[Income Tax] Eligibility to claim deduction is subject to strict interpretation, Supreme Court

The SC on June 05, 2020 {RAMNATH & CO. vs THE COMMISSIONER OF INCOME TAX} held that at and until the stage of finding out eligibility to claim deduction in Income Tax, the ambit and scope of the provision for the purpose of its applicability cannot be expanded or widened and remains subject to strict interpretation but, once eligibility is decided in favour of the person claiming such deduction, it could be construed liberally in regard to other requirements, which may be formal or directory in nature. 

It was held by the Bench, comprising of Justice A.M. KHANWILKAR & Justice DINESH MAHESHWARI, that for bringing any particular foreign exchange receipt within the ambit of Section 80-O for deduction, it must be a consideration attributable to information and service contemplated by Section 80-O; and in case of a contract involving multiple or manifold activities and obligations, every consideration received therein in foreign exchange will not ipso facto fall within the ambit of Section 80-O. It was held that it has to be attributable to the information or service contemplated by the provision and only that part of foreign exchange receipt, which is so attributable to the activity contemplated by Section 80-O, would qualify for claiming deduction. It was also held that such enquiry is required to be made by the Assessing Officer; and for the purpose of this imperative enquiry, requisite material ought to be placed by the assessee to co-relate the foreign exchange receipt with information/service referable to Section 80-O. It was held that evidently, such an enquiry by the Assessing Officer could be made only if concrete material is placed on record to show the requisite co-relation.

The question before the SC was whether the income received by the appellants in foreign exchange, for the services provided by them to foreign enterprises, qualifies for deduction under Section 80-O of the Income Tax Act, 1961, as applicable during the respective assessment years from 1993-94 to 1997-98. The same was answered in negative by the SC.

The SC held that viewed from any angle, the services of the appellant were nothing but of an agent, who was procuring the merchandise for its principals; and such services by the appellant, as agent, were rendered in India. It was held that even if certain information was sent by the assessee to the principals, the information did not fall in the category of such professional services or information which could justify its claim for deduction under Section 80-O of the Act. In other words, it was held that in the holistic view of the terms of the agreements, there is not an iota of doubt that the appellant was only a procuring agent, as rightly described by the High Court.

The SC held that the High Court has rightly analysed the entire matter with reference to the relevant questions and has rightly proceeded on the law applicable to the case. It was held that the impugned judgment calls for no interference. The appeal was accordingly dismissed of the assessee.