RANGANATHAN - (1.) THIS is an appeal preferred by M/ s. Continental Construction Ltd. (hereinafter called 'the assessee') from the judgment of the Delhi High Court in ITR 110 to 11 2 of 1987 (1990 Tax LR 729) answering, against the assessee, the following questions of law referred to under S. 256 of the Incometax Act, 1961 ('the Act'): 1. "Whether on the facts and in the circumstances of the case the Tribunal is right in holding that the income arising from the activities pursuant to the seven agreement with foreign Governments/enterprises, etc. are governed by the provisions of S. 80-HHB of the Income-tax Act, 1961 and not of Section 80-O of that Act?"
(2.) "Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that notwithstanding the approvals granted by the Board to the seven agreements for the purpose of S. 80-O, for the purpose of assessment for assessment year 1983-84, the income arising from these contracts have to be brought under S. 80-HHB of the Incc)me-tax Act, 1961?" "Whether on the facts of the case, the Tribunal is right in holding that the income from the entire activities under the seven agreements cannot be bifurcated and is 'Wholly covered under Section 80-HHB of the Income-tax Act, 1961?" "Whether on the facts and in the circumstances of the case, the. Tribunal is right in holding that the assessee company is not an 'industrial company' as defined in the Finance Act, 1982?" The first two Income-tax References were made to the High Court at the instance of the assessee which was dissatisfied with the decision of the Income-tax Appellate Tribunai on these questions; there were two references because the above questions arose out of two cross-appeals before the Tribunal _ one by the assessee and the other by the Department. This appeal by the assessee, CA. 3458 of 1990 is disposed by the present judgment. 2. The third reference (ITR 112/87) was made by the Tribunal at the instance of the Department on a totally different question which related to the interpretation of Ss. 40(c) and 40A(5) of the Act. The High Court answered all the three references in favour of the assessee and the aggrieved Commissioner of Income-tax (C.I.T.) has preferred an appeal to this Court from that part of the judgment being C.A. 3458-A of 1990. But that question has no connection with the other four question set out earlier. We have, therefore, delinked the appeal by the C.I.T. for -separate hearing. Also, of the four questions posed above in the assessee's appeal, counsel for appellant has stated that he is not pressing question No. 4 before us. We, therefore, do not express any opinion on it and merely dismiss the appeal in so far as this question is concerned. In the result, we confine this judgment to the assessee's appeal and to the first three of the four questions set gut above. 3. The questions arise out of the assessee's assessment to income-tax for the assessment year 1983-84 (the calendar year 1982 being the relevant previous year). S. 80-O of the Act, under which the assessee claimed deductions, provides for a deduction, in computing the total income, in respect of royalties etc. from certain foreign enterprises. This topic was originally dealt with by S. 850. S. 80-O was substituted in its place w.e.f. 1/04/1968. The section has since undergone amendments from time to time. As on 1-4-83, the provision, in so far as is relevant for our purposes, was in the following terms: S.80-O: Deductiort in respect of royalties, etc. from certain foreign enterprises.- "Where the gross total income of an assessee, being an Indian Company, includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or a foreign enterprise in consideration for the 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 or agreed to be made available or provided to such Government or enterprise by the assessee, or in consideration of technical services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, under an agreement approved by the Board in this behalf 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. the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of the whole of such income so received in, or brought into India, in computing the total income of the,assessee. 4. During the currency of this provision, the Finance Act, 1982 introduced a new Sections 80-HHB w.e.f. 1-4-1983. This provision reads thus: S. 80-HHB -- Deduction in respect of profits and gains from projects outside India- (1) Where the gross total income of an assessee being an Indian company or a person (other than a company) who is resident in India includes any profits and gains derived from the business of- (a) the execution of a foreign project undertaken by the assessee in pursuance of a contract entered into by him, or (b) the execution of any work undertaken by him and forming part of a foreign project undertaken by any other person in pursuance of a contract entered into by such other person, with the Government of a foreign State or any statutory or other public authority or agency in a foreign State, or a foreign enterprise, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and ,ains of an amount equal to twenty five per cent thereof: Provided that the consideration for the execution of such project, or, as the case may be, of such work is payable in convertible foreign exchange. (2) For the purposes of this section,- (a)"convertible, foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder: (b) "foreign project" means a project for- (i) the construction of any building, road, dam, bridge or other structure outside India; (ii) the assembly or installation of any machinery or plant outside India; (iii) the execution of such other work (of whatever nature) as may be prescribed. (3) The deduction under this section shall be allowed only if the following conditions are fulfilled, namely:- (i) the assessee maintains separate accounts in respect of the profits and gains derived from the business of the execution of the foreign project, or, as the case may be, of the work forming part of the foreign project undertaken by him and, where the assessee is a person other than an Indian company or a co-operative society, such amounts have been audited by an accountant as defined in the Explanation below sub-sec. (2) of S. 288 and the assessee furnishes, along with his return or income, the report of such audit in the prescribed form duly signed and verified by such accountant; (ii) an amount equal to twenty five per cent of the profits and gains, referred to in sub-sec. (1) is debited to the profit and loss account of the previous year in respect of which the deduction under this section is to be allowed and credited to a reserve account (to be called the "Foreign Projects Reserve Account") to be utilised by the assessee during a period of five years next following for the purposes of his business other than for distribution by way of dividends or profits; (iii) an amount equal to twenty five per cent of the profits and gains referred to in sub-sec. (1) is brought by the assessee in convertible foreign exchange into India, in accordance with the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and'any rules made thereunder, within a period of six months from the end of the previous year referred to in Cl. (ii) or, where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief Commissioner or Commissioner may allow in this behalf: Provided that where the amount credited by the assessee to the Foreign Project Reserve Account in pursuance of Cl. (ii) or the amount brought into India by the assessee in pursuance of Cl. (iii) or each of the said amounts is less than twenty five per cent of the profits and gains referred to in sub-sec. (1), the deduction under that sub-section shall be limited to the amount so credited in pursuance of Cl. (ii) or the amount so brought into India in pursuance of Cl. (iii), whichever is less. (4) If at any time before the expiry of five years from the end of the previous year in which the deduction under sub-sec. (1) is allowed, the assessee utilises the amount credited in the foreign Projects Reserve Account for distribution by way of dividends or profits or for any other purpose which is not a purpose of the business of the assessee, the deduction originally allowed under sub-sec. (1) shall be deemed to have been wrongly allowed, and the sub-section (1) shall be deemed to have been wrongly allowed, and the Income-tax Officer may, notwithstanding, anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment; and the provisions of S. 154 shall, so far as may be, apply thereto, the period of four years specified in sub-sec.(7) of that section being reckoned from the end of the previous year in which the money was so utilised'. (5) Notwithstanding anything contained in any other provision of this Chapter under the heading "C.-Deductions in respect of certain incomes, "no part of the consideration or of the income comprised in the consideration payable to the assessee for the execution of a foreign project referred to in Cl. (a) of sub-sec. (1) or of any work referred to in Cl. (b) of that sub-section shall qualify for deduct on for any assessment year under any such other provision. The three questions which are now for consideration before us raise the issue whether the assessee is entitled to a deduction under S. 80-O or S. 80-HHB or partly under one and partly under the other or, indeed, under neither of the provisions. We shall now pwceed to set out the factual background in which the issues arise.
(3.) THE assessee is a civil construction company which describes itself as Engineers and Contractors. It has executed a large number of projects overseas and in India. In India, its projects include dams, irrigation and hydel projects, water supply and sewerage plants, marine and harbour works, airports etc. THE assessee entered into eight contracts for the construction, inter alia, of a dam and irrigation project in Libya, a fibreboard factory at Abu Sukhair in Iraq. and the huge Karkh Water Supply Project in Baghdad which was of the total value of 534 million dollars. For these contracts the assessee obtained the approval of the Central Board of Direct Taxes ('Board' or 'C.B.D.T.') in terms of S. 80-O. A broad outline of these projects can be gathered from the following table: JUDGEMENT_567_SUPP2_1992Html1.htm In the light of these approvals, the assessee claimed and obtained deduction under Seciton 80-O in respect of the receipts from the first six of the contracts in some of the assessment years between 1976-77 to 1980-81. For the assessment year 1983-84, the assessee returned a gross total income of Rs.72,67,45,938 but, as against this, it claimed a deduction of Rs. 89,16,19,198 in respect of seven of the above contracts, the eighth having been completed much earlier. Of this, the deduction claimed in respect of the Karkh and Diwaniyah Projects came to Rs. 77,84,29,446 and Rs. 6,36,85,436 respectively. As pointed out above, the letter of approval of the Board under S,80-O in respect of these two contracts dated 28-10-83 was limited to the assessment year 1982-83. The Inspecting Assistant Commissioner (I.A.C.), Sri Hari Narain, who completed the assessment on 26-3-1984 declined to grant the assessee any deduction under S. 80-O not only in respect of these two contracts but also in respect of the other five. He was of opinion that it was S. 80-HHB that applied to these agreements and not S. 80-O. However, he declined to grant any relief to the assessee even under S. 80-HHB as the conditions for exemption specified in that sub-section were not fulfilled. In the result, he determined the assessee's total income at Rs. 89,41,35,103 as against the NIL income re-turned by the assessee, thus raising a tax demand of Rupees 66,07,72,982.;