| SooperKanoon Citation | sooperkanoon.com/75571 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | Apr-10-2007 |
| Judge | P Kumar, P M Devi |
| Reported in | (2008)116TTJ(Mum.)681 |
| Appellant | Assistant Commissioner of Income |
| Respondent | Nishith M. Desai |
2. The common issues involved, which require our adjudication, in these four appeals are (i) whether the deduction under Section 80RRA of the IT Act, 1961, is to be allowed on the gross basis or on net basis? and (ii) in case the deduction under Section 80RRA is to be allowed on net basis, what are the principles governing allocation of expenses incurred which are to be reduced from the gross receipts.
3. We will first take up the cross-appeals for the asst. yr. 2000-01.
Both of these appeals are filed against order dt. 29th May, 2003 passed by the CIT(A) in the matter of assessment under Section 143(3) of the IT Act.
4. The material facts of the case, as culled out from the orders of the authorities below, are like this. The assessee is proprietor of a well known law firm by the name of Nishith Desai Associates. As observed by the AO in the assessment order, Nishith Desai Associates "is a research based law firm and it renders highly specialised services to its clients worldwide in various fields of international law". In the course of assessment proceedings, the AO noticed that the assessee had claimed a sum of Rs. 1,37,78,521 as deduction under Section 80RRA. This claim was, by way of filing a revised return, reduced to Rs. 1,28,49,406. The reduction was on account of reducing the foreign exchange earnings by Rs. 12,45,472, representing direct expenses incurred by the assessee to earn these foreign exchange earnings. On a perusal of records, the AO noticed that the assessee has earned different types of professional receiptsnamely professional receipts in Indian rupees, professional receipts in foreign exchange (eligible for deduction under Section 80RRA), professional receipts in foreign exchange (not eligible for deduction under Section 80RRA), other income, out of pocket reimbursements. The AO also noted that the assessee has reduced the eligible professional receipts only by an amount of Rs. 12,45,472 which represents direct expenses incurred to earn the said eligible professional receipt. In response to AO's requisition as to why no other expenses are attributed to foreign exchange earnings, the assessee explained that what was to be reduced from the eligible foreign earnings is only direct expenses incurred to earn the same. It was also pointed out that in the earlier years, the AO has accepted this position and allowed the deduction by reducing only direct expenses so incurred. The assessee further relied upon CBDT Circular No. 762 dt. 18th Feb., 1998, which provides that deduction under this section was linked to repatriation of foreign exchange within stipulated time-limit. The AO was, however, not impressed with the contentions of the assessee. The AO held that Section 80RRA comes into play only when 'gross total income' of the assessee includes 'any remuneration received in any foreign currency', that as provided in Section 80A, aggregate of deductions under Sections 80C to 80U cannot exceed gross total income of the assessee, and that, in terms of the provisions of Section 80AB, deductions under Chapter VI-A, Part C, which includes Section 80RRA as well, are to be made only with respect to income included in gross total income. The AO then examined the nature of various expenses incurred by the assessee and concluded that a portion of these expenses must be attributable to earnings in foreign exchange, and it is not proper that only direct expenses are to be reduced from the eligible professional earnings to arrive at the net remuneration. The AO further held that deductions cannot be adjusted with domestic income when no income or less income is available from foreign sources. He then relied upon Hon'ble Supreme Court judgment in the case of Continental Construction Ltd. v. CIT in support of the proposition that principle of apportionment of expenses is to be followed to arrive at the net income eligible for deduction under Section 80RRA. A reference was also made to the judgment of Hon'ble Himachal Pradesh High Court in the case of Lahaul Potato Growers Co-operative Marketing Processing Society Ltd. v. CAT in support of the same proposition. It was in this background that he proceeded to bifurcate the entire expenses incurred by assessee in India in the same ratio in which the assessee had his earnings eligible for deduction under Section 80RRA. In addition to the direct expenses admitted by the assessee, he allocated Rs. 1,16,94,720, out of the total expenditure incurred of Rs. 3,56,41,706, by thus allocating 34 per cent of total expenditure. The deduction under Section 80RRA was thus held admissible only to the extent of Rs. 40,73,377, as against Rs. 1,28,49,406 claimed by the assessee.
Aggrieved by the stand so taken by the AO, assessee carried the matter in appeal before the CIT(A). The CIT(A) agreed with the AO in principle that a portion of indirect expenses incurred by the assessee is also to be reduced from the eligible foreign exchange earnings, to arrive at the amount eligible for deduction under Section 80RRA. He, however, also held that in view of the weakness of Indian currency and the fact that a lot of expenses incurred by this research based law firm are not directly relatable to any earnings, an estimated deduction of 10 per cent from the eligible professional earnings will be sufficient to take care of all the expenses, incurred to earn this income. Accordingly, he directed the AO to adopt the figure of Rs. 35,64,171 as expenses incurred for earnings the eligible foreign exchange, and to grant the deduction under Section 80RRA in respect of the balance amount, which thus worked out to Rs. 1,11,05,393. The assessee was given part relief.
The assessee is aggrieved that he is not given full relief, as prayed for, and the AO is aggrieved that the expenses allocated for eligible foreign exchange earnings are too low and that CIT(A) has erred in adopting a flat rate @ 10 per cent as the basis of computing the expenses attributable to earning eligible foreign remuneration. That is how both the parties are in cross-appeals before us.
5. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.Mukesh K. Shah v. ITO co-ordinate Bench of this Tribunal had an occasion to deal with the question whether the deduction under Section 80RRA is to be allowed on gross remuneration or on net remuneration, and, in case it is to be allowed on net remuneration, whether all the expenses are to be reduced from the professional earnings or only the direct expenses are to be reduced. After taking note of the dictionary meanings of the expression 'remuneration' and CBDT circular setting out the intended purpose of introducing deduction under Section 80RRA by way of Finance Act, 1975, the co-ordinate Bench concluded as follows: ...It is to be understood that the language of provisions in Sections 80-O and 80RRA is different. The deductions available under Section 80-O and other analogous are from the 'income' from the specified sources and included in the gross total income of the assessee. On the other hand, the deduction under Section 80RRA is on 'remuneration' received.... As rightly understood, 'remuneration' is the compensation paid for services rendered. There is no concept of adjusting expenditure against such remuneration. Remuneration is not in the nature of business receipts. The setting off of expenditure against receipt is necessary when the income is required to be computed. In the case of remuneration, there is no cause for any such computation....
Hon'ble Supreme Court, in the case of CBDT v. Aditya V. Birla took note of the contention of the assessee that the object of Section 80RRA was three-fold : first, earning of foreign exchange for India, second, bringing that currency by Indian nationals from abroad to India and third improve the status of Indians abroad and increasing the market of Indian technicians. Their Lordships, having taken note of this contention, observed that "it appears to us to be plausible objects in the present socio-economic context". One of the dominant objects of introduction of Section 80RRA, therefore, indeed was earning of foreign exchange by Indians abroad and repatriation of the foreign exchange so earned to India. Their Lordships also noted that connotations of the expression 'remuneration' are wider than 'salary', it is thus indeed possible, and in fact it will be more logical, to view the deduction under Section 80RRA as focussed on bringing in foreign exchange in India. Let us not forget that this section was introduced at a time when foreign exchange reserves were a cause of concern, and foreign exchange earnings by Indians was far more important for Indian economy. The view taken by the co-ordinate Bench is, therefore, justified. However, on the peculiar facts of this case, it would not even be necessary to go into that aspect of the matter, as the assessee himself has offered reduction of direct expenses from the eligible professional earning, and the AO has not identified any other expenses which are directly incurred for that purpose. The controversy is confined to the question whether indirect expenses are to be reduced or not, and if so, on what basis.
7. In our considered view, there cannot be any justification, except for an oversimplified approach to the issue, to allocate any expenses on estimate or notional basis when there is no evidence that such expenses are actually incurred for earning that income. The issue of allocation of indirect expenses has come up before several co-ordinate Benches in the context of another deduction under the same chapter i.e.
80M. In the recent Special Bench decision in the case of Punjab State Industrial Development Corporation Ltd. v. Dy. CIT , it is held that only the actual expenditure incurred are to be taken into consideration, and that there is no question of taking expenses on estimate or presumption basis while allowing deduction under Section 80M of the Act. The same approach has to be adopted for the present purposes. The reason is this. The deduction under Section 80RRA is to be granted, even as per the learned Departmental Representative, in respect to income included in gross total income in respect of income.
However, to compute eligible foreign exchange earnings, gross eligible foreign exchange earnings are to be reduced by expenses incurred for that purpose. When professional foreign exchange earnings are viewed as a separate basket of earnings, what is to be allowed as deduction is only the incremental cost of making such earnings. In the cost accounting terminology, it is termed as marginal cost. Therefore, unless an expenditure is not directly connected with such earnings, and constitutes an incremental cost to earn the same, it cannot be deducted from the gross professional earnings, to arrive at income from such foreign exchange earnings. This treatment is fully justified on the light of accounting principles, and commercial realities. Therefore, in our considered view, what is includible in assessee's gross total income on account of such foreign exchange earnings, is the actual and direct expense incurred for that purpose. The concept of averaging of costs is not recognised for this purpose. Revenue's reliance on Hon'ble Supreme Court's judgment in the case of Continental Construction (supra) (which) is of no avail in this context. In that case, their Lordships were in seisin of the question whether a composite contract and earnings from the same can be segregated or not. In the case before us, eligible foreign exchange earnings are not a part of some composite contract; these are for independent activities. In this view of the matter, the gross professional earnings in foreign exchange are to be reduced only by the direct costs incurred by the assessee for the purpose of earning eligible remuneration. As there is no finding by the AO to the effect that there are any other direct costs incurred for the purpose of such earnings, the reduction of professional earnings by an amount of Rs. 12,45,472, as offered by the assessee suo motu, does not call for any disturbance. We direct the AO to accept the same.
Accordingly, while we uphold the grievance of the assessee, the grievance raised by the Revenue is rejected.
8. In the result, while Revenue's appeal for the asst. yr. 2000-01 is dismissed, the appeal filed by the assessee for the asst. yr. 2000-01 is allowed.
9. In assessee's appeal for the asst. yr. 2001-02 the only grievance raised is against reducing the estimated expenses @ 10 per cent in respect of India office and @ 50 per cent in respect of US office as attributable to earning eligible for foreign exchange earnings under Section 80RRA. In view of the discussions above, in respect of the asst. yr. 2000-01, we hold that the deduction under Section 80RRA is to be allowed in respect of gross foreign exchange earnings as reduced by direct expenses to earn that income. We are, therefore, not inclined to approve the disallowance of deduction by reducing 10 per cent of Indian office expenses on estimated basis. As for the US office expenses, we have taken note of the fact that admittedly, this office is not only for working on the assignments from which eligible foreign exchange remuneration is earned. Only such expenses incurred by the US office can be reduced from the gross professional remuneration, to arrive at deduction under Section 80RRA, as are directly incurred for the purposes of earning such income. There is no dispute that in the initial year of opening an office, there was no work generated by the US office and the licence to practice there was granted only w.e.f. 7th April, 2001. Therefore, so far as first year of US office is concerned, we agree that no part of US office expenses should be reduced from foreign exchange earnings as the office was not even operational and the expenses could not be attributed to earning of foreign exchange remuneration. For the asst. yr. 2001-02, the appeal filed by the assessee is, therefore, allowed.
10. As regards assessee's appeal for the asst. yr. 2002-03, the assessee's grievances are the same as asst. yr. 2001-02, but this is the year in which assessee's US office was fully functional. As regards the disallowance by reducing gross eligible earnings by 10 per cent of expenses in India, following the stand that we have taken for the preceding years, we direct the AO to delete the same. However, having regard to the fact that no efforts have been made by any of the authorities below, as indeed by the assessee, to identify the actual expenditure incurred by the assessee in US office for earning the eligible remuneration, we deem it fit and proper to remit the matter to the file of the AO for the limited purposes of verification as to which of the expenses by US office can be said to be directly related to earning of remuneration eligible for deduction under Section 80RRA. The assessee shall give details of such expenses as were incurred by the assessee for the said purpose, and furnish such reasonable particulars as the AO may requisition. The AO shall give due opportunity of hearing to the assessee before passing the fresh order, and shall decide the matter by way of a speaking order. In case the assessee can demonstrate that actual expenditure is less than 50 per cent of US office expenditure as allowed by the CIT(A) on ad hoc basis, the assessee will get relief accordingly. The appeal for the asst. yr. 2002-03 is thus allowed for statistical purposes.
To sum up, assessee's appeal for the asst. yrs. 2000-01 and 2001-02 is allowed, assessee's appeal for the asst. yr. 2002-03 is allowed for statistical purposes, and Revenue's appeal for the asst. yr. 2000-01 is dismissed.