Case Law Details

Case Name : CIT Vs V.S. Dempo & Co. Pvt. Ltd. (Bombay High Court)
Appeal Number : Income Tax Appeal Nos. 989, 991, 948, 957,978 of 2015
Date of Judgement/Order : 05/02/2016
Related Assessment Year :
Courts : All High Courts (1346) Bombay High Court (304)

Brief of the Case

Bombay High Court held In the case of CIT vs. V.S. Dempo & Co. Pvt. Ltd. that section 44B enacts special provisions for computing profits and gains of shipping business in case of non-residents and section 172 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. Further 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. These sections and particularly section 172 devise a scheme for levy and recovery of tax. On a combined and harmoniously reading of above sections would reveal as to how the tax should be levied, computed, assessed and recovered in case of shipping companies. 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.

Facts of the Case

The assessee is a company engaged in the business of mining and export of processed iron ore as also in construction business. The assessee filed its return of income declaring taxable income of Rs.6,19,82,540/-. The assessee claimed deduction u/s 80-HHC of Rs.12,78,82,552/-. The case was selected for scrutiny and notices u/s. 143(2) were issued to the assessee. Assessee, in response, filed details. The assessee declared other income at Rs.9,67,50,252/-. The main item of this is interest income on Bank deposits and others. The basic issue which arises is whether the entire interest income as claimed by the assessee could be said to be business income, to which explanation (baa) to section 80HHC, is applicable or whether the said interest income is income from other sources. The assessee also claimed income received from ‘Lease income’, ‘income from transfer of vessels’, ‘Barge freight’, ‘proceeds from other services’ and ‘miscellaneous income’, as gross receipts received in the course of its business and therefore there is no question of applying Explanation (baa) to it.

The assessee also charged the demurrage charges under the head export expenses to profit and loss account on which no tax has been deducted during the year under consideration. The Assessing Officer held that in view of section 40(a)(i) r/w section 195, the amount paid as demurrage charges are liable for addition under section 40(a). The assessee also claimed miscellaneous expenses, which has been disallowed by the Assessing Officer.

Whether in facts and circumstances of the case, the ITAT has erred in applying the provision of Section 172 in holding that section 40(a)(i) is not applicable, particularly when section 172 concerned with levy and recovery of tax in a case of any ship, as against section 195 r/w 40(a)(i) of the IT Act, refers to non-resident assessee as in the present case ?

Held by CIT (A)

CIT (A) partly allowed the appeal of the assessee.

Held by ITAT

ITAT partly allowed both assessee’s as well as the Revenue’s appeal, directing the Assessing Officer to exclude 90% of the net income eligible for inclusion for the purpose of computing profits of the business for the purpose of determining 80HHC deductions.

Held by High Court

High Court held that there are special provisions for computing profits and gains for shipping business in the case of a nonresident and enacted by section 44B which falls in Chapter IV – Computation of Business Income. A bare perusal thereof would indicate 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.

Further 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.

Accordingly question disposed of.

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Posted Under

Category : Income Tax (20862)
Type : Judiciary (8910)
  • Prakash Mehta

    there is some gap in decision as section 44B cover two situtions whereby it deems the income and nature of such income is profit & gains from Business. (1) freight on export of goods & passanger fare and (2) amount received in India by or on behalf of non resident (i.e. import freight). You may be knowing that as per section 5 of Income tax Act, receipt of income in India irrespective of its place of accrual also tiggers the tax liability and so sub section (2) also provide for the same in that line.
    whereas section 172 covers only one situtation (i.e the taxability of first part of section 44B (i.e. 7.50% of freight on export of goods and passenger fare from Indian port). In this circumstances, though section 172 provide for levy, filing of returns, recovery and assessment, as per the present express provision, its coverage is limited to fright and fare collected on goods and passanger shipped at port in India. so it is silent about amount of import freight which is taxable in India on reciept basis. In the shipping business, it is a business practice that local agent of non resident recieve the money on behalf of non resident towards import freight. considering express provision of section 172, there is a question mark about tds liability on sum received by agent of non resident (i.e. receipt towards freight on import of goods).
    According to my personal view, unless section 172 is amended to cover the both situtations as mentioned in section 44B, TDS is to be deducted on import freight received in India by the agent or non -resident himself unless non-resident or agent therof provide the certificate from AO to be issued u/s. 197 of the Act.

  • Anand Agrawal

    The Act is divided into different chapters dealing with different aspects. Section 172 falls in Chapter XV dealing with Liability in Special Cases. Truly, the liability in case of a foreign ship has been put on the Master instead of the Company. That has necessitated section 172 vis a vis section 139 falling under Chapter XIV “Procedure for Assessment”. Section 196 falls under Chapter XVII “Collection and Recovery of Tax”. No doubt section 172 provides a certificate of tax clearance before leaving port yet it does not substitute other methods of recovery. Assuming in an extreme case the master of the ship does not furnish certificate envisaged under section 172, would the Revenue simply wait indefinitely as appears the result of the judgment, or would resort to other provisions for recovery. With all due respects the judgement appears to be debatable.

    AP Agrawal
    ILS Retd.