2008 (8) TMI 392 - AT - Income Tax

Tribunal: Section 44BBA can't compute income on losses; Section 234B interest levy unjustified due to no taxable income.

Royal Jordanians Airlines. Versus Deputy Director Of Income-tax (International Taxation).

The Tribunal ruled that Section 44BBA of the Income Tax Act, being a machinery provision, cannot be applied to compute income when the assessee has ... Presumptive taxation - Interpretation of statutes - invocation of 44BBA, when appellant has incurred losses in each of the assessment years under consideration - Non-resident - levy of interest u/s. 234B of the Act was in accordance with law? - business of operation of aircraft in international traffic. Stand of the Revenue is that, provisions contained in s. 44BBA of the Act are mandatory and, therefore, any assessee who is a non-resident and is engaged in the business of operation of aircraft in international traffic, his income shall be computed under the provisions contained in s. 44BBA of the Act despite the fact that such an assessee has incurred losses in his business operations. HELD THAT:- On the basis of decisions in SETH MADAN LAL MODI VERSUS COMMISSIONER OF INCOME-TAX. [2002 (11) TMI 57 - DELHI HIGH COURT] as well as decision of Hon'ble Supreme Court in the case of A. Sanyasi Rao & Ors.[1996 (2) TMI 4 - SUPREME COURT], it is held that s. 44BBA of the Act is not a charging section but a machinery provision for computation of income. Sec. 4 of the Act is the charging section, which provides that, tax is leviable on the total income of an assessee. The income as defined in s. 2(24) of the Act provides that, income includes profits and gains. In other words, there must be both profits and gains before a sum can be brought to tax and since, in the case of the appellant, there is loss as contended, no sum can be brought to tax. Therefore, we hold that provisions contained in s. 44BBA of the Act are per se not applicable to the facts of the case of the appellant and, therefore, no income can be computed under the provisions contained in s. 44BBA of the Act. Further contention of the ld DR that, since there is no option under the provisions contained in s. 44BBA of the Act, therefore, necessarily there has to be an income despite there are losses incurred by the appellant, is apparently misconceived. It is settled law that, plain reading of the statute which leads to an absurdity, cannot be held to be valid interpretation. Even assuming that provisions contained in s. 44BBA of the Act are primarily applicable, then too, there has to be an option inbuilt in the scheme of the Act that if there are losses then the assessee has the right still to compute its income at lower sum than the income provided in the Act provided assessee fulfils the necessary condition inasmuch as furnishes his books of accounts as provided under s. 44AA of the Act as has been held by the apex Court in the case of CIT vs. Hyundai Heavy Industries Co. Ltd. [2007 (5) TMI 196 - SUPREME COURT]. The provisions contained in s. 44AA of the Act are applicable to appellant as would be seen from cl. (i) and cl. (iii) of said section. It is to be noted that we are not going into the validity of the provisions of the Act. All what we hold is that, construction of provisions of the statute which leads to absurdity should not be preferred. In the instant case, if the construction of the statute as suggested by the Revenue is applied then too, there is an absurd proposition that, s. 44BBA being a machinery provision and, despite having incurred losses, then too, there is income assessable to tax in view of the provisions contained in s. 44BBA of the Act. Sec. 44BBA provides that in case of an assessee being non-resident and carrying on business of operation of aircraft, a sum equal to 5 per cent of specified sum shall be deemed to be profit of such business. The deeming provision of s. 44BBA only deems 5 per cent of certain receipts as income, however, the provision of s. 44BBA do not deem that every such person shall be deemed to have earned income. The provisions of presumptive taxation are beneficial provisions and are not provisions which bring any sum to tax or deem any income to tax. Therefore, the construction suggested by the Revenue seeks to take away the benefit, which was granted by the legislature. The purpose of presumptive provisions is to provide a simple manner of calculation of income and not to bring to tax an income when there is no income. Therefore, it can be held that, interpretation suggested by the Revenue reduces the 'concept of income' as provided in s. 2(24) of the Act to a dead letter. In other words, even if there is no income yet in view of the machinery provisions and, not the deeming provisions, there is income which can be taxed. The interpretation adopted by the AO is an absurd or inconsistent interpretation. It is wholly impermissible in law for the IT authorities to adopt a mechanical and pedantic interpretation of the provisions of the Act whereby the appellant company is forced to pay tax, notwithstanding the fact that there are losses incurred by the appellant company. The appellant had made two basic submissions namely: (a) that provisions contained in s.44BBA of the Act are machinery provisions and (b) that only real income can be brought to tax and not hypothetical income. In fact, in the case of State of Rajasthan vs. Rajasthan Chemists Association [2006 (7) TMI 17 - SUPREME COURT], apex Court following the judgment of A. Sanyasi Rao & Ors., has again reiterated above principles. It is thus seen that, aforesaid judgment has appropriate application to the facts of the instant case which supports the submission of the appellant that tax is levied on real income and determination of real income has to be the statutorily mandate and not that there is income even when there are losses incurred by the appellant company. Appeal allowed. Issues Involved:1. Applicability of Section 44BBA of the Income Tax Act in cases where the assessee has incurred losses.2. Levy of interest under Section 234B of the Income Tax Act.Detailed Analysis:Issue 1: Applicability of Section 44BBA of the Income Tax ActThe primary issue was whether the provisions of Section 44BBA could be applied to compute an income despite the assessee incurring losses. The assessee, a non-resident engaged in the operation of aircraft in international traffic, argued that since there were losses, the provisions of Section 44BBA were inapplicable. The assessee contended that Section 44BBA is a machinery provision and not a charging section, and it cannot override the fundamental requirement of income for taxability under Sections 4 and 5 of the Income Tax Act.The Tribunal held that Section 44BBA, being a part of Chapter IV-D which deals with the computation of income under the head 'Profits and gains of business or profession,' is indeed a machinery provision. The Tribunal emphasized that the Income Tax Act charges tax on income, and the prerequisite for taxability is the existence of income. Since the assessee had incurred losses, there was no income to be computed under Section 44BBA. The Tribunal relied on the Supreme Court's judgment in the case of A. Sanyasi Rao & Ors., which held that machinery provisions cannot assume the existence of income when there is none.The Tribunal also noted that the Special Bench of the Tribunal had not conclusively decided on the applicability of Section 44BBA in cases of losses. The Special Bench had only restored the issue to the file of the AO for fresh computation, allowing the assessee to present its arguments.Issue 2: Levy of Interest under Section 234B of the Income Tax ActThe second issue was whether the levy of interest under Section 234B was justified when the assessee had incurred losses. The assessee argued that since there was no taxable income, there was no liability to pay advance tax, and hence, no interest under Section 234B could be levied.The Tribunal observed that Section 234B provides for the levy of interest for default in payment of advance tax. However, since the Tribunal had already held that there was no taxable income due to the losses incurred by the assessee, the question of default in payment of advance tax did not arise. Consequently, the levy of interest under Section 234B was not in accordance with the law.Conclusion:The Tribunal concluded that the provisions of Section 44BBA could not be applied to compute income when the assessee had incurred losses. It held that Section 44BBA is a machinery provision and cannot override the fundamental requirement of income for taxability. Consequently, no income could be computed under Section 44BBA, and the levy of interest under Section 234B was also not justified. The appeals were decided in favor of the assessee.