TMI Blog1992 (1) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission earnings. The relevant facts may first be stated. 3. The appellant is a private limited company. It filed its return for the assessment year 1986-87 on 27-6-1986 declaring an income of Rs. 14,99,280. It filed a revised return on 21-1-1987 enhancing the total income to Rs. 18,99,140. It filed yet another return on 31-3-1987 enhancing the income to Rs. 25,19,356. The main activity of the appellant company is to earn commission from parties abroad for technical services rendered. The company is engaged in the business as the insurance broker. It has also income from interest and dividend. Though such interest and dividend, according to the Assessing Officer, is secondary or peripheral in nature, the earning from foreign commission constitutes the bulk of the income of the company. During the relevant accounting year, the appellant received foreign commission of about Rs. 1.78 crores. According to the appellant, the foreign commission, which qualified for deduction under section 80-O, was around Rs. 1.54 crores, although the appellant had received approval from the CBDT for various agreements involving foreign commission of Rs. 1,02,24,483. Before the Assessing Officer the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded from the expenses. It was argued that such contributions and donations could not be treated as expenses incurred for earning foreign commission and donations qualifying for deduction 80G ought to be excluded from the expenses in view of the explicit provisions of section 80AB. It was also argued that pro rata expenses with reference to the total gross income should have been worked out. The CIT (Appeals) observed that since the appellant had claimed deduction under section 80M in respect of its dividend income, its claim that for the purpose of section 80-O the expenses to be allocated with reference to the total gross income including dividend income was inconsistent with its claim of deduction under section 80M. The CIT (Appeals,) therefore, held that it would be fair to allocate expenses pro rata with reference to the gross income excluding dividend income. The CIT (Appeals) accepted that charities and donations qualifying for deduction under section 80G had also to be excluded from the expenses in view of the specific provisions of section 80AB. Such donations, the CIT (Appeals) observed, were not expenses and were an application of income and had to be excluded while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what was the total expenditure to be taken into consideration for working out the proportion of expenses deductible against 80-O receipts. The total expenses were Rs. 1,70,46,742. These included loss on sale of shares and loss on property. There was no dispute between the revenue and the appellant that these two items were not to be included in the total expenditure. So far as donations under section 80G were concerned, the CIT (Appeals) accepted that such donations could not be taken into account while working out the figure of total expenditure. The dispute was about contributions made under sections 35(1)(ii) and 35CCA. Such contributions amounted to Rs. 37 lakhs and Rs. 1,50,000 respectively. The counsel argued that the type of outgoing that is contemplated under sections 35(1)(ii) and 35CCA could not be considered as an expenditure incurred for earning foreign commission which qualified for deduction under section 80-O. The counsel argued that the language of section 35(1)(ii) as well as 35CCA was very similar to the language of section 80GGA. After referring to these sections, he stressed the point that these sections did not speak of expenditure to be allowed but spoke of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income and if such deductions are excluded from the computation of income under the head '80-O receipts', such exclusion will violate the provisions of section 80AB. Lastly, the learned Departmental Representative pointed out that the interest received was taxed as business income and this fact has also to be taken into account for determining the quantum of expenses to be allowed. He pointed out that the CIT (Appeals) had excluded deductions under section 80G in view of the provisions of section 80AB and this rationale could not be applied in support of the argument that expenses under sec. 35(1)(ii) or section 35CCA were not expenses for earning foreign commission and, therefore, should not be taken into account to arrive at the income contemplated under section 80-O. 6. We have considered the submissions made by the learned counsel for the appellant and the learned Departmental Representative. Before going into the merits of the various legal arguments by the learned counsel, it would be necessary to point out that a substantial portion of the income of the appellant is income from foreign commission. In this connection, it would not be wholly irrelevant to take not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. It is difficult for us to accept the proposition that the aforementioned amounts claimed under sections 35(1)(ii) and 35CCA can only be related to these items of income and cannot be related to the substantial foreign commission of Rs. 1,92,50,000 which constitutes more than 90 per cent of the total receipts of the company. This is what we observe on considering the facts as they appear before us. 7. Coming to the legal arguments advanced, the first question to be decided is what are the total receipts to be taken into account as 80-O receipts. After a careful perusal of the order of the Assessing Officer as well as that of the first appellate authority, we find that the claim that the 80-O receipts amounted to Rs. 1,30,00,000 was neither raised before the Assessing Officer nor before the first appellate authority and, therefore, has not been considered by these authorities. This is not a pure question of law but requires verification of facts which probably were not before the lower authorities. Therefore, at this stage before the Tribunal, we cannot entertain the claim of the appellant that the total 80-O receipts should be taken at Rs. 1,30,00,000 instead of Rs. 1,02,24,483 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in this regard was that these are, in effect, items of the type contemplated under section 80GGA and the language of section 35(1)(ii) and section 35CCA was similar to that under section 80GGA. In fact, it was pointedly brought to our notice that section 80GGA(2)(b) specifically refers to section 35CCA. 7.2 For considering the validity of this argument, it is necessary firstly to reproduce the relevant sections. Section 35(1)(i) (ii) as it stood at the relevant time read as under : " 35(1) In respect of expenditure on scientific research, the following deductions shall be allowed----- (i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business------- Explanation : Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of any salary [as defined in explanation 2 below sub-section (5) of section 40A] to an employee engaged in such scientific research or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid out or exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s object the undertaking of any programme of rural development, to be used for carrying out any programme of rural development approved for the purposes of section 35CCA; or (ii) to an association or institution which has as its object the training of persons for implementing programmes of rural development: Provided that the assessee furnishes the certificate referred to in sub-section (2) or, as the case may be, sub-section (2A) of section 35CCA from such association or institution;" Section 80GGA, as is clear from its plain reading, does not speak of any expenditure but provides for deduction in respect of certain donations for scientific research and such deduction is allowed under Chapter VI-A against gross total income, the definition of which given under section 80B(5) is "gross total income" means the total income computed in accordance with the provisions of this Act before making any deduction under this Chapter or under section 280-O. Now, section 80AB, which speaks of deductions to be made with reference to the income included in the gross total income, reads as follows : " 80AB. Where any deduction is required to be made or allowed under any section (except sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand, we cannot also accept that these are sums paid in the nature of contributions or donations similar to those contemplated under section 80G or 80GGA. Thirdly, deductions under section 80G or 80GGA are what are known as Chapter VI-A deductions which are to be allowed under gross total income, which is total income computed under the provisions of the Act before making any deductions under these sections and, therefore, the total income so computed has been computed after taking note of deductions under section 35(1)(ii) or 35CCA. The expression "income by way of royalty, commission ........." cannot be interpreted to mean income which is arrived at only after deducting expenses incurred directly to earn such income. This interpretation finds support from the following observations of the Supreme Court in Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120 at pages 135 and 136 :--- " Now, it was urged on behalf of the assessee that the words "where the gross total income of an assessee .... includes any income by way of dividends from a domestic, company" in the opening part of sub-section (1) of Section 80M refer only to the inclusion of the category of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to arrive at a proper construction of the section, but there is a clear fallacy in this observation, because in making the substitution, it stops short with the words "income by way of dividends from a domestic company" and does not go the full length to which plain grammar must dictate us to go, namely, "income by way of dividends from a domestic company included in the gross total income" (Emphasis supplied). Otherwise, we would not be giving to the word "such" its full meaning and effect. The word "such" in the context in which it occurs can only mean that income by way of dividends from a domestic company which is included in the gross total income and that must necessarily be income by way of dividends computed in accordance with the provisions of the Act." Although the Hon'ble Supreme Court was interpreting the provisions of section 80M, the argument taken there was similar to the argument that has been taken before us in the context of income contemplated under section 80-O. Further, the provisions of section 80AB very clearly and unambiguously state that where any deduction is required to be made under any section included in this Chapter in respect of any income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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