Kerala High Court
Commissioner Of Income-Tax vs 1. S. R. Patton. (I. T. R. No. 173 Of 1985) ... on 15 December, 1989
Equivalent citations: (1992)92CTR(KER)197, [1992]193ITR49(KER), [1992]65TAXMAN472(KER)
JUDGMENT
K. S. PARIPOORNAN J. - These are connected cases. The Revenue is the applicant at whose instance two questions of law have been referred for the decision on this court in each of these cases. They are as follows :
Income-tax Reference No. 173 of 1985 :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the salary of the assessee was not paid by FACT but by the foreign company, Messrs Davy Powergas Inc. ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the salary and living allowance received by the assessees were not assessable to tax under the Income-tax Act, 1961 ?"
Income-tax Reference Nos. 52 to 55 of 1985 :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the salary of the assesses was not paid by FACT/FEDO but by foreign company, Messers Davy Powergas GmbH., West Germany ?
(2) Whether, on the facts and in the circumstances of this case, the Tribunal was right in holding that the salary and the living allowance received by the assessee were not assessable to tax under the Income-tax Act 1961 ?"
The respondents in these cases - assessees - are foreign technicians in Income-tax Reference Nos. 173 of 1985, Messers Davy Powergas Inc., U. S. A. and FACT Ltd, had entered into an agreement with regard to Cochin Fertiliser Project Phase II expansion of the FACT. The services of the foreign technician (assesses) were made available in FACT. In Income-tax References Nos. 52 to 55 of 1985, FEDO entered into an agreement with Messers. Davy Powergas Limited, West Germany (foreign company) for erection of equipment for Cochin Project Phase II of the FACT and as per the contract, the foreign company sent the assesses in those four cases to India to supervise the erection of equipment. The services of the assessees (foreign technicians) were made available to FACT. In Income-tax Reference No. 173 of 1985, we are connected with the assessment year 1976-77. In Income-tax Reference Nos. 52 to 55 of 1985, we are connected with the assessment year 1973-74 in one case and 1976-77 in the other three cases. The appointment of the various assessees (foreign technicians) were approved by the Government of India. The foreign technicians stayed in India for a short period. As per the terms of the agreement entered into between the FACT Ltd. and the foreign companies in the above cases, substantial amount were paid. From out of the above, the foreign companies paid to each of the assessees a definite sum as salary, which formed only a partition of the amount paid to FACT Ltd., to the foreign companies. The assessees were also given by FACT a living allowance. For example, in Income-tax Reference No. 173 of 1985, the FACT paid to the foreign company an amount of Rs. 6,82,460. The foreign company paid to the foreign technician (assessee) as salary Rs. 1,72,656. The assessee was also paid a living allowance of Rs. 47,934. There were similar payments in varying sums in the other cases also. The Income-tax Officer brought to tax the salaries and living allowances paid to the foreign technicians on the basis that they constituted salary earned in India. In the first appeals, in all the cases, the assessees placed reliance on the decision of the Gujarat High Court in CIT v. S. G. Pgnatale [1980] 124 ITR 391 and claimed that the salary and living allowance did not constitute salary earned in India. In the appeal filed by the assessee which is the subject-matter of Income-tax Reference No. 173 of 1985, the Commissioner of Income-tax (Appeals) rejected the said plea. In the other four cases, the Appellate Assistant Commissioner placed reliance on the decision of the Gujarat High Court in S. G. Pgnatales case [1980] 124 ITR 391 and held that the salaries received by the four assessees in those appeals were outside India from their employer and the said salary and the living allowance received in India from (FACT or FEDO) were not liable to tax. The assessee filed the appeal in the case arising from Income-tax Reference No. 173 of 1985 before the Tribunal. The Revenue filed appeals in the other cases -Income-tax Reference Nos. 52 to 55 of 1985. The Tribunal rejected the plea of the Revenue that the assessees were appointed by the FACT Ltd. It was also held that the salaries were paid by foreign companies and not by FACT Ltd. The foreign technicians were deputed by the foreign company to supervise the work under the terms of the agreement between the foreign company and FACT Ltd. In the light of the decision of the Gujarat High Court in S. G. Pgnatales case [1980] 124 ITR 391, the Tribunal held that the salaries of the assessees were not earned in India. Following the same decision, the Tribunal also held that the living allowance, though paid to the technicians directly by FACT Ltd., were given to the assessees only as a reimbursement, rather than as a personal advantage, and so the living allowance paid was not a perquisite. It was also not "salary" because it was neigher a fee, nor commission, nor a perquisite, in view of salary or wages and the amount received by way of living allowance by various foreign technicians was not assessable. The observations of the Gujarat High Court in S. G. Pgnatales case [1980] 124 ITR 391 were relied on to fortify the said view. It thereafter at the instance of the revenue that the two questions of law (extracted hereinabove) in the two sets of cases - one in income-tax Reference No. 173 of 1985 and the other in Income-tax References Nos. 52 to 55 of 1985 - have been referred for the decision of this court.
We heard counsel for the revenue as also counsel for the assessee. It is common ground that the contract of service of the assessees had been approved by the Government of the India for entitlement of exemption under section 10 (6) of the Income-tax Act. The only question that arises for consideration is whether the salaries and living allowances received by the various assessees are taxable under section 9 (1) (ii) of the Income-tax Act, 1961. Section 9 (1) (ii) of the Income-tax Act, 1961 (as it stood at the relevant time) is as follows :
"Income deemed to accrue or arise in India. -
(i) The following incomes shall be deemed to accrue or arise in India. - ...
(ii) Income which falls under the head Salaries if it is earned in India."
The short question is whether the salaries and living allowance paid to the foreign technicians can be brought to tax under the above section as "salary earned in India". The Appellate Tribunal answered in the negative, placing reliance on the Bench decision of the Gujarat High Court in S. G. Pgnatales case [1980] 124 ITR 391.
In this connection, we should remember that an Explanation has been added to section 9 (1) (ii) of the Income-tax Act, 1961, by the Finance Act, 1983. The said Explanation is inserted with effect from April 1, 1979, and runs as follows :
"Explanation. - For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for service rendered in India shall be regarded as income earned in India;"
In this court, the entire arguments by counsel for the Revenue centered round the said Explanation. No reliance is seen to have been placed, nor reference is made, in the appellate orders of the Income-tax Appellate Tribunal, dated January 31, 1984, and February 18, 1984, to the said Explanation. We should normally proceed on the basis that no reliance was placed on the Explanation at the time when the appeals were argued before the Appellate Tribunal in all these cases. Counsel for the assessee submitted that, since the Explanation aforesaid was not pressed in to service before the appellate Tribunal and questions referred to this court are not caused in such wide terms, as to take within its fold the impact of the Explanation in construing section 9 (1) (ii) of the Act, no argument based on Explanation could be advanced by the Revenue at this stage. The assessee "counsel submitted that the questions referred to this court cannot be considered by invoking or by placing reliance on the Explanation to section (9) (1) (ii) of the Act in any manner or to any extent or to any purpose. Reliance was placed on the decision in CIT west v. C. Shantilal and Co. [1982] 136 ITR 522 (Guj). Counsel for the assessees also submitted that the Explanation Introduced by the Finance Act, 1983, with effect from April 1, 1970, is really a substantive provision and no reliance can be placed for a period with which we are concerned, since they were long before April 1, 1979. The Explanation is only by way of clarification and so it cannot operate retrospectively or for a period anterior to the date specified by the statute itself, i.e., for the period interior to April 1, 1979. We are the opinion that the above arguments of counsel for the assessees are entitled to acceptance. We do so.
Counsel for the Revenue placed reliance on the notes on clauses relating to the Explanation to section (9) (1) (ii) for the Act, contained in the Finance Bill, 1983, as seen in [1983] 140 ITR (St.) 116 to the following effect :
"Sub-clause (b) seeks to amend clause (ii) of subsection (1) of section 9 of the Income Tax Act. The Explanation proposed to be added to This clause seeks to clarify that income chargeable under the head Salaries payable for service rendered in India shall be regarded income earned in India.
The proposed amendment will take effect from 1st April, 1979."
Reliance was also placed on the decisions in CIT v. Joy P. Jacob [1985] 151 ITR 19 (Ker) at page 23 and Oommen Punnoose v. Koruthu Koruthu [1951] KLT 223; AIR 1951 Trav-Coch. 118 [FB], in furtherance of the plea that the Explanation was inserted only by way of abundant caution and that it is only declaratory. This leads us to the question as to the purpose and impact of the Explanation introduced by the Finance Act of 1983 with effect from April 1, 1979.
Even assuming that, by adding the Explanation, the legislature has clarified are made cleared to removed whatever ambiguity there was in section (9) (1) (ii) of the Act, the Finance Act, 1983, itself has proceeded to given retrospective effect to the Explanation only with effect from April 1, 1979. The clarification of the declaration, if any, is only from that date. We are concerned in all these cases with the periods which are, admittedly, prior to April 1, 1979. The legislature itself has clearly stated that the Explanation introduced by the Finance Act, 1983, will take effect only from April 1, 1979. We are of the view that, in such circumstances, it is idle to contend that the Explanation can be looked into or pressed into service for the period interior to April 1, 1979, to understood the scope of section 9 (1) (ii) of the Act, as it stood then. In this view, no useful purpose will be served by referring to the Explanation in order to understand the true meaning and scope of section 9 (1) (ii) of the Act, as it stood till March 31, 1979, i.e., before the insertion of the Explanation with effect from April 1, 1979. The Explanation which came into force later, cannot be relied on for any purpose for an interior period.
We shall proceed to consider the larger question argued before us regarding the scope and impact of an Explanation. The mere use of the label "Explanation" is not decisive of the true meaning and scope of the provision. Ordinarily, the purpose of an explanation in a statute is to clarify of Explain or settle any doubt are ambiguity are controversy. It may even widen the scope of the main provision in rare cases. The words used alone can reflect the true intent and they should be construed on their own terms. In this regard, the context, background and history of the legislation may be looked into - See Aphali Pharmaceuticals Ltd. v. State of Maharashtra, AIR 1989 SC 2227; 4 SCC 378, p. 393, paragraph 33 - wherein the Supreme Court has analysed the entire law on the point.
Kanga and Palkhiwala in their book The Law and Practice of Income Tax, the seventh edition (1976) at page 207, stated the scope of section 9 (1) (ii) of the Act Read with sub-section (2) as follows :
"Clause (ii) of sub-section (1) provides an artificial place of accrual for income taxable under the head Salaries. It enacts that income chargeable under the head Salaries (section 15) is deemed to accrue or arise in India if it is earned in India, i.e., if the services under the agreement of employment are or were rendered in India, the place of receipt or actual accrual of the salary being immaterial for this purpose."
A similar view was expressed by other authors also. These views were noticed when the matter was considered by the Bench of the Gujarat High Court in S G Pgnatales case [1980] 124 ITR 391. Even so Construing section 9 (1) (ii) of the Act, in the light of other sections-particularly section 9 (1) (ii) of the Act-the Bench held that, in view of the clear indication given by the legislature itself by using different phraseology in clause (iii) as compared with claused (ii), the words occurring in clause (ii), "earned in India", must be interpreted as "arising or accruing in India" and not from service rendered in India. So long as the liability to pay the amount under the head "Salaries" arises in India, section 9 (1), clause (ii), can be invoked. If the liability to pay arises outside India and the amount is payable outside India, clause (ii) aforesaid cannot be invoked. The Court also held that a mere reimbursement of a necessary disbursement would not amount to a perquisite since a perquisite should be something which arises by reason of a personal advantage.
It is evident that the Gujarat High Court did not accept the views of text book writers regarding the scope of section 9 (1) (ii) of the Act as it stood, before the addition of the Explanation It was perhaps, due to the above controversy regarding the scope of section 9 (1) (ii) of the Act that the legislature intervened and added the Explanation of section 9 (1) (ii) of the Act, with effect from April 1, 1979. In the circumstances, purpose behind the addition of the Explanation was only to clarify and settle the controversy. The Explanation was to have effect only from April 1, 1979. We are, therefore, of the view that the Explanation to section 9 (1) (ii) of the Act cannot be considered to be declaratory nor can it apply to any period anterior to April 1, 1979.
On merits, regarding the scope of section 9 (1) (ii) of the Act, we concur with the ratio laid down by the Gujarat High Court in S. G. Pgnatales case [1980] 124 ITR 391. We endorse the view expressed by the said court at page 401 of the report to the following effect :
"In our opinion, in view of clear indication given by the Legislature itself by using a different phraseology in case (iii) as compared with clause (ii) with which we are concerned in this case and in view of the passage from E. D. Sassoons case [1954] 26 ITR 27 (SC), it is clear that the words earned in India in section 9 (1) (ii) must mean arising or accruing in India.
... it is clear to us that the words earned in India occurring in clause (ii) must be interpreted as arising of accruing in India and not from service rendered in India. So long as the liability to pay the amount under the head salaries arises in India. clause (ii) can be invoked. If the liability to pay arises out of India and the amount is payable outside India, clause (ii) cannot be invoked."
Regarding the "living allowance" paid to the foreign technicians, the court stated in the said decision as follows at page 403 of the report :
"In our opinion, in view of the facts of the case before us, it is clear that the amount of living allowance paid to the assessee per day in the light of the provisions of the supply contract between the French company and the Gujarat company and emphasised as one of the terms and conditions of deputation to the assignment of work in India in the letter of June 30, 1971, is clearly a reimbursement to the assessee for the money that he would be required to spend for his stay in India. It seems that there was no perquisite involved in this case and hence the French company, the original employer with whom the assessee was working, even when he was not sent out to India on this particular assignment, had assured him that he would be required to pay for his stay either at Delhi or elsewhere."
We concur with the above observations also.
In the light of the above, we are of the view that the finding of Appellate Tribunal that the salary was not paid by FACT but by the foreign company. Messers. Davy Powergas Inc., is a finding of the fact and no question of law arises therefrom. The Appellate Tribunal was justified in holding that the salary and living allowance received by the assessees were not assessable to tax under the Income-tax Act, 1961. We answer questions Nos. (1) and (2) in the affirmative, against the Revenue and in favour of the assessees.
The reference are answered accordingly.
A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.