TMI Blog2007 (3) TMI 290X X X X Extracts X X X X X X X X Extracts X X X X ..... o be computed with respect of net receipts in foreign exchange and no adjustment to the same is contemplated by the provisions of s. 80-O of the Act. 3. The appellant prays that the deduction under s. 80-O of the Act be appropriately worked out in the facts and circumstances of the appellant's case." 3. Facts of the case, in brief, are that the assessee received a sum of Rs. 3,67,93,336 in foreign exchange for rendering software consultancy services abroad. The assessee claimed 50 per cent of the aforesaid foreign exchange receipts as deduction under s. 80-O of the IT Act. The AO recomputed the deduction by estimating the indirect expenses incurred at Rs. 50 lakhs for earning the foreign exchange following the decision of this Tribunal in Tata Unisys Ltd. vs. Dy. CIT (1993) 47 TTJ (Bom) 8. On appeal, the learned CIT(A) confirmed the order of the AO which he found to be in conformity with the decision of this Tribunal in Tata Unisys Ltd. He, however, reduced the estimation of indirect expenses from Rs. 50 lakhs to Rs. 35 lakhs following his order for asst. yr. 1995-96. The order of the CIT(A) for asst. yr. 1995-96 was appealed against before this Tribunal as also the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st. yr. 1997-98, this Tribunal has disposed of the issue as under: "2. There are only two grounds taken by the assessee i.e. against in directing to deduct an estimated sum of Rs. 35 lakhs in respect of indirect expenses from the net receipts for computing deduction under s. 80-O of the IT Act and disallowance of an amount of Rs. 3,61,076 in respect of payment made to Blue Star Club disallowed under s. 40A(9) of the Act. 2.1 Both the issues were involved in earlier year's appeal Le. asst. yrs. 1994-95 and 1995-96 decided in ITA No. 1534/Mum/1999, dt. 28th Dec., 2004 and in ITA No. 2260/Mum/1999 for asst. yr. 1995-96 vide order dt. 8th April, 2005. 2.2 The first issue was decided by the Tribunal in favour of the assessee whereas the second issue was restored to the file of the AO to decide the same afresh in the light of the decision in the case of CIT vs. Bharat Petroleum Corpn. Ltd. (2001) 169 CTR (Bom) 119 : (2001) 252 ITR 43 (Bom). In view of the decision taken by the Tribunal for earlier year, we direct the AO to recompute the income of the assessee accordingly." 7. The short question is whether deduction under s. 80-O of the IT Act should be allowed on net receipts or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... broad. It is inconceivable that services of such specialized nature can be had and provided to foreign enterprises without incurring any expenditure. Therefore, the only issue that survives for consideration is as to how the expenses incurred by the assessee in earning those receipts should be computed. If the assessee had treated the aforesaid activity as a profit center and maintained the books of account recording the receipts and expenses relating to the activities undertaken under s. 80-O, it would have been easy to allocate expenses incurred for earning the foreign exchange under s. 80-O. If the assessee has not maintained the books of account for the aforesaid activity, the question that arises is whether the Departmental authorities should work out the expenses relating to the activities under s. 80-O on a reasonable basis. In our view, the Departmental authorities are under legal mandate as also under the mandate of the Hon'ble Bombay High Court to allow deduction only in respect of net receipts and not on gross receipts. Therefore they have ample jurisdiction to work out the expenses incurred for earning the receipts under s. 80-O on pro rata basis or on a reasonable basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, the decision of Hon'ble Bombay High Court shall be followed. Ground No. 2 is treated as allowed for statistical purpose. 14. Ground Nos. 3 and 4 taken by the assessee and ground No. 6 taken by the Department are interlinked. They are therefore being decided here for the sake of convenience. Ground Nos. 3 and 4 taken by the assessee read as under: "III. Compensation received on termination of joint venture agreement 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that out of compensation received on termination of its joint venture agreement (JVA) with Hewlett Packard (USA) (HP) amounting to Rs. 15 crores, a sum of Rs. 10.39 crores is taxable as long-term capital gains, thereby rejecting the appellant's claim that the entire amount received by the appellant is a capital receipt not at all exigible to tax. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has failed to appreciate the facts and ought to have held that the amount received by appellant for giving up rights under the JVA being a zero cost capital asset and is therefore a capital receipt, which is not exigible to capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transfer date for a period of two years commencing with the transfer date. Resultantly, the assessee paid Rs. 1,69,20,000 on 9th Nov., 1989 and Rs. 1,04,00,000 on 16th Aug., 1990 towards share application money for allotment of shares of HPIL. With the liberalization of the policy in and around 1991, foreign companies were allowed to have 100 per cent subsidiaries in India. HPIL therefore did not allot 20 per cent shares to the assessee in respect of which the assessee had paid share application money on 9th Nov., 1989 and 16th Aug., 1990 to HPIL. After negotiations, the parties decided to terminate the joint venture agreement under a MOU dt. 21st July, 1995. In terms of the said MOU, the assessee agreed to allow HP to have 100 per cent shareholding in HPIL in consideration of Rs. 15 crores to be paid by HP to the assessee. It was stated in the MOU that a sum of Rs. 2,73,20,000 being the share application money paid by the assessee would be refunded to the assessee without any interest on or before 30th Oct., 1995. It was further provided that HP would pay to the assessee a sum of Rs. 12,26,80,000 in consideration of. the assessee agreeing with HP not to compete with HPIL in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 603 18. On careful consideration of the submissions made by the assessee, the learned CIT(A) has disposed of the matter with the following observation: "I have given considerable thought to this issue. According to the appellant, it paid HPIL as under: 9-11-1989 Rs. 1,69,29,999 repaid on 30-10-1995 16-8-1990 Rs. 1,04,00,000 repaid on 30-10-1995 The above figures show that the share application money was retained by HPIL from 1989 to 1995 without allotting any shares or rights. During the period the appellant had also transferred their commission business to HPIL. The compensation paid can therefore be (a) a compensation that has an interest potential; (b) transfer of commission to HP. The treatment of Rs. 15 crores received will be considered as under: Calculation of interest and capital gains Amount in Rs. Amount advanced towards share capital in 2,73,20,000 financial years 1989-90 and 1990-91 Interest on above @ 12% p.a. Amount Period in months Interest 1,69,20,000 9-11-1989 to 30-10-1995 1,21,82,400 1,04,00,000 16-8-1990 to 30-10-1995 65,52,000 ----------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC) 310 : (1972) 86 ITR 19 (SC), the learned Departmental Representative submitted that the issue was fully covered in favour of the Department by the aforesaid decision of the Hon'ble Supreme Court. He also referred to the decision of the Hon'ble jurisdictional High Court in Gammon India (P) Ltd. vs. CIT (1993) 111 CTR (Bom) 212 : (1993) 202 ITR 986 (Bom) for the proposition that if the payment is received in the ordinary course of business of the assessee for loss of stock-in-trade; it is a revenue receipt and that, in order to decide, whether or not a payment is a revenue receipt, its true nature and substance must be looked into. Referring to the decision of this Tribunal in Payal Kapur vs. Asstt. CIT, relied upon by the learned senior counsel for the assessee, he submitted that the said decision was not applicable on the facts of the case before us, as the shares had already been allotted in Payal Kapur's case. He further submitted that the compensation was received, in Payal Kapur case for breach of JVA whereas, in the case before us, the assessee has been compensated for loss of right to shares on the basis of a joint agreement entered into by the assessee in the ordinary co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sites of s. 45 for taxing the impugned sum as capital gains are not fulfilled. The right to subscribe to the share capital is a valuable right and so is the right to be involved in the affairs of joint venture under the joint venture agreement. Such right is a capital asset within the meaning of s. 2(14) of the IT Act, which defines capital asset as meaning property of any kind held by an assessee, whether or not connected with his business or profession. Therefore the subject-matter of impugned transfer falls well within the ambit of "capital asset" as defined in s. 2(14) of the IT Act. Loss or extinction of right to subscribe to the share capital and to be involved in the affairs of joint venture fall within the meaning of "transfer" as defined in s. 2(45) of the IT Act. The impugned capital asset has been transferred during the previous year relevant to the assessment year under appeal through the MOU. Thus, the profits or gains arising from the transfer of impugned capital asset effected in the previous year relevant to the assessment year under appeal are chargeable to tax under the head "Capital gains" under s. 45. 23. Sec. 48 provides for the mode of computation of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under s. 10(3) of the Act. 2. He failed to appreciate and ought to have held that the said receipt shall not be chargeable to tax, as it would then constitute a capital receipt." 27. We have heard the parties. The issue has been elaborately discussed at pp. 8-11 of the order of the CIT(A) and at pp. 29-32 of the assessment order. Relying upon the assessee's letter dt. 31st Jan., 1996 submitted before the AO during the course of assessment proceedings for asst. yr. 1993-94, the learned CIT(A) has held that the capital gains as offered by the assessee in its return of income for the year under appeal has rightly been taxed under the head "Capital gains". At the time of hearing, the learned counsel for the assessee did not press ground No. 5. He submitted that the issue raised in ground No. 6 should also be decided, in view of his not pressing ground No. 5, treating the transaction as giving rise to long-term capital gain. We order accordingly. Ground No. 5 is therefore dismissed while the issue raised in ground No. 6 is restored to the file of the AO for treating and taxing it as long-term capital gain. 28. Appeal filed by the assessee is partly allowed. ITA No. 3301/Mum/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in its order for other years. The AO shall also keep in view the decision of the Supreme Court reported in (2005) 198 CTR (SC) 313 : (2005) 278 ITR 546 (SC). 35. Ground No. 4 reads as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to allow relief under s. 80-I without first reducing the eligible profits by the relief admissible under s. 80HH which is in the contravention of the provision of sub-s. (9) of s. 80HH of the IT Act." 36. At the time of hearing, the learned counsel for the assessee submitted that the issue was covered in favour of the assessee by the decision of this Tribunal in the assessee's own case for asst. yrs. 1994-95, 1995-96 and 1997-98 as also by the decision in CIT vs. Nima Specific Family Trust (2001) 165 CTR (Bom) 518 : (2001) 248 ITR 29 (Bom). In this view of the matter, ground No. 4 is dismissed. 37. Ground No. 5 reads as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in law, in holding that the interest income amounting to Rs. 1,36,01,899 should be treated as 'income from business' and not as 'income from other sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause. The income derived out of discounting is hence to be treated as business income." 40. We have heard the parties. In our view, the learned CIT(A) has correctly held that discounting activity undertaken by the assessee was a business activity as it was duly covered by the objects clause of memorandum of association of the assessee. Learned Departmental Representative could not place any material before us to show as to how the finding of fact recorded and conclusion reached by the learned CIT(A) were erroneous. In this view of the matter, the order passed by the learned CIT(A) is confirmed. Ground No. 5 is dismissed. 41. Ground No. 6 reads as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in treating the non-compete fees as long-term capital gains without appreciating that there was no capital asset on transfer of which gains could have accrued, as has rightly been held by the AO in his assessment order." 42. The issue raised by the Department has already been dealt with while deciding ground Nos. 3 and 4 in the appeal filed by the assessee. Following the same, ground No. 6 is dismissed. 43. Ground Nos. 7 and 8 re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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