JEHANGIR GULLABBHAI v. JOINT COMMISSIONER OF INCOME TAX
[Citation -2007-LL-1217-4]

Citation 2007-LL-1217-4
Appellant Name JEHANGIR GULLABBHAI
Respondent Name JOINT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 17/12/2007
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags convertible foreign exchange • remission or cessation • scientific knowledge • system of accounting • condition precedent • technical know-how • gross total income • foreign enterprise • foreign government • professional firm • trading liability • indian company • written off • net receipt • actual use
Bot Summary: 1998-99, the assessee had received fees from foreign countries in convertible foreign exchange to the tune of Rs. 10,14,807 and claimed deduction under s. 80-O. Similarly, assessee claimed deduction under the aforesaid section in the asst. 1997-98, the assessee was eligible for deduction under s. 80-O because of the expression information concerning industrial, commercial or scientific knowledge experience or skill and not because of the expression use outside India of any patent, invention, model, design, secret formula or process or similar property right. Any income related to any other item would not fall within the scope of s. 80-O. Now the question arises, whether the consultation or advise given by the assessee to foreign enterprises regarding any patent, invention, design or trademark in foreign countries would be eligible for deduction under s. 80-O. In our humble opinion, only that income would be eligible which is in consideration for use outside India of any patent, invention, design or trademark. Further, there is no dispute that fee received by the assessee in convertible foreign exchange relate only to the advise given by the assessee as an attorney regarding the use of intangible assets owned by the foreign parties. Since assessee does not own any such intangible assets, the question of receiving any income for use outside India of such asset does not arise. In our view, the assessee is not entitled to deduction under s. 80-O. The claim of the assessee was therefore, rightly denied by the lower authorities. Secondly, the provisions of s. 41(1) apply only where the assessee has obtained whether in cash or in any other manner whatsoever any amount in respect of loss, expenditure or trading liability incurred by the assessee in the earlier years or has obtained some benefit in respect of trading liability by way of remission or cessation thereof.


Both these appeals were heard together and are being disposed of by common order or sake of convenience. first issue common to both appeals relates to deduction under s . 80-O of IT Act, 1961 ( Act ). Briefly stated facts are these. assessee is firm of solicitors and advocates. In asst. yr. 1998-99, assessee had received fees from foreign countries in convertible foreign exchange to tune of Rs. 10,14,807 and claimed deduction under s. 80-O. Similarly, assessee claimed deduction under aforesaid section in asst. yr. 2001-02 in respect of amount received from foreign countries in convertible foreign exchange amounting to Rs. 19,33,583. claim of assessee was denied by AO on ground that provisions of s. 80-O effective from asst. yr. 1998-99, does not permit assessee, deduction under s. 80-O inasmuch as word fee had been omitted from said section. At this stage, it be mentioned that there is not much discussion in assessment order for asst. yr. 1998-99. However, in assessment order for asst. yr. 2001-02, AO asked assessee to explain as to how deduction under s. 80-O could be allowed. explanation of assessee vide letter dt. 13th Jan., 2004 was as under: "The assessee is receiving fees from foreign countries and foreign enterprises in convertible foreign exchange, for professional services for use outside India of any patent, invention, design and registered trademark. list from whom this convertible foreign exchange has been received has already been submitted. Expenses incurred to earn this foreign exchange amounts to Rs. 1,17,561. ...The net receipt of foreign exchange will not be reduced to Rs. 18,16,021.20. 40 per cent of this amount will work out to Rs. 7,26,408.48." However, AO was not satisfied with said explanation and consequently rejected claim of assessee by observing as under: "The assessee firm is only trademark attorney who is advising its clients on law of trademarks, patents, etc. assessee firm does not own any patent, invention, design or registered trademark, for which it has received consideration in convertible foreign exchange for allowing foreign enterprise to use such patent, invention, design or registered trademark. In view of above, assessee firm cannot be granted deduction under s. 80-O of IT Act, 1961." matter was carried in appeal for both years before learned CIT(A) before whom it was contended that s. 80-O provides deduction in respect of royalties, etc. which would include fee also. contention was rejected by learned CIT(A) by observing as under: "I have considered submissions. scope and effect to Finance Act, 1991 have been explained in Departmental Circular No. 763, dt. 18th Feb., 1998. It is stated that s. 80-O provided for deduction in respect of royalties, commission, fees or similar payment from foreign Government or enterprise in consideration for technical or professional services rendered outside India. This tax incentive was provided in order to encourage export of India know-how and skills abroad. Finance Act, 1997 restricted deduction available only to income received from Government of foreign State or foreign enterprise in consideration for use outside India of any patent, invention, design or registered trademark. This incentive is therefore focused on genuine resident taxpayers and will encourage them to exploit their patent rights, trademarks and technical know-how abroad. amendment will take effect from 1998-99. It is clear from above circular that fees received for rendering services to clients abroad has been removed from scope of s. 80-O. appellant is professional firm and has no patent trademark to exploit. technical know-how that it possesses is utilized to advise foreign clients regarding patents and trademarks in India for fee. appellant does not in any way export its technical know-how abroad. Although s. 80-O is applicable to any income received, income should be in consideration of use of design or trademark in appellant case this is not so. In view of above, claim of appellant is rejected and disallowance is confirmed." Aggrieved by orders of learned CIT(A), assessee has preferred these appeals before Tribunal. learned counsel for assessee has assailed order of learned CIT(A) by contending that omission of word fee from s. 80-O effective from asst. yr. 1998-99 would not disentitle assessee from claiming deduction under said section inasmuch as amended provisions effective from asst. yr. 1998-99 allows deduction in respect of any income received by assessee which would include all kinds of income including fee. substance of argument is that word income is of widest amplitude and therefore would include income by way of fee and consequently claim of assessee could not be disallowed on ground that word fee appearing in s. 80-O has been omitted w.e.f. asst. yr. 1998-99. It was also submitted that object of section is to bring foreign exchange in country and therefore sections should be interpreted liberally. He also referred to history of s. 80-O as mentioned in Commentary by Sampath and Iyengar 10th Edition on pp. 6173, 6183 and 6190. He also relied on judgment of Hon ble Supreme Court in case of Bajaj Tempo Ltd. vs. CIT (1992) 104 CTR (SC) 116: (1992) 196 ITR 188 (SC) for proposition that incentive provisions should be construed liberally. next contention of learned counsel for assessee is that assessee had received fee from foreign enterprises regarding advice given by it for use of trademark in foreign country and therefore assessee is entitled to such deduction. According to him, ownership of trademark, patent or invention etc., by assessee is not condition precedent for claiming deduction. On other hand, learned Departmental Representative has relied on reasons given by AO as well as learned CIT(A) and therefore same need not be repeated as we have already narrated in earlier part of order. Rival submissions of parties have been considered carefully in light of provisions of s. 80-O. In our opinion, contention raised by learned counsel for assessee cannot be accepted. We have gone through provisions of s. 80-O as existed on statute book in asst. yr. 1998-99 as well as prior to asst. yr. 1998-99. At this stage, it would be appropriate to refer to original section as existed upto 31st March, 1998 and amended provisions effective from 1st April, 1998. "Provision of s. 80-O applicable up to asst. yr. 1998-99. Provisions of s. 80-O applicable w.e.f. asst. yr. 1997-98. -O. Where gross total income of assessee, being Indian company or person (other than company) who is resident in India, includes any income by way of royalty, commission, fees or any similar payment received by assessee from Government of foreign State or foreign enterprise in consideration for use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provide or agreed to be made available or provided to such Government or enterprise by assessee, or in consideration of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by assessee, and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of assessee in accordance with any law for time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to provisions of this section, deduction of amount equal to fifty per cent of income so received in, or brought into, India, in computing total income of assessee. -O. Where gross total income of assessee, being Indian company or person (other than company) who is resident in India, includes any income received by assessee from Government of foreign State or foreign enterprise in consideration for use outside India of any patent, invention, design or registered trademark and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of assessee in accordance with any law for time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to provisions of this section, deduction of accordance with and subject to provisions of this section, deduction of amount equal to fifty per cent of income so received in, or brought into, India, in computing total income of assessee." perusal of unamended provisions shows that deduction was allowable in respect of certain incomes by way of royalty, commission, fees or any similar payment with reference to use outside India of any patent, invention, model, design, secret formula or process or similar property right or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided. It further shows that royalty related to use of patent, invention, model, design, secret formula or process or similar property right. On other hand, commission and fees related to information concerning industrial, commercial or scientific knowledge, experience or skill. However, provisions were amended effective from asst. yr. 1998-99. perusal of amended section shows that classification of income was removed and it now merely refers to any income , which would include all kinds of income, but, income is now restricted to use of any patent, invention, design or registered trademark. So there is deviation from earlier provisions to extent that income related to information concerning industrial, commercial or scientific knowledge experience or skill ceased to be eligible for deduction under s. 80-O. In our opinion, it is because of such departure from earlier provisions that words commission, fees, etc., were omitted and were substituted by words any income . No doubt incentive provisions are to be construed liberally as contended by learned counsel for assessee, but where wording of section is clear then benefits which are not available cannot be conferred by ignoring or misinterpreting words in section as held by Hon ble Supreme Court in case or IPCA Laboratory Ltd. vs. Dy. CIT (2004) 187 CTR (SC) 513: (2004) 266 ITR 521 (SC). Upto asst. yr. 1997-98, assessee was eligible for deduction under s. 80-O because of expression information concerning industrial, commercial or scientific knowledge experience or skill and not because of expression use outside India of any patent, invention, model, design, secret formula or process or similar property right . combined reading of both provisions shows that legislature deliberately excluded income by way of commission, fees, etc. relating to information concerning industrial, commercial or scientific knowledge experience or skill from scope of s. 80-O. No doubt that word income is of widest amplitude and would generally include fees but income eligible for s. 80-O is restricted to use outside India of any patent, invention, design or registered trademark. Therefore, any income related to any other item would not fall within scope of s. 80-O. Now question arises, whether consultation or advise given by assessee to foreign enterprises regarding any patent, invention, design or trademark in foreign countries would be eligible for deduction under s. 80-O. In our humble opinion, only that income would be eligible which is in consideration for use outside India of any patent, invention, design or trademark. income must have direct nexus with actual use outside India of intangible assets specified in section and by no stretch of imagination benefit can be extended to income by way of fees relatable to advise regarding intangible assets belonging to foreign parties. Admittedly, assessee is not owner of any patent, invention, design or trademark. Further, there is no dispute that fee received by assessee in convertible foreign exchange relate only to advise given by assessee as attorney regarding use of intangible assets owned by foreign parties. income can be said to be in consideration for use of intangible assets if such assets are owned by assessee. If assessee is not owner of intangible assets then, question of receiving any income in consideration of use of such asset would simply not arise. Since assessee does not own any such intangible assets, question of receiving any income for use outside India of such asset does not arise. Therefore, in our view, assessee is not entitled to deduction under s. 80-O. claim of assessee was therefore, rightly denied by lower authorities. orders of learned CIT(A) are, therefore, upheld on this issue. next issue relates to addition of Rs. 12,21,694 under s. 41(1) of Act in respect of asst. yr. 2001-02 only. In course of assessment proceedings, AO noticed that assessee had shown amount of Rs. 12,21,694 as sundry clients in liabilities side of balance sheet. It was also noted that assessee was following cash system of accounting. assessee was asked to submit details in respect to aforesaid amount. assessee vide letter dt. 13th Jan., 2004 explained as under: assessee vide letter dt. 13th Jan., 2004 explained as under: "On 24th Sept., 1994 devastating fire engulfed building Rajabhadur Mansion in which office of assessee was situated. entire office premises, including books of account, records of clients, furniture and fixtures, telephones, telex machine, computers and like were burnt to ashes. For asst. yr. 1995-96 assessee was requested to prepare balance sheet as on 31st March, 1995. assessee prepared list of assets and liabilities which they could muster. However there was difference between assets and liabilities of Rs. 12,31,694.55 which was shown as sundry clients. claim was subsequently received from one of client of Rs. 10,000 and balance now stands at Rs. 12,21,694." Subsequently, AO asked assessee to show cause as to why aforesaid amount should not be taxed under s. 41(1) of Act. In response to same, it was stated by assessee that provisions of s. 41(1) were not applicable. However, AO for reasons given in his order, applied provisions of s. 41(1) of Act and consequently made addition of Rs. 12,21,694. matter was carried in appeal before learned CIT(A) who sustained addition by observing as under: "I have considered arguments of appellant and contentions of AO. It is fact that appellant has not unilaterally written off amount in accounts. At same time, appellant has not been able to produce any evidence or details to suggest that amounts were received from which clients. appellant is following cash system of accounting. In absence of specific evidence to point out clients advancing money with reference to services likely to be rendered, contentions of appellant cannot be accepted. AO has rightly pointed out that after lapse of about 9 years also no client has turned up. appellant has not pointed out as to when, in any of subsequent years till date, amount in question has been offered to tax. Therefore, liability of Rs. 12,21,694 has rightly been rejected and brought to tax by AO. action of AO is sustained. This ground of appeal is rejected." Aggrieved by same, assessee is in appeal before Tribunal on this issue. After hearing both parties, we are unable to sustain addition for reasons given hereafter. Firstly, it is undisputed fact that assessee was following cash system of accounting. Therefore, no addition can be made in any of years unless amount has been received in year under consideration. Admittedly, aforesaid amount represents outstanding amount from its clients and therefore, question of assessing same as income does not arise considering system of accounting followed by assessee. Secondly, provisions of s. 41(1) apply only where assessee has obtained whether in cash or in any other manner whatsoever any amount in respect of loss, expenditure or trading liability incurred by assessee in earlier years or has obtained some benefit in respect of trading liability by way of remission or cessation thereof. Expln. 1 of such provision provides that expression loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof used in sub-s. (1) shall include remission or cessation of any liability by unilateral act of assessee. Admittedly, assessee had not written off amount in books of account. It is also not case of AO that any expenditure has been allowed in earlier years in respect of such liability shown by assessee in balance sheet. Therefore, condition precedent for invoking section is not satisfied. Consequently, addition cannot be sustained. order of learned CIT(A) is therefore, set aside on this issue. addition sustained by him is hereby deleted. In result, ITA No. 6406 is dismissed while ITA No. 5208 is partly allowed. *** JEHANGIR GULLABBHAI v. JOINT COMMISSIONER OF INCOME TAX
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