Court rules petitioner not liable for tax under Income-tax Act as guarantor. Assessment order violated natural justice principles.

The court ruled in favor of the petitioner-company, holding that it was not liable to pay tax under section 172 of the Income-tax Act as a guarantor. The court found that the time charterers, who were the disponee owners of the ship and the iron ore, did not earn any freight, making section 172 inapplicable. Additionally, the petitioner-company's liability was limited to the time charterers, not the ship owners. The court also determined that the assessment order violated principles of natural justice as the petitioner was not given a fair hearing. The guarantee bond's enforceability under Article 299(1) of the Constitution was not addressed due to insufficient pleading.

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Issues Involved:
1. Liability of the petitioner-company as a guarantor under section 172 of the Income-tax Act.
2. Liability of the petitioner-company in relation to the ship owners.
3. Violation of principles of natural justice in the assessment order.
4. Enforceability of the guarantee bond under Article 299(1) of the Constitution.

Issue-wise Detailed Analysis:

1. Liability of the petitioner-company as a guarantor under section 172 of the Income-tax Act:
The primary issue was whether the petitioner-company, acting as a guarantor, was liable to pay tax under section 172 of the Income-tax Act. The petitioner argued that the time charterers, who were the disponee owners of the ship and the iron ore, were not liable under section 172 since they carried their own goods and did not earn freight. The court examined the scheme of section 172, highlighting that it applies to ships carrying goods shipped at an Indian port and that one-sixth of the amount paid or payable for such carriage is deemed income accruing in India to the owner or charterer. The court concluded that the time charterers, carrying their own goods, did not earn any freight, and thus section 172 was not applicable. Consequently, the petitioner-company, as a guarantor, was not liable for the tax.

2. Liability of the petitioner-company in relation to the ship owners:
The petitioner-company contended that its liability was limited to the time charterers and not the ship owners. The court agreed, noting that the guarantee bond was given on behalf of the time charterers, not the ship owners. The court found that the petitioner-company acted as agents for the master of the ship, who was an agent of the time charterers during the voyage. Since there were no freight earnings by the time charterers, the petitioner-company was not liable. The court also noted that the owners of the ship, having let it out on hire, had no involvement in the carriage of the iron ore, and therefore, their liability, if any, did not affect the petitioner-company.

3. Violation of principles of natural justice in the assessment order:
The court examined whether the assessment order violated the principles of natural justice. It was established that the assessment proceeding under section 172 was quasi-judicial, requiring a fair hearing. The petitioner-company was not given a reasonable opportunity to contest the basis of the assessment. The court emphasized that the respondent No. 2 acted without jurisdiction by misreading section 172 and failed to observe the principles of natural justice. The court highlighted the necessity of a fair hearing, citing the principle that no one should be condemned without an opportunity to be heard.

4. Enforceability of the guarantee bond under Article 299(1) of the Constitution:
The petitioner-company argued that the guarantee bond did not comply with the mandatory requirements of Article 299(1) of the Constitution. However, this plea was not raised in the writ petition or affidavits. The court noted that issues of law should be pleaded in the writ petitions or affidavits to apprise the opposite party. Since this issue was not adequately pleaded and might require evidence, the court deemed it unnecessary to address this question.

Conclusion:
The court ruled in favor of the petitioner-company on the first three issues, quashing the assessment order and the notice of demand. The respondents were directed not to enforce the tax liability against the petitioner-company and the time charterers. The fourth issue was not addressed due to insufficient pleading. The petitions were allowed with costs assessed at Rs. 100 in each case.

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