1990 (7) TMI 73 - HC - Income Tax

Demurrage payments not taxable under Income-tax Act. Circular by RBI found without legal authority.

V.M. Salgaocar and Brother Ltd., Chowgule and Co. Ltd., Sociedade De Fomento Industrial Ltd., V.S. Dempo and Co. Ltd. Versus Deputy Controller and others

V.M. Salgaocar and Brother Ltd., Chowgule and Co. Ltd., Sociedade De Fomento Industrial Ltd., V.S. Dempo and Co. Ltd. Versus Deputy Controller and others ... Issues Involved:1. Whether demurrage paid to non-resident shipowners or charterers is exigible to income-tax under sections 44B and 172 of the Income-tax Act, 1961.2. Whether the petitions are premature and should be dismissed in limine.3. Validity of the circular instructions issued by the Reserve Bank of India requiring income-tax clearance for remittances of demurrage payments.Summary:Issue 1: Taxability of Demurrage under Sections 44B and 172 of the Income-tax Act, 1961The petitioners argued that income from shipping of non-resident shipowners or charterers is exclusively covered by sections 44B and 172 of the Income-tax Act, 1961, and that demurrage paid to foreign shipowners or charterers is not exigible to tax under these sections. Section 44B deals with non-resident assessees engaged in the business of operation of ships and section 172 pertains to the levy and recovery of tax from ships belonging to or chartered by non-residents carrying goods from Indian ports. The court noted that demurrage, defined as compensation for the detention of a vessel, does not constitute income from the carriage of goods, passengers, livestock, or mail from Indian ports under sections 44B and 172. The court referred to the Supreme Court's decision in Union of India v. Gosalia Shipping (P.) Ltd. [1978] 113 ITR 307, which held that demurrage does not fall within the ambit of income 'on account of' carriage of goods under section 172(2). Therefore, demurrage paid to non-resident shipowners or charterers is not taxable under sections 44B and 172.Issue 2: Prematurity of the PetitionsThe court rejected the contention that the petitions were premature. It held that the petitions could not be dismissed in limine without deciding whether demurrage is income falling under sections 4, 5, or 9 of the Income-tax Act. The court emphasized the need to determine the initial jurisdiction and the applicability of the relevant sections before dismissing the petitions.Issue 3: Validity of Circular Instructions Requiring Income-Tax ClearanceThe court examined the circular instructions issued by the Reserve Bank of India, which required exporters to obtain income-tax clearance for remittances of demurrage payments. The court found that the circulars, annexures B and C, were based on the opinion formed by the Chairman, Central Board of Direct Taxes. Annexure B referred to Indian charterers, which did not affect the petitioners as they were not charterers. Annexure C dealt with foreign vessels chartered for the carriage of goods exported from India. The court held that the procedure required by the circulars was without the authority of law, as demurrage paid is not income exigible to tax under sections 44B or 172. The court declared that the circulars could not prescribe a mode of recovery and payment for demurrage paid by exporters when the ship falls within the ambit of section 172.Conclusion:The court upheld the contention that demurrage is not taxable under sections 44B or 172 of the Income-tax Act. The circulars issued by the Reserve Bank of India requiring income-tax clearance for demurrage payments were declared without authority of law. The petitions were disposed of with the hope that the respondents would not cause undue hardship to exporters. Parties were directed to bear their own costs.