under Section 43(2) of the Act. The said definition is for the purpose of Section 28 to 41. But the said meaning of the word can be imported for Section 90(1)(a). As per Section 43(2) “paid” means actually paid or incurred according to the method of computing upon the basis on which the profit or gains are computed under the - 31 - head profit and gains of business or profession. In respect of the income of the unit qualifying for deduction under Section 10-A, income tax is neither paid nor incurred. The Apex Court in the case of CIT –vs- Williamson Financial Services & Ors. (297 ITR17 dealing with computation of deduction under Section 80HHC in respect of profits from export of tea held that Section 10 groups in one place various incomes which are exempt from tax. In respect of incomes on which deductions under Chapter VI-A are allowed, such incomes are wholly or partly tax free incomes. Section 10-A provides deduction out of the total income and it is not the income which is exempt from tax. Hence, the deduction which is allowed under Section 10-A is an item of income on which tax is not paid. After referring to the Judgment of the Madras High Court in the case of CIT –vs- K.S.Vaidyanathan (1985) 153 ITR11FB) under the Wealth Tax Act, it was held credit for income tax paid in other country in relation to income under Section 10-A will not be available under Section 90(1)(a). Under Section 90(1)(b), the Central - 32 - Government may enter into an agreement with the Government of any country outside India for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country. For application of Section 90(1)(b), one is required to go with the DTAA. Though the assessing officer has discussed this issue in detail in his order but the CIT(A) has not considered the arguments advanced by the assessing officer for not allowing the tax credit. Therefore, the Tribunal felt that the issue requires to be reconsidered by the CIT(A) in view of the facts and arguments considered by the assessing officer in his order. Hence, the issue was restored back to the file of the CIT(A).
20. However, a finding was recorded that when the assessee is not liable to pay tax in view of the exemption under Section 10-A, the assessee is not entitled to tax relief in respect of taxes paid in the contracting country.-. 33 - 21. Therefore, the finding of the Tribunal that credit for income tax paid in other country in relation to income under Section 10A will not be available under Section 90(1)(a) would stand and the appellate authority has to decide the appeal in the light of the aforesaid statement of law. Aggrieved by the said legal proposition laid down by the Tribunal, the assessee has preferred this appeal.
22. Sri N.Venkataraman, learned Senior Counsel appearing for the assessee assailing the impugned order contended that a reading of Section 90 makes it clear that Section 90(1)(a)(i) provides, if the income is subjected to tax, both in India and in the foreign country, the foreign income taxes paid attributable to such income is allowed as credit in India. However, Section 90(1)(a)(ii) is in respect of DTAA for granting of relief in respect of income tax chargeable under the Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment. Section 10A income is chargeable to tax in view - 34 - of Section 4 of the Act. However, subject to the assessee satisfying the conditions prescribed income under Section 10-A is exempted from making such payment. Once the assessee is made to pay tax on such exempted income in the other contracting State then Section 90(1)(a)(ii) enables him to claim credit of the tax paid in the contracting country. Though this provision 90(1)(a)(ii) came on the statute book from 01.04.2004, it is clarificatory in nature. As per Section 90(2) of the Act, the assessee-company was always entitled to the said benefit as the provisions of the agreement was more beneficial than the statutory provisions. India has entered into DTAA with various countries. The expression used in some of the agreements is “subjected to tax”. The other expression used is “chargeable to tax” . Therefore, the benefit to which the assessee is entitled to is dependant on the expressions used in these contracts in the background of Section 90(1)(a)(ii). He further submitted that in cases where income is subjected to tax, there is no difficulty. The entire amount subjected to tax is given credit - 35 - which is known as “ordinary tax credit”. Further, in the case of the agreements where expression used is subjected to tax on income derived, if the entire export income is not exempted from payment of tax, to the extent the income is subjected to tax, the assessee would be entitled to foreign tax credit. He further pointed out that in the instant case the tax paid by the assessee towards the State tax in USA and Canada has been disallowed on the ground that the DTAA with USA and Canada shows that the claim is admissible only for the taxes paid under Income Tax Act in India and Federal tax in USA and Canada. In coming to the said conclusion the authorities have failed to notice Section 91 of the Act. Statutorily the assessee would be entitled to deduction from the Indian Income Tax payable by him on a sum calculated on such doubly taxed income at the Indian rate of tax or rate of tax of the said country whichever is lower or at the Indian rate of tax if both the rates are equal. The word “country” has been explained in Explanation (iv) where it provides that the expression “Income Tax” in - 36 - relation to any country includes any excess profit tax or business profit tax charged on the profits by the Government of any part of that country or a local authority in that country. Lastly, it was contended that if for any reason the foreign tax relief is not given either under Section 90(1)(a)(i) or (ii) or 91, then the said amount of tax paid in the contracting country is liable for deduction under Section 37 r/w Section 40(a)(ii) r/w Explanation 1 of the Act. Therefore, he submits that seen from any angle the assessee is entitled to the benefit of credit of tax paid in the contracting country.
23. Insofar as not computing the claim in the return filed is concerned he submitted the claim is in the nature of eligibility for tax relief under the Act. When he has furnished the particulars of the income and all other relevant particulars the relief to which the assessee is entitled to is a matter to be determined at the time of assessment. At that stage, he has put forth his claim. If the assessee is not liable to pay tax under the Act merely because he did not put - 37 - forth the claim in the return he cannot be denied this benefit. Decision pertaining to mandatory filing of a revised returns is with reference to claim for deductions and not with reference to tax relief/credit for prepaid taxes.
24. Per contra, Sri Indra Kumar, the learned Senior Counsel appearing for the revenue supported the impugned order. He contended that admittedly the assessee is not liable to pay any tax in respect of the income which falls under Section 10A. Therefore, it is not a case of assessee having paid tax or assessee is liable to pay tax under the Act. When that being so, he is not entitled to credit of any tax paid in the contracting country. He submits that the idea behind the foreign tax credit is that the same income should not suffer taxation twice. When an income suffers taxation in both source and resident jurisdiction, tax paid in first jurisdiction needs to be allowed as tax credit in other jurisdiction. Consequently, if a source of income is taxed only in one jurisdiction, no tax credit or relief is required for other jurisdiction. The assessee’s contention is that the - 38 - entire profit under Section 10A is not exempted as only that part of profit which pertains to export turnover is exempted under the Act. The foreign tax credit cannot be permitted on profit pertaining to domestic turnover because the domestic profit of Section 10A has not suffered double taxation. He also pointed out that Section 14A of the Act categorically states no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act and therefore, he submits no case for interference with the judgment of the Tribunal is made out. Section 90(1)(a)(ii) came into effect from 01.04.2004. It is not retrospective in operation nor it is clarificatory as sought to be made out and therefore, at any rate the assessee is not entitled to any benefit under this provision for the assessment years prior to 01.04.2004. Further, he contended that tax paid or tax payable cannot be deducted under Section 37 of the Act as is clear from the opening words of Section 40a(ii) of the Act. He also contended that the arguments which were canvassed - 39 - before this Court were not canvassed before the lower authorities and therefore, they had no opportunity to consider the same and therefore on that score those orders cannot be found fault with. As the matter has already been remanded to the CIT(A), it is open to the assessee to urge all these grounds before the appellate authorities and it is not necessary for this Court to decide these legal issues in this appeal. It is in this background of rival contentions, the 25. substantial question of law framed in these appeals has to be answered.
26. The answer to the question depends on the interpretation to be placed on Section 90 which is found in Chapter IX which deals with Double Taxation Relief.
27. Section 90 deals with agreement with foreign countries or specified territories. The present Section came into force from 01.04.2004. Earlier to that period, Section 90 read as under: - 40 - “90. Agreement with foreign countries.-(1) The Central Government may enter into an agreement with the Government of any country outside India- (a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country; or…” 28. The notes on clauses to Finance Bill, 2003 which explains Clause 43 seeking amendment to the Act reads as follows: “Clause 43 seeks to amend section 90 of the Income-tax Act relating to agreement with foreign countries. The existing provisions of the said section, inter alia, provide that the Central Government may enter into agreement with the Government of any country outside India for granting of relief in respect of income on which have been paid both income-tax under the Income Tax Act and income-tax in that country, or for the avoidance of double taxation of income under that Act and under the corresponding law in force in that country, etc.-. 41 - It is proposed to substitute clause (a) of sub-section (1) of the said section to provide that the Central Government may enter into an agreement with the Government of any country outside India for the granting of relief, inter alia, in respect of income-tax chargeable under the Income-tax Act or under the corresponding law in force in that country to promote mutual economic relations, trade and investment.” 29. The memorandum explaining provisions in the Finance Bill 2003 reads as follows: “Double Taxation Avoidance Agreements- extending the scope to include agreements for developing mutual trade and investment Under the existing section 90, the Central Government may enter into an agreement with the Government of any country outside India for granting of relief in respect of income on which have been paid both income-tax under the Income-tax Act and income-tax in that country, or for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, etc - 42 - In order to encourage international trade and commerce, it is proposed to insert a new clause in sub-section (1) of Section 90 so as to provide that the Central Government may also enter into an agreement with the Government of any country outside India, for granting relief in respect of income-tax chargeable under this Act or under the corresponding law in that country to promote mutual economic relations, trade and investment.” The amended Section 90 reads as under :- “Agreement with foreign countries or specified territories. 90 (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India, – (a) for the granting of relief in respect of – (i) income on which have been paid both income tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, - 43 - to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gaxette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, - 44 - the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (2A) Notwithstanding anything contained in sub- section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him. (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.” 30. Sub-section (1) lays down that the Central Government may enter into an agreement with the Government of another country. Clause (a) (i) contemplates situation when tax is already paid on the same income in both the countries and it empowers the Central Government to grant relief in respect of such double taxation. Clause (b) which is wider than clause (a) provides that any agreement may be made for the avoidance of the double taxation of income under the Act and under the corresponding law in - 45 - force in that country. Clauses (c) and (d) essentially deals with the agreements made for the exchange of information, investigation of cases and recovery of income tax. With effect from 1.4.2004, clause (a)(ii) was substituted to provide for entering into an agreement for granting relief in respect of income tax chargeable under this Act and under corresponding law in force in that country, to promote mutual economic relations, trade and investment. With this amendment the power of the Central Government has been greatly widened and it can now enter into agreement not only for avoidance of double taxation, but also for granting relief for income exempt from taxation.
31. Thus, Section 90 empowers the Central Government to enter into an agreement with the Government of any country for two purposes: (a) for granting of relief in respect of income tax paid or payable (b) for avoidance of double taxation of income - 46 - 32. Prior to the amendment, the relief was granted in respect of income on which the income tax is paid under the Income Tax Act in the contracting country. Therefore to get the benefit of the said provision, payment of income tax in both the countries was sine qua non. However, by the amendment made by the Finance Act 2003, the benefit of granting the relief was extended to even in respect of income tax chargeable under the Act. Therefore, the payment of income tax in both jurisdictions is not sine qua non any more for granting the relief. This provision was introduced with the object of promoting mutual economic relations, trade and investment. In other words, it was a policy of the Government.
33. When there is a specific provision in the double taxation avoidance agreement providing for a particular mode of computation of income or granting of relief, the same should be followed irrespective of the provisions of the Act. If the agreement with the foreign country is under Clause (a)(i) for relief against double taxation and not under - 47 - Clause (b) for the avoidance of double taxation; the assessee must show that the identical income has been doubly taxed and that he has paid tax both in India and in the foreign country on the same income. Section 91 makes it clear that if a person who is residing in India has paid tax in any country with which, there is no agreement under Section 90 for the relief or avoidance of double taxation, income tax if deducted or otherwise paid as per law in force in that Country, then he shall be entitled to the deduction from the Indian Income Tax payable by him in a sum computed on such doubly taxed income, at the Indian rate of tax or the rate of tax of the said country, whichever is lower or the Indian rate of tax, if both the rates are equal. In fact, the circular No.333 dated April 2, 1982 34. clarifies the legal position. The said circular reads as under:- “The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail - 48 - over the general provisions contained in the Income Tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under Section 90 of the Income Tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the agreement. Thus where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income Tax Act. Where there is no specific provision in the agreement, it is the basic law i.e., Income tax Act that will govern the taxation of income.” It is necessary to notice that if no tax liability is 35. imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by the Act.-. 49 - 36. The Apex Court had an occasion to go into the validity of the agreements entered into under these provisions and their enforceability in the case of UNION OF INDIA AND ANOTHER VS. AZADI BACHAO ANDOLAN AND ANOTHER reported in 263 ITR706 Dealing with the purpose of provisions for avoidance of double taxation, the Supreme Court at page 721 held as under :- “Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors such as location of the source, residence of the taxable entity, maintenance of a permanent establishment, and so on. A country might choose to emphasise one or the other of the aforesaid factors for exercising fiscal jurisdiction to tax the entity. Depending on which of the factors is considered to be the connecting factor in different countries, the same income of the same entity might become liable to taxation in different countries. This would give rise to harsh consequences and impair economic development. In order to avoid such an anomalous and incongruous situation, the Governments of different countries enter into bilateral treaties, - 50 - Conventions or agreements for granting relief against double taxation. Such treaties, conventions or agreements are called double taxation avoidance treaties, conventions or agreements. The power of entering into a treaty is an inherent part of sovereign power of the State. By Article 73, subject to the provisions of the Constitution, the executive power of the Union extends to the matters with respect to which the Parliament has power to make laws. Our Constitution makes no provision making legislation a condition for the entry into an international treaty in time either of war or peace. The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution. The Executive is qua the State competent to represent the State in all matters international and may by agreement, convention or treaty incur obligations which in international law are binding upon the State. But the obligations arising under the agreement or treaties are not by their own force binding upon Indian nationals. The power to legislate in respect of treaties lies with the Parliament under entries 10 and 14 of List I of the - 51 - Seventh Schedule. But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of the citizens or others or modifies the law of the State. If the rights of the citizens or others which are justiciable are not affected, no legislative measure is needed to give effect to the agreement or treaty. When it comes to fiscal treaties dealing with double taxation avoidance, different countries have varying procedures. In the United States such a treaty becomes a part of municipal law upon ratification by the Senate. In the United Kingdom such a treaty would have to be endorsed by an order made by the Queen in Council. Since in India such a treaty would have to be translated into an Act of Parliament, a procedure which would be time consuming and cumbersome, a special procedure was evolved by enacting section 90 of the Act.” 37. It is in this background, when we notice Section 90 of the Act – relief from double taxation is granted in the following circumstances.-. 52 - Firstly, Section 90 (1)(b) of the Act speaks about avoidance of double taxation i.e., Central Government may enter into an agreement with the Government of any country for the avoidance of double taxation of income under this Act and under the corresponding law in force in other country i.e., when tax is payable on income under this Act as well as under the corresponding law in that country they could agree to tax in one country. This happens even before payment of any tax. By virtue of such agreement, tax is paid only in one country, that is how the benefit of double taxation relief by way of avoidance is granted to the assessee in both the countries.
38. Secondly, under Section 90 (1)(a)(i) of the Act, once such assessee has paid Income Tax, under the Act as well as the Tax in the other country, by such agreement, relief could be given by giving credit of the tax paid in the foreign country to the assessee in India. In cases covered under this provision the assessee pays tax in both the jurisdictions. After payment of such tax, he is entitled to double taxation - 53 - relief by way of credit in respect of the tax paid in the foreign jurisdiction.
39. Thirdly, in cases covered under Section 90 (1)(a)(ii) of the Act it is not a case of the income being subjected to tax or the assessee has paid tax on the income. This applies to a case where the income of the assessee is chargeable under this Act as well as in the corresponding law in force in the other country. Though the income tax is chargeable under the Act, it is open to the Parliament to grant exemptions under the Act from payment of tax for any specified period. Normally it is done as an incentive to the assessee to carry on manufacturing activities or in providing the services. Though the Central Government may extend the said benefit to the assessee in this country, by negotiations with the other countries, they could also be requested to extend the same benefit. If the contracting country agrees to extend the said benefit, then the assessee gets the relief. In another scenario, though the said income is exempt in this country, by virtue of the agreement, the amount of tax paid in the - 54 - other country could be given credit to the assessee. Thus for the payment of income tax in the foreign jurisdiction, the assessee gets the benefit of its credit in this country.
40. However, if the contracting country is not agreeable to extend the said benefits, then in terms of the agreement and probably in terms of the exemption granted, the assessee would be entitled to benefit only in this country on account of the exemption and the benefit in the other country is not extended. Thus when exemption is granted in respect of the income chargeable to tax under this Act in respect of which no benefit is granted in the corresponding country the assessee gets no benefit. However, if the benefit is extended to a portion of the income say for example 90% and 10% is subjected to tax then to that extent the assessee would be entitled to benefit of tax credit as he has paid tax in the foreign jurisdiction as per Section 90 (1)(a)(i) of the Act. In this connection, it is contended on behalf of the 41. Revenue that if the income is chargeable to tax in India, then - 55 - only the assessee can have the benefit of tax credit in respect of the tax paid in foreign jurisdiction. In respect of exemption under Section 10A, the income derived is not included in the total income. It is not charged to income tax. Therefore, Section 90 of the Act has no application at all.
42. Section 4 of the Act is the charging section. It provides, “Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and (subject to the provisions (including provisions for the levy of additional income tax) of this Act) in respect of the total income of the previous year of every person”. Sub-section (2) of Section 4 provides, “In respect of income chargeable under sub- section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act”.-. 56 - Section 2(45) of the Act defines total income as under:- “Total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act. Section 5 deals with the scope of total income. It reads as under :- (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived, which - (a) is received or is deemed to be received in India in such year by or on behalf of such person;or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year”. The proviso speaks about a person not ordinarily resident.-. 57 - 43. Chapter III deals with Incomes which do not form part of Total Income. One such income which does not form part of a total income is contained in Section 10A; i.e. income of newly established undertakings in free trade zone, etc. Section 10A(1) provides, “Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.” 44. This provision provides for a deduction of profits or gains derived from export by an undertaking for a period of ten years. The profits and gains derived by such undertaking would form part of the income chargeable to income tax under Sections 4 and 5 of the Act. Therefore, when an - 58 - assessee is having several undertakings, one of which falls under Section 10A, the assessee’s entire income from all the undertakings is computed to arrive at the total income. However, the income from such undertaking falling under Section 10A has to be deducted from the total income.
45. Chapter IV deals with the computation of total income under various heads of income. Section 14 provides for classification of income under various heads of income for the purposes of charge of income-tax and computation of total income. It reads as under :- “Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the heads of income”.
46. The Apex Court in the case of AZADI BACHAO ANDOLAN’s case at page 724 and 725 clarifying the legal position regarding the effect of Section 90 vis-à-vis Sections 4 and 5 held as under:- - 59 - “A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principal of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections “subject to the provisions” of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of - 60 - total income, to the extent of inconsistency with the terms of Double Taxation Avoidance Contract.
47. Having regard to the object sought to be achieved by enacting Section 90 of the Act, the provisions of Sections 4 and 5 of the Act are expressly made “subject to the provisions of the Act” which means that they are subject to provisions of Section 90 of the Act. By necessary implication they are subject to the terms of the double taxation avoidance agreement, if any, entered into, by the Government of India. Therefore, the total income specified in Sections 4 and 5 chargeable to income tax is also subject to the provisions of the agreement to the contrary, if any.
48. Reliance is placed on the judgment of this Court in the case of Commissioner of Income Tax and another Vs. Yokogawa India Ltd., and others reported in (2012) 341 ITR385(Karn.) In fact in the aforesaid judgment, this Court has held at paras 13, 14 & 15 as under:
13. Section 2(45) defines “total income” to mean the total amount of income referred to in - 61 - Section 5 and computed in the manner laid down in the IT Act. Section 5 defines the scope of total income and it is subject to the provisions of IT Act. Section 14 provides that “save as otherwise provided by the IT Act, all income shall, for the purpose of charge of income-tax and the computation of total income, be classified under the following heads of income.” Therefore, the total income in its strict sense requires computation for the purpose of levy of tax. The computation of total income begins only with Chapter IV and as Section 10A is covered in Chapter III, the phrase “total income” used in S.10A cannot be understood in the same sense as in S.2(45).
14. The phrase “Total income” has been used in the IT Act in several places with different connotations and shades. The phrase “total income” used in S.10A is one such variant. The phrase need not necessarily mean the total income as computed in accordance with the provisions of the Act. The relief under this section is with reference to the STP undertakings and not to the assessee. In other words, the relief travels with the undertaking irrespective of who owns - 62 - the same. The computation of relief as provided in S.10A(4) is also with reference to the undertaking. A business might have several undertakings and S.28 does not envisage computation of income of each such undertaking. In other words, the profits of the business of the undertaking cannot be computed in isolation. The profits are computed under the head “profits and gains of business or profession”, as under the above head, the income from business as a whole has to be computed. The phrase “total income” used in Section 10A(1) is, therefore, to be understood as the total income of the STP unit. This is clear from the first proviso to Section 10A(1) which makes a reference to the total income of the undertaking and not to the total income of assessee. The definition of any term given in Section 2 will apply only when the context does not otherwise require. The placement, language and setting of Section 10A cannot mean the total income computed in accordance with the provisions of the Act. Instead, such a phrase, in the context of Section 10A, means profits and gains of the STP undertaking as understood in its commercial sense.-. 63 - 15. Chapter IV deals with the computation of total income under various heads of income. Section 14 provides for classification of income under various heads of income for the purposes of charge of income-tax and computation of total income. The purpose of classification of any income under any head of income is to compute the same. The twin conditions of Section 14 are that income is subject to charge of income-tax and is includible in the total income. As the relief under Section 10A is in the nature of exemption although termed as deduction and the said relief is in respect of commercial profits, such income is neither subject to charge of income tax nor includible in the total income. Therefore, the twin provisions of Section 14 are not existing in the case of income of STP undertaking and accordingly such income is not liable to be computed under Chapter IV. Therefore, the correct view would be that the relief under Section 10A will have to be given before Chapter IV. The deduction shall be given first and process of computation of “profits and gains of business or profession” begins thereafter. This proposition is in line with the form of return. Allowing deduction - 64 - at the earliest stage of business income computation almost blurs the difference between the commercial profits and tax profits. In the said judgment, the position has been made very 49. clear. The phrase `total income’ has been used in the Income-tax Act in several places with different connotations and shades. The phrase “total income” used in Section 10A is one such variant. The phrase need not necessarily mean the total income as computed in accordance with the provisions of the Act. The relief under this section is with reference to the STP undertakings and not to the assessee. In other words, the relief travels with the undertaking irrespective of who owns the same. The computation of relief as provided in section 10A(4) is also with reference to the undertaking. A business might have several undertakings and section 28 does not envisage computation of income of each such undertaking. In other words, the profits of the business of the undertaking cannot be computed in isolation. The profits are computed under the head “Profits - 65 - and gains of business or profession”. Under the above head, the income from business as a whole has to be computed. The phrase “total income” used in section 10A(1) is, therefore, to be understood as the total income of the STP unit. This is clear from the first proviso to section 10A(1) which makes a reference to the total income of the undertaking and not to the total income of the assessee. The definition of any term given in section 2 will apply only when the context does not otherwise require. The placement, language and setting of section 10A cannot mean the total income computed in accordance with the provisions of the Act. Instead, such a phrase in the context of section 10A, means profits and gains of the STP undertaking as understood in its commercial sense.
50. The substituted section 10A continues to remain in Chapter III. It is titled as “Incomes which do not form part of total income”. It may be noted that when section 10A was recast by the Finance Act, 2001, Parliament was aware of the character of relief given in Chapter III. Chapter III deals with - 66 - incomes which do not form part of total income. If Parliament intended that the relief under section 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI- A which houses the sections like 80HHC, 80-IA, etc. Parliament was aware of the various restrictions and limitations of provisions like section 80A and section 80AB which is in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates that the intention of Parliament is that it has to be regarded as an exemption and not a deduction. The act of Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter III deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. Parliament, despite - 67 - being conversant with the implications of this Chapter, has consciously chosen to retain section 10A in Chapter III.
51. If section 10A is to be given effect to as a deduction from the total income as defined in Section 2(45), it would mean that section 10A is to be considered after Chapter VI-A deductions are given from out of the gross total income. The term “gross total income” is defined in section 80B(5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter. As per the definition of gross total income, the other provisions of the Act will have to be first given effect to. There is no reason why reference to the provisions of the Act should not include Section 10A. In other words, the gross total income would be arrived at after considering section 10A deduction also. Therefore, it would be inappropriate to conclude that section 10A deduction is to be given effect to after Chapter VI-A deductions are exhausted.-. 68 - 52. Section 10A (1) speaks of “deduction”. The deduction is of profits and gains for a period of ten consecutive assessment years. The said deduction is from the total income of the assessee. Therefore, the total income before allowing the said deduction includes the profits and gains from the business referred to in Section 10A(1). Section 5 of the Act explains the scope of total income to mean all income from whatsoever source derived. Section 4 of the Act charges this total income. However, Section 10A (1) provides that, subject to the provisions of the said Section, profits and gains derived by an undertaking referred to in that Section shall be allowed as deduction from the total income of the assessee. Therefore, by virtue of the aforesaid statutory provision namely Section 10A of the Act, the income of the assessee from exports in respect of the said unit is exempted from payment of income tax. The very fact that it is exempted from payment of tax means but for that exemption such income is chargeable to tax. This relief under Section 10A is in the nature of exemption although termed as - 69 - deduction. But for this exemption, the said income namely profits and gains derived by an undertaking, is chargeable to tax under the Act. The said exemption is only for a period of ten years. After the expiry of the said ten years the said income is taxable. When such exemption is given under the Act, but the said income is taxed in foreign jurisdiction, there is no relief to the assessee at all. Therefore, to promote mutual economic relations, trade and investment, the Act was amended by way of Finance Act, 2003 which came into force from 1.4.2004. By insertion of a new clause (ii) in sub- section (1)(a) of Section 90 the Central Government has been vested with the power to enter into an agreement with the Government of any country outside India for the granting of relief in respect of income tax chargeable under the Income Tax Act or under the corresponding law in force in that country, to promote mutual economic relations, trade and investment. Therefore, the statute by itself is not granting any relief. But, by virtue of the statute, if an agreement is - 70 - entered into providing for such relief, then the assessee would be entitled to such relief.
53. Relying on the judgments in the case of Wallace Flour Mills Contracting State Ltd., Vs. Collector of Central Excise, Bombay Division III, and in the case of Kasinka Trading and Another Vs. Union of India and another, it was held that merely because exemption has been granted in respect of the taxability of particular source of income, it cannot be formulated that the entity is not liable to tax as contended by the respondents.
54. In fact the Apex Court in the case of Kasinka Trading and another Vs. Union of India and another, reported in AIR1995SC874 a case arising under Customs Act at para 21 has held as under: The power to grant exemption from payment of duty, additional duty etc. under the Act, as already noticed, flows from the provisions of Section 25(1) of the Act. The power to exempt includes the power to modify or withdraw the - 71 - same. The liability to pay customs duty or additional duty under the Act arises when the taxable event occurs. They are then subject to the payment of duty as prevalent on the date of the entry of the goods. An exemption notification issued under Section 25 of the Act had the effect of suspending the collection of customs duty. It does not make items which are subject to levy of customs duty etc. as items not leviable to such duty. It only suspends the levy and collection of customs duty, etc. wholly or partially and subject to such conditions as may be laid down in the notification by the Government in “public interest”. Such an exemption by its very ;nature is susceptible of being revoked or modified or subjected to other conditions. The supersession or revocation of an exemption notification in the “public interest” is an exercise of the statutory power of the State under the law itself as is obvious from the language of Section 25 of the Act.” 55. Similarly, the Apex Court in the case of Wallace Flour Mills Co. Ltd., Vs. Collector of Central Excise, Bombai, - 72 - Division III reported in 44 ELT598at para 4 has held as under: “Excise is a duty on manufacture or production. But the realization of the duty may be postponed for administrative convenience to the date of removal of goods from the factory. Rule 9A of the said Rules merely does that. That is the scheme of the Act. It does not, in our opinion, make removal the taxable event. The taxable event is the manufacture. But the liability to pay the duty is postponed till the time of removal under Rule 9- A of the said Rules. In this connection, reference may be made to the decision of the Karnataka High Court in Karnataka Cement Pipe Factory v. Supdt. Of Central Excise (1986 23 ELT313 (Karn HC)), where it was decided that the words `as being subject to a duty of excise’ appearing in section 2(d) of the Act are only descriptive of the goods and do not relate to the actual levy. “Excisable goods”, it was held, do not become non-excisable goods merely by reason of the exemption given under a notification.
56. Therefore, it follows that the income under Section 10A is chargeable to tax under Section 4 and is includible in the - 73 - total income under Section 5, but no tax is charged because of the exemption given under Section 10A only for a period of 10 years. Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax. The said exemption granted under the statute has the effect of suspending the collection of income tax for a period of 10 years. It does not make the said income not leviable to income tax. The said exemption granted under the statute stands revoked after a period of 10 years. Therefore, the case falls under Section 90(1)(a)(ii).
57. In the background of this legal position, we have to look into the Double Taxation Agreements entered into between India and United States, Canada. (1) INDO-US AGREEMENT:
58. Article 25 of the Indo – US Double Taxation Agreement deals with Relief from double taxation. Clause 2(a) is the relevant provision. It reads as under: - 74 - “2.(a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the United States, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States.” 59. A perusal of the aforesaid provision makes it clear that if a resident Indian derives income, which may be taxed in United States, India shall allow as a deduction from the tax on the income of the resident, amount equal to the income tax paid in United States of America, whether directly or by deduction. The conditions mandated in the treaty is that if any “income derived” and “tax paid in United States of America on such income”, then tax relief/credit shall be granted in India on such tax paid in United States of America. The said provision does not speak of any income - 75 - tax being paid by the resident Indian under the Income-tax Act as a condition precedent for claiming the said benefit. Where the Indian resident pays no tax on such income derived, whereas the said income is taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the United States. Therefore, this provision is in conformity with Section 90(1)(a)(ii) of the Act i.e., the income tax chargeable under the income-tax Act and in the corresponding law in force in United States of America. Therefore, it is not the requirement of law that the assessee, before he claims credit under the Indo – US convention or under this provision of Act should pay tax in India on such income. However, the said provision makes it clear that such deduction shall not, however, exceed that part of the income tax (as computed before the deduction is given) which is attributable to the income which is to be taxed in United States. Therefore, an embargo is prescribed for giving such tax credit. In other words, the assessee is entitled to - 76 - such tax credit only in respect of that income, which is taxed in the United States. This provision became necessary because the accounting year in India varies from the accounting year in America. The accounting year in India starts from 1st of April and closes on 31st of March of the succeeding year. Whereas in America, the 1st of January is the commencement of the assessement year and ends on 31st of December of the same year. Therefore, the income derived by an Indian resident, which falls within the total income of a particular financial year when it is taxed in United States, falls within two years in India. Therefore, while claiming credit in India, the assessee would be entitled to only the tax paid for that relevant financial year in America, i.e., the income attributable to that year in America. In other words, the income tax paid in the same calendar year in United States of America is to be accounted for two financial years in India. Of course, this exercise should be done by the assessing authority on the basis of the material to be produced by the assessee.-. 77 - (2) INDO-CANADA AGREEMENT:
60. Insofar as the Indo-Canada Double Taxation Agreement is concerned, Article 23 deals with Elimination of Double Taxation. It provides that the laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this agreement. In the case of India, double taxation should be eliminated as follows: “(a) The amount of Canadian tax paid, under the laws of Canada and in accordance with the provisions of the Agreement, whether directly or by deduction, by a resident of India, in respect of income from sources within Canada which has been subjected to tax both in India and Canada shall be allowed as a credit against the Indian Tax payable in respect of such income but in an amount not exceeding that proportion of Indian Tax, which such income bears to the entire income chargeable to Indian tax.” - 78 - 61. A reading of the aforesaid provision makes it clear that the benefit of Article 23 would be available to an assessee in India only in respect of the income from sources within Canada, which has been subjected to tax both in India and Canada, which forms part of the total income of the assessee and has suffered tax in India under the Income tax Act and has suffered tax in Canada also i.e., assessee has paid tax both in India as well as in Canada on the same income. Then the agreement provides the tax paid in Canada shall be allowed as a credit against the Indian tax payable in respect of such income. However, the said benefit is confined only to the extent of an amount not exceeding that proportion of Indian tax, which such income bears to the entire income chargeable to Indian tax. In other words if the income tax paid in India is less than the income tax paid in Canada, the assessee would be entitled to relief only to the extent of tax paid in India and not to the extent of tax paid in Canada. Therefore, this clause is in conformity with Section 90(1)(a)(i) of the Act. As a corollary if the assessee is exempted from - 79 - payment of tax in India, then if the same income is subjected to tax in Canada, according to the treaty, there is no double taxation. Therefore, the benefit of this treaty is not available to the Indian assessee.
62. It is submitted on behalf of the assessee that by virtue of the formulae prescribed under Section 10-A (4), entire export profits had not got exempted under Section 10-A, residuary surplus being subjected to tax both in India and Canada. This residuary surplus could qualify for tax credit as it is subjected to tax in both the countries.
63. As is clear from the aforesaid clause in the Indo- Canadian agreement if the income from source within Canada, is lower, has been subjected to tax both in India and Canada then, the tax paid in Canada shall be allowed as a credit against the Indian Tax paid in respect of such income. If the entire income assessed by the assessee under Section 10-A is exempted in India, then, the aforesaid clause does not confer any benefit on the assessee. However, - 80 - notwithstanding the aforesaid provision, if any portion of the income falling under Section 10-A is subjected to tax then, by virtue of aforesaid provision, the tax paid in Canada corresponding to the income subjected to tax in India, the assessee would be entitled to credit of the tax paid in Canada. However, this exercise has to be done by the assessing authority on the basis of materials to be produced by the assessee and after giving effect to the formulae prescribed under Section 10-A(4) of the Act. (3) NO AGREEMENT WITH STATES:
64. Whether the assessee is entitled to the aforesaid benefit when India has no agreement with the States where tax is levied on the income of the assessee.
65. Section 91 of the Act specifically deals with the said question. The aforesaid Section reads as under: “91. Countries with which no agreement exists: - (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or - 81 - arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country whichever is the lower, or at the Indian rate of tax if both the rates are equal. (2)…. (3)….” Explanation (i) …. …. (ii) …. … (iii) …….. (iv) the expression ‘income tax’ in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country.-. 82 - 66. The said provision provides for deduction of the tax paid in any country from the Indian Income tax payable by him of a sum calculated on such doubly taxed income even though there is no agreement under Section 90 for the relief or avoidance of double taxation. Explanation (iv) defines the expression income tax in relation to any country includes any excess profit tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. Therefore the intention of the Parliament is very clear. The Income Tax in relation to any Country includes Income Tax paid in any part of the country or a local authority. It applies to cases where in a Federal structure a citizen is made to pay Federal Income tax and also the State Income Tax. The Income tax in relation to any country includes income tax paid not only to the Federal Government of that Country, but also any income tax charged by any part of that country meaning a State or a local authority, and the assessee would be entitled to the relief of double taxation benefit with respect to the latter - 83 - payment also. Therefore, even in the absence of an agreement under Section 90 of the Act, by virtue of the statutory provision, the benefit conferred under Section 91 of the Act is extended to the income tax paid in foreign jurisdictions. India has entered into agreement with the Federal Country and not with any State within that country. In order to extend the benefit of this, relief or avoidance of double taxation, aforesaid explanation explicitly makes it clear that income tax in relation to any country includes the income tax paid to the Government of any part of that country or a local authority in that country. Therefore, even though, India has not entered into any agreement with the State of a Country and if the assessee has paid income tax to that State, the income tax paid in relation to that State is also eligible for being given credit to the assessee in India. Therefore, the argument that in the absence of an agreement between India and the State, the benefit of Section 90 is not available to the assessee is ex-facie illegal and requires to be set aside.-. 84 - RETROSPECTIVE OR PROSPECTIVE67 Whether the amendment to Section 90(1) vide Finance Act, 2003 is retrospective in operation or is clarificatory in nature. The Indo-US Treaty was entered into on 20.12.1990 vide notification GSR199E) dated 20.12.1990. The substituted section came into force from 1.4.2004. Now the question is whether provision is retrospective in operation or clarificatory in nature?. Sub-section (2) of Section 90 which has a bearing on this question reads as under: “Where the Central Government has entered into an agreement with the Government of any Country outside India or specified territory outside India, as the case may be, under sub- section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee” 68. What follows is, if the provisions contained in Section 90 is more beneficial to the assessee as compared to the - 85 - terms in the agreement by India with the Government of any country outside India then, notwithstanding such agreement, the provisions of the Act to the extent they are beneficial to that assesseee apply. The benefit claimed by the assessee is by virtue of the terms of the agreement. The agreement came into existence in 1990. The amended provision came into existence from 1.4.2004. In fact, the amendment is giving effect to the terms of agreement of 1990. In other words, the terms of agreement was more beneficial than the provision of the Act prior to amendment. After amendment, the amended provision is in conformity with the benefit agreed to be given under the agreement. In fact, the Apex Court (in Azadi Bachao Andolan) dealing with the aforesaid amended provisions has held as under: “…………said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of DTAs which would automatically over-ride the provisions of Income Tax Act in the matter of ascertainment of chargeability to income tax and - 86 - ascertainment of total income, to the extent of inconsistency with the terms of DTAC”.
69. Therefore, if prior to the amendment, there was no thorough provision granting the said benefit as the said benefit was conferred on the asessee under DTAs, the assessee was entitled to the said benefit as DTAs over-ride the provisions of Income Tax Act. In that view of the matter, it is not necessary to go into 70. the question whether the amended provision is retrospective or clarificatory in nature when the terms of the agreement are more beneficial and assessee is entitled for benefit which is now conferred by way of amendment. Even for the period prior to the amendment, the assessee is entitled to this benefit. REVISED RETURN71 It was contended on behalf of the revenue that, no revised return was filed by the assessee under Section 139 (5) of the Act claiming the relief under Section 90 of the Act - 87 - read with Double Taxation Avoidance Agreement. Only a letter claiming the said relief was filed before assessment and the same cannot be taken into consideration.
72. Section 139(5) of the Act provides that, if any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of Section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. The said provision refers to a return under sub- section (1). Sub-section (1) of Section 139 provides for filing of a return of income on or before the due date, furnishing a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. If in such return the assessee discovers any omission or any wrong statements therein which has to be necessarily with reference to his - 88 - income and if it is sought to be corrected, then it could be done only by resorting to a revised return under Section 139 (5) of the Act. The income contemplated by Section 139 (1) of the Act can only be the income which the assesee bona fide believes to be his income and not the income as finally assessed by the assessing officer. On the discovery of omission or wrong statement in the earlier return filed by the assessee he can safely file a revised return without recourse to the assessing officer in any way. Once such a revised return is filed under Section 139 (5), the effective return for the purpose of the assessment is thus the return which is ultimately filed by the assessee on the basis of which he wants his income to be assessed. In this context one should notice the issue on hand is not with regard to a claim that would vary the income of the assessee. The issue is with regard to allowing a credit on account of tax paid outside India in respect of which particulars were furnished to the assessing authority during the course of assessment proceedings before the assessment is passed. It is bound to - 89 - be entertained and dealt with on merits. Once the return is filed and the income tax officer commences the assessment proceedings, the assessing authority is not the tax payer’s opponent, in the strictly procedural sense of the term. The assessment functioning involves the adjustment of the tax liability of the assessee in accordance with the facts on record and in accordance with the law laid down by the legislature. The assessment is nothing but another name for adjustment of the tax liability to accord with the taxable event in the particular tax payer’s case. While determining the tax liability of the assessee, the assessing authority shall allow the credit for all prepaid taxes referred to in Section 234B.
73. The CBDT Circular No.14 (XL-35) dated 11.4.1955 states to the effect that it is the duty of the assessing officer to make available to the assessee any legitimate and legal tax relief to which the assessee is entitled, but has omitted to claim for one reason or another. Merely because the assessee in the return filed under Section 139(1) has not put - 90 - forth a claim for relief, he cannot be estopped from getting the tax relief if he is entitled to in law. The omission in the return filed under Section 139 (1) of the Act is not about non-disclosing of income. Income is disclosed. The omission is claiming tax relief out of the income which the assessee is entitled to under Section 10A of the Act. Realising this mistake before the assessment proceedings concluded, the assessee has filed a letter putting forth such claim. Therefore, the assessing authority is legally bound to take into consideration the said letter where the assessee is claiming tax credit/relief and decide whether the assessee is entitled to such relief out of the tax liability on the total income in respect of which he has filed the return under Section 139(1) of the Act. As the tax liability is fastened on the assessee on the basis of the statutory provisions, if any statutory provision gives the assessee the tax benefit, the assessing authority is legally bound to consider the same and grant him relief. In the course of assessment the said claim cannot be rejected on the ground that the same is not - 91 - made in the return filed under Section 139 (1) and on the ground that no revised return is filed under Section 139 (5) of the Act. What the assessee is claiming by way of a letter is to bring to notice of the assessing authority the statutory provisions as well as the provisions of the Double Taxation Avoidance Agreement under which the assessee is entitled to claim tax benefit, as the said benefit of tax was not claimed in the return filed under Section 139 (1) of the Act. Once the assessee files the necessary particulars and claims relief under the provisions of the Double Taxation Avoidance Agreement, the limitation placed by domestic law would yield to the tax relief provided for under the Double Taxation Avoidance Agreement. Therefore, the assessing authority was not justified in rejecting the said claim on the ground that no revised return is filed under Section 139 (5) of the Act. In fact, probably the assessing authority was conscious that it is not a valid ground to reject the claim, he proceeded to consider the claim of the assessee on merits and has rejected the claim on merits also. 74.-. 92 - In view of the aforesaid discussions, the said substantial question of law is answered in favour of the assessee and against the revenue and the assessee is entitled to the tax benefit to the extent set out above. Substantial question No.2 “Whether the Tribunal was right in directing that only that part of the MODVAT credit that is availed of prior to the due date for filing the return of income is deductible under Section 43B when it is apparent that MODVAT credit availed on goods purchased by the appellant is not a sum payable by the appellant and accordingly Section 43B itself is not applicable to the MODVAT credit?.” [Question of law No.(c) in ITA Nos. 879/2008, 880/2008 and 108/2009; Question of law No.(d) in ITA3342009 – (assessee’s appeal)) 75. The case of the assessee is that the finished goods are liable to excise duty. The company has opted for MODVAT scheme for the payment of excise duty on the finished goods - 93 - manufactured. Under the scheme, the excise duty paid on the purchase of raw materials and components is held as advance i.e., as MODVAT credit. In other words the purchase of raw-materials and components is accounted for as part of cost without the excise duty components. The excise duty receivable is adjusted against the excise duty payable at the time of clearance of the finished goods manufactured by the company. Thus, the MODVAT credit did not form part of cost of purchase. As the valuation of stock of raw-material, work in progress and finished goods is at cost, the effect of MODVAT credit which is not a part of the cost was not included in the said stock. However, it was made clear that even if the MODVAT credit is included in cost of purchase such accounting practice will not alter the profit of the year. The assessing authority did not accept the case of the assessee in view of Section 145A of the Income- tax Act which was inserted with effect from assessment year 1999-2000. The said provision states that the valuation of stock should include the amount of any tax duty, cess or fee - 94 - actually paid or incurred to bring the goods to its present location and condition. The Department has followed a consistent stand of including it in view of the amended Section 145A. Therefore, the assessing authority directed that unavailed value of MODVAT credit to the extent of Rs.7,11,43,455/- be added to the value of the closing stock of the raw-materials. As the assessee had an opening balance of unavailed MODVAT credit to the extent of Rs.5,78,92,690/-, the MODVAT credit was adjusted accordingly. Still a balance of Rs.1,32,50,765/- MODVAT credit was available and that was directed to be added back to the total income on account of the impact of unavailed MODVAT credit on the closing stock. It is this adding back of unavailed MODVAT credit to the total income which was challenged by the assessee by preferring an appeal. The Commissioner of Income-tax (Appeals), following the earlier orders passed in the assessee’s case and also following the decision of the Tribunal for earlier years reversed the said order of the assessing authority. Aggrieved by the same, the - 95 - Revenue preferred an appeal. The Tribunal, relying on the judgment of the Special Bench in DCIT V/s. Glaxo Simthkline Consumer Healthcare Limited reported in 299 ITR(1) ITAT (CHA) held that the unavailed MODVAT credit cannot be allowed as deduction under Section 43B. It further held that if the excise duty paid by the assessee is to be included in the closing stock, then the same is to be considered in purchase as the closing stock is a figure to balance the item of purchase left at the end of the year. If MODVAT credit available on closing stock is set-off before the due date of filing of return, then such amount is available for deduction and not restricted under Section 43B of the Act. It means the unavailed MODVAT credit of Rs.1,32,50,765/- is availed before the due date of filing of returns, then there will be no addition. Therefore for re- computation, the matter was restored back to the assessing officer. Aggrieved by the said order, the assessee is in appeal.-. 96 - 76. The learned Senior counsel appearing for the assessee submitted that if excise duty is included in the cost of raw- materials and as such reflected in the opening balance, then the same is to be reflected in the closing balance as well as in the opening balance of the next year. Though earlier they were maintaining accounts on the basis of net value of raw- material without including the Excise duty, in view of Section 145A if excise duty is added it makes difference insofar as the valuation of the goods are concerned but no difference in the profit for the year. But the question is whether the unavailed MODVAT credit can be added back as the income of the assessee. In this regard, he relies on the judgment of the Apex Court in the case of CIT V/s. INDO NIPPON CHEMICAL INDUSTRIES LIMITED., reported in 261 ITR page 275 and contends that unavailed MODVAT credit cannot be construed as income for the purpose of levying tax under the Act and including the unavailed MODVAT credit to the closing balance is different from adding it to the total income.-. 97 - 77. Per contra, learned Senior counsel appearing for the Revenue submitted that in view of Section 145A, the excise duty is to be added to the cost price of the raw-material. If the MODVAT credit is availed by the assessee at the time of sale of finished products to that extent, he would be entitled to deduction. If MODVAT credit still remain unavailed, it is to be added to the closing balance and that has to be taken into consideration in deciding the profit earned by the assessee and tax is liable to be paid on the said unavailed MODVAT credit.
78. Therefore, the short question that arise for our consideration is whether an unavailed MODVAT credit constitutes income under Section 2(24) of the Income-tax Act and liable to tax. The Apex Court in the aforesaid judgment of Indo Nippon Chemicals had an occasion to consider this aspect. In para 3 of the Judgment, the question was formulated as under: - 98 - “In each of these cases, the assessing officer took the view that the MODVAT credit that is available should be treated as an income or an advantage in the nature of income, and, therefore, added back the said amount to the income of each of these assessees.” Answering the said question it was held as under: “We are unable to accept the view of the assessing officer that merely because the MODVAT credit is an irreversible credit available to the manufacturers upon purchase of duty paid on raw-materials, it would amount to income which is liable to be taxed under the Act.
79. Therefore, it is clear that by virtue of Section 145A of the Act, the valuation of purchase and sale of goods and inventory for the purpose of determining the income chargeable under head “profit and loss account” from business or profession should be in accordance with the method of accounting regularly adopted by the assessee. In such accounting, the assessee should include the amount of any tax duty, cess or fee incurred by the assessee to bring - 99 - the goods to the place of its location and condition as on the date of valuation. Therefore, prior to this introduction of the provision, if the assessee has followed a particular accounting practice where the cost of raw-material is taken into consideration as net value, even while determining the value of the finished products that net value could have been adopted. There was no obligation to include any tax, duty, cess or fee in the cost of raw-material. Having regard to the confusion on the conflicting views expressed by various Courts, the Parliament thought it fit to amend the law and introduce Section 145A taking away the decision which was in favour of the assessee. Now it is made clear that whatever may be the accounting practice adopted by the assessee, the cost price of the raw-material should include tax, duty, cess or fee and correspondingly, the said amount should be reflected in the opening stock as well as in the closing stock. Under the MODVAT scheme, once an assessee pays excise duty when the finished goods are liable for excise duty, he is entitled to set-off that duty payable by him as against the - 100 - duty he has paid while purchasing the raw-material. If for any reason, the assessee is not able to exhaust the said MODVAT credit available it continues in his accounts. He can avail the benefit whenever he makes sale and the liability to pay the duty arises. But that amount i.e., the unavailed MODVAT credit cannot be treated as an income till it is availed by the assessee. Section 43B provides that if a deduction is claimed of duty, unless the duty is paid, he would not be entitled to claim deduction. Now, the question before this Court is not claiming deduction as an expenditure. The question is whether the unavailed credit constitutes income which is liable to income-tax in the hands of the assessee. It is clear from the aforesaid pronouncement of the Apex Court that the unavailed MODVAT credit cannot be construed as income and there is no liability to pay tax on such unavailed MODVAT credit. Therefore, in terms of the order of the Tribunal, it is open to the assessing authority to recompute the opening and closing balance by adding the duty paid and duty availed but - 101 - on the unavailed MODVAT credit, there is no liability to pay any tax. Therefore, the substantial question of law is answered in favour of the assessee and against the Revenue. Substantial question of law No.3 “Whether the Tribunal is right in holding that the allocation of commission made by the respondent had to be upheld?.” [Question of law No.(a) in ITA Nos. 879/2008, 880/2008 and 334/2009 – (assesse’s appeal)].
80. The assessee company has various business activities which are controlled by four business units, having separate accounts and functioning as independent profit centre. The accounts of the assessee company are consolidation of unit’s accounts. These units have separate profit and loss account and balance sheet. The assessee filed returns for assessment year 2001-2002 on 30.10.2001. One of the points of controversy is that the assessee has made commission payments of Rs.6,86,28,000/- to its directors. The directors of the company were entitled for commission - 102 - on the services rendered on the basis of percentage of profit earned. The commission paid to its directors was allocated by the assessee to the units which these directors are heading as whole time directors. The assessing authority was of the view that allocation of this commission should be on the basis of the profits earned by each unit. Therefore the assessing authority re-allocated the said commission on the basis of profits earned by each unit. The following table shows the allocation made by the assessee and re-allocation made by the assessing authority. Commission Payment (Rs.) Allocation to Unit Wipro Remark/Bas allocated to Technologies is (Rs.) 3,16,74,625 Corporate 259,73,500 82% Name Azim H. Premji Vivek Paul 2,37,61,102 Wipro Technologies 1,9484,103 18% reduced from Wipro Technologies Arun Thyagarajan 52,33,294 Wipro Infotech Wipro 4291301.08 82% P.S. Pai 79,18,656 Consumer 6493297.9 82% Care - 103 - 81. Aggrieved by the said re-allocation of the commission, the assessee preferred an appeal to the Commissioner of Income-tax appeals.
82. The appellate authority declined interference with the said order of the assessing authority. Aggrieved by the same, assessee has preferred an appeal to the Tribunal.
83. The Tribunal held that the profit from the undertaking which is qualifying for deduction under Section 10(A) is a source of making payment of commission to the directors. The payment of commission is directly debitable to the said undertaking. Therefore, the assessing officer has rightly allocated the commission expenditure to the undertaking eligible for deduction under Section 10A and affirmed the findings recorded by the assessing authority. It is against these findings the assessee has preferred these appeals.
84. The learned Senior Counsel appearing for the assessee contended that, it is not in dispute that the salary paid to the directors are allocated to the units which they are - 104 - heading as whole time directors. Commission is a part of salary. The ability of earning profits in the future in a competitive environment depends on the strategies and the investment decisions made on an ongoing basis. Such decisions are taken up by the directors of the company collectively. Even though credit should go to all directors collectively irrespective of the unit which is making profit, it cannot be ignored that each one of them is in-charge of the respective unit exclusively. When salary is paid to them irrespective of the profits earned by the units it follows that the commission paid which is part of the salary should also be allocated to each unit, which they are heading. This concept that commission is directly debitable to the profits of the unit and therefore it should be allocated to the profit making unit to the extent of profit made has no legal basis.
85. Per contra, learned Senior Counsel appearing for the revenue submitted when Section 10A unit is the source of making payment of commission, the commission paid to the extent of percentage of profit made should necessarily be - 105 - allocated to the said unit, otherwise the profit margin of the unit which is exempted from payment of tax would be huge and such determination is improper and therefore he submits the allocation of commission to 10A unit made by the authorities is legal and valid and did not call for any interference.
86. It is not in dispute that the assessee is carrying on various business activities through its business units. These units have separate account and function as independent profit centres. The accounts of the assessee are consolidation of units accounts. Each unit has separate profit and loss account and balance-sheet. There are four directors in the assessee company. Each one of the directors are full time directors who are managing these units. The salary is paid by the assessee and the salary so paid admittedly is allocated to each unit which they are heading. Section 198 of the Companies Act 1956 deals with overall maximum managerial remuneration payable to the directors which reads as under: - 106 - “[198. Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits. (1) The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company, to its directors and its managing agent, secretaries and treasurers or manager in respect of any financial year shall not exceed eleven per cent. of the net profits of that company for that financial year computed in the manner laid down in sections 349, 350 and 351, except that the remuneration of the directors shall not be deducted from the gross profits: Provided that nothing in this section shall affect the operation of sections 352 to 354 and 356 to 360. (2) The percentage aforesaid shall be exclusive of any fees pay- able to directors under sub- section (2) of section 309. (3) Within the limits of the maximum remuneration specified in sub- section (1), a company may pay a monthly remuneration to its managing or whole- time director in accordance - 107 - with the provisions of section 309 or to its manager in accordance with the provisions of section 387. (4)2 Notwithstanding anything contained in sub- sections (1) to (3), but subject to the provisions of section 269, read with Schedule XIII, if, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole- time director or manager, by way of remuneration any sum [exclusive of any fees payable to directors under sub- section (2) of section 309]., except with the previous approval of the Central Government.]. Explanation.- “For the purposes of this section and sections 309, 310, 311, 348, 352, 381 and 387,” remuneration" shall include,- (a) any expenditure incurred by the company in providing any rent- free accommodation, or any other benefit or amenity in respect of accommodation free of charge, to any of the persons specified in sub- section (1); (b) any expenditure incurred by the company in providing any other benefit or amenity free of - 108 - charge or at a concessional rate to any of the persons aforesaid; (c) any expenditure incurred by the company in respect of any obligation or service which, but for such expenditure by the company, would have been incurred by any of the persons aforesaid; and (d) any expenditure incurred by the company to effect any insurance on the life of, or to provide any pension, annuity or gratuity for, any of the persons aforesaid or his spouse or child.].
87. The aforesaid provisions make it clear that the total managerial remuneration payable to a director shall not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in the Companies Act within the limits of maximum remuneration specified in Sub Section 1. The company may pay managerial remuneration to its directors. After reducing such monthly remuneration paid, if the company earns profits more than what is paid as remuneration, then the directors should be eligible for payment of commission to the extent of 11% of the net profits of the company.-. 109 - 88. Section 17(1) of the Income-tax Act, 1961 defines what is salary for the purposes of Sections 15 and 16 of the Act, which reads as under: “17(1) “Salary” includes (i) (ii) (iii) (iv) (v) wages; any annuity or pension; any gratuity; any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; any advance of salary; (va) any payment received by an employee in respect of any period of leave not availed of by him; (vi) the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule; (vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule(2) of rule 11 of Part A - 110 - of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-rule(4) thereof; and (viii) the contribution made by the Central Government (or any other employer) in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.” 89. The aforesaid provisions make it clear that salary includes commission. When the salary paid to a director by the assessee is allocated to the unit which the said director is heading as full time director, the commission paid to him which is a part of salary also needs to be allocated to the units which he is heading. When the salary paid to whole- time director is not dependent on profit the unit which the director is heading is making, the commission payable at the end of the year when the company makes profit, is nothing but a part of the salary. Therefore, it also has to be allocated to the unit which he is heading as a full time director.-. 111 - Though there are four units and each unit is carrying on different activities, assessee maintained separate accounts, preparing separate balance-sheets and also preparing profit and loss account, but in law it is the consolidation of four accounts which would be the account of the assessee. It is from the profits derived by the assessee that the salary is paid. The payment of the salary as it is not dependent on the profit earned by any unit, the basis of commission payable by the assessee to its directors also cannot be made subject to the profit making ability of a unit. Merely because by such allocation the profit margin of 10A unit is going to increase cannot be the basis to allocate the commission paid to the directors proportionately to the profit making unit. In that view of the matter we do not see any justification to deny the benefit which the assesseee is entitled to. The impugned orders passed by the authorities has no legal basis. On the contrary it runs counter to the statutory provisions.-. 112 - 90. In that view of the matter the substantial question of law is answered in favour of the assessee and against the revenue. Substantial question of law No.4:
91. As the question of law involved is the same, these two substantial questions of law are taken up for consideration. They are : - “Whether the Tribunal was right in excluding AMC profits for the purpose of computing deduction under Section 80IB of the Act, when AMC income is derived from the manufacturing units?.” [Question of law No.‘a’ in ITA Nos.881 & 882/2008, 109/2009 & 333/2009 – (assesse’s appeal)]. “Whether the Tribunal was right in concluding that purchase and sales of monitors constituted a trading activity and thus excludable from the profits of the Pondicherry units for the purposes of computing deduction under Section 80-IB of the Act, when such monitors were part of the computers manufactured and sold by the units?.” - 113 - [Question of law No.‘b’ in ITA Nos.881 & 882/2008, 109/2009 & 333/2009 – (assesse’s appeal)]. In substance, the question for consideration is, 92. whether profits derived from AMC and profits derived from sale of monitors are eligible for exemption under Section 80IB of the Act?.
93. The assessee is manufacturing computers. For the purpose of sale of these computers manufactured they have two schemes. The first scheme is, on the payment of a certain discounted amount, the assessee affords a three year warranty against sales of computers. The second scheme is, the warranty period is restricted to one year and the customer is permitted to take out an annual maintenance contract (AMC) for the balance of two years. The assessee claims that AMC charges are also derived from the sale of computers and eligible for deduction under Section 80IB. The assessing authority was of the view that the units at Pondicherry are mainly production units and it is incorrect - 114 - to conclude that AMC income is integrally connected with those units. Accordingly, he excluded AMC income and re- computed deduction under Section 80IB of the Act. Both the Commissioner of Income Tax (Appeals) and the Tribunal have upheld the said order of the assessing officer. Aggrieved by the said orders, the assessee is before us.
94. The learned senior Counsel appearing for the assessee, assailing the said finding, contends that the income derived from AMC has a direct nexus with the manufacturing activity and it falls within the first degree as enunciated by the Apex Court in Liberty India’s case [(2009) 317 ITR218 and the same amount is also to be included for determining deduction under Section 80IB.
95. Per contra, the learned senior Counsel appearing for the revenue contends that, the profits derived from AMC has no direct nexus with the manufacturing activity, it does not fall within first degree and, therefore, as held by the Apex - 115 - Court in the very same judgment, they are not eligible for deduction.
96. The assessee manufactures computers at its Pondicherry unit. It also sells computers manufactured therein. It has two schemes for sale of such computer. For the first scheme, a three year warranty against sale of computers is granted. Therefore, the value of the computer includes the value of the computer + warranty charges. Similarly, in the second scheme, one year warranty is granted. There also the value of computer includes cost of computer + one year warranty. The revenue has accepted this position and has given the benefit of Section 80IB to the total consideration in both the cases. Now, the dispute is regarding the profit arising out of AMC contract of two years in the second scheme where only one year warranty is agreed and two years AMC is provided. In this context, it is necessary to look at Section 80IB. Section 80IB deals with deduction in respect of profits and gains from certain - 116 - industrial undertakings other than infrastructure development undertakings. Section 80IB (1) reads as under:
80. IB Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to(11), (11A) and (11B) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.
97. Sub-section (2) of Section 80IB deals with the conditions to be fulfilled by an industrial undertaking for being eligible for the benefit conferred under Section 80-IB. Sub-section (3) provides for the percentage of deduction - 117 - such an industrial undertaking is entitled to out of the profits and gains derived from such industrial undertaking for a period of ten consecutive assessment years. Sub- section (4) provides for the benefit being extended to an industrially backward State specified in the Eighth Schedule.
98. A reading of the aforesaid provision makes it clear that, the benefit is granted on profits and gains derived from such eligible business. The Apex Court in the case of LIBERTY INDIA vs COMMISSIONER OF INCOME TAX [(2009) 317 ITR218 explaining the meaning of the word ‘derived’ in Section 80IB held that, the words “derived from” is narrower in connotation as compared to the words “attributable to”. In other words, by using the expression “derived from”, Parliament intended to cover sources not beyond the first degree. Such profits are to be computed as if such eligible business is the only source of income of the assessee. Any industrial undertaking, which becomes eligible on satisfying sub-section (2), would be entitled to deduction under sub-section (1) only to the extent of profits - 118 - derived from such industrial undertaking after specified dates(s). This is the importance of the words “derived from industrial undertaking” as against “profits attributable to industrial undertaking”. In the said case, the Apex Court held that, duty 99. drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the P&L a/c for purposes of Section 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking.
100. Following the said judgment, this Court in the case of the assessee itself, in ITA No.507/2002 dealing with the sale of import licence which was given under the incentive scheme for exports when it was converted into money which again can be ploughed back by the industrial undertakings to be more competitive in international market, held that, this special import licence has a direct nexus with the - 119 - manufacturer and export of the products and it falls within the first degree and benefit was extended.
101. However, the learned Counsel for the revenue relied on the judgment of the Delhi High Court in the case of COMMISSIONER OF INCOME TAX vs GITWAKO FARMA (I) (P) LIMITED [(2011) 332 ITR471 where it was held that, converting raw fish into tinned fish did not amount to manufacturing and, therefore, the assessee is not entitled to deduction under Section 80-IB. There the question was, whether conversion of raw fish into tinned fish constitutes a manufacturing activity and not whether the income derived there from is an income from the business.
102. The learned Counsel also relied on the judgment of the Rajasthan High Court in the case of D.D.SHAH AND BROTHERS vs UNION OF INDIA AND ANOTHER [(2006) 283 ITR486(RAJ)]. where the question which fell for consideration is, whether blending of different qualities of tea constitute manufacture and production. It was held that, it - 120 - does not constitute manufacture and production and Section 80-IB is not attracted.
103. In the instant case, the business which is carried on by the assessee consists of manufacturing of computers and servicing those computers either under a warranty arrangement or by virtue of AMC. In fact, the assessee is also in the business of entering into AMC in respect of computers which are not manufactured by them. In respect of the profits derived from AMC contract for computers which are not manufactured by them, they are not claiming any benefit under Section 80IB as it has no direct nexus with the manufacturing activity. The department has given the benefit of profits derived from one year warranty and three year warranty. In respect of computers for which one year warranty is fixed, the assessee is also giving two years AMC contract. The amount received under that AMC contract is for the purpose of servicing the computers which they have manufactured and sold to the customer with one year warranty. Though the said amount does not form part - 121 - of the sale consideration of the computer, the services rendered under the AMC contract is in continuation of the sale of computers manufactured by them. Though it does not represent the cost of manufacturing, it is a part of the business income of the undertaking. Any manufacturing product without warranty/after sale maintenance may not have high standing in the market. Customers would get attracted to a product because of the warranty and the after sales maintenance and hence warranty/after sales maintenance is integral to the manufacturing and business of the undertaking. When the consideration paid for three year warranty is treated as an income eligible for benefit under Section 80IB, we do not see any justification not to extend the same benefit to the income derived from one year warranty + two years AMC for the computer which is sold. The said income has a direct nexus with the manufacturing activity. The said income constitute the income of eligible business. It is an income derived from the eligible business in respect of an industrial undertaking which is involved in - 122 - the manufacture of computers. Therefore, the assessing authority was not justified in not extending the benefit of Section 80IB to the profits derived from AMC contract in relation to the computers manufactured by the assessee. However, it is to be made clear that, if the assessee is deriving any profit under an AMC contract in respect of computers which are not manufactured by them in the industrial unit at Pondicherry the said income does not form part of the eligible business and, therefore, to that extent they are not eligible for benefit under Section 80IB. MONITORS104 The assessee sells computers manufactured at Pondicherry unit. The monitor attached to the computer is a part of the system and the system cannot be used without the monitor. Although some monitors were bought and sold, the majority of the monitors purchased have been sold as part of the computers. The assessing officer took a similar stand as in the case of AMC income and directed that sale of monitors cannot be said to have an integral link with - 123 - manufacturing activities of the appellant and is, therefore, not includable for computation under Section 80IB of the Act. Both the Commissioner of Income Tax (Appeals) and the Tribunal upheld the said contention. Aggrieved by the said order, the assessee is before this Court.
105. Learned senior Counsel assailing the said finding contended that, the sales of only monitors are not allowable for deduction under Section 80IB. However, when a monitor is sold as part of a computer and is liable to excise duty, the assessee is eligible for the benefit under Section 80IB. In fact, when the assessee was asked to furnish details of monitors sold and to show cause why the claim under Section 80IB should not be modified since monitors are only a traded commodity, the assessee has furnished the particulars in a tabular column which reads as under : - Quantitative details of Monitors (for assessment year 2002-2003) Industrial Opening undertaking Stock Purchases Sales of only monitors Sales along with computers Closing Stock Industrial undertaking at Thirubuvanai, Pondicherry Value Industrial undertaking at Thattanchavady, Pondicherry - 124 - 2451 54114 25681 27736 3148 - 257082167 194693,285 Note 363 50 Value Total 337500 - - - 413 - - - - Note: Breakup cannot be given as they form part of composite value of computers.
106. After the aforesaid information was furnished, the assessing authority proceeded with the assessment order holding that the assessee has furnished incomplete details, only value of monitors which have been sold separately are given and details of monitors sold as a component with the computer has not been furnished. Therefore, he took the average value on the basis of the furnished filed in Annexure and did not extend the benefit of Section 80IB in respect of the monitors which were sold as a part of the computer. In the aforesaid tabular column, it is shown that the assessee has sold 25,681 monitors, i.e., they are purchased and sold - 125 - as monitors and the value of the same is given and the assessee has not claimed benefit under Section 80IB in respect of the said amount. He has also given the particulars of the monitors sold along with the computers. 27,736 monitors were sold as a part of the computer. The assessee has pleaded its inability to give the value of the said monitor because the said monitor was sold as a part of the composite value of the computers and the assessee is claiming benefit under Section 80IB in respect of the total consideration. As set out earlier the assessee is carrying on the manufacturing of computers and sale of computers. He has satisfied all the requirements stipulated in sub-section (2) of Section 80IB and he is eligible for the said exemption. The monitors which he has purchased from outside is used as a spare part in the manufacture of computer and it is sold to the customers as such. In other words, those monitors which are used in the computers are not the traded commodities. Therefore, it is a part of the computer and the total consideration of the computer includes the value of this - 126 - monitor. The profit derived from the said computer includes the sale of the monitor which is a part of the said computer which falls within the first degree. In view of the aforesaid judgments the profit derived from the said sale of monitor as a part of the computer is also eligible for benefit under Section 80IB. However, it is made clear the assessee is not entitled to the benefit of Section 80IB in respect of monitors which are purchased and sold separately as a traded commodity. In fact, the assessee has not claimed any benefit in respect of those monitors. Therefore, the finding recorded by the authorities that the assessee is not entitled to the benefit of deduction under Section 80IB in respect of the monitors which form part of the computer is hereby set aside. Both the substantial questions are answered in favour of the assesee and against the revenue. Substantial Question of law No.5 : “Whether the Tribunal was right in excluding VAT/GST from export turnover and total turnover for the purpose of computing deduction under Sec.10A of the Act ?.” - 127 - [Question of Law No.’d’ in ITA Nos.881 & 882/2008, 109/2009 & 333/2009 – (assesse’s appeal)].
107. VAT/GST is payable in certain foreign jurisdiction where the company supplies computer software to its customers in the jurisdiction. It is inexplicable that it is part of turnover and an integral part of the export turnover. Therefore the assessee contended there is no requirement to eliminate VAT/GST from export turnover as defined in clause (4) of Explanation 2 under Sec. 10A. However, the assessing officer was of the view, the tax paid and collected does not have profit element and therefore does not form part of turnover. The said stand of the assessing authority is confirmed both by the Commissioner of Income tax (Appeal) as well as the Tribunal. Aggrieved by the said order, the assessee is before this Court.
108. The learned Senior Counsel appearing for the assessee contended, having regard to the definition of export turnover contained in Explanation 2(iv) under Section 10A, that the - 128 - consideration in respect of export of articles or things or computer software received in or brought into India by the assessee in convertible foreign exchange in accordance with sub-sec. (3) is eligible for exemption. What are to be excluded are also specified in the said proviso. They are freight, tele-communication charges or insurance attributable to the delivery of articles or things or computer software outside India which are to be excluded. VAT and GST therefore is included in the export turnover. The finding of the assessing authority that as VST and GST do not represent profit and it is tax collected and paid to the concerned Government, the same cannot be taken into consideration while granting benefit under Section 10A, is contrary to the express provision contained in the statutes.
109. Per contra, the learned Senior Counsel appearing for the Revenue contended that the VAT and GST collected by the assessee in foreign jurisdiction is paid to the authority there itself. The said amount is not received in or brought into India by the assessee in convertible foreign exchange.-. 129 - Therefore, the authorities rightly excluded the said amount from export turnover and therefore he submits that no case for interference is made out.
110. In order to appreciate this contention it is necessary to look into the definition of export turnover as contained in explanation 2(iv). It reads as under : “(iv) “export turnover” means the consideration in respect of export [by the undertaking]. of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India,” 111. Explanation 2 makes it very clear, the definition of export turnover is only for the purpose of Sec.10A. Therefore the question of looking into the definition of export turnover - 130 - under the Act in respect of other provisions or under any other statutes would be of no assistance in determining what the export turnover is in clause (iv) of Explanation 2 of Sec.10A. A reading of the said provision makes it clear that export turnover means, the consideration in respect of export by the undertaking of articles or things or computer software received in or brought into India by the assessee in convertible foreign exchange in accordance with sub-Sec.(3). Therefore, in order to appreciate the said definition it is necessary to look into sub-Sec.(3) which reads as under: “(3) This section applies to the undertaking, if the sale proceeds or articles or things or computer software exported out of India are received in, or brought into India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.” 112. Therefore, in view of the aforesaid two definitions, to be eligible for benefit under Sec. 10A, an assessee should receive the sale proceeds in, or bring into India in convertible - 131 - foreign exchange. It is that foreign exchange which was received in or brought into India which is eligible for the said exemption. However, clause (iv) of explanation 2 explicitly excludes certain aspects such as freight, telecommunication charges or insurance. Even though the assessee receives in or brings into India amount by way of convertible foreign exchange for the aforesaid purposes, the same shall not be taken into consideration for granting the benefit under Sec. 10A. The argument is, the foreign exchange should be received in India or brought into India. In respect of GST and VAT, though the assessee collected the same as part of the sale consideration in foreign jurisdiction, it was paid to the appropriate Government in that jurisdiction and it was neither received in or brought into India and therefore that amount cannot be included in the export turnover.
113. Sub-Sec.(3) has two explanations. Explanation 2 reads as under : “the sale proceeds referred to in this sub- section shall be deemed to have been received in - 132 - India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.” 114. Therefore the sale proceeds referred to in sub-sec. (3) is defined under this explanation. With the approval of the Reserve Bank of India, if the assessee has maintained a separate account with any Bank outside India and the sale proceeds received for export of articles, things or computer software is credited to such separate account, the said sale proceeds is deemed to have been received in India. Though the said sale proceeds are not received in or brought into India, by a legal fiction, explanation 2 declares that the said sale proceeds are deemed to have been received in India. Once that sale proceeds is deemed to have been received in India, it falls within the definition of export turnover under clause (iv) of explanation 2 and satisfies the first condition of the consideration in respect of export being received in India. Similarly, it also satisfies sub-sec. (3) of Sec.10A where the - 133 - word used is `received in India’. Once the sale proceeds are received in India by the assessee by virtue of the said legal fiction, then it falls within the definition of export turnover, unless expressly excluded, and the amount so received is eligible for benefit under Section 10A.
115. The authorities have declined to grant the said benefit by relying on a judgment of the Apex Court in CIT vs. Laxmi Machine Works reported in (2007) 290 ITR667 The question which arose for consideration in the said judgment was, whether excise duty and sales tax were includible in the total turnover which was the denominator in the formula contained in Sec. 80 HHC as it stood at the material time. In answering the said question, the Apex Court held as under : “We have to read the words `total turnover’ in Sec. 80HHC as part of the formula which sought to segregate the “export profits” from the “business profits”. Therefore, we have to read the formula in entirety. In that formula, the entire business profits is not given deduction. It is the business profit which is proportionately reduced - 134 - by the above fraction/ratio of export turnover which constitutes 80HHC concession (deduction). Income in the nature of “business profits” was, therefore, apportioned. The above formula fixed a ratio in which “business profits” under Section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words “total turnover”, but also to the words “export turnover”, “total export turnover” and “business profits”. That is the reason why we have quoted herein above extensively the illustration from the Direct Taxes (Income Tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words “total turnover” in the above formula with reference to the definition of the word “turnover” in other laws like Central Sales Tax or as defined in the accounting principles. Goods for export do not incur excise duty liability. As stated above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under section 80HHC. ….. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the “turnover”. Just as interest, commission - 135 - etc. did not emanate from the “turnover”, so also excise duty and sales tax duty did not involve any such turnover. Since excise duty and sales tax duty did not involve any turnover, such tax had to be excluded. … In our view, sales tax and excise duty also do not have any element of “turnover” which is the position even in the case of rent, commission, interest, etc. It is important to bear in mind that excise duty and sales tax are indirect taxes”.
116. From the aforesaid judgment, the Apex Court has categorically held that, we cannot interpret the words `total turnover’ in the above formula with reference to the definition of the word turnover in other laws like Central Sales Tax or as defined in the Accounting Principles. Therefore, the definition of export turnover has to be interpreted in the context in which it is used. Moreover in the aforesaid case, the assessee was not liable to pay either excise duty or sales tax on its exports. When the said amount was not included in the sale price, it could not have - 136 - been included in the turn over or export turnover or total turnover.
117. In fact the Revenue relied on yet another judgment of the Apex Court in the case of Anand Swarup Mahesh Kumar v. The Commissioner of Sales Tax reported in 1980 STC Vol.46 pg. 477, where it was held, “Where a dealer is authorized by law to pass on any tax payable by him on a transaction of sale to the purchaser, such tax does not form part of the consideration for purposes of levy of tax on sales or purchases but where there is no statutory provision authorizing the dealer to pass on the tax to the purchaser, such tax does form part of the consideration when he includes it in the price and realizes the same from the purchaser. The essential factor which distinguishes the former class of cases from the latter class is the existence of a statutory provision authorizing a dealer to recover the tax payable on the transaction of sale from the purchaser.” - 137 - 118. That was the case where the question for consideration was, whether purchase tax to be levied on turnover which includes sales tax paid. That is not the contention in this case. In this case, we are dealing with granting of exemption to the assessee as an incentive under Sec. 10A of the Act. As such, the said judgment has no application.
119. Reliance was also placed on the judgment of the Apex Court in the case of State of Punjab and others v. Guranditta Mal Shauti Prakash reported in 2004 STC Vol 136 pg.
12. The Apex Court held that, “under the Punjab Agricultural Produce Markets Act, 1961, there is no obligation on the part of the seller to pay the market fee. It is duty of the buyer to pay the market fee and the seller can realize it from the buyer. The market fee paid by the buyer does not form part of the purchase turnover of the buyer. Therefore there is no liability on the part of the dealer who purchases agricultural produce in the market area to pay purchase tax under the Punjab General Sales Tax Act, 1948, on the element of market fee.” - 138 - 120. That is the law laid down by the Apex Court while interpreting Sec. 2(ff) under the Punjab General Sales Tax Act and Sec. 23 under the Punjab Agricultural Produce Markets Act, which has no application to the facts of this case.
121. Again the Supreme Court in the case of State of Punjab and others v. Chhabra Rice Mills and others reported in 2006(60) Kar.L.J.
222 (SC) held, interpreting Sec.2(i) of the Punjab General Sales Tax Act, 1948, that market fee paid by the dealer in respect of agricultural produce purchased by him cannot be treated as sales tax and hence not included in sales turnover. Levy of purchase tax on element of market fee paid by dealer in respect of agricultural produce purchased by him cannot be treated as sale consideration and hence not included in sales turnover. Levy of purchase tax on element of market fee is, therefore, not proper. Here again, the question was whether tax is - 139 - leviable on the market fee. As such, it has no application to the facts of the case.
122. In fact the assessee also relied on a judgment in the case of Paprika Ltd. vs. Board of Tade (1944) 1 All E.R. 372, 374 ( KB ), where it has been held as under : “Wherever a sale attracts purchase tax, that tax presumably affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even if the price is expressed as X plus purchase tax.” 123. Again in the case of Love vs. Norman Wright (Builders) Ltd. (1944) 1 All E.R. 618, 620 ( CA ), it is held as under : “Where an article is taxed, whether by purchase tax, customs duty, or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consideration, though made up of cost plus profit plus tax. So, if a seller offers goods for sale, it is for him to quote - 140 - a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up, or whether the seller has included tax or not.” 124. The Constitution Bench of the Apex Court in the case of M/s George Oakes (P) Ltd., vs. State of Madras reported in (1961) 12 STC476 484 ( SC ), observed as under : “We think that these observations are apposite even in the context of the provisions of the Acts we are considering now, and there is nothing in those provisions which would indicate that when the dealer collects any amount by way of tax, that cannot be part of the sale price. So far as the purchaser is concerned, he pays for the goods what the seller demands, viz., price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.” - 141 - 125. Following the said judgment, the Apex Court in the case of Sinclair Murray and Co. Pvt. Ltd., vs. CIT reported in 97 ITR615held that : sales tax should not be treated to be a part of the price realized by the assessee from the purchaser .is not well founded. Sales tax should be treated as a part of the price realized by the assessee from the purchaser. Therefore, ultimately in order to find out whether a tax paid is included in the sale consideration or not has to be decided in the light of the definition used in the statute and also in the context for which it is used.
126. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up, or whether the seller has included tax or not. When the dealer collects any amount by way of tax, that cannot be part of the sale price. So far as the purchaser is concerned, he pays for the goods what the seller demands, viz., price even though it may include tax.-. 142 - That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.Tax should be treated as a part of the price realized by the assessee from the purchaser. Therefore, ultimately in order to find out whether a tax paid is included in the sale consideration or not has to be decided in the light of the definition used in the statute and also in the context for which it is used.
127. In the context of Sec.10A when the statute provides a particular definition for the purpose of the said section only, then we have to interpret that definition in the light of the words used in the said provision. We cannot take assistance from the definition in the other statutes and not even the said definition in the very same Act if it is derived in the context of other sections. Similarly the object behind the said provision also has to be kept in mind.-. 143 - 128. In the instant case, VAT and GST is payable by the purchaser. It is a part of the sale price. The assessee collects the tax and remits it to the Government. It is an indirect tax. The definition of export turnover expressly says what is excluded from export turnover i.e., freight, telecommunication charges or insurance. It has not excluded the VAT and GST payable by the assessee in the foreign jurisdiction. The test to be applied in the light of the aforesaid definitions is excluding the aforesaid three charges from the sale consideration received, sale proceeds received in or brought into India in convertible foreign exchange constitutes the export turnover. If the sale proceeds are credited to a separate account maintained for the purpose by the assessee with any Bank outside India with the approval of the Reserve Bank of India, though the said proceeds are not actually received in India or brought into India, it is deemed to have been received in India and forms part of the export turnover.-. 144 - 129. In that view of the matter, the finding recorded by the authorities is contrary to law. They have not taken into consideration explanation 2 to sub-sec. (3) of Sec. 10A and thus committed an error. Hence, the said finding requires to be set aside. Accordingly, it is set aside. The substantial question of law is answered in favour of the assessee against the Revenue. Substantial question of law No.6: “Whether the Tribunal was right in holding that the transfer of stock took place during the year ended 31.03.2001 and not during the years when the execution and registration of the sale deeds took place?.” [Question of Law No.(h) in ITA Nos.879/2008 – (assesse’s appeal)].
130. The assessee acquired immovable property at Brunton Road, Bangalore, with a land bearing area 43,979 square feet for a cost of Rs.1.97 crores in the assessment year 1989- 90. The said immovable property was acquired and held as capital asset. The cost of acquisition of Rs.1.97 crores is - 145 - accounted and reported as part of capital assets in the balance sheet. On 31st March 1995, the assessee converted/treated the immovable property as stock in trade. The fair market value on the date of the conversion was Rs.45 crores. Stock in trade of Rs.45 crores was reported as inventory in the balance sheet. Capital reserve of Rs.43.03 crores was shown under reserves and surplus in the balance sheet. Over the period, the value of the land declined from Rs.45 crores to Rs.17.70 crores. The closing stock in trade year to year was valued at lower of cost or market price. As on 31st March 1999, the closing stock was valued at Rs.17.70 crores. Amounts were drawn down from capital reserve to the extent of reduction in the value of land, i.e., stock in trade. On 09.02.2000, the assessee entered into an agreement to sell the aforesaid immovable property for Rs.12.50 crores with Prestige Estate Projects Private Limited. A sum of Rs.2 crores was received along with the agreement and the schedule for payment of the balance of Rs.10.50 crores was contracted. The closing stock-in-trade as at 31st - 146 - March 2000 was valued at Rs.12.50 crores. A further sum of Rs.5.20 crores was drawn down from the capital reserve consequent to valuing the closing stock in trade at 12.50 crores against the opening stock in trade at 17.70 crores. On 22.01.2001, a general power of attorney was issued to the promoters of M/s.Prestige Estates Projects Private Limited. The power of attorney authorized the said attornies to sell or otherwise dispose of the immovable property by way of sale or otherwise in whole or in the form of undivided shares or in any other manner and on such terms and conditions as the attornies deem it fit in favour of any predecessors or in favour of his/her nominee (assesses). In the accounts, stock in trade was recorded as sold. They released the capital of Rs.10.07 crores drawn down from the capital reserve to the profit and loss account. A deed of transfer came to be executed for the assessment year 2004- 05 conferring an area to the extent of 8,344 square feet of land in favour of the buyers identified by the power of attorney holder. Capital gain of Rs.7,93,63,680/- computed - 147 - as per Section 48 read with Section 45(2) was declared in the return of income for assessment year 2004-05. In the subsequent year, i.e., assessment year 2005-06, the remaining extent of 35,635 square feet of land was transferred by way of a deed of conveyance in favour of buyers identified by the power of attorney holder. A sum of Rs.33,89,40,021 computed as per Section 48 read with Section 45(2) was declared in the return of income. Accordingly, the assessee filed his return declaring the capital gains of the aforesaid amount for the assessment years 2004-05 and 2005-06, respectively. However, the assessing authority taxed the capital gain of Rs.41,83,08,696/- in the assessment year 2001-02 itself on the basis that general power of attorney was issued to contractors and entries were recorded in books of accounts as a sale. In appeal, the Commissioner of Income Tax (Appeals) held that there is no transfer within the meaning of Section 45(2) of the Act and the capital gains of conversion of the property into stock in trade cannot be taxed in the - 148 - assessment year 2001-02 and that it has to be taxed on the date of execution of the deed of conveyance, i.e., in 2004-05 and 2005-06. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal.
131. The Tribunal reversed the order of the Appellate Commissioner on the ground that when the assessee himself has shown such stock in trade as sold and credited the sale proceeds in the assessment year 2001-02, the Order passed by the assessing authority levying tax on capital gains in the assessment year 2001-02 was correct and therefore, the Tribunal set aside the Order of the Appellate Authority and restored the assessment Order. Aggrieved by the said order, the assessee is before this Court.
132. The learned senior counsel appearing for the assessee, assailing the impugned Order, contends Section 2(47) of the Act defines transfer in relation to a capital asset. Section 45(1) deals with any profits and gains arising from the transfer of a capital asset which has no application to a - 149 - transfer of a stock in trade or a business asset. It is Section 45(2) of the Act which is attracted in the case of profits or gains arising from the transfer by way of conversion by the owner of a capital asset into stock in trade of business or it is the treatment by him as a stock in trade in business and the same is chargeable to income tax as his income of the previous year in which such stock in trade is sold. By execution of the power of attorney, the assessee received the consideration due to him for sale of the land. As in law there was no transfer, the said amount is liable to tax only when the said stock in trade is sold and therefore, the order passed by the lower appellate Court was in accordance with law and the Order passed by the Tribunal is erroneous and as such, the same is liable to be set aside.
133. Per contra, learned senior counsel appearing for the department/revenue contends the stock in trade sold by the assessee earlier was a capital asset by virtue of Section 2(47)(iv). The said capital asset was converted by the owner there of into stock in trade of a business. Though Section - 150 - 45(1) is not attracted, Section 45(2) contemplates two instances. One, when stock in trade is sold. The second, otherwise transferred by him. The words otherwise transferred by him as incorporated under the Act includes the interest in an immovable property transferred by way of a power of attorney. In the instant case, by virtue of the power of attorney, the power of attorney holder was authorized to execute the sale deed, to collect the entire sale consideration and to dispose of the property in the manner he liked and therefore, on the day the said power of attorney was executed, the transfer otherwise took place and that is the assessment year which is to be reckoned for levying tax and the Tribunal as well as the assessing authority were justified in levying tax in the assessment year 2001-02. He further submits Section 2(47) includes transfer of a stock in trade.
134. Therefore, in the light of the aforesaid facts and the rival contentions, the point that arises for our consideration is: - 151 - “By execution of a power of attorney by the assessee, is there a transfer of stock in trade so as to attract capital gains under Section 45(2) of the Act on the date of execution of the power of attorney, i.e., in the assessment year 2001-02?.” 135. The facts are not in dispute. The assessee acquired immovable property at Brunton Road to an extent of 43,979 square feet at a cost of Rs.1.97 crores. This falls within the definition of a capital asset. Section 2(47) defines transfer in relation to a capital asset. Sub-clause (4) declares that in a case where the asset is converted by the owner thereof into or is treated by him as the stock in trade of a business carried on by him, such conversion or treatment falls within the definition of transfer within Section 2(47) of the Act. In the instant case, admittedly, on 31st March 1995, the assessee converted/treated the said immovable property as stock in trade and assessed the value of the stock in trade on conversion at Rs.45 crores. Accordingly, stock in trade of Rs.45 crores was reported under inventory in the balance sheet. Now, the dispute is regarding the capital gain tax - 152 - payable on sale of such stock in trade and the year in which the tax is payable. In order to answer the said question, we have to look at Section 45 which deals with capital gains. It reads as under: “Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H be chargeable to income-tax under the head “Capital Gains”, and shall be deemed to be the income of the previous year in which the transfer took place. (1A) Notwithstanding anything contained in sub- section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of – (i) typhoon, flood, hurricane, cyclone, earthquake or other convulsions of nature; or (ii) (iii) accidental fire or explosion; or riot or civil disturbance; or - 153 - (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. (2) Notwithstanding anything contained in sub- section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of - 154 - the consideration received or accruing as a result of the transfer of the capital asset. (2A) Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as income of the depository who is deemed to be the registered owner of securities by virtue of sub-section (1) of Section 10 of the Depositories Act, 1996, and for the purposes of – (i) (ii) proviso to clause (42A) of section 2, section 48; and the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method.
136. Section 45(1) deals with profits or gains arising from the transfer of a capital asset. Therefore, it does not deal with transfer of a business asset or a stock in trade. It provides that the profits and gains arising from the transfer - 155 - of the capital asset shall be chargeable to income tax under the head ‘capital gains’ and shall be deemed to be the income of the previous year in which the transfer took place. It is here that the definition of transfer under Section 2(47) assumes importance. The definition of transfer contemplated in the provision is only in relation to the capital asset and not in relation to the stock in trade or a business asset. However, sub-section (2) contains a non-obstante clause by saying not withstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into or its treatment by him as stock in trade of business carried on by him shall be chargeable to income tax as his income of the previous year in which such stock in trade is sold or otherwise transferred by him. Therefore, in so far as stock in trade is concerned, the relevant year in which the capital gain tax is leviable is the previous year in which such stock in trade is sold. The word used is sold or otherwise transferred by him. In view of the expressed words used in - 156 - Section 45(2), it is clear that Section 45(1) deals with capital gains on transfer of capital asset, Section 45(2) deals with payment of capital gains in a transaction where stock in trade is sold or otherwise transferred by him.
137. Under Sec. 45(1), the capital gains are chargeable to income tax of the previous year in which the transfer took place. The said transfer may be in any one of the modes prescribed under Sec. 2(47). It need not necessarily be by way of sale, exchange or relinquishment of the asset as evidenced by registered documents. It can be in any one of the modes contemplated in clause (i) to (vi) of Sec. 2(47). However, when it comes to levying of capital gains under sub-sec.(2) of Sec. 45, it deals with capital asset converted by the owner thereof into, or is treated by him as stock-in- trade of a business carried on by him as contemplated under Sec. 2(47)(iv). Once such capital asset which is converted as stock-in-trade is sold, it is also subjected to capital gains, but the said capital gains is chargeable to income tax in the previous year in which such stock-in-trade is sold. The word - 157 - used is sold, not transferred. However, if the stock-in-trade is not sold, but is transferred otherwise, which has the effect of a sale, then the capital gains is chargeable to income tax in the previous year in which such stock-in-trade is otherwise transferred. Having regard to the scheme of the entire section and the express words used in sub-section (2) of Sec. 45, the case of considering stock-in-trade otherwise transferred, would arise only if stock-in-trade is not sold. If stock-in-trade is sold, the question of considering whether the stock-in-trade is otherwise transferred would not arise for consideration. The object of using the words `otherwise transferred’ as it is in the other provisions in the same section is to prevent avoidance of payment of capital gains by the owners thereof by resorting to modes which are not recognized in law, but which in substance has the same effect. In other words, if the owner by such transfer ceases to have any interest in the property and transfers all his interest in the property to the transferee and earns profits and gains, but declines to pay the capital gain, on the - 158 - ground that such transfer is not one such transfer recognized in law, then the law in such cases to plug the loop hole has used the term otherwise transferred. Once it is sold, the question of considering whether it has been otherwise transferred would not arise.
138. In the instant case, the assessee entered into an agreement with M/s.Prestige estates Pvt. Ltd. on 09-02-2000 to sell the aforesaid property for a sum of Rupees twelve crores fifty thousand. Clause (6) of the said agreement provides that, as desired by the purchasers, in order to enable the purchasers to process with the preparation of the plan, sanction and other orders required for commencement of the construction in the schedule property, the vendors have this day executed a power of attorney in favour of the purchasers and their nominees to enable them to secure appropriate clearance and other sanctions as detailed therein which shall be valid till completion of sale in terms of this business. Further, it stated anything contained herein shall on delivery of possession of the said property or - 159 - empower the purchasers to claim any prospective rights in the schedule property. In the power of attorney executed, there is no whisper of delivery of possession of the schedule property to the power of attorney holder. Under Sec. 2(47), any transaction involving the allowing of possession of immovable property be taken or retained in part performance of a contract of the nature referred to in Sec. 53A of the Transfer of Property Act is a deemed transfer in relation to a capital asset. Therefore even if the stock-in-trade which was prior to its conversion a capital asset, as treated by the Tribunal as a capital asset, as possession is not delivered, it would not become a transfer and question of payment of capital gains would not arise.
139. The CBDT circular No.495 dt. 22-09-87 which came into effect from 01-04-1988 explains the purpose of sub- clause (vi) of Sec. 2(47) in these following words : pg. 129 “the newly inserted sub-clause (6) of Sec.2(47) has brought into the ambit of transfer, the practice of enjoyment of property rights though words commonly known as power - 160 - of attorney arrangement. The practice in such cases is adopted normally where transfer of ownership is not legally permitted. A person holding the power of attorney is authorized the power of owner, including that of making construction. The legal ownership in such case continues to be with the transferor. Therefore, with that object and in respect of such persons, clause (vi) was inserted which reads as under : “2(47)(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company of other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property.” 140. Therefore, any transaction which has the effect of transferring or enabling the enjoyment of any immovable property is deemed to be a transfer under Sec.2(47). The Apex Court in the case of Suraj Lamp & Industries Pvt. Ltd., v. State of Haryana reported in Special Leave Petition No.- 161 - 13917/2009 explaining the scope of power of attorney has held as under : “a power of attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property. A power of attorney is creation of an agency whereby the grantor authorises the grantee to do the acts specified therein, on behalf of grantor, which when executed will be binding on the grantor as if done by him (Sec. 1A and 2 of Power of Attorney Act, 1882). It is revocable or terminable at any time unless it is made irrevocable in a manner known to law. Even an irrevocable attorney does not have the effect of transferring title to the grantee.” 141. In State of Rajasthan and others v. Basant Nahata 2005(12) SCC77 the Court held as follows : “A grant of power of attorney is essentially governed by Chapter X of the Indian Contract Act. By reason of a deed of power of attorney, an agent is formally appointed to act for the principal in one transaction or a series of transactions or to manage the affairs of the principal generally conferring necessary authority upon another - 162 - person. A deed of power of attorney is executed by the principal in favour of the agent. The agent derives a right to use his name and all acts, deeds and things done by him and subject to the limitations contained in the said deed, the same shall be read as if done by the donor. A power of attorney is as is well known, a document of convenience”.
142. A deed of power of attorney is executed by the principal in favour of the agent. The agent derives a right to use his name and all acts, deeds and things done by him and subject to the limitations contained in the said deed, the same shall be read as if done by the principal. A power of attorney is a document of convenience. A power of attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property. It is revocable or terminable at any time unless it is made irrevocable in a manner known to law.
143. Therefore even if Section 2(47) is held to be applicable to a stock-in-trade, unless the transaction in question has - 163 - the effect of transferring or enabling the enjoyment of any immovable property, it would not amount to a transfer.
144. In the instant case, assessee executed a power of attorney after entering into an agreement of sale for the purposes mentioned therein. It is in pursuance of the power so conferred, coupled with the terms of the agreement of sale, the power of attorney holder has to develop the property, identify the purchasers and sell the undivided share of land as well as the built area to such purchasers. Neither in the agreement of sale nor in the power of attorney, possession of the property was given to him. Having regard to the terms of the power of attorney, the intention of the assessee was not a transfer of the right in a schedule property in favour of his agent nor was he permitted to enjoy the immovable property. Therefore the case would not fall under Sec. 2(47)(vi). The assessee though executed a power of attorney, received the entire consideration under the agreement and acknowledged the same in the books of account and showed it in the balance sheet, that by itself did - 164 - not confer the power of transferring the stock-in-trade in favour of the power of attorney holder or in favour of the purchasers unless he has executed the sale deed on behalf of the purchasers. Therefore, in view of sec. 45(2) of the Act, the capital gains is not chargeable on receipt of the consideration in the year in which that consideration was received under Sec. 45(2). The income tax is charged in the previous year in which such stock-in-trade is sold. Sale took place in the assessment year 2004-05 and 2005-06. The power of attorney had been executed in assessment year 2001-02. When stock-in-trade is sold by executing a deed for conveyance and duly registered, the question of the said stock-in-trade being otherwise transferred would not arise at all. Therefore, the argument of the Revenue, that on the day the power of attorney was executed when the entire consideration due under the agreement of sale was received and by virtue of the power of attorney, the power of attorney holder is authorized to develop the property, to sell the property and to receive the entire consideration, it amounts - 165 - to the stock-in-trade being otherwise transferred leading to the said income being chargeable to income tax in the previous year in which the power of attorney is executed is without any substance. As the stock-in-trade is sold by way of a registered deed, there is no intention to avoid payment of capital gains. On receipt of such capital gains, the capital gain tax has been paid in the previous year in which the stock-in-trade was sold and therefore the order of the Tribunal as well as the order of the assessing authority is contrary to the aforesaid statutory provisions. As such, it is unsustainable in law. Accordingly, the said two orders are set aside. The order passed by the Appellate Commissioner is restored.
145. Accordingly, the substantial question of law is answered in favour of the assessee and against the Revenue. REVENUE’S APPEAL – QUESTION No.7: “Whether the Appellate Authorities were correct in holding that the assessee will be entitled to claim deduction u/s 10A of the Act in respect of foreign - 166 - exchange which is yet to be received during the current assessment year for sale of software i.e., within six months contrary to Section 10A(3) of the Act as an application for extension had been filed and Section 155(11A) of the Foreign Exchange Management Act 1999 and RBI Rules were applicable?.” [Question of law No.28 in ITA Nos.907 & 909/2008; Question of law No.24 in ITA Nos.904 & 905/2008; Question of law No.8 in ITA Nos.210 & 211/2009 and Question of law No.12 in ITA No.363/2009 (Department’s appeal)].
146. The facts are not in dispute. The assessee is a status holder exporter. The export has been done strictly in accordance with law. Foreign exchange remittances should have been received within six months from and of the financial year. It has not been received. Therefore, an application is filed seeking for extension of time to the Reserve Bank of India. Even to this day the Reserve Bank of India has not rejected the said request. On the contrary, after the period of 6 months, foreign exchange remittances are received and credited to the assessee’s account through - 167 - the Reserve Bank of India. It is in this context merely because the written approval of extension is not passed by the Reserve Bank of India, whether the assessee could be denied the benefit of Section 10A. The Tribunal on consideration of the entire material on record, taking note of the statutory provisions and the object underlying this provision, has come to the conclusion that notwithstanding the fact there is no express order granting approval by the Reserve Bank of India, as it has not been rejected and foreign exchange is received and remitted through the proper channel, the assessee is entitled to the benefit of Section 10A. In the facts of the case, we do not find any error committed by the Tribunal. Therefore, the said substantial question is answered in favour of the assessee and against the revenue. Substantial Question No.8: “Whether the Tribunal was right in excluding the computer software sales made to STP units in India from “export turnover” for the - 168 - purpose of computing deduction under section 10A of the Act?.” [Question of law No.‘c’ in ITA Nos.881 & 882/2008, 109/2009 & 333/2009 – (assessee’s appeal)].
147. The said question came up for consideration before this Court in the case Tata Elxsi vs. Asst.Commissioner of Income Tax in ITA4112008. This Court has answered the said substantial question in favour of the assessee and against the revenue. Accordingly, the said substantial question of law is answered in favour of the assessee and against the revenue. Substantial Question No.9: “Whether appellate authority were correct in holding that the expenses incurred by the Corporate Division cannot be allocated in respect of various business units of the assessee based on the turn over, but at an ad hoc percentage of 20% as held in the earlier assessment years?.” [Question of law No.20 in ITA Nos.907 & 909/2008; Question of law No.16 in ITA Nos.904 - 169 - & 905/2008; Question of law No.3 in ITA Nos.210 & 211/2009 and Question of law No.11 in ITA No.363/2009 - (Department’s appeal)].
148. The assessee had allocated the corporate expenses on the basis of the actual expenditure incurred by the units. The assessing authority taking into consideration that in the earlier year 57% expenditure was allocated to the 10A units, was not willing to accept the case of the assessee. Therefore, assessee by a letter dated 04.03.2004 agreed for allocation of only a part of the expenditure related to salary, wages and allowances and directors’ fee at 20% to Wipro Technologies which is a 10A unit and which had generated 57% of the revenue of the assessee. Assessing Authority did not agree with assessee’s submission and allocated expenses of the corporate division in the ratio of revenue of the 10A units. Aggrieved by the same the assessee preferred an appeal. In the appeal by the assessee, the Commissioner of Income-Tax following the judgments of the ITAT in the assessee’s case itself for the earlier year set aside the said allocation made by the assessing authority, accepted the case of the assessee - 170 - and directed the Assessing Authority to consider only such expenses for allocation as admitted by the assessee during the assessment process. Aggrieved by the said order the revenue preferred an appeal to the Tribunal. The Tribunal held that the allocation of common expenditure cannot be made on the basis of revenue generated. The assessee himself has agreed to an allocation of 20% of its expenditure and the same has been confirmed by the CIT (A). Therefore, the Tribunal felt that the allocation at the rate of 20% of common expenses is in order. Thus the ITAT upheld the order of the Appellate Authority. Aggrieved by the said order the revenue is in appeal.
149. Learned Senior Counsel appearing for the revenue submits that, when 57% of the revenue is generated by the 10A units and 82% is the profit earned by the said units allocating 20% of the common expenditure to such 10A units is not proper when in fact, on an earlier occasion 57% was allocated to the 10A units and therefore he submits that the - 171 - orders passed by the Appellate Authority requires to be set aside.
150. Per contra, learned senior counsel appearing for the assessee submitted the said issue is covered by the judgment of this Court in assessee’s case ITA No.507/2002 disposed on 25.08.2010. Based on the aforesaid facts it is clear that the assessee wanted allocation of actual expenditure incurred by each unit. When the Assessing Authority did not agree, they came forward and agreed that each of the units could be allocated 20% of the total expenditure incurred by corporate division. However, the Assessing Authority is of the view that, the allocation of the expenditure related to salary, wages and allowances and directors’ fee should be dependent on the revenue generated and therefore he did not accept the allocation of 20% of expenditure to each of the unit. There is no provision of law which is pointed out to us which states that the allocation of expenditure should be proportionate to the revenue generated by a unit when an assessee runs several units.-. 172 - Either it should be actual expenditure incurred or expenditure which is distributed equally to all the units of the assessee. In the instant case when department did not accede to the allocation of the actual expenditure, the assessee has come forward to distribute the entire expenditure equally to all the units and the said procedure is followed consistently by the assessee for more than a decade now. In the aforesaid judgment of the assessee’s cases, this Court after considering very same point accepted actual allocation of expenditure. The relevant observations of this Court is at para Nos.27 and 28. “27. A perusal of the aforesaid statement shows the Corporate Office has spent a sum of Rs.7,37,98,774/- towards the expenses consisted of salaries etc., excluding interest less revenues. They allocated a sum of Rs.4,93,49,416/- to the various sub-divisions other than the software export sub-division. Similarly they have recovered a sum of Rs.3,70,00,000/- from software exports sub-division in the process the excess recoveries is 1,25,50,642/-. Further, a sum of Rs.20,11,34,657/- is the interest out go to intra - 173 - business and external agencies. The interest earned from deployment of funds intra-business and with external agencies is Rs.9,38,24,255/-. The net interest outgo is 10,73,10,402/-.
28. It is this amount which they were claiming as deduction. In the light of the aforesaid facts it does not represent the expenditure incurred by the Corporate Office in respect of its sub- divisions. In those circumstances, the Assessing Officer and the First Appellate Authority were not justified in allocating the substantial portion of the amount as the expenses incurred in respect of Section 10A and disallowing the deduction. That is precisely what the Tribunal has held on proper appreciation of the material on record. In that view of the matter we do not find any justification to interfere with the well considered order of the Tribunal. Accordingly, this question of law is answered in favour of the assessee and against the Revenue” 151. We do not find any justification to differ from the said view taken by this Court and the question is answered in favour of the assessee and against the revenue.-. 174 - Substantial question No.10 “Whether the Appellate Authorities were correct in reversing the finding of the Assessing Officer that the selling, administrative and general expenses and loss in respect of some units having not been correctly arrived at was allocated on proportion of sales and worked out the loss when computing deduction u/s.80IB of the Act?.” [Question of law No.15 in ITA No.363/2009 - (Department’s appeal)]. “Whether the Appellate Authorities were correct in holding that the allocation made in the assessment order of allocation of expenditure under the head ‘selling and general administration’ of Wipro Infotech Division and lighting factory to the eligible undertaking claiming deduction under Section 80-1B of the Act was to be deleted?.” [Question of Law No.17 in ITA Nos.210 & 211/2009 (Department’s appeal)].
152. In fact, this Court while answering the substantial question of law No.(9) following the Judgment of this Court - 175 - in ITA50702 dated 25.8.2010 in the case of assessee itself has answered the said substantial question of law in favour of the assessee and against the revenue and accordingly, the said substantial question of law is answered in favour of the assessee and against the revenue. Substantial Question No.11: “Whether the Appellate Authorities were correct in holding that units which had got approval from STPI as expansion of old undertakings commenced operations prior to 01.04.1993 will also be entitled to claim u/s 10A of the Act as a new industrial undertaking?.” [Question of law No.24 in ITA Nos.907 & 909/2008; Question of law No.20 in ITA Nos.904 & 905/2008; Question of law No.10 in ITA Nos.210 & 211/2009 and Question of law No.13 in ITA No.363/2009 - (Department’s appeal)]..
153. A similar question was raised for consideration in assesssee’s case itself in ITA893 894, 900, 910, 929 and 931/08 which was decided on 10.6.2014. In fact, this Court followed the Judgment rendered in assessee’s sister concern - 176 - in the case of Wipro GE Medical Systems Ltd., in ITA Nos.391 and 392/2008 and substantial question of law was answered in favour of the assessee and against the revenue.
154. Following the said Judgment, the above substantial question of law is answered in favor of the assessee and against the revenue. Substantial question No.12: [Question of law No.33 in ITA Nos.907 & 909/2008 – (Department’s appeal)]. “Whether the Tribunal was correct in reversing the finding of the Assessing Officer which was confirmed by the Appellate Commissioner who had held that the difference in the price of shares of Wipro Finance Limited, purchased at market value and sold to assessee’s advocate and ex- employee at a subsidized price being a colorable devise to avoid tax should be allowable as a capital loss?.” 155. The said question arose for consideration before this Court in the assessee’s case in ITA Nos. 1395/2006 c/w - 177 - 1394/2006 decided on 5.11.2013. It was held at para 53 of the said judgment as under : - 53. In the facts and circumstances of the case, we are satisfied that it is not a real scheme. It is not a legitimate tax planning. It is a devise adopted to evade payment of tax on the capital gains earned by the assessee company. Though the proximity of the date between the sale of shares and purchase of shares and disinvestment alone cannot be a criteria to hold the transaction is a sham transaction and the profit earned from sale of shares in Wipro Net Limited is real and loss incurred by the sale of shares is also real and though there was no bar for sale of shares at throw away price and sometimes, the businessman act in undue exercise and hasty and without any rationale any one of them is not sufficient to hold a transaction as sham transaction. But the cumulative effect of all these instances unequivocally points out the real intention behind this transaction and leads to a irresistible conclusion that this tax planning is done with the intention to avoid payment of tax on capital gains and it is not a case of legitimate tax planning but a devise to avoid payment of - 178 - tax. Therefore, the Tribunal was not justified in characterizing this transaction as a legitimate tax planning. The observation of the Tribunal that the shares transactions of Wipro Finance Limited had happened at different times in the past is not factually correct. It is not a case where the assessing authority came to such a conclusion merely because of the proximity of the dates and it was done hurriedly but the assessing authority on careful consideration of the entire material on record, in particular, the explanation offered by the assessee for his queries has arrived at the finding that it is a colourable devise and a sham transaction which finding has been affirmed by the Appellate Commissioner on re-appreciation of the entire material on record after making note of the entire case law on the point. It is the Tribunal which has interfered with such a concurrent finding of fact without properly appreciating the mechanism adopted by the assessee to avoid payment of tax. In that view of the matter the finding of the Tribunal on this issue requires interference and accordingly, the same is set aside. The said substantial question of law is - 179 - answered in favour of the revenue and against the assessee.
156. In the instant case, the facts are slightly different. The balance of 21,62,044 equity shares of Wipro Finance Limited out of 5,04,76,188 acquired over the years from financial year 1991-92 to financial year 1998-99 were sold during assessment year 2001-02. The long term capital loss of Rs.2,50,07,294 from the sale of these shares was claimed.
157. It was contended that, in the instant case there is no windfall gain transaction during the assessment year 2001- 02 as was the finding in assessment year 2000-01 wherein the sale of shares in Wipro Net Limited resulted in short- term capital gain of Rs.109.54 crores.
158. Though in this case there is no windfall gain, still having regard to the total number of shares of Wipro Finance Limited which is already sold and only a small balance was the subject matter of these proceedings, we do not find any justification to differ from the finding which we have given - 180 - earlier and, therefore, following the said reasoning, the finding recorded by the Appellate Tribunal is hereby set aside.
159. However, the assessee has incurred capital loss in assessment year 2001-02 of Rs.102,58,60,379 from the sale of the following shares in WFL which were purchased in 2000-01. Sl. No.a) b) c) d) Transaction particulars acquisition Cost of Indexed cost of acquisition (Rs.) (Rs.) 1,97,18,970 2,05,80,724 32,16,00,000 33,56,54,499 45,00,00,000 46,96,65,810 20,00,00,000 20,00,00,000 in WFL Equity shares purchased from CDC Convertible preference shares of WFL purchased from ICICI Equity shares of WFL allotted to the assessee (out of Rs.95,00,00,000 infused on 31.12.1999) equity Conversion shares of Convertible Preference Shares allotted to the assessee and sale thereafter* of Rs.95,00,00,000 infused on 31.12.1999) to (out Total 99,13,18,970 102,59,01,03 3 * Short-term capital loss - 181 - 160. In the aforesaid judgment referred to supra, in an identical situation we have held as under : - “55. We find force in the said submission. It is only when we held that the purchase of shares at a premium is a genuine transaction and infusion of capital of Rs.95 crores is a genuine transaction, the sale made by the assessee for a throwaway price to its ex-employees was held to be sham. Now whether those transactions were for the market price or the shares had no value but purchased on account of the previous contract and thereby the assessee incurred any loss in the business, is a matter to be gone into by the Tribunal.
161. The Tribunal had not gone into the said question and, therefore, the matter is remanded back to the Tribunal to decide the said question and record a finding thereon. Substantial QUESTION No.13: [Question of law No.‘e’ in ITA No.333/2009 – (Assessee’s appeal)]..-. 182 - “Whether the Tribunal erred in not disposing off the ground pertaining to deductibility of net receipts of the software development centres located outside India, under Section 10A?. Whether the appellant is entitled to such deduction?.” 162. The learned Counsel for both the parties contended that the Tribunal at paras 220 and 221 has considered a wrong question and answered the same and remanded the matter back to the assessing officer which is wholly erroneous. The said order has to be set aside and this question has to be remanded back to the Tribunal for fresh consideration and in accordance with law. Accordingly, the finding recorded by the Tribunal at paras 220 and 221 is hereby set aside. This question is remanded to the Tribunal for fresh consideration in accordance with law. Substantial Question of law No.14: “Whether the Tribunal was right in directing that losses of a 10A unit, which are already set-off against other business income of the appellant, .-. 183 - should be again carried forward and set-off against eligible profits of the same unit in a subsequent year?.” [Question of law No.(b) in ITA Nos.879/2008, 880/2008 and 108/2009 and Question of law No.‘c’ in ITA No.334/2009 – (assessee’s appeal)]. “Whether the Tribunal was correct in holding that income of each undertaking should be taken independently and losses of Section 10A units cannot be set off against profits of Section 10A units, when computing deduction u/s 10A of the Act?.” [Question of law No.22 in ITA Nos.907 & 909/2008 and Question of law No.18 in ITA Nos.904 & 905/2008 – (Department’s Appeal)].. “Whether the Appellate Authorities failing to take into consideration the amendment provision of section 10A(6)(ii) of the Act, which clearly contemplated that the loss of the undertaking can be carried forward and adjusted against other income?.” [Question of law No.23 in ITA Nos.907 & 909/2008, Question of law No.19 in ITA Nos.904 - 184 - & 905/2008 and Question of law No.9 in ITA Nos.210 & 211/2009 – (Department’s Appeal)].. “Whether the Appellate Authorities were correct in holding that the finding recorded by the AO that in view of the amendment to section 10A (6)(ii) w.e.f. 01.04.2001 the loss of the STP units should be carried forward at the end of the 10 years, tax holiday period u/s 10A of the Act and should be set off against profits in respect of Madivala R&D unit by treating the cost of development of shrink wrap computer software as work in progress and therefore cannot set off the loss?.” [Question of law No.16 in ITA Nos.210 & 211/2009 – (Department’s Appeal)]..
163. The said substantial questions of law was considered by the Apex Court in the case of CIT vs. Canara Workshops reported in 161 ITR320in favour of the assessee and against the revenue.
164. Following the said Judgment in the assessee’s case itself in ITA139506 connected with ITA139406, this - 185 - Court by its order dated 5.11.2013 following the Judgment of the Supreme Court answered the said substantial question of law in favour of the assessee and against the revenue. Therefore, aforesaid questions of law are answered in favour of assessee and against the revenue. Substantial Question of Law No.15: “Whether the Appellate Authorities were correct in holding that the items like difference in foreign exchange, royalty, provision for doubtful debts written off, scrap sales, sundry creditors written back etc., should be included when computing deduction/s 80HHC of the Act?.” [Question of law No.32 in ITA Nos.907 & 909/2008 and Question of law No.25 in ITA Nos.904 & 905/2008 – (Department’s Appeal)].. [Question of law No.27 in ITA Nos.907 & 909/2008; Question of law No.23 in ITA Nos.904 & 905/2008; Question of law No.12 in ITA Nos.210 & 211/2009 and Question of law No.14 in ITA No.363 /2008 – (Department’s Appeal)].. [Question of law No.29 in ITA Nos.907 & 909/2008 – (Department’s Appeal)]..-. 186 - [Question of law No.31 in ITA Nos.907 & 909/2008 and Question of law No.13 in ITA Nos.210 & 211/2009 – (Department’s Appeal)].. [Question of law No.14 in ITA Nos.210 & 211/2009 – (Department’s Appeal)]..
165. In the connected cases similar questions were raised which are treated as substantial questions of law No.15, 16, 17 and 20. The said substantial question of law arose for consideration in the assessee’s case in ITA32042005 which was decided on 28.2.2012. In the said case, the Court was considering Section 80 HHE which is pari materia with 80HHC. It was held that the aforesaid items have to be reduced only from profits of the business of goods or merchandize. Accordingly, the said substantial question of law was answered in favour of the assessee. The aforesaid substantial questions of law are accordingly answered in favour of the assessee and against the revenue. Substantial Question No.16: “Whether the Appellate Authorities were correct in holding that income earned from sale of - 187 - scrap export incentive, rent received, interest income and gain on exchange rate fluctuation should be treated as profits and gains derived from export and exempted u/s.10A of the Act contrary to the judgment of the Apex Court in Sterling Sea Foods 237 ITR579” [Question of law No.21 in ITA Nos.907 & 909/2008; Question of law No.17 in ITA Nos.904 & 905/2008; Question of law Nos.4, 5, 6, 7 in ITA Nos.210 & 211/2009 – (Department’s Appeal)]..
166. This Court had an occasion to consider the substantial question of law in assessee’s case itself in ITA5072002 decided on 25.8.2010 while dealing with the income earned from sale of scrap, export incentive & rent received, answered the question in favour of the assessee and against the revenue.
167. In so far as gain on exchange rate fluctuation is concerned, it was subject matter of ITA320205 which was decided on 28.2.2012 in the assessee’s case itself, where the - 188 - said question was answered in favour of the assessee and against the revenue.
168. In so far as income earned from interest is concerned that was subject matter of this Court in the case of CIT vs. Motorola India Electronics (P) Ltd., in ITA No.428/2007 decided on 11.12.2013 while dealing with exemption under Section 10B. It is in pari materia with Section 10A and has answered the said question in favour of the assessee and against the revenue.
169. As all these questions are decided and answered in favour of assessee in the aforesaid case, this question of law is answered in favour of the assessee and against the revenue. Substantial Question No.17: “Whether the Appellate Authorities were correct in holding that the provision for warranty claim is an allowable deduction despite the same having not been expended during the current assessment - 189 - year and the assessee not following actuarial method of accounting?.” [Question of law No.25 in ITA Nos.907 & 909/2008; Question of law No.21 in ITA Nos.904 & 905/2008; Question of law No.11 in ITA Nos.210 & 211/2009 and Question of law No.10 in ITA No.363/2009 – (Department appeal)]. “Whether the Appellate Authorities were correct in holding that the provision for warranty was held to be an allowable deduction despite the unit was on the brink of closure as no manufacturing activity was carried on?.” [Question of law No.15 in ITA Nos.210 & 211/2009 – (Department’s appeal)].
170. The said questions arose for consideration before this Court in the assessee’s case in ITA No.3198/2005 which was decided on 28.2.2012 where the substantial questions of law were answered in favour of the assessee and against the revenue. Following the said Judgment, said questions of law are answered in favour of assessee and against the revenue. Substantial Question No.18: “Whether the Appellate Authorities were correct in holding that the payments made by the assessee - 190 - for import of software cannot be disallowed u/s 40(a)(i) of the Act for failing to deduct tax at source u/s 195 of the Act as such payments did not constitute royalty u/s 9(1)(vi) of the Act?. [Question of law No.26 in ITA Nos.907 & 909/2008, Question of law No.22 in ITA Nos.904 & 905/2008 and Question of law No.9 in ITA No.363/2009 – (Department’s appeal)]. “Whether the Appellate Authorities were correct in holding depreciation claimed on software imported for in house utilization and treated as part of block of assets should be allowed, despite the same being in the nature of royalty as per Explanation to section 9(1)(vi) of the Act and no TDS u/s 194 of the Act having been deducted, section 40(a)(i) of the Act?.” [Question of 211/2009 – (Department’s appeal)]. law No.2 in ITA Nos.210 & 171. The said substantial questions of law arose for consideration in the assessee’s case itself in ITA50702 which was decided on 25.8.2010 where the substantial question of law was answered in favour of assessee and - 191 - against the revenue. Accordingly, the said question of law is answered in favour of the assessee and against the revenue. Substantial Question No.19: “Whether the Appellate Authorities were correct in holding that excise duty and sales tax should be included in the total turnover for the purpose of computation of deduction u/s 80 HHC of the Act?.” [Question of law No.27 in ITA Nos.907 & 909/2008; Question of law No.23 in ITA Nos.904 & 905/2008; Question of law No.12 in ITA Nos.210 & 211/2009 and Question of law No.14 in ITA No.363/2009 – (Department’s appeal)].
172. The said question also arose for consideration before this Court in the assessee’s case in ITA No.507/2002 which was decided by Judgment dated 25.8.2010, the said question of law was answered in favour of assessee and against the revenue.
173. Accordingly, the said question of law is answered in favour of assessee and against the revenue.-. 192 - Substantial Question No.20 : “Whether the tribunal was right in referring to another decision and fixing an exclusion of 80% of uplinking charges when the appellant and the respondent has agreed upon an exclusion of 5% of telecommunication expenses or attributable to delivery of computer software outside India for the later assessment years?.” [Question of law No.‘f’ in ITA Nos.879/2008, 880/2008; Question of ITA No.108/2009 and Question of law No.’b’ in ITA No.334/2009 – (Assessee’s appeal)]. law No.’a’ in 174. Learned Counsel appearing for both the parties did not dispute the fact except for the relevant year, the assessee has been allowed exclusion of 5% of telecommunication expenses consistently for all other years. Only in so far as this year is concerned, relying on a judgment which is unconnected, the exclusion has been enhanced to 80%. Absolutely no reasons are forthcoming for deviating from the consistent practice. Under these circumstances, it would be proper to set aside the finding recorded by the Tribunal and remand the matter to the Tribunal to decide the matter - 193 - afresh taking into consideration the consistent practice followed by the authorities in the case of the assessee itself. That would meet the ends of justice. Substantial Question No.21: ”Whether the Tribunal was right in remanding the issue pertaining to prior period items without noting the submissions of the appellant?.” [Question of law No.’g’ in ITA No.879/2008 – (Assessee’s appeal)].
175. Learned Counsel for both the parties submit that this question does not arise for consideration. Accordingly, it is deleted. Question No.22: “Whether the Tribunal was right in upholding the levy of interest under Sec. 234D of the Act ?.” [Question of law No.‘e’ in ITA Nos.881 & 882/2008 and Question of law No.’f’ in ITA No.333/2009 – (Assessee’s appeal)].
176. The assessee contended, interest under Sec. 234D is not leviable if a refund was due unless it was actually granted for use in the business of the assessee. Further, - 194 - Section 234D is not applicable as it came into force with effect from 1-6-03. However, the assessing officer levied interest under Sec. 234D of the Act. Both the CIT (Appeal) and the Tribunal upheld the levy of interest. It is against the said order, the present appeal is filed.
177. Learned Counsel for the parties submitted, on the day the Tribunal passed the impugned order, explanation (1) and (2) to Sec. 234D was not on the statute book. It was inserted by the Finance Act, 2003, which came into effect from 01-06- 2003. This provision has not been considered by the Tribunal while passing the impugned order. Therefore, it is appropriate that the findings recorded by the Tribunal be set aside and the matter is remitted back to the Tribunal for fresh consideration after taking note of the explanations inserted and then decide whether it is prospective in nature or retrospective in nature and whether the said provision applies to the factual situation in the assessee’s case. That would meet the ends of justice.-. 195 - Substantial Question No.23: “Whether the Tribunal was correct in holding that expenditure towards termination of rent agreement with BSNL (A communication link provider) Rs.3 crores, termination of internet band width agreement with Local Cyberstar Rs.2.07 crores and termination of purchase commitment of Rs.5.6 crores, is an allowable deduction when no details about the transactions were furnished by the assessee nor examined by the Tribunal and consequently recorded a perverse finding?.” [Question of 211/2009 – (Department’s appeal)]. law No.1 in ITA Nos.210 & “Whether the Tribunal was correct in reversing the finding of the Commissioner exercising jurisdiction u/s 263 of the Act that the expenses of Rs.18.15 crores had been explained by the assessee under a letter dated 11.11.2005 which did not reflect the correct details to consider the expenses and therefore the details sought in the subsequent letters by the department dated 13.12.2005 and 25.01.2006 were not considered by the Tribunal and consequently recorded a perverse finding?. - 196 - [Question of law No.1 in ITA No.209/2009 – (Department’s appeal)]. “Whether the Tribunal was correct in reversing the finding of the CIT (A) u/s 263 of the Act, when the assessee itself had taken a contention in the appeal (CIT) against the assessment order that the AO had allowed a sum of Rs.19.68 crores (without examining the details) and the expenses of Rs.10.67 crores (issue remitted back to AO by CIT(A) to examine the details furnished by the assessee and allow expenses in accordance with law) being similar in nature should also be allowed?.” [Question of law No.2 in ITA No.209/2009 – (Department’s appeal)].
178. The said questions arose for consideration before this Court in assesssee’s case itself in ITA320205 by order dated 28.2.2012, it was held that loss incurred on discontinuance of business does not involve a substantial question of law. Here again, the same questions arise. They - 197 - do not constitute substantial questions of law. We decline to answer the same. Substantial Question No.24: “Whether the Tribunal was right in holding that interest received under Section 244-A would be taxable in the year of receipt of the said interest without considering the fact that the tax granted as a refund on which interest is computed itself is disputed in appeals by the respondent?.” [Question of law No.(d) in ITA Nos.879 & 880/2008 – (Assessee’s appeal)].
179. The said question arose for consideration in the assessess’s case in ITA32042005 and this Court by its order dated 28.2.2012 answered the same as under: “6. It is settled law that interest paid is compensatory in nature under the Income Tax Act. If an amount is due on a particular date and if that amount is not paid on that date and if it is paid on a subsequent date the recipient of that amount is deprived of the amount which was legally due till it was actually paid. It is to compensate the denial of - 198 - the benefit of the said amount that interest is levied paid under various provisions under the Income-Tax Act. It is not dependent on the claim in any legal proceedings when admittedly the assessee has received the money by way of interest on refund and the said amount ought to have been shown in the returns as an income and was liable to pay tax. The offering of the said amount for tax is not dependent on the fact whether the said interest has become irrevocable under the Act or refundable under the Act. In that view of the matter, the said finding in our view is contrary to law and cannot be sustained. Accordingly, it is set aside. As the matter is already remitted to the assessing authority he shall first calculate the interest refunded and the amount of refund on the subsequent orders by which the said benefit is sought to be withdrawn and thereafter calculate the interest taxable under the aforesaid Act. That would meet the ends of justice. Thus question no.4 is disposed off.” - 199 - 180. Accordingly, following the aforesaid Judgment the finding of the authorities is set aside and the matter is remitted to the Assessing Authority with a direction that he shall first calculate the interest received and amount of refund on the subsequent orders by which the said benefit is sought to be withdrawn and thereafter, calculate the interest taxable under the aforesaid act. Question No.24 is disposed of accordingly. All the appeals stand disposed of, accordingly. No costs. Sd/- JUDGE Sd/- JUDGE sps/sbs/nsu/tl/ksp/ng/sk/mgn/ckl/bnv/-