Tax effect in a case means overall tax effect in respect of disputed issues in a particular year

IN THE ITAT RAJKOT BENCH

Income-tax Officer, (International Taxation)

versus

CMA CGM Agencies (India) (P.) Ltd.

IT APPEAL NOS. 151 TO 190 (RAJ) OF 2012

[ASSESSMENT YEAR 2010-11]

AUGUST 31, 2012

ORDER

1. All the 40 appeals filed by the Department were earlier split by the Registry into 3 bunches of 15 appeals, 15 appeals and 10 appeals and listed for hearing on 27th, 30th, and 31st July 2012 respectively. Factual matrix and grounds of appeal in the present bunch of appeals are identical. A common order has been passed u/s 172(4) of the Income-tax Act by the AO giving rise to the present bunch of appeals. On appeal before the CIT(A), a common appellate order has been passed by the CIT(A) against which the present bunch of appeals has been filed before this Tribunal. A request was received from the ld. authorized representative for the assessee that he would not be available on the aforesaid dates of hearing and therefore he sought preponement of hearing of the entire bunch of appeals after clubbing them together, on 20.7.2012. Both parties agreed to argue the matter on 20.7.2012. The entire bunch of appeals was accordingly heard on 20.7.2012.

2. As already stated earlier, the grounds taken in all the appeals are identical. They read as under:

“(i)  The ld. CIT(A) has erred in law and on facts in holding that the order of the AO is null and void and that the assessee is assessable u/s 172(7) of the Act.

(ii)  The Ld. CIT(A) has further erred in law and on facts in not directing the jurisdictional AO to tax the income of the assessee from the business of handling cargo transportation (including slot chartering business), as per normal provisions of the Act, while holding that the order passed u/s 172(4) is null and void.”

3. Facts of the case, in brief, in so far as they are relevant for disposal of the present bunch of appeals are that the Respondent-company, namely, M/s CMA CGM Agencies (India) Pvt. Ltd., acts as agent for the freight beneficiary, namely, M/s CMA CGM SA France. In the assessment year under appeal also, it acted as agent of the said freight beneficiary. The freight beneficiary, i.e., M/s CMA CGM SA France, is engaged in the business of transportation of goods by sea. The principal company, i.e., freight beneficiary, is registered in France and resident of France. In the year under appeal, the principal company operated 40 voyages arriving at Mundra Port. The respondent-company, acting as agent of the freight beneficiary, filed voyage returns in respect of the aforesaid 40 voyages before the Assessing Officer at Gandhidham as required by section 172(3) of the Income-tax Act. Instead of passing 40 orders u/s 172(4) separately to dispose of each of the aforesaid 40 voyage returns filed by the Respondent u/s 172(3) before him, the Assessing Officer passed, for the sake of convenience, a composite order u/s 172(4) on 29.12.2010 disposing of all the 40 voyage returns filed by the Respondent-company for the assessment year under appeal as the factual matrix and the issues in all of them were identical. He has worked out taxable income in respect of each voyage covered by each return filed by the respondent-company u/s 172(3) separately in the order passed by him u/s 172(4). Perusal of assessment order shows that the AO has assessed the taxable income u/s 172(4) in respect of all the 40 voyages at Rs. 2,09,67,176/-, being 7.5% of total amount of freight (Rs. 27,95,62,354/-). The benefit of DTAA between India and France, as claimed by the respondent-company, was denied by the AO on the ground that the freight beneficiary was only a slot charterer and not owner or charterer of the ship.

4. Aggrieved by the composite order passed by the AO u/s 172(4), the respondent-company filed appeal before the CIT(A). The ld. CIT(A) has quashed the composite order passed by the AO u/s 172(4) with the following, amongst others, observations:

“….I have perused the submission made by the appellant and am of the opinion that the appellant is in regular shipping business and not in occasional shipping business. I have considered the judgments cited. Once a person claims that it is not engaged in occasional shipping business and wants to go out of the ambit of section 172; the recourse is provided in section 172 (7) only and for that it has to opt for filling return u/s 139 (1). It has also approached its regular assessing officer to get DIT relief from DDIT Mumbai to the financial year showing its intent to be taxed there. The appellant has been filling returns at Mumbai for many years (its case for assessment year 2002 -03 went up to the Hon. ITAT, Mumbai and is a reported case, 24 DTR 37) and had filed the return for the assessment year under question much before the 172 (4) order was passed.

Since, the appellant has opted for the option to be assessed u/s 172(7) by filing return of income u/s 139(1); it is established that the appellant is in regular shipping business and liable to be assessed under other provisions of the Act including 44B; and not u/s 172(4). Thus, the combined order passed u/s 172(4) by the Income Tax Officer is null and void as assessee’s claim that it is not engaged in occasional shipping business is backed by its taking the alternate recourse provided in section 172(7) itself. It is liable to be assessed on the basis of return filed u/s 139(1) for its entire income.

One more aspect here is that once the AO says that the appellant is not owner/charter of the vessel; then he could not have taken recourse to section 172 itself as the section applies to freight income paid/payable to the owner/character only (or any person on its behalf). The subsection (1) reads as under:

“172. (1) The provisions of this section shall, notwithstanding anything contained in the other provisions of this Act, apply for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, main or goods shipped at a port in India”

In addition, the relevant part of subsection (3) reads as under:-

172 (3) Before the departure from any port in India of any such ship, the master of the ship shall prepare and furnish to the Assessing Officer a return of the full amount paid or payable to the owner or charter or any person on his behalf, on account of the carriage of all passengers, livestock, mail or goods shipped (emphasis supplied) at that port since the last arrival of the ship thereat.

Therefore, the section applies only for freight received/receivable by owner/charter (or any person on its behalf). However, whether the appellant is owner/charter or not on the facts of the case is not adjudicated here, because even in case of it is, it has to be assessed as per option exercised u/s. 172(7). Therefore, ground 5 (for all the 40 appeals) is decided in appellant’s favour.”

5. Aggrieved by the order passed by the CIT(A), the Department is now in appeal before this Tribunal.

6. At the time of hearing before us, the ld. authorized representative for the respondent-company raised a preliminary objection as to the maintainability of 30 out of 40 appeals on the ground that the tax effect in respect of disputed issues under appeal is less than three lakhs of rupees in each of the aforesaid thirty appeals. In this connection, he referred to the instructions (Instruction No. 3/2011 dated 9.2.2011) issued by the Central Board of Direct Taxes and submitted that the said instructions prohibited the Department from filing appeal before this Tribunal in cases where tax effect with reference to disputed issues in a case was less than three lakhs of rupees. He further submitted that the AO himself has worked out tax effect at less Rs. 3 lakhs in the appeal memo itself in each of the thirty appeals filed by him. He contended that each voyage return filed by the Respondent-company was a case and that was the reason why the Department has filed 40 appeals treating each of the voyage returns as a separate case. Referring to Para 3 of the aforesaid instructions, he submitted that the issue of tax effect has to be seen with reference to disputed issue in each case. According to him, tax effect in each case/appeal was less than Rs. 3 lakhs and hence 30 out of 40 appeals filed by the Department were not maintainable as they have been filed in contravention of the aforesaid instructions issued by the CBDT.

7. Per contra, the ld. CIT-DR referred to Para 5 of the aforesaid instructions and submitted that tax effect has to be seen with reference to each case which, according to him, referred to an assessee. His second submission was that the issue under appeal was common in all the appeals and therefore tax effect should be seen with reference to the disputed issue under appeal in the case of the assessee and not with reference to each of the appeals. According to him, all the 40 appeals filed by the Department were strictly in conformity with the aforesaid instructions and therefore they were maintainable.

8. As regards the issues taken by the Department in its Grounds of appeal, the ld. CIT-DR submitted that the ld. CIT(A) has brought no foundational fact on record to support his view that the respondent-company has already filed its return of income u/s 139(1) and therefore the ld. CIT(A) was not justified in invoking the provisions of section 172(7) for quashing the order passed by the AO u/s 172(4). He submitted that the ld. CIT(A) ought to have confirmed the action of the AO unless there was material on record to indicate that the Respondent-company had exercised its option in terms of section 172(7). According to him, the ld. CIT(A) ought to have verified as to whether the respondent-company had included the income from 40 voyages which was taxed by the AO in the order under appeal, in its return of income filed u/s 139(1). He urged that the order passed by the CIT(A) should therefore be vacated or alternatively the AO be given the option to verify the facts and thereafter tax the income from 40 voyages in accordance with law.

9. In reply, the ld. ld. authorized representative for the Respondent-company supported the order passed by the CIT(A). His submissions were three-fold: One, the appellant and the freight beneficiary are engaged in regular shipping business and not in occasional shipping business and therefore the provisions of section 172 are inapplicable to them. In this connection, he referred to the finding recorded by the CIT(A) and submitted that the Department has placed no material on record to rebut the finding recorded by the CIT(A) in this behalf. Two, the fact that the freight beneficiary was engaged in regular shipping business was also apparent from the fact that the respondent has regularly, as observed by the CIT(A), been filing its return of income on behalf of the freight beneficiary at Mumbai. In support of his submissions, he filed a copy of acknowledgment of return, which shows that the Respondent had filed return of income in ITR-VI before the ADIT (1)(2) at Mumbai on 7.10.2010 returning total income at Rs. 91,96,88,751/-. Three, the Income-tax Act does not stipulate multiple assessments against the same assessee simultaneously u/s 172(4) and also under the normal provisions of the said Act. He contended that the ld. CIT(A) has therefore rightly quashed the order passed by the AO u/s 172(4).

10. We have heard both the parties. We shall first take up the preliminary objection raised by the ld. authorized representative for the respondent-company that tax effect in all the appeals, barring 10 appeals bearing ITA Nos. 154-157, 162, 164, 167, 172, and 189-190, is less than Rs. 3 lakhs and hence all 30 of them are not maintainable in view of the instructions issued by the Central Board of Direct Taxes. The case of the Revenue, on the other hand, is that the tax effect is more than Rs. 3 lakhs with reference to the disputed issue in the case of the Respondent-company in the assessment year under appeal and therefore all the aforesaid appeals are maintainable in terms of the aforesaid instructions of the Board. Paragraphs 2-5 of Instruction No. 3/2011 dated 9.2.2011 issued by the CBDT are relevant for adjudicating upon the issue under consideration. They read as under:

“2. In supersession of the above instruction, it has been decided by the Board that departmental appeals may be filed on merits before Appellate Tribunal, High Courts and Supreme Court keeping in view the monetary limits and conditions specified below.

3. Henceforth appeals shall not be filed in cases where the tax effect does not exceed the monetary limits given hereunder:-

It is clarified that an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits prescribed above. Filing of appeal in such cases is to be decided on merits of the case.

4. For this purpose, “tax effect” means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed (hereinafter referred to as “disputed Issues”). However the tax will not include any interest thereon, except where chargeability of interest itself is in dispute. In case the chargeability of interest is the issue under dispute, the amount of interest shall be the tax effect. In cases where returned loss is reduced or assessed as income, the tax effect would include notional tax on disputed additions. In case of penalty orders, the tax effect will mean quantum of penalty deleted or reduced in the order to be appealed against.

5. The Assessing Officer shall calculate the tax effect separately for every assessment year in respect of the disputed issues in the case of every assessee. If, in the case of an assessee, the disputed issues arise in more than one assessment year, appeal, can be filed in respect of such assessment year or years in which the tax effect in respect of the disputed issues exceeds the monetary limit specified in para 3. No appeal shall be filed in respect of an assessment year or years in which the tax effect is less than the monetary limit specified in para 3. In other words, henceforth, appeals can be filed only with reference to the tax effect in the relevant assessment year. However, in case of a composite order of any High Court or appellate authority, which involves more than one assessment year and common issues in more than one assessment year, appeal shall be filed in respect of all such assessment years even if the ‘tax effect’ is less than the prescribed monetary limits in any of “the year(s), if it is decided to file appeal in respect of the year(s) in which ‘tax effect’ exceeds the monetary limit prescribed. In case where a composite order judgment involves more than one assessee, each assessee shall be dealt with separately.”

11. Perusal of paragraph 2 of the aforesaid instructions shows that that it is the policy of the Government to file appeal before this Tribunal only in those “cases” where tax effect is more than Rs.3 lakhs. “Tax effect” has been defined in paragraph 4 of the said instructions as the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed (“disputed issues”). It is clarified in paragraph 4 of the aforesaid instructions that “tax” shall not include any interest thereon, except where “chargeability of interest” itself is in dispute. Paragraph 5 of the aforesaid instructions is quite relevant for deciding the issue before us. Opening lines of Para 5 require that “tax effect” should be calculated separately for “every assessment year in respect of the disputed issues in the case of every assessee.” Paragraph 5 of the said Instructions further states: “In other words, henceforth, appeals can be filed only with reference to the tax effect in the relevant assessment year.” It is thus clear that tax effect in a case has to be seen in respect of the disputed issues in every assessment year in the case of an assessee. Paragraph 5 enables the Department to file appeal(s) if the tax effect in respect of disputed issues in an assessment year in the case of every assessee exceeds Rs. 3 lakhs. After careful consideration of the rival submissions, we hold that tax effect in a “case” means overall tax effect in respect of disputed issues in a particular assessment year in the case of the assessee himself. Tested on the aforesaid basis, tax effect in respect of disputed issues in the assessment year under appeal in the case of respondent-company is more than Rs. 3 lakhs and hence all the 40 appeals filed by the Department are held to be maintainable.

12. The aforesaid view taken by us is also supported by the judgment dated 29.8.2011 (unreported so far) of the Hon’ble Supreme Court in CIT v. Surya Herbal Ltd. [2011] 202 Taxman 462 in which the Hon’ble Court has held as under:

“Liberty is given to the Department to move the High Court pointing out that the Circular dated 9th February 2011 should not be applied ipso facto, particularly, when the matter has a cascading effect. There are cases under the Income-tax Act, 1961, in which a common principle may be involved in subsequent group of matters or large number of matters. In our view, in such cases if attention of the High Court is drawn, the High Court will not apply the Circular ipso facto. For that purpose, liberty is granted to the Department to move the High Court in two weeks.”

13. We shall now turn to the issues raised in the grounds of appeal taken by the Department. The issue before us is not about the assessability or determination of income from the aforesaid 40 voyages but about the procedure to be adopted for assessment of income from those voyages. The Assessing Officer has invoked section 172(4) to tax the income in a summary manner from 40 voyages operated by the freight beneficiary in the year under appeal on the basis of the returns filed u/s 172(3) before him. The respondent-company, on the other hand, claims that the procedure outlined in section 172(4) is not applicable to it as it has already filed its return of income u/s 139(1) before the expiry of the assessment year under appeal and therefore it ought to have been assessed in respect of income from 40 voyages under the normal provisions of the I-T Act in view of the provisions of section 172(7).

14. On appeal by the assessee, the ld. CIT(A) has quashed the order passed by the AO u/s 172(4) for four principal reasons. One, the shipping business being carried on by the freight beneficiary is not occasional shipping business but regular shipping business and hence the income there-from is liable to be assessed under the normal provisions of the I-T Act and not u/s 172(4) thereof. Two, the respondent-company is filing its return of income u/s 139 and is being assessed as such in respect of income from shipping business and hence the provisions of section 172(4) are inapplicable to it. Three, the respondent-company has already filed its return of income u/s 139 at Mumbai and thus exercised its option in terms of section 172(7) for being assessed under the normal provisions of the I-T Act. Four, the I-T Act does not contemplate multiple assessments in the case of the same person and/or in respect of the same income in the hands of the same person.

15. Before proceeding further, it is considered useful to refer to the scheme of taxation u/s 172, which falls under Chapter XV of the Income-tax Act 1961. Chapter XV deals with “Liability in Special Cases”. Part “H” of Chapter XV contains only one section, i.e., section 172. It deals with “Profits of non-residents from occasional shipping business”. It therefore follows that the persons covered by section 172 are only those who are in occasional shipping business and not in the regular shipping business. Those who are in the regular shipping business are clearly outside the scope of section 172. They are covered by section 44B which contains “Special provision for computing profits and gains of shipping business in the case of non-residents”. While section 172 seeks to tax profits of non-residents from occasional shipping business, section 44B seeks to tax their profits from regular shipping business. Sub-section (1) section 172 empowers the Assessing Officer to levy and recover tax in the case of any ship belonging to or chartered by a non-resident in a summary manner notwithstanding anything contained in any other provisions of the I-T Act. Sub-section (2) of section 172 contains summary procedure for computing the income of non-residents from such ships @ 7.5% of the amount paid or payable on carriage of passengers, livestock, mail or goods to the owner or charterer of such ships or to any person on his behalf. Sub-section (3) of section 172 requires the master of the ship to prepare and furnish, before the departure of any such ship, to the Assessing Officer a return of the full amount paid or payable to the owner or charterer or any person on his behalf on carriage of all passengers, livestock, mail or goods shipped at that port since the last arrival of the ship thereat. Sub-section (4) requires the AO to assess income referred to in sub-section (2) and determine the sum payable thereon. The procedure of assessment contemplated by sub-sections (2) and (4) is summary in nature in that it neither allows the non-residents to claim any deduction including the benefits otherwise admissible under the Double Taxation Avoidance Agreements nor requires the AO to follow any elaborate procedure for making the assessment. The AO has to simply assess the income at the rate of 7.5% of the freight paid or payable to the owner or charterer of the ship or any person on his behalf. And that is the end of the matter as far as assessment of income from such ships is concerned. Sub-section (7) of section 172 confers a right on the owner or charterer of a ship to claim before the AO before the expiry of the relevant assessment year that an assessment be made of his total income in accordance with the normal provisions of the I-T Act, and if he so claims, any payment made by him u/s 172 shall be treated as payment in advance of the tax leviable for that assessment year, and the difference between the sum so paid and the amount of tax found payable by him on such assessment shall be paid by him or refunded to him, as the case may be.

16. The scheme of taxation u/s 172 has been explained by the Hon’ble jurisdictional High Court in Arabian Express Line Ltd. of United Kingdom v. Union of India [1995] 82 Taxman 6 (Guj.) as under:

“………… It is to be noted that section 172 of the Income-tax Act occurs in Chapter XV which provides for liability in various special cases. The sub-heading of section 172 is “Profits of non-residents from occasional shipping business”. This section provides that the profits made by non-residents from occasional shipping shall be taxed by adopting the summary method of assessment by holding that 7 ½ per cent of the amount paid or payable on account of such carriage to the owner or the charterer is deemed to be income accruing in India to the owner or charterer on account of such carriage. It also provides that before departure of the ship, the master of the ship has to furnish to the Assessing Officer a return of the full amount paid or payable to the owner or charterer on account of the carriage of all passengers shipped at that port since the last arrival of the ship thereat. Sub-section (3) provides that if the master is unable to do so, he has to make satisfactory arrangement for the filing of the return and payment of the tax by any other person on his behalf. Sub-section (6) provides that a port clearance certificate shall not be granted to the ship until the Collector of Customs is satisfied that the tax assessable under this section has been duly paid or that satisfactory arrangements have been made for the payment thereof. In our view, the aforesaid procedure of assessing the income of a non-resident Indian because of his occasional activity in shipping business in India would not be applicable in a case where there is a convention between the Government of India and the foreign countries as provided under section 90 of the Income-tax Act. In the case of such agreement, section 90 would have overriding effect.”

17. It is thus quite evident that the summary procedure contemplated by section 172 would not be applicable to (i) assess the profits of non-residents from regular shipping business; (ii) the cases covered by sub-section (7) of section 172, i.e., where the owner or charterer claims that his total income should be assessed in accordance with the normal provisions of the Income-tax Act; and (iii) cases where there is a convention between the Government of India and the foreign countries as provided under section 90 of the Income-tax Act. The summary procedure of assessment contemplated by section 172 cannot be mixed up with a regular assessment especially when option is exercised by the owner or charterer of the ship u/s 172(7). By the same analogy, there cannot be multiple assessments of profits from the same voyages, i.e., one u/s 172(4) on the basis of returns filed u/s 172(3) and the other under the normal provisions of the Income-tax Act on the basis of the return filed u/s 139.

18. Looking to the magnitude of the voyages undertaken by the freight beneficiary and the fact that the respondent-company has been, as observed by the ld. CIT(A), regularly filing its return of income at Mumbai and being assessed to tax at Mumbai, the finding of the CIT(A) that the freight beneficiary is not engaged in occasional shipping business but in regular shipping business and hence would be outside the scope of section 172 cannot be said to be untenable on facts and in law. His finding in this behalf is therefore confirmed. Similarly, the Department has not placed any material on record to rebut the finding recorded by the CIT(A) that the respondent-company has already filed its return of income at Mumbai. That being the position, the provisions of section 172(7) would apply to the respondent-company. Besides, as rightly observed by the CIT(A), the Income-tax Act does not permit multiple assessments in the hands of the same taxable entity and that too in respect of income from the same business. On these facts, we are unable to disturb the finding recorded by the CIT(A). The order of the CIT(A) that the respondent-company is liable to be assessed on the basis of return filed u/s 139(1) for its entire income is therefore confirmed. His further order quashing the order passed by the AO u/s 172(4) is also resultantly confirmed.

19. As stated earlier, the Hon’ble jurisdictional High Court has held in Arabian Express Line Ltd. of United Kingdom (supra) that the procedure contemplated by section 172 for “assessing the income of a non-resident Indian because of his occasional activity in shipping business in India would not be applicable in a case where there is a convention between the Government of India and the foreign countries as provided under section 90 of the Income-tax Act”. The reason for such a view is obvious. Section 172(2)/(4) provides for summary assessment @ 7.5% of the freight paid or payable. By the very nature of assessment contemplated by section 172, it is not possible to deal with the cases covered by Double Taxation Avoidance Agreement. In the matters before us, the AO has rejected the claim of the respondent-company that its case falls under DTAA. Such an examination, in our view, cannot be undertaken in the proceedings u/s 172 as the AO has no discretion u/s 172(2)/(4) except to compute the income @ 7.5% of freight paid or payable. It is perhaps for this reason that section 172(7) gives an option to the owners/charterers of ships to seek assessment of their income in accordance with the normal provisions of the Income-tax Act. Once a return is filed by a non-resident u/s 139 claiming the benefit of DTAA, his assessment would need to be completed under the normal provisions of the Income-tax Act.

20. Apropos Ground No. (ii), it was vehemently contended by the ld. CIT-DR that the jurisdictional Assessing Officer should be directed to verify the position and tax the income of the freight beneficiary (represented by the respondent-company) from the business of handling cargo transportation (including slot chartering business) as per normal provisions of the Act. It is the case of the respondent-company that its income including the income from 40 voyages covered by the impugned order passed by the AO u/s 172(4) should be taxed in accordance with the normal provisions of the Income-tax Act on the basis of the return filed by it u/s 139 at Mumbai. Perusal of the order passed by the CIT(A) shows that he has taken a view that the case of the respondent falls u/s 172(7) and not u/s 172(4). The respondent-company has also accepted the liability to be dealt with u/s 172(7). The jurisdictional AO may therefore verify the position and take such action as may be warranted in law in terms of section 172(7) to ensure that the income of the assessee from the aforesaid 40 voyages does not escape assessment as per the normal provisions of the I-T Act.

21. In view of the foregoing, all the 40 appeals filed by the Revenue are dismissed subject to the observations made above.