2009 (10) TMI 575 - HC - Income Tax

Section 172 inapplicable to Indian shipping assessee; demurrage to foreign company hit by section 40(a)(i) disallowance

HC held that section 172, relating to profits of non-resident occasional shipping businesses, had no application as the assessee is an Indian company and ... Applicability of section 40(a)(i) - entitlement to claim deduction of the demurrage charges payable to foreign shipping company without deducting tax - provisions of section 172(8) introduced by the Finance Act, 1997 with retrospective effect from April 1, 1976 - HELD THAT:- In our view, the respondent- assessee cannot lay fingers on section 172, since we are not dealing with profits of non-residents. The other aspect is that such profits of non-residents should be from occasional shipping business. It is not the case that the respondent-assessee has earned some profit from occasional shipping and is a non-resident. In our view, section 172 does not have application in relation to the respondent-assessee and in the facts and circumstances of the present case. There is no dispute about the interpretation of section 172 or section 195. The crucial point is as to how section 172 applies to the facts of the present case wherein the respondent-assessee is an Indian company, incorporated under the provisions of the Companies Act, 1956. In our view, the learned Vice President of the Income-tax Appellate Tribunal has recorded a perverse observation/finding in paragraph 3 regarding the application of sections 44B and 172 of the Act 1961. In our view, the learned Commissioner of Income-tax (Appeals) and the learned Appellate Tribunal have wrongly interpreted the circular dated September 19, 1995, issued by the Central Board of Direct Taxes. This circular, in our opinion, cannot be considered in the facts and circumstances of the present case, in aid to the respondent-assessee. The learned Assessing Officer, in fact, has passed a legal, proper and reasoned order, holding that the provisions laid down under section 40(a)(i) of the Act 1961 apply to the case on hand. There are no pleadings or material brought on record to show that the case is governed by occasional shipping within the meaning of section 172 of the Act, 1961 and the said section applies. The order passed by the Assessing Officer, in our view, is legal, proper and in accordance with the scheme of the Act 1961. The same are, accordingly, quashed and set aside and the order passed by the Assessing Officer stands upheld. Issues: (i) Whether section 40(a)(i) of the Income-tax Act, 1961 applies to deny deduction for demurrage paid to a non-resident where tax was not deducted at source; (ii) Whether Section 172 of the Income-tax Act, 1961 (and its sub-section (8)) applies so as to exclude the application of section 40(a)(i) to the payments in question; (iii) Whether Circular No. 723 dated September 19, 1995 issued by the Central Board of Direct Taxes is relevant and operative to permit deduction without deduction of tax at source.Issue (i): Whether section 40(a)(i) applies to disallow deduction for demurrage payable to a non-resident on which tax was not deducted at source.Analysis: The statutory language of section 40(a)(i) and the facts were examined to determine whether the demurrage payment fell within the clause requiring deduction of tax. The assessment officer's finding that tax was not deducted and that the claim should be disallowed under section 40(a)(i) was considered. The court found that the assessee is a resident Indian company and there was no material establishing that the payments fell within any special exclusion that would negate the operation of section 40(a)(i).Conclusion: Section 40(a)(i) applies and disallowance of the deduction is warranted; conclusion is in favour of Revenue.Issue (ii): Whether section 172 (including subsection (8)) operates to displace section 40(a)(i) and permit deduction without tax deduction at source.Analysis: Section 172 concerns profits of non-residents from occasional shipping business and contains a non obstante clause. The court examined whether the present facts established that the payer or recipient fell within the scope of section 172 (i.e., profits of non-residents from occasional shipping). It was held that the assessee is a resident Indian company and there was no pleaded or evidential foundation showing that the case involved occasional shipping profits of a non-resident so as to bring section 172 into play. The appellate tribunal's reliance on section 172 was found to be based on a perverse factual conclusion and unsupported by material showing occasional shipping by a non-resident.Conclusion: Section 172 does not apply and does not displace section 40(a)(i); conclusion is in favour of Revenue.Issue (iii): Whether Circular No. 723 dated September 19, 1995 (CBDT) is applicable to allow deduction without TDS in the facts of the case.Analysis: The court reviewed the scope and legal effect of the CBDT circular and considered the binding effect of such circulars. The circular was found not to assist the assessee on the facts because it cannot operate to override the statutory requirements where the statutory provision (section 40(a)(i)) applies and where the facts do not bring the payments within the special statutory scheme relied upon by the assessee. The court held that the lower authorities had wrongly interpreted and applied the circular in the present factual matrix.Conclusion: The CBDT circular is not applicable to permit deduction without deduction of tax at source in this case; conclusion is in favour of Revenue.Final Conclusion: The assessment officer's order disallowing the deduction under section 40(a)(i) is upheld; the orders of the first appellate authority and the Appellate Tribunal are quashed and set aside and the appeal is allowed for the Revenue.Ratio Decidendi: Where payments to a non-resident do not fall within the statutory scheme (section 172) for profits of non-residents from occasional shipping and tax has not been deducted, section 40(a)(i) applies to deny deduction; a departmental circular cannot be applied to negate that statutory requirement in the absence of facts bringing the case within the special statutory provision.