Madras High Court
Commissioner Of Income-Tax vs Hongkong Ocean Shipping Co. Ltd. & Ors. on 30 September, 1997
Equivalent citations: (1998)144CTR(MAD)558
JUDGMENT
J. KANAKARAJ, J. :
These 5 tax cases arise out of orders passed in the case of 5 assessees for the asst. yr. 1976-77. In all the cases, the assessment orders were passed on identical terms except with regard to the actual figures relating to the total income and the tax payable or refundable as the case may be. In all the cases, the assessees contended that the income for the year should be computed in two periods namely, for the period between 1st January, 1975 and 31st May, 1975 on the basis of the voyage accounts and so far as the second period from 1st June, 1975 to 31st December, 1975, the assessment had to be made on the deemed income, as per the amendment to s. 44B of the IT Act. According to the assessees, the amendment for computing the income in respect of the ships owned by the non-residents touching the Indian Ports only after 1st June, 1975 are liable to be taxed on the deemed income. Therefore, the assessees contended for the period before 1st June, 1975, the voyage account alone should be adopted. The ITO did not agree with the said contention and proceeded to say that s. 44B of the IT Act was to come into effect from 1st June, 1976 and therefore, applies to the asst. yr. 1976-77. Consequently, the assessees previous year relevant to the assessment year should be taken note of for the purpose of applying the amended provisions of law. In this view of the matter, the ITO applied the amended s. 44B of the IT Act and charged the income accordingly even in respect of the period from 1st January, 1975, to 31st May, 1975. Consequently, in cases of some assessees additional tax was payable and in cases of some assessees, certain refunds were payable and all the assessees had filed appeals before the CIT(A). Before the appellate authority, it was contended that s. 44B had been amended along with certain amendments introduced to s. 172 of the Act. Therefore, both the amendments have to be read together even though the amendment to s. 172 came into force w.e.f. 1st June, 1975. We will discuss the finer aspects of the amendments a little later. Suffice it to say at this stage, that all the appeals were allowed and the appellate authority held that the assessment should be completed only as per the assessees contention namely on the basis of voyage accounts upto 31st May, 1975 and on the basis of the deemed income from 1st June, 1975. The Revenue took up the matter in appeal before the Tribunal. The Tribunal agreed with the order of the appellate authority. It is under these circumstances, at the instance of the Revenue, the following question has been referred to us for decision :
"Whether, on the facts and in the circumstances of the case, the assessment could be made on the basis of the deemed income under s. 44B of the IT Act only in respect of previous year commencing on 1st April, 1976 and not the assessment year commencing on 1st April, 1976 ?"
2. Before referring to the provisions of law, it would be better to notice the fact that all the non-resident companies had permanent agents in India within the meaning of s. 163 of the IT Act and they were assessable as representative assessees under s. 160 of the Act. As per s. 29 of the IT Act, the income of the assessees are profits and gains from business and they had to be computed in accordance with the provisions of ss. 30 to 43A. But, we are concerned with two sections relating to shipping business of non-residents. We will first refer to s. 172 of the Act, and it is captioned as "H - Profits of non-residents from occasional shipping business".
A careful perusal of the entire section shows that it is a complete code in itself so far as occasional shipping business is concerned. It applies to such occasional shipping business, notwithstanding anything contained in other provisions of the Act. It applies in the case of any ship belonging to or chartered by a non-resident which carries passengers, livestock, mail or goods shipped at a port in India. Prior to the Finance Act, 1975, there was a further clause at the end of sub-s. (1) of s. 172 as follows :
"Unless the ITO is satisfied that there is an agent of the non-resident from whom the tax will be recoverable under the other provisions of this Act."
The above clause, which we have quoted in inverted commas, would clearly suggest that it was open to the ITO to deny the applicability of s. 172, in case where there was an agent of the non-resident as mentioned above sub-s. (2) provides for the freight charges as the deemed income and a percentage of such deemed income as the tax payable by the non-resident shipper. sub-s. (3) provides for filing of the return by the master of the ship and sub-s. (4) enables the AO to assess the income and determine the sum payable as tax. The manner of payment is provided for in sub-ss. (5) and (6). sub-s. (7) is important and has some bearing to the facts of the present case. We, therefore, quote sub-s. (7) and it is as follows :
".. (7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment be made of his total income of the previous year and the tax payable on the basis thereof be determined in accordance with the other provisions of this Act, and if he so claims, any payment made under this section in respect of the passengers, live stock, mail or goods shipped at Indian ports during that previous year shall be treated as a payment in advance of the tax leviable for that assessment year, and the difference between the sum as 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."
In the event of the assessee making an option under sub-s. (7), the payment made under sub-s. (4) shall be treated as "a payment in advance of the tax leviable for that assessment year". In all the cases before us, the assessee had exercised the option under sub-s. (7) of s. 172.
3. So far as s. 172 is concerned, the change made by the Finance Act, 1975, the amendments were two-fold. The provision of sub-s. (1) of s. 172 was made applicable even in the case where the non-residents had an agent in India from whom the tax in respect of the income of the non-resident could be recovered under the provisions of the IT Act. The second part of the amendment related to the specific words 7-1/2 per cent. of the freight charges instead of 1/6th of the freight charges.
4. By the very same Finance Act of 1975, s. 44B was introduced and it runs as follows :
"44B. Special provision for computing profits and gains of shipping business in the case of non-residents - (1) Notwithstanding anything to the contrary contained in ss. 28 to 43A, in the case of an assessees, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent. of the aggregate of the amounts specified in sub-s. (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession"."
(2) The amounts referred to in sub-s. (1) shall be the following, namely :
(i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and
(ii) the amount received or 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."
The important aspect of s. 44B of the Act is as the sub-title itself says, it is a special provision for computing profits and gains of shipping business in the case of non-residents. It clearly says that notwithstanding anything to the contrary contained in ss. 28 to 43A, in the case of such an assessee, a sum equal to 7-1/2 per cent. of the aggregate amount specified in sub-s. (2) shall be deemed to be profits and gains of such business, chargeable to tax under the head "profits and gains of business or profession". Sub-s. (2)(i) says that the deemed income will be the amount paid or payable whether in or out of India to the assessee on account of carriage of passengers, livestock, mail or goods shipped at any port in India. Similarly, under sub-s. (2)(ii) any amount received or deemed to be received in India by or on behalf of the assessee shall also be added to the said amount. The difficulty in the assessment of the cases in hand, arose out of the fact that s. 44B was to come into effect from 1st April, 1976 and therefore, applicable to the asst. yr. 1976-77 whereas the amendment to s. 172 was to come into effect on 1st June, 1975.
5. The contention of the assessees whose previous year ended on 31st December, 1975, was that amendments to both s. 44B and s. 172 should be read together and if so read, the deemed income can be taken note of only from 1st June, 1975. On the other hand, the contention of the Revenue was that s. 44B came into effect from 1st April, 1976 and therefore, it applies to the assessment of income for the entire asst. yr. 1976-77 and there was no scope for splitting the period into two halves.
6. We will first take up the correctness of the view expressed by the CIT(A). The appellate authority proceeded to say that inasmuch as option had been exercised under s. 172(7) of the Act, the determination of the total income at 7-1/2 per cent. on voyage receipts as laid down in s. 44B is only a measure corresponding to the introduction of the same percentage for the determination of the income under s. 172(2) which came into effect from 1st May, 1975. Therefore, the appellate authority concludes that for determining the income of the assessee in the previous year namely, the calendar year of 1975, the income of the assessee should be computed upto 31st May, 1975, on the basis of what is called voyage accounts applying the provisions of ss. 28 to 43 without considering s. 44B of the Act. It was further stated by the appellate authority that s. 44B comes into play only in respect of the income for the period from 1st June, 1975 to 31st December, 1975. Observes the appellate authority as follows :
".. It is contended on behalf of the assessee that the introduction of the computation of the income in respect of a particular voyage at 7-1/2 per cent. in sub-s. (2) of s. 172 has a material bearing on the question. It is pointed out that this change has been introduced in s. 172(2), at the same time as the introduction of s. 44B. Therefore, the provisions of s. 44B should be considered to be effective only from the date on which the amended s. 172(2) also was to come into force viz., 1st June, 1975."
7. We may straightaway say that the above observation of the appellate authority has no authority of law. We are unable to see how the amendment to s. 172(2) could affect the applicability of s. 44B in respect of the asst. yr. 1976-77 relatable to the accounting year being the calendar year 1975. The appellate authority again made a mistake purporting to deduce the legislative intention to continue the voyage account basis for computing the income upto 31st May, 1975 and for this purpose, the appellate authority has stated that the amendments to ss. 44B and 172 of the Act should be read together. The appellate authority proceeded to say that it was open to the assessee to either opt for regular assessment under sub-s. (7) of s. 172 or refuse to do so. According to the appellate authority if s. 44B is to be given effect to for the whole assessment year, the very purpose of the option under s. 172(7) will become otiose. The option under sub-s. (7) of s. 172 cannot, according to the appellate authority, be taken away by the introduction of s. 44B w.e.f. 1st April, 1976. We are unable to agree with this reasoning of the appellate authority.
8. The Tribunal went one step further. After referring to the history of the legislation, the Tribunal observes that it is well settled principle of law that the law as on the first day of April of any assessment year should govern the assessment of that year. However, the Tribunal clarifies by saying that the said principle of law is not absolute, but it is subject to any express provision to the contrary. The question really is whether there is any such express provision to the contrary on the facts and circumstances of the case. The Tribunal proceeds to say that the intention of the legislature must be understood. Unless the intention was to create a fresh liability on the assessee, the above principle of law cannot be adopted says the Tribunal. The Tribunal further points out that while construing statutory provisions absurdity and mischiefs should be avoided. According to the Tribunal, when s. 44B provides for estimating the income of the assessee from the shipping business at 7-1/2 per cent. of the freight charges, it was indeed a deeming provision and it cannot be made to apply even if the assessee had maintained accounts or the true income of the assessee could be found out by applying other provisions of the law. According to the Tribunal, if s. 44B is to be applied as per the contention of the Revenue, it would result in arbitrary assessment of the income. In fact, the Tribunal goes to the extent of doubting the validity of s. 44B itself. In our opinion, it is this doubt of the Tribunal which had resulted in the Tribunal accepting the views of the CIT(A). The Tribunal commits the same error as that of the appellate authority while making the following observations :
".. But, when s. 44B states that even in the regular assessment tax shall be chargeable only on the deemed income and not on the basis of the accounts of the assessee, it appears that the continuance of sub-s. (7) is otiose, for, ad hoc assessments on estimated income are to be substituted by regular assessment on the same basis which cannot make much of a difference .."
Therefore, the Tribunal concludes that the substitution of the deemed income for the entire previous year would have the result of giving retrospective operation to s. 44B of the Act and the assessee being prejudiced on that account. That is precisely the reason why the Tribunal went to the extent of saying that such a deeming provision as introduced by s. 44B could be accepted only if it is prospective and therefore, s. 44B, if at all could apply only to the previous year and not to the assessment year when the Finance Act introduced s. 44B w.e.f. 1st April, 1976. In fact, the Tribunal went to the extent of saying that the deemed income could not be adopted for the entire accounting year. However, since the assessees had offered the income from 1st June, 1975 to 31st December, 1975, the Tribunal restricted its relief to the extent granted by the appellate authority.
9. We have given our anxious thoughts to the submissions made on either side. We have also carefully perused the orders of the authorities below. We are clearly of the opinion that both the CIT(A) and the Tribunal have failed to keep in mind the dichotomy between s. 44B of the Act and s. 172 of the Act. We have already noticed the fact that s. 172 which is in the statute book right from the beginning is meant for assessing non-residents from occasional shipping business. The same cannot be mixed up with a regular assessment, especially when an option is exercised under sub-s. (7) of s. 172 of the Act. It may be true that the omission of the words in sub-s. (1) from 1st June, 1975, relating to the existence of an agent of a non-resident from whom tax could be recovered under the provisions of the Act could not have any significant role to play as contended by the assessees. In fact, the argument of the Revenue is that in the case of all the assessees they had agents, and therefore the application on s. 172 at all did not arise. We are not inclined to accept this extreme proposition because the words which were omitted by the Finance Act, 1975 w.e.f. 1st June, 1975, could only give an option to the assessing authority to either give the benefit of s. 172 or deny the same. In all these cases, the assessing authorities proceeded on the basis that s. 172 of the Act did apply and in fact, an option had been exercised under sub-s. (7) of s. 172 of the Act. In our opinion, the above words did not have any significant role to play in the interpretation of the Finance Act, 1975. It appears to us that when the Finance Act, 1975 did introduce, two dates with regard to the applicability of s. 44B and with regard to the amendments to s. 172, the Parliament did have a reason for the same. It is certainly not open to the assessing authorities to construe the provisions of law, with reference to the liability of the assessee and as to whether he could arrange his affairs in such a manner as to avoid prejudice. When the Finance Act has made it very clear that s. 44B will apply from 1st April, 1976, namely the asst. yr. 1976-77 meaning thereby the accounting year 1975 there is no scope for tampering with the said introduction of s. 44B by referring to s. 172 and the amendments to s. 172 of the Act. We are clearly of the opinion that the two sections act in different areas and circumstances and there is no scope for reading its amendments together. There is a clear dichotomy between these two sections and it should be kept in mind. We do not also agree with the Tribunal that sub-s. (7) of s. 172 will become otiose, by introduction of s. 44B of the Act w.e.f. 1st April, 1976. We have already mentioned that s. 172 of the Act is applicable only in respect of occasional shipping business and where the non-resident is anxious to move his ship away from the port by paying the amounts as demanded under s. 172(4) of the Act. It may be that to some extent, the introduction of s. 44B dilutes the necessity for making an option under sub-s. (7) of s. 172 of the Act. In our opinion that will not go to the extent of saying that s. 44B cannot be applied for the asst. yr. 1976-77 relatable to the accounting year 1975.
10. In this view of the matter, we answer the question of law referred to us in the negative and in favour of the Revenue.