1992 (1) TMI 33 - HC - Income Tax

Deduction disallowed for foreign port payment under Income-tax Act; ship acquisition funds deductible.

Commissioner Of Income-Tax Versus Kerala Lines Limited

Commissioner Of Income-Tax Versus Kerala Lines Limited - [1993] 201 ITR 106, 118 CTR 272, 72 TAXMANN 3 Issues Involved:1. Deductibility of Rs. 53,410 paid at foreign ports under Section 37 of the Income-tax Act, 1961.2. Disallowance of Rs. 53,410 paid at foreign ports under Section 40(a)(ii) of the Income-tax Act, 1961.3. Deductibility of amounts owed by the assessee in acquiring a ship from the written down value when computing capital employed.4. Classification of Rs. 24,82,000 taken from the Shipping Development Fund Committee as money borrowed or debt incurred in acquiring the ship.Issue-wise Detailed Analysis:1. Deductibility of Rs. 53,410 Paid at Foreign Ports under Section 37 of the Income-tax Act, 1961:The court examined whether Rs. 53,410 paid by the assessee at foreign ports could be deducted under Section 37 of the Income-tax Act, 1961. The assessee argued that these payments were necessary for the operation of its business. However, the court concluded that these payments were essentially income-tax and not an expenditure incurred to earn profits. The court referred to several precedents, including CIR v. Dowdall O'Mahoney and Co. Ltd., CIT v. Indian Overseas Bank Ltd., and others, which established that taxes are an application of profits and not an expense incurred to earn them. Therefore, the court held that the amount of Rs. 53,410 paid by the assessee at foreign ports is not deductible under Section 37 of the Act.2. Disallowance of Rs. 53,410 Paid at Foreign Ports under Section 40(a)(ii) of the Income-tax Act, 1961:Given the conclusion on the first issue, the court found it unnecessary to delve deeply into the second issue. However, it clarified that under Section 40(a)(ii) of the Act, sums paid on account of any tax levied on profits or gains of business are not deductible. The court referenced Jaipuria Samla Amalgamated Collieries Ltd. v. CIT but noted that since Section 37 was already deemed inapplicable, further analysis under Section 40(a)(ii) was redundant. Thus, the court refrained from rendering a specific answer on this issue.3. Deductibility of Amounts Owed by the Assessee in Acquiring a Ship from the Written Down Value When Computing Capital Employed:The court considered whether the amounts owed by the assessee for acquiring a ship should be deducted from the written down value under Rule 19A(5) of the Income-tax Rules when computing capital employed for relief under Section 80J of the Act. The Tribunal had deducted Rs. 17,56,614 owed to Deustche Bank, Hamburg, but not Rs. 19,85,600 borrowed from the Shipping Development Fund Committee. The court disagreed with the Tribunal's view, stating that the borrowing from the Shipping Development Fund Committee was indeed a debt incurred in acquiring the ship, as it facilitated the purchase through a series of financial transactions. Hence, the court held that both amounts should be deducted from the written down value of the ship.4. Classification of Rs. 24,82,000 Taken from the Shipping Development Fund Committee as Money Borrowed or Debt Incurred in Acquiring the Ship:The court analyzed whether the sum of Rs. 24,82,000 borrowed from the Shipping Development Fund Committee constituted a debt incurred in acquiring the ship. The Tribunal had viewed this borrowing as a collateral transaction. However, the court found that the borrowing was integral to the acquisition process, as it enabled the assessee to secure a guarantee for the ship's purchase. The court emphasized that the borrowing was directly related to the acquisition, despite not being used directly to pay for the ship. Therefore, the court concluded that the amount borrowed was indeed a debt incurred in acquiring the ship and should be deducted from the written down value under Rule 19A(5).Conclusion:The court answered the first question in the negative, disallowing the deduction under Section 37. It refrained from answering the second question due to the resolution of the first. The third and fourth questions were answered in the affirmative, allowing the deductions under Rule 19A(5) for computing relief under Section 80J. There was no order as to costs.