1984 (5) TMI 37 - HC - Income Tax

Court upholds Income Tax Officer's jurisdiction under Section 195(2) of Income Tax Act.

The court held that the Income Tax Officer (ITO) had jurisdiction to pass an order under Section 195(2) of the Income Tax Act, 1961, determining the tax ... Firm Issues Involved:1. Jurisdiction of the Income Tax Officer (ITO) under Section 195(2) of the Income Tax Act, 1961.2. Validity of the ITO's order determining the tax liability for payments to a non-resident company.Issue-wise Detailed Analysis:1. Jurisdiction of the Income Tax Officer (ITO) under Section 195(2) of the Income Tax Act, 1961:The primary question referred to the court was whether the ITO had jurisdiction under Section 195(2) of the Income Tax Act, 1961, to pass an order determining the tax liability on payments made to a non-resident company. The assessee, a public limited company, had entered into an agreement with an Italian company for technical know-how and royalty payments. The assessee applied to the ITO for a tax clearance certificate, contending that no tax was deductible from the payments to the Italian company. The ITO, however, passed an order under Section 195(2) of the Act, determining the taxable portion of the payments.The Tribunal held that the ITO lacked jurisdiction under Section 195(2) because the application was merely for a tax clearance certificate and not for determining the taxable portion of the payments. The Tribunal relied on the decision of the Calcutta High Court in Czechoslovak Ocean Shipping International Joint Stock Company v. ITO [1971] 81 ITR 162, which emphasized that an application under Section 195(2) presupposes that the applicant is in doubt about the taxable portion of the payments and seeks determination from the ITO.The court, however, disagreed with the Tribunal's view. It noted that there is no prescribed form for an application under Section 195(2) and that the ITO's jurisdiction is not limited by the specific wording of the application. The court observed that the ITO's order was based on the relevant contract and documents and was passed after hearing the assessee. Moreover, the assessee participated in the proceedings and contested the order on merits, indicating acceptance of the ITO's jurisdiction.The court also referred to decisions of the Allahabad High Court in Rattan Lal Ved Prakash v. CIT [1983] 144 ITR 135 and the Punjab and Haryana High Court in Karnal Kaithal Co-operative Transport Society Ltd. v. CIT [1972] 84 ITR 46, which supported the view that an implied application or voluntary submission could confer jurisdiction on the ITO.2. Validity of the ITO's order determining the tax liability for payments to a non-resident company:The court held that the ITO had jurisdiction to pass the order under Section 195(2) of the Act. The court emphasized that the assessee's application, although initially for a tax clearance certificate, was treated as one under Section 195(2) by the ITO. The assessee provided the necessary information and participated in the proceedings, which indicated that the application was effectively under Section 195(2).The court concluded that the ITO's order was valid and within his jurisdiction. The reference was answered in the negative, in favor of the Department, and the matter was remanded to the Tribunal for a decision on merits.Conclusion:The court held that the ITO had jurisdiction to pass an order under Section 195(2) of the Income Tax Act, 1961, and that the order determining the taxable portion of the payments to the non-resident company was valid. The Tribunal's decision on the preliminary point was set aside, and the matter was remanded for a decision on merits.