1991 (6) TMI 53 - HC - Income Tax

Demurrage for Loading Delays Not Taxable under Income-tax Act, 1961

Central Board Of Direct Taxes And Others Versus Chowgule And Co. Limited And Others

Central Board Of Direct Taxes And Others Versus Chowgule And Co. Limited And Others - [1991] 192 ITR 40, 98 CTR 124 Issues Involved:1. Taxability of demurrage payable to non-resident ship owners or charterers under the Income-tax Act, 1961.2. Applicability of sections 5(2), 44B, and 172 of the Income-tax Act, 1961.Summary:1. Taxability of Demurrage:The primary issue was whether demurrage payable to non-resident owners or charterers of ships for delays in loading ore sold to foreign buyers is taxable under the Income-tax Act, 1961. The agreements between the petitioners and the foreign buyers indicated that the demurrage was a compensatory payment for the delay in loading the goods, not an extended freight. The Revenue argued that demurrage should be treated as extended freight and taxed similarly. However, the court held that demurrage in this context is not an extended freight but a compensatory payment for detention of the ship.2. Applicability of Sections 5(2), 44B, and 172:The court examined the applicability of sections 5(2), 44B, and 172 of the Income-tax Act. Section 5(2) governs the levy of tax on the total income of a non-resident, while section 44B pertains to the computation of income from shipping business for non-residents. Section 172 is a special provision for taxing non-resident ship owners or charterers for occasional shipping business. The court noted that section 172 is a complete code by itself and overrides other provisions of the Act. It applies to ships carrying goods shipped at an Indian port but not engaged in the regular business of operating ships. The court held that section 172(1) identifies the subject of taxation, and section 172(2) quantifies the income for taxation. Since section 172 is a complete code, the income specified under section 172(2) cannot be taxed under section 5(2).The court referred to the Supreme Court's decision in Union of India v. Gosalia Shipping P. Ltd., which clarified that payments made by a charterer for the hire of a ship are not 'on account of' the carriage of goods and thus not taxable under section 172. Similarly, in the present case, the demurrage payable was for the delay in loading goods, not for the carriage of goods, making section 172(2) inapplicable.Conclusion:The court concurred with the learned single judge's declaration that the demurrage in the instant case is not an extended freight and is not taxable under section 172 or section 5(2) of the Income-tax Act. The impugned circulars issued by the Reserve Bank of India cannot be applied to the facts of these cases. The writ appeals were dismissed without any order as to costs.