Judgment:
1. These two appeals have been filed by the assessee for the asst. yrs.
1995-96 and 1997-98.
2. Ground No. 1 is general in nature and as such, was not pressed for.
The same thus stands rejected.
3. Ground Nos. 2 to 6 are in connection with the assessee's claim for deduction under Section 80-IA of the Act. In the course of hearing of this appeal, it was contended by the learned Counsel for the assessee that ground Nos. 3, 4, 5 and 6 are all argumentative in nature in support of the assessee's claim for deduction under Section 80-IA of the Act, which has been raised in ground No. 2. It was pointed out that substantial ground to be argued is only ground No.2 related to the assessee's claim for deduction under Section 80-IA of the Act in respect of the assessee's activity of manufacturing of sand and for preparation of identity cards. Therefore, the issues that fall for our consideration are (i) as to whether the activity of manufacturing of sand constitutes industrial undertaking within the meaning of Section 80-IA of the Act and (ii) as to whether the assessee's activity of preparation of identity card constitutes industrial undertaking for the purpose of Section 80-IA of the Act. We shall first take the question whether the assessee's activity of manufacturing of sand constitutes industrial undertaking for the purpose of deduction under Section 80-IA of the Act.
4. The assessee's claim of deduction under Section 80-IA in respect of manufacturing sand has been rejected by the AO by giving the following reasons: 1. Sand was manufactured out of rock by mechanical means. The production of sand from stone was not an industrial activity for the purpose of computing deduction under Section 80-IA, inasmuch as for the purpose of claiming deduction under Section 80-IA, the assessee should manufacture or produce article or thing which implies that there must be a change as a result of manufacturing or producing activity.
2. The AO has relied on the decision of Rajasthan High Court in the case of CIT v. Lucky Minerals (P) Ltd. where the activities of the assessee-company consisting of excavating lime stone and marble boulders and after cutting the boulders into slabs, selling them, was not treated as amounting to manufacturing, inasmuch as the original commodity retained a continuing substantial identity through the processing stage carried out by the assessee-company. In other words, the AO was of the view that there was no substantial change in the identity of the commodity when sand was manufactured out of rock.
3. The AO stated that the aforesaid case of Rajasthan High Court refers to production of marble blocks, but the same is also applicable to the assessee's case, since the nature of activity is almost the same while producing sand from the stone.
5. On appeal before the CIT(A), the assessee submitted that the assessee was manufacturing sand out of the rock by mechanical means, and for this purpose, the assessee had acquired rights to draw the raw materials from a stone quarry, near which a sand mill plant was put up.
The assessee further submitted that the production of sand from stones by crushing them was in the nature of an industrial activity for the purpose of claiming deduction under Section 80-IA of the Act. The assessee submitted that setting up of a crusher into which stones or boulders extracted from a quarry by blasting are fed, which finally generates a new product altogether, namely, sand amounted to manufacturing activity for the purpose of Section 80-IA of the Act, inasmuch as the use of the sand was entirely different (from) that of the boulders. The assessee relied on the decision of the Hon'ble Rajasthan High Court (Jaipur Bench) in the case of CIT v. Best Chem & Limestone Industries (P) Ltd. assessee also placed reliance on the decision of Hon'ble Gauhati High Court in the case of CIT v. R.C. Construction (1997) 137 CTR (Gau) 486 : (1996) 222 ITR 658 (Gau) : 135 Taxation 236 wherein the assessee crushing boulders to get quarts and small chips was held to be an industrial company as it involved manufacturing process. The assessee also pointed out before the CIT(A) that the AO has wrongly placed reliance on the decision of Rajasthan High Court in the case of CIT v. Lucky Minerals (P) Ltd. (supra), inasmuch as this case was quite clearly distinguishable from the facts of the assessee's case. It was clarified that in CIT v. Lucky Minerals (P) Ltd. (supra), the assessee was merely cutting and sizing limestone and marble blocks which did not create any new article, though in the assessee's case a different article in the nature of sand has been produced from the boulders.
6. After considering the assessee's submissions as well as the AO's stand, the CIT(A) held that the activity of preparation of sand by crushing stones did not amount to manufacturing or producing any article or thing. The CIT(A) has relied on the decision of Hon'ble Madhya Pradesh High Court in the case of Indian Poultry v. CIT as well as the decision of Hon'ble Calcutta High Court in the case of J.M.D. Medicare Ltd. v. Union of India and Ors.
. The CIT(A) also relied on the decision of Hon'ble Supreme Court in the case of CIT v. N.C. Budharaja and Co. & Am.
.
8. The learned Counsel for the assessee has drawn our attention to the Mowing note on sand mill activities: In Mumbai and New Mumbai areas source of construction sand has traditionally been, materials dredged from creek and river beds.
This results in excess of dredging of sand than that of its natural replenishment, The alternative sane (sic) for sand was to manufacture it out of rock by mechanical means. This prompted V.M. Jog Engg Ltd. to put up a stone aggregate and sand mill plant supported by stone mine in New Mumbai area, viz., at Owale. The capacity of sand is 1,00,000 tons per year on a two shifts per day working basis. The company acquired a land admeasuring 1 lakh sq.
mts. at village Owale, Tal Panvel, Distt. Raigad on lease from CIDCO vide lease deed dt 31st Oct., 1997. In consideration of lease rent the company (lease) acquired rights to excavate the quarry and draw raw material (stone from quarry) for production of crushed sand and aggregates.
The learned Counsel further contended that in the recent case of the Delhi High Court in Bhagat Construction Co. (P) Ltd. v. CIT Their Lordships down by the apex Court in the case of CIT v. N.C. Budharaja & Co.
(supra). In the case of Bhagat Construction Co. (P) Ltd. v. CIT (supra), the assessee had claimed investment allowance under Section 32A for the machinery used for quarrying stones. Their Lordships held that since the assessee was a contractor and though it had manufactured intermediary products, these items were used in end product, i.e., in its own civil engineering operations. Therefore, it was held that the assessee was not engaged in the manufacture of any article or thing. He further submitted that in the case before us the operation of manufacturing sand amounted to manufacturing of different commodity, inasmuch as the entire sand manufactured by it were sold by the assessee to outside party and was not utilized for the assessee's own activity, The learned Counsel for the assessee had placed reliance on the following decisions:CIT v. Lucky Mineral (P) Ltd. 4. Aspinwall & Co. Ltd. v. CIT (2001) 170 CTR (SC) 68 : (2001) 251 ITR 323 (SC)M.B. Chemicals v. Dy. CIT (2001) 70 TTJ (Pune) (TM) 278 : (2001) 76 ITD 1 (Pune)(TM).CIT v. Best Chem & Limestone Industries (P) Ltd. 9. The learned Departmental Representative, on the other hand, supported the orders of the authorities below and contended that conversion of boulder into sand is not a manufacturing activity for the purpose of claiming deduction under Section 80-IA of the Act. He relied on the decision of the Hon'ble Madhya Pradesh High Court in the case of Indian Poultry v. CIT (supra).
10. We have heard both the parties and have gone through the orders of the authorities below.
11. On perusal of Section 80-IA, it is seen that the deduction under that section is available to an assessee, whose gross total income includes any profits and gains derived from any business of an industrial undertaking, which fulfils all the special conditions laid down in that behalf under Section 80-IA(2) of the Act. In this case, we are concerned with the question as to whether the assessee's gross total income includes any profit or gains derived from any business of industrial undertaking. The business of the assessee is of conversion of boulders into sand. It is, therefore, to be seen as to whether the conversion of boulder into sand amounted to an industrial undertaking for the purpose of computing deduction under Section 80-IA of the Act.
Clause (iii) of Sub-section (2) of Section 80-IA provides that Section 80-IA shall apply to any industrial undertaking which fulfils the condition that it manufactures or produces any article or thing not being any article or thing specified in the list in the Eleventh Schedule. However, this clause is applicable to small-scale industries with certain modifications. The case before us is not of small-scale industrial undertaking. The case is to be decided as per the main provisions of Clause (iii) of Sub-section (2) of Section 80-IA. It is thus to be seen whether the assessee manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule. The authorities below had rejected the assessee's claim by holding that the assessee does not manufacture or produce any article or thing. The question as to the items specified in the list in the Eleventh Schedule is not before us. We have to decide the only issue as to whether the assessee produces or manufactures any article or thing. According to Section 80-IA(12)(b), the expression 'industrial undertaking' shall have the meaning assigned to it in the Explanation to Section 33B of the IT Act.
12. In the case of Aspinwall & Co. Ltd. v. CIT (supra), the Hon'ble Supreme Court has defined the meaning of the word 'manufacture' as under: The word 'manufacture' has not been defined in the IT Act. In the absence of a definition, the word 'manufacture' has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to manufacturing activity.
13. In this decision, the Hon'ble Supreme Court has referred to its own decision in the case of Dy. CST v. Pio Food Packers (1980) 46 STC 63 (SC). The Court observed at p. 65 of the Report as under: Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place.Lucky Minmat (P) Ltd. v. CIT (supra), the decision of Rajasthan High Court in the case of CIT v. Lucky Mineral (P) Ltd. (supra) was affirmed by holding that mere mining of limestone and marble and cutting the same before, it was sold in the market would not be considered to be a manufacturing process while the conversion into lime and lime dust or concrete by stone crushers could legitimately be considered to be a manufacturing process. In this case, the Hon'ble Supreme Court had distinguished the decision of Rajasthan High Court in the case of CIT v. Best Chem & Limestone Industries (P) Ltd. (supra) in which case the assessee was engaged in the business of extracting limestone and its sale either as such or after converting it into lime and lime dust or concrete by stone crushers.CIT v. Lucky Minerals (P) Ltd. (supra) distinguished its earlier judgment in the case of CIT v. Best Chem & Limestone Industries (P) Ltd. (supra) because of the fact in the case of Lucky Minerals Ltd. (supra) the assessee was engaged in the business of mining of limestone and marble and cutting the same before it was sold in the market, though in the case of Best Chem & Limestone Industries (P) Ltd. (supra) the assessee was engaged in the business of extracting of limestone and selling them after converting it into lime and lime dust or concrete by stone crushers. The AO has relied on the decision of the Rajasthan High Court in the case of CIT v. Lucky Minerals (P) Ltd. (supra). But, we find that the facts of the present case are quite distinguishable from the facts of the case of Lucky Minerals (P) Ltd. (supra). The facts of the present case are similar and identical to the case of Best Chem & Lime Stone Industries (P) Ltd. The Rajasthan High Court has not applied its judgment in the case of Best Chem & Lime Stone Industries (P) Ltd. to the case of Lucky Mineral (P) Ltd. having found that facts of both the cases were distinguishable. There is no dispute as to the decision of the Rajasthan High Court in CIT v. Lucky Mineral (P) Ltd. because of the reason that the assessee was merely selling limestone and marble after cutting them in sizes and not by converting the same into new commodity. The Hon'ble Supreme Court has in the case of Lucky Minmat (P) Ltd. v. CIT (supra) has approved the decision of the Rajasthan High Court in the case of Best Chem & Lime Stone Industries (P) Ltd. (supra) by observing that conversion into lime and lime dust or concrete by applying crushers could legitimately be considered to be manufacturing process while mining lime stone and marble and cutting the same before it was sold in the market could not be so considered. In the present case, the assessee's activity of conversion of boulders or stone or rock into sand has not been doubted. The assessee's case is of conversion of stone or boulder or rock into sand. Since conversion into lime and lime dust or concrete by stone crushers is legitimately considered to be manufacturing process, we do not find any just reason as to why the conversion of stone or boulders or rocks into sand is not equally and legitimately to be considered to be a manufacturing process, having regard to the principles laid down by the Hon'ble Supreme Court in the case of Lucky Minmat (P) Ltd. (supra) and in the light of the Rajasthan High Court decision in the case of Lucky Mineral (P) Ltd. as well as Best Chem & Limestone Industries (P) Ltd. In the case of CIT v. R.C. Construction (supra), the Hon'ble Gauhati High Court has held that the assessee is entitled to investment allowance, when it was found that the assessee was making chips out of big boulders.
16. The decision of the Hon'ble Madhya Pradesh High Court in the case of Indian Poultry v. CIT (supra) relied on by the learned Departmental Representative is also not found to be applicable to the assessee's case. In that case, the assessee-company was carrying on the business of rearing chick to broilers by applying scientific, process. In this case, the chicks were also reared for few days and they were developed.
Thereafter, they became broilers. Therefore, even after rearing they remained chicks only. In this context, the activity of the assessee-company of rearing chicks was held to be not amounting to manufacture, and the assessee, therefore, was held to be not an industrial undertaking entitled to deduction under Sections 80HH and 80-I of the Act. In the case on hand, stones or boulders had been converted into sand. The use of stone or boulders as compared to the use of sand in daily or ordinary course are quite distinct and separate. After conversion of stone and boulders into sand, stones or boulders remained not the same thing, but, in the form of sand, a new identity has resulted. The original commodity, i.e., stones or boulders or rocks after conversion into sand can no longer be regarded as the original stone or boulder or rock, but instead is recognized as a new and distinct marketable thing or article or commodity in the nature of sand, which has, in commercial sense of term, a different and distinct use than that of boulder/stone/rock.
17. In the light of the above discussion and particularly in view of the Hon'ble Supreme Court decision in the case of Lucky Minmat (P) Ltd. (supra) where the earlier decisions of the Rajasthan High Court in the case of CIT v. Lucky Mineral (P) Ltd. (supra) as well as in the case of CIT v. Best Chem & Limestone Industries (P) Ltd. (supra) has been distinguished, we are of the considered opinion that conversion of stone or boulders into sand could legitimately be considered to be a manufacturing process for the purpose of Section 80-IA of the Act. We hereby direct the AO to treat the same as manufacturing process and then to decide the assessee's claim under Section 80-IA in the light of the various other provisions contained in Section 80-IA of the Act. The AO shall provide reasonable opportunity of being heard to the assessee for the purpose of computing deduction under Section 80-IA in the light of discussion made above. We order accordingly.
18. Now, we come to the assessee's other activity of producing identity cards.
19. The assessee's claim of deduction under Section 80-IA in respect of the profit derived from its activity of producing identity card has also been rejected by the AO more or less for the reasons given for rejecting the assessee's claim of deduction under Section 80-IA in respect of its profits derived from its activity of conversion of stone or boulders into sand. The AO has discussed this issue as under: Assessee has claimed under Section 80-IA in respect of the preparation of electoral identity cards. While explaining the deduction, assessee has stated that Government of Maharashtra decided to issue computerized identity cards to all voters and in turn assigned the job of preparation of identity cards to the assessee.
Since the job was to be completed in a time-bound programmer, the assessee-company decided to have a separate, fulfledge division called software division. The work of this division was divided in six areas as under: 1. Data entry-to enter name, age and address of voters and convert it into Devnagiri.
3. Processing-co-relating photographs with details of voters entered.
For the above purpose, computer system like accessories, VCRs, TVs, etc. were purchased and new staff was appointed Discussing his contentions on the above lines, assessee states that deduction under Section 80-IA is available on the software division.
I am afraid, I am not in agreement with the assessee's aforesaid contentions. The preparation of identity cards even after passing through various activities/stages as discussed above cannot by any stretch of imagination be held as an industrial activity. In fact, the assessee itself has referred to the word 'preparation' of identity cards. To make an industrial undertaking entitled for deduction under Section 80-IA, it should manufacture/produce article or thing which involves consumption of raw material which, after passing through various stages/activities/processes takes a new form which physically and chemically should be different from the inputs, inasmuch as the nature, composition, utility, character, etc. of the finished goods are irreversibly different from the inputs that is raw material which is not the case in the preparation of identity cards. Hence, deduction claimed by the assessee under Section 80-IA is disallowed.
Without prejudice to the above discussion, it is stated that the assessee has himself revised the deduction under Section 80-IA from Rs. 16,89,042 shown in the statement of total income to Rs. 16,67,879 as per separate submissions filed by the assessee.
But since disallowance (sic) under Section 80-IA has been disallowed in respect of both the activities/units, no deduction is allowed under Section 80-IA. Penalty proceedings under Section 271(1)(c) is initiated for claiming wrong deduction under Section 80-IA.20. On appeal before the CIT(A), the assessee submitted that the data entry, processing, printing, lamination are to be construed as industrial activity. It was further submitted that the assessee involved all these manufacturing activities to print identity cards.
When each individual stage in preparing identity cards is held to be an activity by various Courts of law, the final product, i.e., voters' identity card which is the culmination of all industrial activities is eligible for deduction under Section 80-IA. Reliance was placed on the following decisions: 1. Orient Longman Ltd. v. CIT (publisher of books, i.e., books manufactured by getting manuscript, designing its nature, finishing anticipated product and selling product after getting it made)CIT v. Peerless Consultancy Services (P) Ltd. (1990) 90 CTR (Cal) 73 : (1991) 54 Taxman 68 (Cal)(wherein the assessee providing technical and industrial consultancy on the basis of computer and undertaking electronic data processing jobs)CIT v. Datacon (P) Ltd. 21. After considering the assessee's submission, the CIT(A) says that for the purpose of claiming deduction under Section 80-IA, the assessee must manufacture or produce any article or thing. He further stated that if in an ordinary social gathering, someone were to say that he was manufacturing sand or producing identity cards, he should be making a laughing stock of himself. The GIT(A) further said that mere crushing of stones or making identity cards and to construe the same as amounting to manufacture or production would amount to overstraining the language from its normal and ordinary meaning. In support of the contention that every change is not manufacture, the CIT(A) has relied on the decision of the Madhya Pradesh High Court in the case of Indian Poultry v. CIT (supra). He was of the view that the decision of the Hon'ble Madhya Pradesh High Court is applicable to the assessee's case.
He further relied on the decision of the Calcutta High Court in the case of J.M.D. Medicare Ltd. and Ors. v. Union of India and Ors.
(supra) as well as the decision of the Hon'ble Supreme Court (supra). The Hon'ble Calcutta High Court held in that case that a diagnostic centre is, by no ordinary meaning of the words, an industrial undertaking merely by purchase of a scanning machine. It was further held that a scanning machine produces photographs which are totally different in the case of different patients and, therefore, such scanning could not be considered to be in the nature of industrial processing. The CIT(A) further relied on the decision of Hon'ble Bombay High Court in the case of CIT v. Western India Pharmaceutical Services (P) Ltd. manufacturer's name on pharmaceutical capsules does not amount to processing of goods as the capsules do not undergo any process in the case of printing.
23. The learned Counsel for the assessee has submitted following note on its job of preparing identity cards: In 1994, the Government of Maharashtra decided to issue computerized identity card to all the voters and in turn assign the job of preparation of identity cards to V.M. Jog Engg. Ltd. The tender of V.M. Jog Engg. Ltd. was accepted for the electoral constituencies of Satara, Thane and Solapur.
Since the job was to be completed in a time-bound programme and considering the volume of work and quality of work V.M. Jog Engg.
Ltd. decided to have a separate and full fledged division called 'software division'.
1. Data entry-to enter name, age, sex and address of voters and convert it in Devnagiri.
To ensure the early completion of the job separate arrangements were made, briefly described as follows: 1. Appointment and utilisation of staff exclusively for job (No. of staff employed) 3. Purchase of capital items viz. computer systems, accessories, VCRs, televisions for utilization to such jobs 4. Accumulation of contract receipts for the jobs to software division 5. Utilisation of the loans acquired for such jobs towards expenditure incurred for software division The contentions and submissions made before the CIT(A) were reiterated before us. He further placed reliance on the following decisions:Daks Copy Services (P) Ltd. v. ITO (1989) 34 TTJ (Del)(SB) 604 : (1989) 30 ITD 223 (Del)(SB);CIT v. Ajay Printery (P) Ltd. 24. The learned Departmental Representative, on the other hand, supported the orders of the authorities below and submitted that in the light of the decision of Hon'ble Supreme Court in the case of (1993) 114 CTR (SC) 420 : (1993) 204 TTR 412 (SC)(supra), service activity of providing identity card by the assessee did not amount to manufacture of any articles or things for the purpose of computing deduction under Section 80-IA of the Act.
25. We have considered the rival contentions of both the parties and have carefully perused the materials on record. We have deliberated upon the various decisions cited at the Bar.Asstt. CIT v. Soni Photo Films (P) Ltd. (supra), the Tribunal, Special Bench has observed and held as under: It is not necessary that the original article or material should have lost its identity completely. All that is important is whether what is emerged as a result of operations is a different commercial commodity having its own name, identity, character or end use. In the instant case, applying the test, the negative vacant film roll fitted or kept in or fitted into the camera is a quite different and distinct article than the photograph which can be taken on the negative film. Nobody calls the photo as equal to a negative film.
The negative film loses its identity completely and the photo is quite a different commercial commodity having its own identity, character and end use. Therefore, what is involved while taking a photograph by the photographer is manufacture. Hence, the assessee was entitled to investment allowance and the Departmental appeal being without merits was liable to be dismissed.CIT v. Air Survey Co. of India (P) Ltd. (supra) has held that the ultimate photographs which came to be produced as a result of the business activity of the assessee came within the expression 'manufacture' or production of 'article' or 'thing' and as such, the assessee was entitled to investment allowance under Section 32A of the Act. In that case, the assessee, an air survey company, which derived its income from surveying, mapping, aerial photography and aero-magnetic photography done for the Surveyor General of India and the Atomic Mineral Division of the Government of India, claimed investment allowance under Section 32A of the Act in respect of the aircraft radio purchased in the relevant year. This activity of the assessee was regarded as falling within the purview of the expression 'manufacture' or 'production'.
28. In the case of CIT v. Emirates Commercial Bank Ltd. (supra), the Hon'ble jurisdictional Bombay High Court has held as under: In order to attract Section 32A(2)(b)(iii) of the IT Act, 1961, there should be existence of plant or machinery in an industrial undertaking for the purposes of the business of manufacture or production of any article or thing. The nature of the services rendered by the bank to its customers does involve the work of data processing. It is on the basis of this data processing that information is provided to its customers by the bank. It is on the basis of this data processing that the balance sheets are prepared.
It is on the basis of this data processing done by computers that the management information reports come out. Hence, banks are entitled to deduction under Section 32A in respect of the computers installed in the office premises.CIT v. Comp-Help Services (P) Ltd. (2000) 159 CTR (Mad) 220 : (2000) 246 ITR 722 (Mad) and CIT v. Computerized Accounting & Management Service (P) Ltd. Mowed.Asstt.
CIT v. Soni Photo Films (P) Ltd. (supra) as well as the Hon'ble Rajasthan High Court decision in the case of CIT v. Laxmi Art Studio (2001) 168 CTR (Raj) 380 : (2001) 249 ITR 710 (Raj), the Tribunal Pune Bench in the case of Fotofast Colour Processors v. Jt. CIT vide ITA Nos. 1159, 1160, 1309 & 1310/Pune/2002, where we were parties, has treated the activities of printing of photographs from negatives as amounting to manufacture or production of an article or thing for the purpose of Section 80-IA of the Act. The Tribunal held that the assessee was engaged in the business of production of photographs.
30. The cases relied on by the learned Departmental Representative are distinguishable on the facts, inasmuch as they are not directly related to the activities undertaken by this present assessee of producing identity cards. Those decisions relied on by the learned Departmental Representative as well as by the authorities below are on different context. The issue before us is squarely covered by the decision of the Special Bench in the case of Soni Photo Films (P) Ltd. (supra) as well as Rajasthan High Court in the case of Laxmi Art Studio (supra) and also supported by the decision of jurisdictional High Court in the case of CIT v. Emirates Commercial Bank Ltd. (supra) and further the decision of this Tribunal in the case of Fotofast Colour Processors (supra). In the light of the above discussion, we, therefore, hold that the assessee's activity of producing identity card amounted to production or manufacture of article or thing for the purpose of Section 80-IA of the Act. The AO shall treat the same accordingly and consider the assessee's claim under Section 80-IA in the light of the various other conditions and provisions contained in Section 80-IA of the Act. The AO shall provide reasonable opportunity of being heard to the assessee for the purpose of computing deduction under Section 80-IA in the light of our order made above. We order accordingly.
31. Ground No. 7 is directed against the CIT(A)'s order in disallowing a sum of Rs. 50,000 out of foreign trip of Shri Ravindra V. Jog and Shri M.M. Sahney. The AO disallowed the sum of Rs. 50,000 on estimate out of the foreign travelling expenses. The CIT(A) has confirmed the action of the AO by saying that except giving a general statement that officials of the company had gone to keep themselves abreast with the modern day technology, no specific details were furnished by the assessee during the course of hearing before him. The CIT(A) further held that there was no justification for a long foreign trip of 21 days. Still aggrieved, the assessee is in appeal before us.
32. The learned Counsel for the assessee submitted that the details of the amount of foreign travelling expenses have been placed at p. 33 of the paper book. It is not in dispute that the AO had disallowed the same purely on estimate. Admittedly, the AO has allowed rest of the expenses out of Rs. 4,90,345, except Rs. 50,000 having not incurred for the purpose of business. We do not find any reason to disallow part of the same purely on estimate without identifying and pointing out any specific item of inadmissible nature. The disallowance made by the AO is, therefore, deleted. The order of the authorities below on this issue is therefore set aside.
33. Ground No. 8 is against the CIT(A)'s order in restricting the deduction under Section 80-O being fees received for technical consultancy to Rs. 35,000 as against Rs. 59,000 claimed by the assessee.
34. We have heard both the parties and have gone through the orders of the authorities below. This disallowance of deduction under Section 80-O was made only on the ground that the foreign travelling was not fully in connection with the assessee's business. The AO has reduced the deduction under Section 80-O by saying that certain expenditure should have been attributable towards earning of income covered by Section 80-O. After considering the totality of the facts and circumstances of the case, we are of the considered view that only net amount is deductible under Section 80-O. There is no doubt that certain expenses should be allocated towards earning of income covered by Section 80-O. Total receipts shown by the assessee is of Rs. 1,18,000.
No expenses have been allocated towards these receipts. It is not in dispute that the assessee's foreign travelling expenses has been allowed in full. Certain foreign expenses are to be allocated towards earning of this income. Therefore, the sum of Rs. 1,18,000 being fees for technical consultation is to be netted for allocating expenses incurred for earning this income. The AO has estimated the sum of Rs. 50,000 towards earning of this income. In our considered view, Rs. 50,000 expenses considering the same having incurred for earning this income is on higher side. Considering the totality of facts and circumstances of the case and specifically in view of the fact that the assessee has not given full particulars as to the expenses incurred towards earning fees for technical consultation of Rs. 1,18,000, we estimate the expenses which has already been allowed as deduction, of Rs. 30,000 having incurred for earning this income. Therefore, net fees for technical consultancy would be Rs. 78,000. Deduction would be 50 per cent thereof, i.e., Rs. 39,000. The AO shall allow deduction under Section 80-O at Rs. 39,000 as against Rs. 34,000 allowed by him and as against Rs. 59,000 claimed by the assessee. In the result, the assessee's claim of deduction under Section 80-O is allowed to the extent of Rs. 39,000. The AO shall modify the assessment order accordingly.
35. The only issue involved in this appeal is related to the assessee's claim of deduction under Section 80-IA. This issue has already been decided by us vide this common order in the asst. yr. 1995-96. The order passed in the asst. yr. 1995-96 will equally apply to this assessment order (year) also. The AO shall allow the claim under Section 80-IA in the light of the decision for the asst. yr. 1995-96.
37. In the result the appeals for both the assessment years are allowed in the manner as indicated above.