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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-32, Mumbai [ in short ‘the CIT(A)’] dated 31/12/2007, for the Assessment Year 2002-03.
The assessee in appeal has raised nine grounds including sub-grounds. Shri Nitesh Joshi appearing on behalf of the assessee submitted at the outset that he would not be pressing ground of appeal
No.2,3,4,6 & 7 (including sub- grounds). Thus, the effective grounds of appeal for adjudication before the Bench are ground No.1,5,8 &
9. The same reads as under:
“1. For the purpose of arriving at the book profit the Commissioner of Income- tax(Appeals)-XXXII, Mumbai [hereinafter referred to as the CIT(A) ] ought to have held that in computing the profits which are eligible for deduction under section 80HHE the export turnover and the total turnover should include the turnover of the following software technology parks. Rs.(in lakhs) i) SEEPZ 46.2 ii) Noida 18.08 iii) Ashoka Plaza 429.09
5. (a) The CIT(A) erred in holding that the amount of Rs.8,44,00,000 received by the appellants was chargeable to tax, as against the appellants contention that this was on capital account. (b) The CIT(A) erred in holding that the amount of Rs.8,44,00,000 received by the appellants was chargeable to tax as ‘Income from other sources’ . 8. The CIT(A) ought to have held that since no dividend income has been received, the provision of Section 94(7) are not applicable and the short term capital loss of Rs.6,23,062/- arising on sale of units of Mutual Funds not be disallowed. 9. The CIT(A) erred in holding that provisions of section 234D were applicable to the appellants.” 2.1 The assessee has also raised additional ground, the same is supplementary to ground No.5 of appeal. The additional ground raised by the assessee reads as under:
In the event that the original ground no.5 is decided in the favour of the appellant, the amount of Rs.8,44,02,000 being compensation received by the appellant is not to be considered while computing the book profit under section 115JB of the Income Tax Act,1961.
The ld. Counsel for the assessee narrating facts of the case submits that the assessee is a leading Software Solution Provider. The assessee provides offshore as well as onsite services to its global clients. It has three offshore development centers i.e. at Pune, SEEPZ and Noida. The assessee has wholly owned subsidiaries in US and Singapore. The subsidiary companies market offshore and onshore development capabilities of the assessee in their respective overseas territories. The assessee is eligible to claim deduction u/s. 80HHE of the Income Tax Act, 1961 (in short ‘the Act’). The assessee has certain Export Oriented Units (EOU), the profits from which are eligible for deduction u/s. 10A of the Act. The said units are located at Software Technology Parks at SEEPZ, Noida and Ashok Plaza. As per section 80HHE(3) of the Act, profits derived from business referred to in section 80HHE(1) of the Act shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried out by the assessee. Section 80HHE of the Act does not provide that in computing export turnover, the turnover of the unit eligible for section 10A benefit are to be excluded.
3.1 The ld. Counsel for the assessee submits that without prejudice to the primary claim above, if it is held that the turnover of units eligible for section 10A are to be excluded from total turnover then the turnover of units eligible for section 10A benefits are also to be excluded from the export turnover. The ld.Counsel for the assessee pointed that identical issue had come up before the Tribunal in assessee's own case in assessment year 2001-02 in Cross Objection No.76/Mum/2006 filed by the assessee in appeal of the Department in ITA No.4538/Mum/2005. The Tribunal decided the issue in favour of assessee by holding that if the turnover of the units eligible for section 10A deduction are excluded from export turnover, the same will have to be excluded from total turnover while computing deduction u/s. 80HHE of the Act. The ld.Counsel for the assessee further, placed reliance on the decision of Tribunal in the case of Tata Technologies Ltd. vs. JCIT in & 19/PN/2012 for Assessment Years 2004-05 and 2005-06 decided on 29/05/2015. He pointed that the Tribunal while deciding similar issue directed the Assessing Officer to include turnover of the export oriented units while computing deduction u/s. 80HHE of the Act.
Per contra, Shri Jasdeep Singh representing the Department vehemently defended the findings of the CIT(A) on this issue. However, ld. Departmental Representative fairly admitted that the issue raised in present appeal has been considered by the Tribunal in assessee’s own case in assessment year 2001-02.
In respect of ground No.5 of appeal read with additional ground, the Ld.Counsel for the assessee submitted that the assessee and NEDCOR Bank Ltd ( in short ‘NEDCOR’) in order to exploit new business opportunities in South Africa and for unique utilizing their competence agreed to form a Joint Venture. In this direction an Interim Agreement was signed between the two parties on 27/10/1999. The said agreement is at pages 78 to 103 of the paper book. During the currency of agreement, NEDCOR instead of developing relationship with the assessee, decided to go ahead with L.C. Singh, one of the employees of the assessee. The assessee had assigned him to work and co-ordinate with NEDCOR on behalf of the assessee. L.C.Singh floated a company named Nihilent Technologies Ltd. In the said company NEDCOR held 74% stake with an investment of around USD 10 million. Thus, the terms and conditions of the agreement dated 27/10/1999 were breached by NEDCOR. Thereafter, series of litigation started in various Courts. The assessee initiated Civil and Criminal legal proceedings against L.C.Singh and others in the Court of Judicial Magistrate/ Civil Judge, Pune and against NEDCOR in the High Court of South Africa and Judicial Magistrate, Pune. Thereafter, to put an end to the ensuing litigation between the parties, an out of Court settlement was made and the agreement, dated 10/05/2001 was executed. The said agreement is at pages 197 to 213 of the paper book. As per the said agreement, the assessee was entitled to receive compensation of USD 18,00,000 (equivalent to Rs.8.44 crores). In lieu thereof, the assessee had to withdraw all cases filed against NEDCOR, L.C. Singh and others. The aforesaid compensation was received by the assessee for loss of profit making apparatus and hence, is capital in nature. The Assessing Officer and the CIT(A) have erred in treating the said compensation as “Income from other Sources”. In support of his submissions, the Ld.Counsel for the assessee placed reliance on the following decisions:
(i) Kettlewell Bullen & Co. Ltd, vs. CIT, 53 ITR 261 (SC) (ii) Karan Chand Thapar & Bros P. Ltd. vs. CIT, 80 ITR 167 (SC) (iii) CIT vs. Bombay Burmah Trading Corp., 27 Taxman 314(SC) (iv) CIT vs. Vazir Sultan & Sons , 36 ITR 175 (SC)
The Ld.Counsel for the assessee further submitted that with the execution of Compromise Agreement, the assessee surrendered the right to sue. Any compensation received in lieu of surrender of right to sue is capital in nature, hence, the compensation received by the assessee is capital receipt. In support of his argument, he placed reliance on the decision in the case of CIT vs.Abbasbhoy A. Dehgamwalla, 59 Taxman 498 (Bom).
5.1 The ld. Counsel for the assessee submitted that in case, the Tribunal holds that the compensation received by the assessee is on capital account then the compensation should not be added while computing book profits.
To support this contention, he placed reliance on the decision in the case of PCIT vs. Ankit Metal & Power Ltd , 109 taxmann.com 93(Calcutta) and PCIT vs. L.H Sugar Factory Ltd.88 taxmann.com 647 (Allahabad).
Controverting the submissions made by ld. Counsel for the assessee, the ld. Departmental Representative submitted that assessee is in the business of software development. A perusal of agreement between assessee and NEDCOR would show that Clause 4.4 restricts NEDCOR and Nihilent Technologies Ltd. to do business with customers of assessee. Hence, the dissolution of Joint Venture does not impair business opportunity of the assessee in any manner. Therefore, the arguments of ld. Counsel for the assessee that the existing source of income has been impaired is without any merit. He further submitted that since the amount has been reflected in the P&L Account, the assessee itself has treated the amount of compensation as revenue receipt. The ld. Departmental Representative vehemently defended the findings of Assessing Officer and CIT(A) and prayed for dismissing ground No.5 of appeal.
In respect of ground No.8 of appeal the ld. Counsel for the assessee submits that a revised calculation of the amount of disallowance is furnished, the same is at page 214 of the paper book. As per the calculation, the amount of Rs. 4,90,568/- is to be disallowed as against the disallowance of Rs.6,23,062/- u/s. 94(7) of the Act. The Assessing Officer has made excess disallowance of Rs.1,32,516/- as the period between purchase date and the declaration of dividend is more than three months.
We have heard the submissions made by rival sides and have examined the orders of authorities below. The ld. Counsel for the assessee has stated at Bar that he is not pressing ground No.2,3,4,6 & 7 (including sub-grounds). In view of the statement made by ld. Counsel for the assessee, aforesaid grounds are dismissed as not pressed.
The assessee in ground No.1 of appeal has assailed the manner of computation of deduction u/s. 80 HHE of the Act. The short contention of the assessee is that while computing deduction u/s. 80HHE of the Act the turnover of export oriented units eligible for deduction u/s.10A of the Act should also be considered. We find that identical issue was decided by the Co-ordinate Bench in assessee's own case in Assessment Year 2001-02 in C.O No.76/Mum/2006 (supra). The relevant extract of the findings of the Tribunal are as under:
“3.1.3 We have perused the records and considered the matter carefully. The dispute is regarding inclusion of export turnover of other units in the export turnover of computer software business while computing deduction under section 80HHE. Under the said section, deduction is allowable in respect of profit derived from the export of computer software. The phrase “profit derived from” has been defined as the profit of business apportioned in the ratio of export turnover to total turnover. Therefore the export turnover will only be turnover of exports in relation to the computer software and it will not include any turnover of any other unit. The total turnover will be the turnover of business in respect of which deduction under section 80HHE is being claimed. In case the assessee is also doing other business in respect of which separate accounts have been maintained, the profit and turnover of that business will not be considered while computing deduction under section 80HHE. It was submitted by Learned AR that in respect of 10 B units, separate accounts have been maintained. Therefore in our view the export turnover of other units will have to be excluded and it will also not be included in the total turnover while computing deduction under section 80HHE. The issue is restored to AO for passing a fresh order after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee.” No contrary material is brought to our notice by the Revenue to controvert the findings of Tribunal on this issue. Following the decision of Co-ordinate Bench in assessee's own case, ground No.1 of appeal is allowed in similar terms.
In ground No.5 of appeal the assessee has assailed the order of CIT(A) in holding the amount of compensation Rs.8.44 crores received as “Income from other Sources”, as against assessee’s claim of capital receipt. In so far as the facts narrated by the assessee that resulted in litigation and the settlement of litigation out of Court are not in dispute. A perusal of the Interim Agreement at page 78 of the paper book reveals that NEDCOR and the assessee had decided to enter into a joint venture for providing onsite consultancy services, onsite analysis, design development, testing and project management services, , software development, maintenance, production support, re-engineering, etc. in African countries viz. South Africa, Zimbabwe , Namibia, Swaziland, Lesotho, Mauritius, Malavi, Mozambique, etc. Clause – 16 of the said agreement refers to the remedies available to the parties incase of breach of terms of the agreement. The said clause is reproduced herein below for the ready reference:
“16. BREACH.
If any party fails breaches any material provision or term of this agreement(other than those which contain their own remedies or limit the remedies in the event of a breach thereof) (and which in the case of JCIL shall include a failure to provide service under any contract to a proper and workmanlike standard) and fails to remedy such breach within 45 (forty five) days of receipt of written notice requiring it to do so ( or if it is not reasonably possible to remedy the breach within 45 (forty five) days, within such further period as may be reasonable in the circumstances provided that the party in breach furnishes evidence within the period of 45 (forty five) days, reasonably satisfactory to the other party, that it has taken whatever steps are available to it, to commence remedying the breach, then the aggrieved party shall be entitled without notice, in addition to any other remedy available to it at law or under this agreement, including obtaining an interdict, to cancel this agreement or to claim specific performance of any obligation whether or not the due date for performance has arrived, in either event without prejudice to the aggrieved party’s right to claim damages. Notwithstanding the aforegoing, the liability of NEWCO to pay any damages arising herefrom or in connection herewith shall be limited to the amounts earned by NEWCO in respect of any particular contract, if the cause of the damages is related to that particular contract, or the aggregate amount earned by NEWCO in any particular year if the cause of the damages is related to NEWCO’s conduct in general, unrelated to a particular contract.”
Thus, the agreement itself provided for damages to the aggrieved party in case of breach of conditions of agreement. Undisputedly, there was breach of agreement by NEDCOR leading to series of litigation in Indian Courts, as well as in the High Court of South Africa. NEDCOR and the other parties involved in breach of agreement and the assessee decided to end the litigation out of Court. The assessee was paid compensation of USD 18,00,000, subject to unconditional withdrawal of all cases including cases pending before the Court of Judicial Magistrate/ Civil Judge, Pune and in the High Court of South Africa. The stand of the assessee is that the aforesaid compensation is on capital account as it has been received for loss of profit making apparatus i.e. joint venture between the assessee and NEDCOR or in alternate compensation can be considered for surrender of right to sue. In either case the compensation is capital receipt.
Before we proceed to decide the nature of compensation received by the assessee in the present case, it would be relevant to refer to the observation of the Hon'ble Supreme Court of India in the case of Kettlewell Bullen & Co. Ltd, vs. CIT(supra). The Hon'ble Apex Court laid down the guidelines to determine the true nature of such receipt. The relevant extract of the observations made by Hon'ble Apex Court are as under:
“Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt.” Thus, the broad principle to test the nature of compensation is that where the compensation is received for loss of source of income, the said receipt is on capital account, whereas, any compensation received as loss of profit in a trading transaction, the same falls under revenue receipt, which is taxable income. The said principle is reiterated by the Hon’ble Court in the case of Karam Chand Thapar & Bros P. Ltd. (supra) and various other judgments.
In the instant case, the aforesaid principle is applied for determining the nature of compensation. The assessee had entered into agreement with NEDCOR to set up a joint venture for providing services in African countries including South Africa, Zimbabwe , Namibia, Swaziland, Lesotho, Mauritius, etc. Undisputedly, there was breach of agreement by NEDCOR. Consequent to said breach, litigation started. To put an end to the litigation and settle the dispute, the parties decided to enter into an agreement. The assessee was obliged to withdraw all Civil/Criminal cases filed in different Courts in lieu of compensation. With the breach of terms and conditions of the interim agreement the joint venture, which was to be carried out by assessee with NEDCOR come to an end. Thus, one of the possible source of income for the assessee that was build by the assessee had to be shelved. Though there was no restrictive covenant in the final settlement agreement, nevertheless the assessee will have to start afresh and examine the possibilities to build a new apparatus for carrying out such business in the said territory. Thus, in our considered view the compensation received by the assessee is for the loss of source of income and is capital in nature. . Hence, the assessee succeeds on ground No.5 of appeal.
The assessee in additional ground has prayed that the compensation received should not be considered while computing book profit u/s. 115JB of the Act. In support of this contention reliance is placed on the decision in the case of PCIT vs. Ankit Metal and Power Ltd (supra) and some other decisions of the Tribunal. Here it would be relevant to refer to the provisions of section 115JB(1) of the Act. The relevant extract of same is reproduced hereinunder:-
115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent.
A perusal of sub-section (1) makes it clear that it refers to the income tax payable on the total income as computed under the Act in any previous year. Since, we have held the compensation to be capital receipt, there is no question of including said compensation for computation of book profit u/s. 115JB of the Act.
In the result, ground No.5 and the additional ground of appeal
are allowed.
15. In ground No.8 of appeal, the assessee has pointed that there is an error in calculating the amount to be disallowed u/s.94(7) of the Act. We deem it appropriate to restore this issue back to the file of Assessing Officer for the purpose of verification and re-computation of correct amount to be disallowed under the provisions of section 94(7) of the Act. The ground No.8 of appeal is thus, allowed for statistical purpose. 16. In ground No.9 of appeal, the assessee has assailed charging of interest u/s. 234D of the Act. Charging of interest under the aforesaid section is mandatory and consequential, hence, ground No.9 of appeal is dismissed. 17. In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on Monday the 28th day of August, 2023.
Sd./- Sd./- (GAGAN GOYAL) (VIKAS AWASTHY) लेखाकार सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER मुंबई/ Mumbai, �दनांक/Dated 28/08/2023 Vm, Sr. PS(O/S) ��त�ल�प अ�े�षतCopy of the Order forwarded to :