Bombay High Court
Deputy Commissioner Of Income-Tax vs Geoservices Eastern Inc. on 6 June, 1995
Equivalent citations: [1995]55ITD227(MUM)
ORDER
Per M. K. Chaturvedi, JM - This appeal by the revenue is directed against the order of the Commissioner of Income-Tax (Appeals) - XVIII, Bombay and pertains to the assessment year 1986-87.
2. Briefly the facts : Assessee is a non-resident company. It was incorporated in the State of Panama. The assessee-company was engaged in the business of providing services for the work of mud and well logging in connection with prospecting for, or extraction of production of, mineral oils. During the relevant assessment year, assessee executed contract for OIL AND NATURAL GAS COMMISSION (ONGC), and CHEVRON OIL COMPANY OF INDIA LTD.
The income was offered for taxation on the basis of the following statement of contract revenues :
Contract No. US $
1. BOP/SP-PDN/SCON-OPS/30/82 154,890
2. BOP/STR/IMP/GEOL/3/83/B-130 551,662
3. BOP/SP/SCON-OPS/PTS-WLS-CS/KGC(WB)/83-84 505,418
4. GO-277 SO6425 168,489
5. BOP-SP-PDN/SCN-OPS/T-II/85-86 101,638 14,82,097
3. Audit report reflected the amount of gross receipts during the year at US $ 19,93,282. Assessee was asked to explain the reason for difference. It was stated that difference arose as because income offered for taxation was computed on the basis of cash system of accounting. In the audit report amount was reflected on the accrual basis. That is how the difference arose. The Assessing Officer did not accept the system followed by the assessee. Reference was made to the prescription of section 44BB of the Income-tax Act, 1961. It was stated that as per the scheme of section, the income has to be taxed on accrual basis only. He, therefore, brought to tax the amount of gross receipt as reflected in the audit report US $ 19,93,282. The CIT(A) reversed the order of the Assessing Officer.
4. Shri A. P. Pawar, learned Departmental Representative appeared before us. Our attention was invited on the prescription of section 44BB of the Act. It was contended that as per the scheme of this section, it is not open for the assessee, to offer the receipts on cash basis. Section 44BB is a special provision and it prevails over the general provisions. There is no requirement of maintaining the regular books of account under section 44BB. It was added that there is nothing on record to show that the assessee maintained the regular books of account. The choice of system can be preferred only when the assessee maintains the books of account.
According to Sri Pawar, a clear mandate is given in the section as to the charge of receipts. These are to be taxed on accrual basis. The question, therefore, apropos the choice of method does not arise.
Reference was made to the Heydons Rule to find out the intention of the Legislature in bringing out section 44C.
In explaining the meaning of the word "or" as appeared in sub-section 2(a) of section 44BB, our attention was invited on pages 232-234 of Maxwell on Interpretation of Statutes.
5. Sri. B. K. Khare, learned counsel for the assessee appeared before us. It was stated that the assessee in the preceding years followed cash system of accounting. This cannot be disturbed. There is no stipulation in section 44BB that the assessee must declare the income on accrual basis. According to Sri Khare, the language of section 44BB is plain and simple. Therefore, no rule is required to make interpretation of the provision. As there is no mandate in the section to declare the income on accrual basis it is open to the assessee to follow the system of his choice. Since, in past, the assessee offered income on cash basis, it is incumbent on the Assessing Officer to accept the same system. He cannot propose any modification in the system. According to Sri Khare, the word "or" used in section 44BB is to be understood in the ordinary sense.
Sri Khare stated that non obstante clause in section 44BB, is qua sections 28 to 41 and sections 43 and 43A. This section does not prevail over section 145 which speaks about the method of accounting.
6. Learned counsel invited our attention on section 5(2) of the Act. It was submitted that section 44BB is not a charging section. Therefore, the right of the assessee, apropos, the choice of method of accounting cannot be tinkered and tailored. Chargeability in the instant case cannot be said to be hinges upon accrual system.
7. We have heard the rival submissions in the light of material placed before us and precedents relied upon. We regard the solitary point, persuasively presented by Sri B. K. Khare, deserving of a speaking order. The short question neatly identified by Sri Khare is, whether within the sweep of section 44BB of the Income-tax Act, 1961, it is open for the assessee to follow the cash system of accounting ? Section 44BB prescribes a special provision for the computation of income of non-resident derived from the business of exploration, etc., of mineral oils. This section was inserted by the Finance Act, 1986 (11 of 1987) with retrospective effect from 1st April, 1983. This reads as under :
"44BB. (1) Notwithstanding anything to the contrary contained sections 28 to 41 and sections 43 and 43A, in the case of an assessee being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (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-section (1) shall be the following, namely :-
(a) 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 provision of services and facilities in connection with, or supply of plant and machinery on production of, mineral oils in India; and
(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India."
8. Sri Pawar made a reference to the Heydons rule. It is a sound rule of construction of a statute. It was firmly established in England as far back as 1584 when in Heydons case [1584] 3 Co. Rep. 7a it was decided that :
"... for sure and true interpretation of statutes in general ... four things are to be discerned and considered :
(i) what was the common law before making of the Act;
(ii) what was mischief and defect for which the common law did not provide;
(iii) what remedy the Parliament hath resolved and appointed to cure the disease of the Common Wealth; and
(iv) the true reason of the remedy; and then the office of all the judges is always to make such construction as shall suppress mischief and advance the remedy."
9. Testing the section on the touchstone of Heydons Rule, we find that prior to the insertion of section 44BB good many complications were involved in the computation of the taxable income of a non-resident tax-payer engaged in the business of providing services and facilities in connection with or supply of plant and machinery on hire, used or to be used in the exploration and exploitation of mineral oils.
Due to the complicated and cumbersome procedure for the computation of the taxable income, the interest of revenue suffered.
As a measure of simplification section 44BB was inserted in the Income-tax Act, providing for determination of income of such tax-payer at 10 per cent of the aggregate of certain amounts. It would be appropriate to quote here the relevant portions from the Memorandum explaining the provisions in the Finance Bill, 1987 :
"New provisions for computation of taxable income from activities connected with exploration of mineral oils.
28. The computation of the taxable income of a taxpayer engaged in the business of providing services and facilities in connection with, or supplying plant and machinery on hire, used or to be used in the exploration for, and exploitation of, mineral oils involved a number of complications.
As a measure of simplification, the Bill seeks to insert a new section 44BB in the Income-tax Act providing for determination of income of such taxpayers at ten per cent, of the aggregate of certain amounts. The amounts in respect of which the provisions will apply would be the amounts paid or payable to the taxpayer or to any person on his behalf whether in or out of India, on account of the provision of such services or facilities or supplying plant and machinery for the aforesaid purposes. This amount will also include the amounts received or due to be received in India on account of such services or facilities or supply of plant and machinery.
The aforesaid amendment will not, however, apply to any income to which the provisions of section 42, 44D, 115A or 293A of the Income-tax Act apply.
The proposed amendment will take effect retrospectively from 1st April, 1983 and will accordingly, apply in relation to the assessment year 1983-84 and subsequent years." [165 ITR (St.) 161-162]
10. We further quote from the Financial Bill, 1987 : Notes on clauses :
"Clause 11 seeks to insert a new section 44BB in the Income-tax Act.
Under the proposed provisions, the income of an assessee engaged in the business of providing services and facilities in connection with, or supplying plant and machinery on hire used or to be used in, the exploration for and exploitation of mineral oils will be determined at 10 per cent of the aggregate certain amounts. The amounts in respect of which the provision will apply would be the amounts paid or payable to the assessee or to any person on his behalf whether in or out of India, on account of the provision of services or facilities in connection with, or the supply of plant and machinery on hire used or to be used in the exploration for and exploitation of mineral oils in India. The amount will also include the amounts received or deemed to have been received in India by or on behalf of the assessee on account of such services or facilities or the supply of plant and machinery on hire in respect of the exploration for and exploitation of mineral oils outside India.
This amendment will take retrospective effect from 1st April, 1983, and will, accordingly, apply in relation to the assessment year 1983-84 and subsequent years." [165 ITR (St.) 125]
11. As per Maxwell, in ordinary usage "And" is conjunctive and "or" disjunctive. But to carry out the intention of the Legislature, it may be necessary to read "and" in place of the conjunction "or" and vice versa. Conversely, the Court may substitute "and" for "or".
12. As per the scheme of section 44BB assessee is not required to maintain the regular books of account. We did ask specifically this question at the time of hearing that whether the assessee is maintaining books of account ? No clear-cut reply was given to this question. Since, there is no mandate in the section, it is not necessary to maintain the regular books of account. We do not know whether the assessee is maintaining the books of account. It is open for the assessee to adopt the system of accounting of his choice only when he maintains the books of account. If there are no books of account no question arises in regard to the choice of methods. Section 145 is, therefore, not relevant for deciding the case of the assessee.
13. Section 44BB begins with a non obstante clause. Sub-section (2)(a) of section 44BB deals with the amount paid or payable to the assessee. The language of the section indicates that receipts are to be taxed on the accrual basis. This section was inserted by the Finance Act, 1987. It is a piece of retroactive legislation and effect was given from 1-4-1983. Therefore, during the relevant assessment year mandate of section is to be followed. As per the section, the sum equal to 10 per cent of the aggregate of the amounts specified in sub-section (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-section (2) deals with the amounts paid or payable whether in or out of India and also the amount received or deemed to be received in India. This, in our opinion, refers to the amount received on accrual basis. We, therefore, uphold the order of the Assessing Officer and reverse the order of the CIT(A) on this count.
14. In the result, the appeal of the revenue stands allowed.