Income Tax Appellate Tribunal - Mumbai
Kec International Ltd. vs Income-Tax Officer on 28 October, 1993
Equivalent citations: [1994]51ITD178(MUM)
ORDER
V.K. Sinha, Accountant Member
1. These two appeals filed by the assessee are being consolidated for the sake of convenience as common points are involved.
2. The appeals have been filed by the assessee against a consolidated order of the Commissioner of Income-tax, passed under Section 263, of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), holding that the assessment orders were erroneous and prejudicial to the interests of the revenue in respect of allowance of foreign tax liability. The foreign tax liability in question amounted to Rs. 2,11,91,152 for assessment year 1982-83 and Rs. 2,51,27,084 for assessment year 1983-84.
3. The Commissioner examined the assessment orders for the two years and was of the prima facie opinion that they were erroneous and prejudicial to the interests of the revenue since deductions of foreign tax liability were claimed and wrongly allowed to the above extent. He, therefore, issued notices to show cause why orders under Section 263 of the Act should not be passed.
4. The assessee submitted, in the first instance, that the foreign tax liability had been correctly allowed on merits. It was urged that the expression 'profits and gains of business or profession', referred to in Section 40(a)(ii) of the Act, has reference only to profits and gains as determined in accordance with Section 29 of the Act and that any rate or tax levied upon profits calculated in another manner is outside the purview of Section 40(a)(ii) of the Act. Reliance was placed on the following decisions:
(i) CIT v. Gurupada Dutta [1946] 14 ITR 100 (PC);
(ii) Jaipuria Sarrila Amalgamated Collieries Ltd. v. CTT (1971] 82 ITR 580 (SC);
(iii) Simbholi Sugar Mills Ltd. v. CIT [1962] 45 ITR 125 (All.); and
(iv) TTO v. South East Asia Shipping Co. (P.) Ltd. [IT Appeal No. 223 (Bom.) of 1974-75] (Tribunal).
5. It was the assessee's contention that the taxes levied by the authorities in Libya and Iran were not based on actual profits but were computed in a manner different from that prescribed under Section 29 of the Act.
6. It was next submitted that on general principles also, only the net income after the deduction of foreign tax could be treated as taxable income since that only was the real income. Case law in support of this contention was also cited.
7. The assessee also submitted that in the course of appeal proceedings before the CIT(A) in assessee's own case for sur-tax assessment year 1982-83, the CIT(A) has held that contractors' tax levied in Iran, as a percentage of total receipts, cannot be treated to be a tax in respect of income.
8. The Commissioner was not satisfied with the replies and gave his reasons for the same. In this regard, he mentioned that for assessment years 1977-78 and 1978-79, similar claims were disallowed in the assessment orders. The CIT(A) allowed the claims but appeals had been filed by the department which were pending before the Tribunal.
9. In response to a query from the Commissioner, the assessee stated that in the course of assessment proceedings, the merits of the claim were explained in detail to the Assessing Officer in several letters but the Commissioner took a view that it was incumbent upon the Assessing Officer to make further enquiries and investigate the full facts regarding the claims, particularly when the departmental appeals were pending before the Tribunal on the same issue for assessment years 1977-78 and 1978-79. Some of the items he mentioned where further enquiries were necessary were the method of accounting regularly employed by the assessee for making provision in accounts in respect of foreign tax; and was it on the basis of liability estimated on the basis of relevant foreign tax laws or on the basis of assessment orders and demand notices received during the accounting year? He mentioned some figures for assessment year 1982 -83 according to which, the assessment of foreign tax made by the Finance Ministry in Iran came to Rs. 94,89,640 whereas deduction had been claimed for a much larger amount of Rs. 1,05,97,202. He also mentioned what appeared to be a duplicate claim for assessment year 1983-84 amounting to Rs. 9,55,967. It also appeared that some of the claims related to other years as well. It was clarified by the Commissioner that these were only a few examples. He, therefore, came to the conclusion that in absence of proper enquiries, the two assessment orders were erroneous and prejudicial to the interests of the revenue, relying on the following decisions:
(i) Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi);
(ii) Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC);
(iii) Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC);
(iv) Thalibai F. Jain v. ITO [1975] 101 ITR 1 (Kar.); and
(v) Addl. CIT v. Mukur Corporation [1978] 111 ITR 312 (Guj.).
10. After invoking jurisdiction under Section 263 of the Act in the above manner, the Commissioner proceeded to examine the question on merits. He observed that the primary question was whether the claims of deduction of foreign taxes could be said to be 'laid out or expended wholly and exclusively for the purposes of business', in accordance with Section 37 of the Act. In this connection, he took a view that income-tax is not paid for the purpose of earning the profits but on the contrary, it is paid out of the profits. In other words, even the foreign taxes were merely a charge on the income and, therefore, an application of the income after it has been earned. He, therefore, came to the conclusion that the foreign taxes were not deductible under Section 37 of the Act. He found support for his conclusion from the following decisions:
(i) S. Inder Singh Gill v. CIT [1963] 47 ITR 284 (Bom.);
(ii) CFT v. Indian Overseas Bank Ltd. [1963] 50 ITR 725 (Mad.);
(iii) Molins of India Ltd. v. CIT [1983] 144 ITR 317 (Mad.); and
(iv) A.V. Thomas & Co. Ltd. v. CIT [1986] 159 ITR 431 (Ker.)(FB).
11. When discussing the above cases, the Commissioner pointed out that it had been held in the last two cases that it is immaterial whether the amount claimed as deduction comes within the express prohibition contalned in Section 40(a)(ii) of the Act, or not since it is not admissible in the first place as a deduction under Section 37 of the Act.
12. The Commissioner, thereafter, distinguished the cases of Gurupada Dutta's case (supra) and Jaipuria Samla Amalgamated Collieries Ltd.'s case (supra), on the ground that it had been specifically conceded that the levy was not on the profits and gains. The two decisions were, therefore, to be understood in that limited and specified context and did not support the assessee's case.
13. The Commissioner, thereafter, examined the assessee's plea that the claims of foreign taxes did not represent any sum paid on account of any rate or tax levied on the profits and gains of the business. He observed that in Libya, income was estimated at a flat rate of 8 per cent on receipts from supply contracts and @ 10 per cent on erection contracts. Similarly, income in Iran was estimated @ 8 per cent on receipts from supply contracts. In this context, he examined also the provisions of Articles 76, 79, 134, 166 and 167 of the Direct Taxes Act of Iran relating to Contractors' Tax, Corporate Tax, Municipal and Chambers of Commerce Tax and, came to the conclusion that the foreign taxes cannot be allowed as deduction merely on the plea that the tax in question was levied on an estimated percentage of the turnover.
14. The Commissioner also held that the decision of the Bombay High Court rejecting a reference application under Section 256(2) of the Act in the case of South East Asia Shipping Co. (P.) Ltd. 's case (supra) could not be said to have laid down any principle of law, since all that had been held was that no referable question of law arose from the decision of the Tribunal.
15. For the above reasons, the Commissioner held that the assessment orders were erroneous insofar as they were prejudicial to the interests of the revenue as the Assessing Officer had wrongly allowed deductions of the claim of foreign tax liabilities without making proper enquiries. He directed that the foreign tax liabilities should be added back and the total income enhanced accordingly. Insofar as assessment year 1982-83 was concerned, he gave a further direction to recompute the double taxation relief under Section 91 of the Act admissible to the assessee and allow such additional relief as may be admissible according to law. However, in the facts of the case, no such further double taxation relief was due for assessment year 1983-84. The assessee is aggrieved by the above decision of the Commissioner and is now in appeal before us.
16. The business of the assessee-company is that of manufacture of electricity transmission towers and of construction and laying down of electricity transmission lines. The company had contracts of laying down and construction of electrical transmission lines in India as well as in Iran and Libya. The learned counsel for the assessee submitted before us that as far as Iran was concerned, the assessee was subjected to the following types of foreign taxes governed by various Articles of the Iran Direct Taxes Act:
SI. Description Article of No. Iran Tax Law 1. Corporate Tax or Project Tax 134 2. Contractors' Tax 76 & 79 3. Municipal and Chambers of Commerce Tax 166 & 167
17. As far as Libya was concerned, the assessee was subjected to 'income-tax' which was stated to be similar to Corporate Tax, or Project Tax and a "Jehad Tax" which was only a surcharge on the above.
18. The learned counsel for the assessee has submitted a preliminary obj ection which will be dealt with first. Our attention has been invited to the assessment order in assessee's own case for assessment year 1979-80, dated 18th August, 1983. In para 10 of the order, it has been observed that claims for deduction of foreign taxes had been disallowed in the assessment orders for assessment years 1977-78 and 1978-79. However, the CIT(A) had decided the appeal for assessment year 1978-79 and allowed the foreign taxes as deduction treating them as being outside the scope of Section 40(a)(ii) of the Act. He accordingly allowed deduction of the foreign taxes in the years under consideration following the order of the CIT(A). The assessment orders for the years under consideration, i.e., assessment years 1982-83 and 1983-84, were passed in March 1985 and March 1986 and on the same lines, the Assessing Officer allowed deduction of foreign taxes. In other words, the Assessing Officer had only followed the decision of the CIT(A) for assessment year 1978-79. He submitted that when a decision of a higher appellate authority was being followed, the assessment order could not be called "erroneous" within the meaning of Section 263 of the Act. Reliance was placed on the decision of the Calcutta High Court in the case of Russel Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 (Cal). This decision has been followed by the Tribunal in the case of Orissa State Financial Corporation v. ITO [1986] 17 ITD 100 (Ctk.).
19. In this connection, the learned counsel also invited our attention to the decision of the Madras High Court in the case of Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129. It was held in that case in connection with the scope of the power of a Commissioner under Section 263 of the Act, that the scope is not to set aside merely unfavourable orders and to bring to tax some more money, or, to get at sheer escapement of revenue. The prejudice that is contemplated under Section 263, of the Act, the court said, is prejudice to the income-tax administration as a whole. Section 263 of the Act, the court held, is to be invoked only for the purpose of setting right distortions and prejudices to the revenue which is a unique conception and has to be understood in the context of and in the interest of revenue administration. This decision was followed subsequently by the Tribunal in the case of BBC Brown Boveri & Co. Ltd. v. ITO [1989] 31 ITD 408, by Bombay Bench 'A'. According to him, these decisions also supported his contention that the jurisdiction had not been invoked validly.
20. The learned Departmental Representative, on the other hand, submitted that the jurisdiction had been invoked validly and, in this connection, pointed out that the Assessing Officer himself had filed a second appeal against the order of the CIT(A) for assessment year 1978-79 well before the assessment orders for the two years under consideration were passed. In these circumstances, according to him, the Assessing Officer should have disallowed the claim for foreign taxes despite the decision of the CIT(A) in favour of the assessee.
21. We have heard the rival submissions carefully. Before discussing the cases relied upon by the learned counsel for the assessee, it will be useful to state briefly the procedure for assessments, appeals and revision under the Act. The Assessing Officer is both an investigating officer and a quasi-judicial authority computing the total income under the provisions of the Act. Although the assessee can file an appeal against the assessment order under Section 246 of the Act to the DCIT(A), or, CIT(A), as the case may be, no such appeal can be filed against the assessment order by the department. However, both the assessee and the department are entitled to file appeals against the orders of the DCIT(A), or, the CIT(A), as the case may be, under Section 253 of the Act to the Income-tax Appellate Tribunal. In the absence of any provision for the department to file an appeal against the assessment order, a provision has been made under Section 263 of the Act for revision by the Commissioner of orders, which are erroneous and prejudicial to the interests of the revenue. In the circumstances, proper administration of the Income-tax Department requires that if there is an appellate order which has not been accepted by the Department, then, for the sake of keeping the matter alive and protecting the interests of the revenue, the Assessing Officer should follow the departmental view, but not insist on collection of disputed taxes. Such a procedure would not be necessary for the first appellate authorities since there is a provision for filing of appeals, both by the department and the assessee against their orders. In case the Assessing Officer does not follow the above-mentioned administrative procedure and follows the order of the first appellate authority, then the remedy available for the revenue would be, for the Commissioner to invoke his powers of revision under Section 263 of the Act. With these preliminary remarks, we will examine the matter further now.
22. It has to be seen first, whether there is any evidence that the Assessing Officer has, in fact, followed the order of the first appellate authority for assessment year 1978-79. We have seen the assessment order for assessment year 1982-83 carefully and the learned Departmental Representative has also brought to our notice that the order does not contain even a single sentence referring to the deductility of foreign taxes, let alone any reference to the decision of the first appellate authority for assessment year 1978-79. In the circumstances, how can it be said that the Assessing Officer was following the order of the CIT(A) for assessment year 1978-79? The learned counsel for the assessee has submitted in this regard that the discussion is available in the assessment order for assessment year 1979-80 and, it is not necessary to keep on repeating the reasons. We do not find force in this contention. The assessment order for assessment year 1979-80 was passed on 18th August, 1983, whereas the assessment order for assessment year 1982-83 was passed in March 1985 and the order for assessment year 1983-84 was passed in March 1986. Each order is a separate order and it cannot be presumed, in absence of any indication whatsoever, that the reasons given in another order passed two-three years earlier, have been automatically incorporated in the fresh orders. Thus, we hold that although it is a fact that deduction for foreign taxes have been allowed, evidence is not sufficient to hold that the basis for such an action was the appellate order of the CIT(A) for assessment year 1978-79.
23. For the sake of argument, even if it is presumed that the Assessing Officer was following the order of the CIT(A) for assessment year 1978-79, we find that the decision of the Madras High Court in the case of Venkatakrishna Rice Co. (supra), which was rendered considerably after the decision of the Calcutta High Court in the case of Russel Properties (P.) Ltd. (supra) is against the assessee and not in its favour. It was explained therein that the prejudice that is contemplated under Section 263 of the Act, is prejudice to the income-tax administration as a whole and has to be employed only for the purpose of setting right distortions and prejudices to the revenue understood in the context of the interests of revenue administration. We have already observed above that in cases where further appeal has been filed by the department against the order of the first appellate authority, it is in the interests of revenue administration to follow the departmental view in pending assessments in absence of any provision for an appeal by the department against an assessment order.
24. For the above reasons, we are unable to accept the preliminary contention of the learned counsel for the assessee that the assessment order was not erroneous and, therefore, Section 263 of the Act could not be invoked.
25. The learned counsel for the assessee has also submitted a second preliminary objection which will now be dealt with. Our attention was invited to the order under Section 263 of the Act where reliance has been placed on the decision of the Delhi High Court in the case of Gee Vee Enterprises (supra) and some other cases to come to the conclusion that the Assessing Officer's failure to make enquiries and further investigate the facts in the return would make the assessment order erroneous. Our attention was further invited to the observations of the Commissioner in this regard which have already been narrated above. The learned counsel submitted that all necessary data for computation of foreign tax was made available during the assessment proceedings by letters from time to time, copies of which are in the paper book and, therefore, it could not be said that the Assessing Officer had not applied his mind. In the circumstances, itwas argued that the assessment order could not be called erroneous and the provisions of Section 263 of the Act could not be invoked.
26. The learned Departmental Representative, on the other hand, took us through the assessment order to show that there was no discussion whatsoever in it to show that the Assessing Officer had applied his mind. The learned counsel for the assessee again referred to the assessment order for assessment year 1979-80 which we have described above.
27. After carefully considering the rival submissions, we are unable to accept this preliminary objection either. It may be that data was made available to the Assessing Officer but there is nothing to indicate that the Assessing Officer applied his mind to it in the manner in which the Commissioner has described. It is worth repeating that there is not even a single sentence in the assessment order discussing the deduction of foreign taxes. We, therefore, reject this second preliminary objection also.
28. Coming to the merits, the learned counsel for the assessee submitted before us that a similar issue had been considered by the Tribunal in assessee's own case for assessment year 1978-79 in ITA No. 2413/Bom/1982, dated 17th July, 1989. It had been held that corporate tax or project tax was a taxlevied on the income computed under the Iranian Law and was not deductible at all. However, the matter was set aside to the Assessing Officer as regards contractors' tax and municipal and Chambers of Commerce tax. Subsequently, the Assessing Officer had passed an order on 20th July, 1992 giving effect to the order of the Tribunal and had allowed deduction for the same.
29. It was further submitted that the Tribunal had considered a similar issue in assessee's own case for assessment year 1982-83 in surtax appeal No. 71/Bom/1986, dated 5th April, 1991. Under the Companies (Profits) Sur-tax Act, 'chargeable profits' are computed after making certain adjustments to the, total income as per income-tax assessment. One of the adjustments is the deduction of income-tax paid. It was held by the CIT(A) that the contractors' tax levied in Iran as a percentage of total receipts could not be treated to be a tax in respect of income. This finding was contested in appeal by the assessee, but the finding was upheld by the Tribunal and the assessee's contention rejected. The learned counsel for the assessee submitted before us that as far as the contractors' tax was concerned, the matter should, therefore, be treated as concluded in favour of the assessee as far as the income-tax appeal was concerned.
30. The learned counsel for the assessee further invited our attention to the decision of the Tribunal, Bombay Bench 'A', in the case of Builders International (India) [IT Appeal Nos. 6103 & 6104 (Bom.) of 1985, dated 31-1-1990]. It had been held that foreign tax levied by the Government of Qatar in respect of contract of construction was not within the purview of Section 40(a)(u) of theAct, relying on the decision of the Tribunal in the case of South East Asia Shipping Co. (P.) Ltd. (supra) and rejection of reference under Section 256(2) of the Act, by the Bombay High Court. The foreign taxes were, therefore, held to be deductible in that case.
31. Copies of the orders of the Tribunal in the case of South East Asia Shipping Co. (P.) Ltd. (supra) in ITA No. 416/Bom./1975-76 were also filed before us.
32. It was next submitted that in the case of Tata Sons Ltd. [IT Appeal No. 5708 (Bom.) of 1982 and ITA No. 5790 (Bom.) of 1983] for assessment year 1979-80, it had been held by the Tribunal that the CIT(A) had rightly allowed deduction on account of local tax deducted out of the consultancy fees received by the assessee in that case from a foreign party. The reference applications under Section 256(1) of the Act for the said two years were also rejected in RA Nos. 305 &306/Bom./1985, dated 14th January, 1986. The copies of these orders were filed before us. It was further submitted that recently the Bombay High Court had rejected an application under Section 256(2) of the Act in the same matter and a copy of the newspaper report in Times of India dated 29th April, 1993 was placed before us. However, itwas stated that a copy of the judgment itself was not available.
33. In this connection, it was further submitted by the learned counsel for the assessee that an application under Section 256(2) of the Act is made to the High Court if the applicant is not satisfied 'with the correctness of the decision of the Appellate Tribunal' and, therefore, it would follow that where the High Court declines to direct the Tribunal to state the case and to refer it to the High Court, then the High Court has approved the correctness of the decision of the Tribunal. Reliance was placed on the decision of the Special Bench of the Tribunal in the case of Samir Diamonds Exports (P.) Ltd. v. ITO [1988] 25 ITD 73 (Bom.).
34. Lastly, it was submitted that the expression 'profits or gains of any business or profession', referred to in Section 40(a)(ii) of the Act, has reference only to profits and gains as determined in accordance with Section 29 of the Act and that the foreign tax which had been calculated in a manner otherwise than that provided under Section 29 of the Act, cannot be disallowed under Section 40(a)(ii) of the Act. Reliance was placed on the decision of the Privy Council in the case of Gurupada Dutta (supra) as well as on the decision of the Supreme Court in the case of Jaipuria Samla Amalgamated Collieries Ltd. (supra).
35. As far as the taxes levied in Libya are concerned, it was submitted that they were similar to corporate tax or project tax levied in Iran and the matter may be dealt with accordingly.
36. For the above reasons, it was submitted that the foreign taxes under consideration should be allowed as a deduction.
37. The learned Departmental Representative, on the other hand, relied on the order of the Commissioner under Section 263 of the Act. He emphasised further that the Tribunal decision in assessee's own case for assessment year 1978-79 was in favour of the department for income-tax proceedings and that should be followed in preference to the Tribunal decision for the same assessment year in assessee's case for surtax proceedings. According to him, the proceedings under the Companies (Profits) Surtax Act were in regard to a different law and could not be made applicable here. He also stated that the decision given by the Tribunal in assessment year 1978-79 was only with regard to corporate tax or project tax and, therefore, the matter regarding contractors' tax, as well as municipal tax was open and the order giving effect to the order of the Tribunal by the Assessing Officer could not be equated with an order of the Tribunal.
38. The learned Departmental Representative further submitted that an application to the High Court under Section 256(2) of the Act can be rejected for several reasons and it did not automatically follow that the correctness of the decision of the Tribunal had been approved. In this connection, he invited our attention to the copies of the decisions of the Tribunal in the case of South East Asia Shipping Company (P.) Ltd. (supra), where it had been held that income-tax paid in foreign countries is an expenditure incurred by the assessee wholly and exclusively for the purpose of business and was, hence, allowable under Section 37 of the Act. However, the Madras High Court had held recently in the case of CIT v. Kerala Lines Ltd. [1993] 201 ITR 106 that taxes paid in foreign ports were application of income and were not necessary for carrying on of business. In the circumstances, it was further held that it was not allowable as a deduction under Section 37 of the Act. He submitted that this decision of a High Court should be followed in preference to a decision of the Tribunal.
39. The learned Departmental Representative further referred to the decision of the Tribunal in the case of Tata Sons Ltd. (supra) and the rejection of application under Section 256(1). In this regard, he pointed out that the nature of business by the assessee in a foreign country was that of consultancy and quite different from construction work carried out by the assessee in the case before us. According to him, the ratio of the decision of the Tribunal in the case of Tata Sons Ltd. (supra) was not applicable. Regarding the newspaper report about the rejection of an application under Section 256(2), he reiterated that the rejection of the application did not amount to the approval of the correctness of the decision of the Tribunal. He added further that in the absence of the text of the decision of the High Court, it was not possible to draw any further conclusion from the newspaper report.
40. For the above reasons, it was submitted that deduction for foreign taxes should not be allowed.
41. We have considered the rival submissions carefully. In order to appreciate the dispute before us, we would first reproduce the relevant extract of Section 40(a)(ii) of the Act hereunder:
40. Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-
(a) in the case of any assessee-
(i)** ** **
(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.
42. It is evident from the above that the question of amounts not being deductible by virtue of Section 40(a)(ii), of the Act will arise only if the amount is otherwise deductible under Sections 30 to 39 of the Act. In the present case, the deduction, if any, can be admissible only under Section 37 of the Act under which it should be laid out or expended 'wholly and exclusively for the purposes of the business'. In the circumstances, any discussion regarding deduction under Section 40(a)(ii), of the Act will be relevant only if the amount is first found to be deductible under Section 37(1) of the Act. This conclusion finds support from the decision of the Madras High Court in the case of Kercda Lines Ltd. (supra) at pages 114 and 115 as under:
We may now proceed to consider the second question, the answer to which would depend upon the answer to the first question. Under Section 40(a)(ii) of the Act, notwithstanding anything to the contrary in Sections 30 to 39 of the Act, any sum paid on account of any rate of tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains, shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession'. We have earlier held that the income-tax payments made by the assessee at the foreign ports are not allowable deductions under Section 37 of the Act. Section 40 of the Act provides for disallowing claims for deduction in computing the income chargeable under the head 'Profits and gains of business or profession' in the cases provided thereunder, despite the provisions of the contrary in Sections 30 to 39 of the Act. Inasmuch as we have earlier held that the income-tax payments made by the assessee in the foreign ports would not qualify for deduction under Section 37 of the Act, it would really be unnecessary to consider whether those amounts shall not be deducted under Section 40(a)(ii) of the Act. However, in view of the strong reliance placed by learned counsel for the assessee upon the decision of the Supreme Court in Jaipuria Samba Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580, we would like to point out that in that decision, there was no dispute regarding the applicability of Section 10(2)(xv) of the Indian Income-tax Act, 1922 [now Section 37(1) of the Act], and, therefore, it became necessary further to consider the applicability of Section 10(4) of the Indian Income-tax Act, 1922, comparable to Section 40(a)(ii) of the Act. Since we have held that Section 37 of the Act is inapplicable, there is no need for us to further consider this question and we refrain from rendering an answer on the second question.
43. We will, therefore, now proceed to consider whether the foreign taxes can be allowed as deduction under Section 37(1) of the Act. For this purpose, it is first necessary to ascertain whether the taxes are of the nature of income-tax, or not. As far as corporate tax, or project-tax at Iran is concerned, it is governed by Article 134 of the Iran Taxation Laws, as noted by the Tribunal in its order in assessee's own case, for assessment year 1978-79. A perusal of Article 134 shows that there is a graded rate of taxation on the taxable income as the following extract will show:
"Amount of annual Taxation
taxable income rate
Upto Rls. 400,000 15%
Upto Rls. 600,000 18% on sums in
excess of Rls. 400,000
Upto Rls. 800,000 20% on sums in
excess of Rls. 600,000
.... .... ....
.... .... ....
.... .... ....
Over Rls. 50000,000 60% on sums in
excess of Rls. 50000,000
44. In view of the above, we concur fully with the decision of the Tribunal in assessee's own case for assessment year 1978-79 that corporate tax or project tax is a tax on income.
45. In this regard, it may be clarified that the Tribunal's decision under the Companies (Profits) Sur-tax Act in assessee's own case for assessment year 1982-83 relates to contractors' tax and, therefore, there is no contradiction with the decision of the Tribunal for assessment year 1978-79 in income-tax appeal.
46. Coming to contractors' tax, the Tribunal considered the matter in assessee's own case for assessment year 1982-83 under the Companies (Profits) Sur-tax Act, as already noted above. It was observed that sur-tax was in absence levied on the super profits of a company. Starting from total income, as per income-tax assessment, certain adjustments were made to arrive at the 'chargeable profits' and one of the important adjustments thereto was deduction of income-tax paid. It was in this context that the nature of contractors' tax levied in Iran was examined and, after considering Article 76 of the Iran Taxation Laws, the Tribunal came to a decision that contractors' tax was not a tax in respect of income and, therefore, could not be deducted in the computation of chargeable profits.
47. Firstly, we are of the opinion that even under the Companies (Profits) Sur-tax Act, what was under consideration of the Tribunal was similar to the question under consideration before us, i.e., whether the contractors' tax was a tax on income. Secondly, it has to be noted that the Tribunal examined the matter only with reference to Article 76 of Iran Taxation Laws, but Article 79 thereof was not brought to the notice of the Tribunal. Under Article 76, in respect of contracts for any type of construction work, the employers were required to submit a copy of the contract to the local assessment office and withhold, when effecting each payment, 5 1/2 per cent of the amount thereof, to be paid to the local finance office. Thus, it is a provision for tax deduction at source at the time of making payment to the contractor and depositing the same with the Government. There are some provisions governing cases where a copy of the contract is not submitted or if the employer fails to notify the contractors' names etc. In such cases, the amount of tax due "on the taxable income derived from such contract work, which income shall be computed in accordance with the provisions of Article 79, shall be demanded and collected from the employer according to the rates mentioned under Article 134 plus 4 per cent of the sum paid".
Thus, 4 per cent of the sum paid is only an additional sum to be demanded which would not be normally payable if all earlier conditions are satisfied.
48. According to Article 79 of the Iran Taxation Laws, the 'taxable income in respect of operations referred to in Article 76', shall consist of 8 per cent of the annual receipts. It was argued before the Tribunal in the above surtax appeal that there were parallels in the Income-tax Act, 1961, for charging income-tax as a percentage of gross receipts, such as Section 44AC, Section 44BB, Section 44BBA and Section 44BBB and, indirectly through Section 44D also. However, the Tribunal only had Article 76 before it and observed that 4 per cent of the gross receipts was in addition to the tax levied with reference to the total income and, therefore, the above provisions of the Income-tax Act were clearly distinguishable. However, now that Article 79 is also before us and, it covers taxable income in respect of operations referred to in Article 76. We hold that the computation of income at 8 per cent of the annual receipts is quite similar to the quantification of income as a percentage of gross receipts in the above-mentioned Sections of the Income-tax Act, 1961. The conclusion, therefore, is that contractors' tax is also a tax on income.
49. We now come to municipal tax and Chambers of Commerce Tax covered by Articles 166 and 167 respectively of the Iran Taxation Laws. On a perusal of these Articles, it is seen that Article 166 lays down only an additional tax @ 3 per cent "on the taxable income" and Article 167 lays down only an additional tax @ 3 1/2 per thousand 'on the taxable income'. The nomenclature in both cases only signifies the use to which such collections should be put to. In the first case, the proceeds would be paid to the local municipality and, in the second case, would be paid to Chambers of Commerce, etc. The utilisation of the taxes cannot have any bearing on the nature of tax itself which has been clearly described as additional tax on taxable income. Thus, we hold that the municipal tax and Chambers of Commerce Tax are also taxes on income.
50. As far as the taxes in Libya are concerned, it is not disputed before us that the nature of the taxes are similar to corporate tax or project tax in Iran. Thus, following our above decision, we hold that these taxes are also taxes on income.
51. The next question for consideration is whether taxes on income levied in a foreign country are deductible under Section 37(1) of the Act.
52. Several cases had been cited before us in this regard, including some cases mentioned in the order under Section 263 of the Act, which have been relied upon by the learned Departmental Representative. According to the learned counsel for the assessee, a rejection of application under Section 256(2) of the Act, by the High Court should be equated to an approval by the High Court of the correctness of the decision of the Tribunal and, reliance has been placed on the decision of the Special Bench of the Tribunal in the case of Samir Diamonds Exports (P.) Ltd. 's case (supra). We have perused the above decision and find that the proposition laid down by the Special Bench was not as wide as that. What has been observed by the Special Bench is that when an order rejecting an application under Section 256(2) of the Act is a speaking order and reasons in support of the view are given in the said order, the said order of the High Court would be a binding authority for the proposition which is affirmed. In the present case, copies of the orders of the High Court under Section 256(2), of the Act have not been made available to us either in the case of South East Asia Shipping Co. Private Ltd. or in the case of Tata Sons Limited. There is, therefore, nothing to show that the order of the High Court was a speaking order and reasons in support of the view were given in the said order. In the circumstances, the orders under Section 256(2) of the Act cannot be taken to be an affirmation of the correctness of the orders of the Tribunal. Further, we agree with the learned Departmental Representative that the order of the Assessing Officer giving effect to the order of the Tribunal for assessment year 1978-79 in relation to contractors' tax and municipal and Chambers of Commerce tax is not an order of the Tribunal on merits since the Tribunal had only set aside the matter and restored it to the file of the Assessing Officer. Further, the decision of the Tribunal in the case of Builders International (India) Ltd. (supra), where it was held that foreign tax was deductible from the income, has considered only Section 40(a)(ii) of the Act, but not Section 37 of the Act. It has been held in that case that foreign tax was not within the purview of Section 40(a)(ii) of the Act. Thus, this decision does not throw any light on the question presently being considered.
53. The first decision of a High Court to be considered is a decision of the jurisdictional High Court itself, i.e., the Bombay High Court, in the case of S. Indersingh Gill (supra). Here, in the case of a non-resident, it was held that there is no commercial practice or principle under which tax paid on foreign income in the foreign country should be deducted in computing the foreign income for the purpose of ascertaining the total world income under the Income-tax Act, 1961.. The ratio of the decision has been found to be equally applicable to a resident company by the Madras High Court in the case of Kerala Lines Ltd. (supra), at page 113.
54. Next, in the case of Indian Overseas Bank Ltd. (supra), the Madras High Court was considering whether the payment of excess profits tax by an assessee in Ceylon on Ceylon income was an allowable deduction under the Indian Income-tax Act, 1922. It was held that even on general principles, a tax deduction was not expenditure laid out wholly and exclusively for the purposes of earning profits.
55. In the case of A. V. Thomas & Co. Ltd. v. CIT [1986] 159 ITR 431, the Full Bench of the Kerala High Court, after noticing that sur-tax was a charge on income and a levy on the profits and gains of business, held that it was an application of profits and gains of business after they have been earned and was not an allowable deduction under Section 37 of the Act. A plethora of cases was considered by them before coming to the conclusion.
56. Lastly, we have the decision of the Madras High Court, recently reported in Kerala Lines Limited (supra). It was held that taxes paid in foreign ports were only an application of income and not allowable as deduction under Section 37 of the Act. They have quoted with approval, the following passage in Ashton Gas Co. v. Attorney-General [1906] AC 10 (HL), at page 113 of the report, as under:
My Lord, so presented the case appears to me to be perfectly clear. The fallacy has been in arguing as if you can deduct from the income-tax which you have got to pay something which alters what is the real nature of the profit. Now the profit upon which the income-tax is charged is what is left after you have paid all the necessary expenses to earn that profit. Profit is a plain English word; that is what is charged with income-tax. But if you confound what is the necessary expenditure to earn that profit with the income-tax, which is a part of the profit itself, one can understand how you get into the confusion which has induced the learned counsel at such very considerable length to point out that this is not a charge upon the profits at all. The answer is that it is. The income-tax is a charge upon the profits; the thing which is taxed is the profit that is made and you must ascertain what is the profit that is made before you deduct the tax you have no right to deduct the income-tax before you ascertain what the profit is. I cannot understand how you can make the income-tax part of the expenditure. I share Buckley, J.'s difficulty in understanding how so plain a matter has been discussed in all the courts at such extravagant length.
57. In view of the above, we would respectfully follow the ratio of the above High Court decisions, including a decision of the jurisdictional High Court and hold that foreign taxes on income are not deductible under Section 37(1) of the Act since they are only an application of income and not incurred wholly and exclusively for the business.'
58. In view of the above finding, it is not necessary to consider the further question whether the foreign taxes on income are within the purview of Section 40(a)(ii) of the Act. In this regard, we respectfully follow the observations of the Madras High Court in the case of Kerala Lines Ltd. (supra) which have already been described above.
59. In the result, the assessee's appeals for both the years are dismissed.