CIT vs. V. S. Dempo (Bombay High Court) (Full Bench)

As a Division Bench of the Bombay High Court was unable to agree with the view taken in Commissioner of Income-tax vs. Orient (Goa) Private Limited 325 ITR 554, the Full Bench had to consider the question “Whether, while dealing with the allowability of expenditure under section 40(a)(i) of the Income Tax Act, 1961, the status of a person making the expenditure has to be a non-resident before the provision to section 172 of the Act can be invoked?” HELD by the Full Bench overruling CIT vs. Orient (Goa) Private Limited 325 ITR 554:

(i) A bare perusal of s. 44BB indicates as to how this provision covers the case of an assessee who is a non-resident and engaged in the business of operation of ships. That stipulates a sum equal to 7 % of the aggregate ½ of the amount specified in sub-section (2) of section 44B as deemed to be profits and gains of such business chargeable to tax under the head “Profits and Gains of Business or Profession”. It is the explanation which refers to the demurrage and for the purpose of sub-section (2) of section 44B. It clarifies that the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature shall for the purposes of sub-section (1) deemed to be the profits and gains of the business, namely, shipping business chargeable to tax under that head. The amounts which are paid or payable whether in or out of India to the assessee or to any person on his behalf on account of carriage of passengers, livestock, mail or goods shipped at a port in India and the amount received was deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods shipped at any port outside India shall be deemed to be the profits and gains. On that the tax is payable by virtue of subsection (1) of section 172. That has to be levied and recovered in terms of the sub-sections of section 172 of the Income Tax Act. Once section 172 falls in Chapter XV titled as Liability in Special Cases – Profits of Non-residents, then section 172 is referable to section 44B. Both provisions open with a non-obstante clause and whereas section 44B enacts special provisions for computing profits and gains of shipping business in case of non-residents section 172 dealing with shipping business of non-residents is enacted for the purpose of levy and recovery of tax in the case of any ship belonging to or chartered by a non-resident operated from India. These sections and particularly section 172 devise a scheme for levy and recovery of tax. The sub-sections of section 44B denote as to how the amounts paid to or payable would include demurrage charges or handling charges or any other amount of similar nature. The sub-sections of section 172 read together and harmoniously would reveal as to how the tax should be levied, computed, assessed and recovered. Therefore, there is no warrant in applying the provisions in chapter XVII for collection and recovery of the tax and its deduction at source vide section 195.

(ii) To our mind, the Division Bench judgment in Commissioner of Income-tax vs. Orient (Goa) Pvt. Ltd. seen in this light does not, with greatest respect, take into account the scheme and setting as understood above. There need not be apprehension because there is no escape from the levy and recovery of tax. The tax has to be levied and collected. The ship cannot leave the port or if allowed to leave any port in India, it must either pay or make arrangement to pay the tax. Hence, the apprehension of avoidance or evasion both are taken care of by the legislature. That is how advisedly the legislature cast the obligation to deduct tax at source on the person responsible to make payment to a non-resident in shipping business.

(iii) The resident assessee contended before the Division Bench in Orient (Goa) (supra) as well as the Division Bench which made the referring order that section 172 of the Income Tax Act has a bearing and an important one on the obligation to deduct tax at source. Therefore, it is the recipient’s position and the perspective in which the recipient’s income would be taxed will have to be borne in mind. The non-resident shipping company in respect of its’ income would be in a position to rely upon section 44B and consequently section 172. However, we do not see how there is an obligation to deduct tax at source on the resident assessee/Indian company before us. While computing the income of the non-resident Indian / foreign company, assistance can be derived by such non-residents from section 44B if they are in shipping business. It would also be in a position to rely upon section 172 but the responsibility of the person making payment to a non-resident in sub-section (1) of section 195 cannot be avoided in the manner set out in other cases. The scheme as above operates only to cases covered by section 172 of the IT Act and none else.