1990 (5) TMI 31 - HC - Income Tax

Tribunal Rules on Tax Treatment of Foreign Income Contracts: Section 80HHB Prevails Over 80-O

Continental Construction Limited Versus Commissioner Of Income-Tax

The Tribunal held that income from agreements with foreign Governments/enterprises is governed by Section 80HHB, not Section 80-O. It concluded that the ... Business Expenditure, CBDT, Deduction, Foreign Project, Indian Company, Industrial Company, Project, Restrictions Issues Involved:1. Applicability of Section 80HHB vs. Section 80-O of the Income-tax Act, 1961.2. Validity of approvals granted under Section 80-O for the assessment year 1983-84.3. Whether income from the seven agreements can be bifurcated under Section 80HHB.4. Classification of the assessee-company as an 'industrial company' under the Finance Act, 1982.5. Exclusion of directors' remuneration paid outside India from the limit specified in Section 40A(5)(a) and Section 40(c).Issue-wise Detailed Analysis:1. Applicability of Section 80HHB vs. Section 80-O of the Income-tax Act, 1961:The Tribunal held that the income from the seven agreements with foreign Governments/enterprises is governed by Section 80HHB and not Section 80-O. The Tribunal noted that Section 80HHB relates to the execution of foreign projects, including construction contracts and does not exclude sophisticated or highly complicated work. The Tribunal emphasized that Section 80HHB(5) mandates that if the income is covered under this section, no part of it can be considered under any other section. The Tribunal concluded that the contracts were indivisible and integrated, making them turnkey projects, and therefore, the income could not be bifurcated to claim benefits under Section 80-O.2. Validity of approvals granted under Section 80-O for the assessment year 1983-84:Despite the Board's approvals under Section 80-O, the Tribunal held that the income for the assessment year 1983-84 must be considered under the law as it stood at that time. The Tribunal found that the approvals were subject to the provisions of Section 80HHB, which became operative from April 1, 1983. The Tribunal rejected the plea of promissory estoppel, stating that the matter must be decided according to the law and not based on any confusion created by the authorities.3. Whether income from the seven agreements can be bifurcated under Section 80HHB:The Tribunal held that the income from the entire activities under the seven agreements could not be bifurcated and is wholly covered under Section 80HHB. The Tribunal noted that the contracts were indivisible and integrated, and the consideration was for the execution of foreign projects. The Tribunal emphasized that no part of the income arose as fees or royalty from rendering technical services under the contracts.4. Classification of the assessee-company as an 'industrial company' under the Finance Act, 1982:The Tribunal, following the decision in Minocha Brothers Pvt. Ltd., held that the assessee could not be considered an industrial company. The Tribunal noted that the amendment made by the Finance Act, 1983, was not applicable for the assessment year 1983-84 but for later years.5. Exclusion of directors' remuneration paid outside India from the limit specified in Section 40A(5)(a) and Section 40(c):The Tribunal upheld the assessee's claim that remuneration paid to directors for their employment outside India should be excluded from the limit of Rs. 72,000 laid down in Section 40A(5)(a) and Section 40(c). The Tribunal noted that the directors working abroad were also employees of the company, and Section 40A(5)(b)(i) excludes such remuneration from the disallowance limit.Conclusion:The Tribunal's decision was comprehensive, addressing the applicability of Sections 80HHB and 80-O, the validity of approvals under Section 80-O, the indivisibility of contracts, the classification of the company, and the exclusion of directors' remuneration paid outside India. The Tribunal's analysis was based on the interpretation of relevant sections and judicial precedents, leading to a detailed and reasoned judgment.