TaxTMI 
TaxTMI 
2007 (3) TMI 290
X X X X Extracts X X X X
X X X X Extracts X X X X
....ling to appreciate that deduction under s. 80-O of the Act was required to 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s appeal." 6. In its order dt. 14th Sept., 2006 in the assessee's appeal for asst. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to it on gross receipts. 9. The assessee has rendered software consultancy services abroad. 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....etroleum and Raasi Cement Ltd. vs. CIT. In the event of a conflict between the aforesaid decisions, 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....petitive with the products of HP or of HPIL in the test and measurement (T & M) product range as of the 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 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p; 30-10-1995 1,04,00,000 2,73,20,000 Cost inflation index of year of payment financial 172 year 1989-90 Cost inflation index of year of payment financial 182 year 1990-91 Cost inflation index of year of payment financial 281 year 1995-96 Indexed cost of acquisition 16920000*271/172 2,76,42,558 10400000*281/182 1,60,57,143 4,36,99,701 ------------ Long-term capital gain 10,63,00,290 Tax on LTCG @ 30% plus surcharge of 15% 3,66,73,603 18. On careful consi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; ----------- ------------ Balance-LTCG 10,39,45,600 The question of charging commercial interest was contemplated. However, considering the course of events and the protracted negotiations, I am of the opinion that charging of 12 per cent would be reasonable. The AO is directed to charge interest @ 12 per cent on Rs. 2,73,20,000 from the date of payment till receipt of such amount by the appellant as shown above. The balance will be taxed as long-term capital gains. The AO is directed to verify the date of payment of share application money and date of its receipts and long-term capital gains be calculated accordingly." 19. In support of the aforesaid ground of appeal, the learned counsel for the assessee has reiterated the submissions made by the assessee before the Departmental authorities. Accordin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... entered into by the assessee in the ordinary course of its business. 21. We have heard the parties. In Gammon India (P) Ltd. vs. CIT, the Bombay High Court has held that if the payment is received in the ordinary course of the business of the assessee for loss of stock-in-trade, it is revenue receipt, and if, on the other hand, the payment is received towards compensation for extinction or sterilization, partly or fully, of a profit-earning source, such receipt, not being in the ordinary course of assessees business is a capital receipt. In the case before us, the assessee had entered into a joint venture agreement with HP by which the assessee was given the right to subscribe to the extent of 20 per cent of the paid-up capital of the joint venture, namely, HPIL. The joint venture agreement also contained a non-compete clause, which prohibited the assessee from carrying on a business in competition with the joint venture. The assessee paid a sum of Rs. 2,73,20,000 as share application money to HPIL. The MOU, on the other hand, provided for payment of Rs. 15 crores to the assessee which included refund of share application money as also for a non-compete clause incorporated in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 48 provides for the mode of computation of capital gains. It provides that the income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of transfer of the capital asset the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement thereto. In the case before us, the cost of acquisition is the amount paid as share application money and the sale consideration is the amount which has been received on termination or extinction of assessee's right to subscribe to the share capital. The prayer of the assessee that it should be allowed the benefit of indexed cost of acquisition therefore merits consideration. In this view of the matter, we direct the AO to tax the impugned amount as long-term capital gains after giving the benefit of indexed cost of acquisition as per law. 24. In view of the aforesaid, the order of the CIT(A) bifurcating the compensation received in two parts, i.e., (i) interest on share application money liable to be taxed as income from other sources; and (ii) refund of share app....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee is partly allowed. ITA No. 3301/Mum/2001 : (Department's appeal) 29. Ground No. 1 reads as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing treatment of expenses incurred on issue of bonus shares as revenue expenditure ignoring the decision of the Supreme Court in the case of Brooke Bond India Ltd. vs. CIT (1997) 140 CTR (SC) 598 : (1997) 225 ITR 798 (SC)." 30. The issue is covered against the Department by the decision of the Hon'ble Supreme Court in CIT vs. General Insurance Corporation (2006) 205 CTR (SC) 280 : (2006) 286 ITR 232 (SC). Ground No. 1 is therefore dismissed. 31. Ground No. 2 reads as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing the exclusion of Modvat credit from the valuation of the closing stock." 32. We have heard the parties. The issue is covered against the Department by the decision of the Hon'ble Supreme Court in CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 182 CTR (SC) 291 : (2003) 261 ITR 275 (SC) and also by the orders of this Tribunal in the assessee's own case for asst. yrs. 1994-95, 1995-96 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eated as 'income from business' and not as 'income from other sources' as held by the AO." 38. Para 13 of the assessment order deals with the issue as under: "In the computation of total income, the assessee has not reduced dividend amounting to Rs. 54,54,248 and interest amounting to Rs. 3,91,13,884 (intercorporate interest received on ICDs as per details submitted vide their letter dt. 4th Sept., 1998) for computing the business income. Both dividend and interest are taxed as income from other sources." 39. On appeal, the learned CIT(A) has disposed of the issue with the following observations: "10.1. I have considered the issue. I find that the Hon'ble Bombay High Court's decision in the case of CIT vs. Paramount (P) Ltd. (1991) 190 ITR 259 (Bom) deals with a situation where the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. The Hon'ble Supreme Court's decision in the case of Govinda Chaudhary & Sons basically underlines the fact that interest partakes the same character as payment on which (interest is) awarded. The details of interest earned are as under: Interest on inter corporate deposits&n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nfirmed. 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 read as under: "7. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in restricting the disallowance made by the AO on account of expenditure in hotels to 50 per cent of Rs. 50,45,625 on the ground that the same represented expenditure incurred for entertaining the employees in hotels without appreciating that the disallowance of Rs. 50,45,625 made by the AO was in accordance with Explanation to s. 37(2A) and was in the nature of entertainment expenditure." "8. On the facts and in the circumstances of the case and in law, the learned CIT(A) ha....