Income from foreign commission

Income from foreign commission - deduction u/s 80-O - both direct as well as indirect expenses to be considered to work out allowable net income : ITAT INCOME Tax allows deduction u/s 80-O in respect of convertible foreign exchange received by an assessee. Title to Sec.80-O says 'Deduction in respect of royalties etc. received from certain foreign enterprises' and the section lays down that where the gross total income of an Indian Co. consists of income received from a foreign enterprise or foreign State in consideration for use outside india of any patent, invention, design or trade mark in convertible foreign exchange, the same will be allowed deduction under this section at the prescribed rates. But the moot point is, how is such income to be computed for deduction purposes which was also the question that came up before the Delhi Bench of the Tribunal. The bone of contention in this case was whether only direct expenses were to be deducted from such income eligible for deduction u/s 80-O or even indirect expenses? And the Tribunal relying on a Delhi High Court judgement held that both direct as well as indirect expenses are to be taken into account for arriving at net foreign income for deduction u/s 80-O. Brief Facts of the case : Assessee in the instant case received income from foreign commission. The case pertained to AYs 92-93, 93-94, 94-95 & 96-97. The original assessment completed by A.O. was taken in appeal by assessee to CIT(A) who held that assessee was entitled to deduction u/s 80-O in respect of income from foreign commission on net basis. In pursuance to this order A.O. made the assessment and allowed deduction at 50% of net foreign commission income. But in calculating net income the A.O. deducted both direct as well as indirect expenses incurred in earning income of foreign commission. Aggrieved by this approach, assessee took the matter in appeal to CIT (A) challenging deduction of indirect expenses from the income and contended that in computing net income for the purpose of deduction u/s 80-O only direct expenses incurred for earning such income have to be deducted from the receipts and not indirect expenses. CIT(A) accepted the contention of assessee and held that in arriving at net convertible foreign exchange for deduction u/s 80-O only direct foreign expenses incurred were to be deducted from the receipts on account of forign commission and no deduction can be made of indirect expenses incurred in India and according to this observation computed the deduction allowable to assessee u/s 80-O for four years under consideration. Not happy with the concession given to assessee by CIT(A), revenue took the matter to the Tribunal which heard the rival contentions. It held that the issue involved in the instant case i.e. whether quantum of deduction u/s 80-O is to computed taking into account only direct expenditure or both direct and indirect expenditure, is squarely covered in favour of revenue by the decision of Delhi High Court in the case of CIT vs. Chemical & Metallurgical Design Co. Ltd, according to which deduction under the said section is allowed on net income which is to be arrived at by reducing the income by both direct as well as indirect expenditure incurred in earning such income. Thus according to Tribunal there was no controversy with respect to this issue and the only thing to be determined is the quantum of such net income after making deductions of expenditure, both direct and indirect. In this regard Ld. AR submitted that in computing of net income from commission, AO. has committed two mistakes. Firstly while apportioning the indirect expenses on pro rata basis amongst income from foreign commission and income from other activities, on the one hand A.O. has taken gross receipts from foreign commission whereas on the other hand he took gross profits from other activities instead of taking gross receipts as done in case of commission. Secondly it was brought out that entire activity of assessee in earning income from foreign commission was carried out from Delhi head office and Bombay branch office and rest of the branches had no role to play in earning of this income but in apportioning of indirect expenses, expenses of all branches have been considered overlooking the fact that they had no role to play in earning of foreign commission. On the other hand Ld. DR relied on the order of A.O. Having heard the rival contentions the Tribunal totally agreed with the contention of assessee with regard to mistake committed by A.O. in computation of net income. It noted that in apportioning the indirect expenses to foreign commission and other income, while it took quantum of gross receipts from foreign commission, on the other hand he took only gross profits from other activities and this differential treatment was wrong in the opinion of Tribunal which held that the quantum of receipts for both activities should have been taken on an equal footing. Secondly, it also observed that since other branches had no role to play in earning of income from foreign commission and it was only Delhi head office and Bombay branch where entire activities were carried out to earn foreign commission, it was faulty and wrong on the part of A.O. to include indirect expenses of all branches for the purpose of apportionment. On the basis of above observation, it held that A.O. committed an error in working out the quantum of deduction for the purpose of Sec.80-O. In consequence thereof AR presented a revised detail of working of computation of deduction u/s 80-O which was to be allowed to the assessee after correcting the mistake. However Tribunal observed that since this revised working of computation was based on facts which had to be verified before being allowed, it remanded the matter back to the file of A.O. for the limited purpose of verifying the details of computation given by assessee and accordingly allow the claim of assessee. Thus as per the above discussion and decision of the Tribunal, deduction u/s 80-O is to be allowed on income of convertible foreign exchange on net basis which is to be arrived at after deducting both direct and indirect expenses incurred in earning such income.