Madras High Court
Commissioner Of Income-Tax vs Ronald William Trikard And Others on 22 November, 1994
Equivalent citations: [1995]215ITR638(MAD)
JUDGMENT Somasundaram, J.
1. All these tax cases relate to the assessment year 1983-84. The assessee are foreigners and non-residents employed by Sedco International S. A., a non-resident company. Sedco International was engaged in the drilling of oil wells along and off the shores of India on contract with the Oil and Natural Gas Commission. The said contract was entered into on November 5, 1981, and it expired on January 22, 1985. The terms of the contract, inter alia, provided that the area of operation was to be the seas above the continental shelf of India. The assessees carried on their employment on the oil rig. The rig itself was operated on the seas above the continental shelf. According to the Assessing Officer, in view of the Explanation to section 9(1)(ii) of the Income-tax Act, 1961, read with the Government of India's Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), File No. 5147/F. No. 133(79)/82 TPL, dated March 31, 1983, issued under the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976, the salary received by the assessee for the serviced rendered in India became liable to tax under the Income-tax Act, 1961. The assessee filed their respective returns and paid tax on self-assessments. Thereafter, on the basis of the various opinions, the assessee filed revised returns on November 5, 1983, with "Nil" taxable income on the ground that the notification under the Territorial Waters, Continental Shelf and Exclusive Economic Zones Act was applicable only from the assessment year 1984-85 relevant to the previous year 1983-84. In other words, the assessee contended that the notification dated March 31, 1983, applies only prospectively and not retrospectively. The assessees' contention that the notification referred to earlier applies only from the assessment year 1984-85 onwards was not accepted by the Income-tax Officer, since according to him, the notification came into force with effect from April 1, 1983, and the provisions of the Income-tax Act, 1961, would apply to the continental shelf and exclusive economic zone in relation to the assessment year 1983-84 and subsequent years. Accordingly, the assessments in respect of all the assessee herein were completed by including the salary income.
2. Aggrieved, the assessee filed appeals before the Commissioner of Income-tax (Appeals). In the appeals before the Commissioner of Income-tax (Appeals), the assessee' representative contended that the notification issued by the Government of India on March 31, 1983, by which the Income-tax Act was extended to the continental shelf and economic zone is not retrospective. It was submitted that at the time when the assessees were earning the income there was no liability for the assessee to pay the tax as the notification was non-existent. It was, therefore, contended that the notification will have only prospective effect. The Commissioner of Income-tax (Appeals) accepted the contention of the assessees that they were working in a drilling ship registered in Panama, that the place of employment will be outside the taxable territory but for the notification extending the Income-tax Act to India's exclusive economic zone, that a notification cannot have retrospective application unless it is specifically stated in the said notification and that in the present case there is nothing to show that the notification was issued with retrospective effect. The Commissioner of Income-tax (Appeals) further held that during the year 1983-84, the assessees are not coming within the definition of "assessee" as their place of employment was located outside India. Consequently, in the case of all the assessee, the assessments were cancelled and the appeals filed by the assessees were allowed and the Inspecting Assistant Commissioner was directed to modify the order accordingly and refund the excess tax, if any, collected to the assessees.
3. Aggrieved by the orders of the Commissioner of Income-tax (Appeals), the Department filed appeals before the Tribunal in Income-tax Appeals Nos. 1727 to 1734 and 1736 to 1772 of 1986. Before the Tribunal, it was contended on behalf of the Revenue in the first place that the continental shelf and exclusive economic zone were always part of India even prior to the issue of Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, and, therefore, the order of assessments passed by the Assessing Officer were legal and proper. Secondly, it was contended on behalf of the Department before the Tribunal that in any event, Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983 is applicable to the assessment year 1983-84 and, therefore, the salary received by the assessee during the accounting year 1982-83 is liable for income-tax. The Tribunal, after considering the contentions of the Revenue and the assessees, found that while it is true that the law prevailing on the first day of the assessment year has to be applied for that year, still before applying such law, it must also be found that the income has accrued or arisen to the assessee in the taxable territories during the previous year relevant to the assessment year before it could be taxed on the basis of the law as on the first day of April. The Tribunal has further held that the continental shelf and the exclusive economic zone were not part of the taxable territory during the previous year relevant to the assessment year 1983-84. According, the Tribunal held that the salary income earned by the assessees prior to April 1, 1983, cannot be charged to tax under the provisions of the Income-tax Act, 1961, in the assessment year 1983-84. In that view of matter, the appeals filed by the Department were dismissed by the Tribunal by the common order dated February 28, 1987. Thereafter, pursuant to the reference applications filed by the Revenue in R.A. Nos. 276 to 320 and 336/(Mds) of 1988 in Income-tax Appeals Nos. 1727 to 1734 and 1736 to 1772/(Mds) of 1986, before the Tribunal under section 256(1) of the Income-tax Act, 1961, the Tribunal by the order dated May 31, 1988, referred the following common question of law to this court for opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the continental shelf and exclusive economic zone were not part of India prior to the notification of the Government of India File No. 5147/F. No. 133(79)/82 TPL, dated March 31, 1983, in view of the provisions of section 6(6) and section 7(7) of the Territorial Waters, Continental Shelf and Exclusive Economic Zones Act, 1976, and, consequently, the salary income earned by the assessees prior to April 1, 1983, was not chargeable to tax under the Income-tax Act, 1961, in the assessment year 1983-84 ?"
4. In the present case, the admitted facts are :
The assessees are not Indian citizens and are non-residents for the purpose of the Income-tax Act, 1961. The assessees were employees during the assessment year 1983-84 of a non-resident company incorporated under the laws of Panama. The said non-resident company entered into a contract with the Oil and Natural Gas Commission for exploring oil in the seas adjoining the territories of India. The area of operation was to be the seas above the continental shelf of India. The assessees carried on their employment on the oil rig operated on the seas above the continental shelf. Before us, Mr. S. V. Subramaniam, learned senior counsel for the Revenue, contended that the continental shelf and the exclusive economic zone where the assessees worked during the assessment year 1983-84 were part of India even prior to the issue of Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, by the Central Government in exercise of the powers conferred by clause (a) of sub-section (6) of section 6 and clause (a) of sub-section (7) of section 7 of the Territorial Water, Continental shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976, extending the Income-tax Act, 1961, to the continental shelf of India and the exclusive economic zone of India with effect from the 1st day of April, 1983, that the continental shelf and exclusive economic zone became part of India long before the issue of Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St. 11), with effect from October 5, 1963, when article 297 of the Constitution of India was amended by the Constitution (Fifteenth Amendment) Act, 1963, and that, therefore, the income earned by the assessees during the accounting year 1982-83 is subject to income-tax in the assessment year 1983-84. Learned senior counsel for the Revenue further contended that even assuming for the purpose of argument that the continental shelf and exclusive economic zone became part of India with effect from April 1, 1983, it makes no difference as far as the taxability of that income is concerned, because, the income-tax is levied on the basis of the law prevailing in the assessment year, on the income of the previous year and, therefore, the income earned by the assessees during the accounting year 1982-83 is taxable for the assessment year 1983-84 as per the law prevailing in the assessment year. According to learned senior counsel for the Revenue, the order of the Tribunal taking a different view and holding that income earned by the assessees during the accounting year 1982-83 is not taxable for the assessment year 1983-84 is not at all correct.
5. Per contra, Mr. S. E. Dastur, learned senior counsel for the assessees submitted that the continental shelf and exclusive economic zone were not part of India prior to the issue of Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, for the purpose of the applicability of the provisions of the income-tax Act to the continental shelf and exclusive economic zone of India, that it cannot be said that any income has accrued to the assessees in the taxable territory that is in India, during the accounting year 1982-83 so as to bring it to tax for the assessment year 1983-84 and that the salary income earned by the assessee prior to April 1, 1983, is not chargeable to tax under the provisions of the Income-tax Act in the assessment year 1983-84.
6. In the light of the rival contentions of learned counsel for the Revenue and the assessees, the first question that arises for consideration is whether the continental shelf and exclusive economic zone formed part of India, even prior to the issue of Notification G.S.R. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983. To appreciate the rival contentions of learned counsel for the parties on this aspect, it is necessary to refer to article 297 of the Constitution of India and the relevant provisions of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976. The relevant provision in the Constitution is article 297 and it reads thus :
"(1) All lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone of India shall west in the Union and be held for the purposes of the Union.
(2) All other resources of the exclusive economic zone of India shall also vest in the Union an be held for the purposes of the Union.
(3) The limits of the territorial waters, the continental shelf, the exclusive economic zone and other maritime zones of India shall be such as may be specified from time to time, by or under any law made by Parliament."
7. Under this article, all lands, minerals and other things of value underlying the ocean within the territorial waters or the continental shelf or the exclusive economic zone of India vest in the union. Although the Constitution does not itself define the terms "territorial waters", "continental shelf" and "exclusive economic zone", clause (3) of article 297 states that their limits shall be such as may be specified by Parliament. In 1976, Parliament implemented the amendments introduced to the Constitution of India in the years 1973 and 1976 by passing the Act known as the Territorial Water, Continental shelf, Exclusive economic Zone and Other Maritime Zones Act, 1976 (Act 80 of 1976), relating to territorial waters the continental shelf, the exclusive economic zone and maritime zones.
8. The Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 (hereinafter referred to as "the Act"), under section 3(2)prescribes the limit of the territorial waters as 12 nautical miles from the nearest point of the appropriate baseline. Section 3(1) state that the sovereignty of India extends and has always extended to the territorial waters of India.
9. Under section 6(1)of the Act, the continental shelf of India extends to a distance of 200 nautical miles from the baseline referred to in sub-section (2) of section 3 where the outer edge of the continental margin does not extend up to that distance. Section 6(2) describes the sovereign Central rights of India, in respect of its continental shelf. Section 6(6) enables the Central Government by notification in the Official Gazette to extend, with such restrictions and modifications as it thinks fit, any enactment for the time being in force in India or any part thereof of the continental shelf or any part thereof.
10. Section 7(1) describes the exclusive economic zones of India as an area beyond and adjacent to the territorial waters and the limit of such zone is 200 nautical miles from the baseline referred to in sub-section (2) of section 2. Under section 7(7), the Central Government may, by notification in the Official Gazette, extend, with such restrictions and modifications as it thinks fit, enactment for the time being in force in India or any part thereof to the exclusive economic zone or any part thereof.
11. A careful reading of sections 3, 6 and 7 of the Act shows that territorial waters, the sea bed and sub-soil underlying therein and the air space over such territorial waters form part of the territory of India and that the sovereignty of India extends over such areas. However, the position is different in the case of the continental shelf and exclusive economic zone of India. The continental shelf of India comprises the sea bead beyond the territorial waters to a distance of 200 nautical miles. The exclusive economic zone represents the sea or waters over the continental shelf. It is also clear from sections 6 and 7 of the Act that in respect of the continental shelf and exclusive economic zone, India has been given only certain limited sovereign rights and such limited sovereign rights conferred on India in respect of continental shelf and exclusive economic zone do not make the continental shelf and the exclusive economic zone part of India and the limited sovereign rights conferred on India in respect of the continental shelf and the exclusive economic zone cannot be equated to extending the sovereignty of India over the continental shelf and exclusive economic zone as in the case of territorial waters. Sub-section (6) of section 6 and sub-section (7) of section 7 of the Act empower the Central Government by notification to extend any enactment in force in India with such restrictions and modification as it thinks fit to the continental shelf and the exclusive economic zone and further provide that an enactment so extended shall have effect as if the continental shelf or the exclusive economic zone to which the enactment has been extended is a part of the territory of India. Thus sections 6(6) and & 7(7) created a fiction by which, the continental shelf and the exclusive economic zone are to be deemed to be a part of India for the purposes of such enactments which are extended to those ares by the Central Government by notification in the Official Gazette. Under Notification bearing G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, issued in exercise of the powers under sub-section (6) of section 6 and sub-section (7) of section 7 of the Act, the Central Government extended the Income-tax Act, 1961, to the continental shelf of India and the exclusive economic zone of India with effect from April 1, 1983, subject to the restriction that the Income-tax Act shall apply only in respect of income derived by every person from any of the following activities :
(a) the prospecting for or extraction or production of mineral oils in the continental shelf on India or the exclusive economic zone of India;
(b) the provision of any services or facilities or supply of any ship, aircraft, machinery or plant (whether by way of sale or hire) in connection with any activities referred to in clause (a);
(c) the rendering of services as an employee of any person engaged in any of the activities referred to in clause (a) or clause (b).
12. In paragraph 38 of the common order, the Tribunal has given eight valid reasons for coming to the conclusion that the continental shelf and exclusive economic zone could not be treated as part of India prior to Notification issued by the Central Government G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983. The relevant portion of paragraph 38 of the common order of the Tribunal containing the said reasons reads thus :
"Prior to 31st March, 1983, the continental shelf of India and the exclusive economic zone of India could not be treated as a part of India for the following reasons :
(1) Sections 6(6) and 7(7) of the Territorial Waters Act clearly provide that the continental shelf an exclusive economic zone are to be regarded as a art of territory of India for the purposes of any enactment only from the date of issue of a notification extending such enactment to these areas; if these areas were always a part of the territory of India, then the provisions of sections 6(6) and 7(7) of the Territorial Waters Act were unnecessary. A plain natural construction of sections 6(6) and 7(7) of the territorial Waters Act would indicate that these areas were not a part of India till the issue of the necessary notification.
(2) By the said notification, the Income-tax Act has been extended to these areas only with effect from 1st April, 1983, and only in connection to income derived from certain types of activities. The said notification also postulates that prior to 1st April, 1983, these areas did not form part of India. This notification does not extend the Income-tax Act to all types of income derived in the areas, since even after the coming into operation of the said notification income derived from fishing operations or from producing energy from tides and currents would not be chargeable to tax in India. Therefore, the argument that these areas have always been a part of the territory of India would render the notification redundant.
(3) The Finance Act, 1981, introduced section 293A in the Income-tax Act. The said section, inter alia, empowers the Central Government to make exemption, reduction in rate or modification in respect of income-tax in favour of persons who are in the business of prospecting for or extrication or production of mineral oils, etc. The intention of the Legislature can also be seen from the Memorandum explaining the provisions in the Finance Bill, 1981 (vide [1981] 128 ITR (St.) 85, page 94, paragraphs 31 to 33). The relevant portions of the Memorandum are as under -
'31. Measures for facilitating the association or participation of foreign companies in oil exploration and production. - The provisions of the Income-tax Act extend to the whole of India. For this purpose, India includes the territorial waters up to 12 nautical miles from the nearest point of the appropriate baseline.
Under the existing provisions, in the case of non-residents only income accruing or arising to or received in India is chargeable to income-tax.
32. The Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976, provides that the exclusive economic zone of India is an area adjacent to the territorial waters and the limit of such zone is 200 nautical miles from the baseline. In this exclusive economic zone, the Central Government has sovereign rights for the purpose of exploration, exploitation, conservation and management of natural resources. The Central Government is empowered, notification in the Official Gazette, to extend, with such restrictions and modifications as it thinks fit, any enactment for the time being in force in India or any part thereof, to the exclusive economic zone or any part thereof and to make such provisions as it may consider necessary for facilitating the enforcement of such enactment. Where any such enactment is so extended, it will have the effect as if the exclusive economic zone or any part thereof to which it has been extended were a part of the territory of India.
33. At present, considerable exploration work is being undertaking in the off shore regions situated in the exclusive economic zone to discover mineral oils. Since the exclusive economic zone does not form part of territory of India, any income accruing or arising to, or received by, a non-resident in such zone is not chargeable to income-tax. A notification is being issued in terms of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976, to extend the direct tax enactment to the exclusive economic zone.' The abovesaid paragraphs clearing indicate that prior to 1st April, 1983, these areas did not form part of India and that a specific notification extending the Income-tax Act to these areas was necessary before income-tax in respect of income derived in these areas could be charged in the case of non-resident assessee.
(4) It also remains to be seen that this position is reiterated by the Central Board of Direct Taxes in Circular No. 308 dated 29th June, 1981 (see [1981] 131 ITR (St.) 119). The circulars issued by the Central Board of Direct Taxes are binding on all the authorities under the Act.
(5) In the letter date 26th September, 1974, the Central Board of Direct Taxes clarified the position in response to a query from the Oil and Natural Gas Commission that income of a foreign non-resident contracted attributable to drilling operations confined to off shore areas about 80 miles off the Indian coast will nor be regarded as income accruing or arising within India, as such areas were not part of India for the purpose of the Income-tax Act (see ITO v. S. A. Hareford [1985] 11 ITD 569 (Delhi), page 579).
(6) The Tribunal in ITO v. S. A. Hareford [1985] 11 ITD 569 (Delhi), held that the said notification, dated 31st March, 1983, was self-speaking as according to the notification, the Income-tax Act had been extended to these areas only with effect from 1st April, 1983. In other words, the Income-tax Act did not apply to these areas prior to that date. The Tribunal held that prior to 1st April, 1983, the provisions of the Income-tax Act were not applicable to the continental shelf and the exclusive economic zone of India (see paragraphs 10 and 11 at pages 576 and 577).
(7) A plain reading of article 1(3) of the Constitution of India would indicate that it is only the land mass and the territorial waters to the extend of 12 nautical miles from the baseline of the different State of India and the sea-bed and sub-soil underlying such waters that would form part of the territory of India and to which the Income-tax Act would originally extend. (see Seervai's Constitutional law of India, Third edition, Vol. II. pages 1804, 1805, paragraph 19.41).
(8) The Assessing Officer has also proceeded on the basis that the income arising to the assessees on account of their services in these areas is chargeable only because of the said notification extending the provisions of the Income-tax Act to these areas, and not on the basis that according to the Constitution of India these areas always vest in the Union Government and, therefore, the Income-tax Act, 1961, would apply."
13. We agree with the above reasons given by the Tribunal in paragraph 38 of its order for coming to the conclusion that prior to April 1, 1983, the continental shelf and exclusive economic zone could not be treated as part of India, as there is no good reason for us to take a different view.
14. Mr. S. V. Subramaniam, learned senior counsel for the Revenue, placed heavy reliance on article 297 in support of his contention that the continental shelf and exclusive economic zone formed part of India even prior to the issue of Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983. Article 297 occurs in Chapter III of Part XII of the Constitution which deals with the division of property, contracts, rights and liabilities of the Union and the States. A plain reading of article 297 shows that it deals with the rights of the Union with regard to territorial waters, the continental shelf and the exclusive economic zone of India as against the rights available to the States. It must be pointed out that the expression use in article 297 is "Union" and not "India" as found in article 1(3) of the Constitution of India. We must also remember that article 297 has to be harmoniously construed with reference to article 1(3) of the Constitution of India. Again, it must be pointed out that article 297 was added by way of amendment to the Draft Constitution in order to negative any contention of an acceding maritime India State for the territorial waters and property underlying it. Dr. Ambedkar said : "ordinarily it was always understood that the territorial limits of a State were not confined to the actual physical territory, but extended beyond that for three miles in the sea. But there was a fear that if a certain maritime State, such as Cochin-Travancore or Cutch got into the Indian Union, unless there was a specific provision in the Constitution, it was still open to them to say that their accession gave the Indian Union only jurisdiction over the physical territory of the States and that the territorial waters were free from the jurisdiction of the Centre". As for fisheries Ambedkar added, they were included in the provincial lists and they would continue to be a provincial subject even within the territorial waters of India. Thus, it is clear from a reading of article 297 that the said article confers on the Union certain rights in respect of the continental shelf and the exclusive economic zone, to enable the Union to exploit these areas as against the States and there is nothing in the said article 297 to show that the continental shelf and the exclusive economic zone always formed part of the territory of India, even prior to the issue of Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, as contended by learned senior counsel for the Revenue. As rightly pointed out by learned senior counsel appearing for the assessees, if the contention of learned senior counsel for the Revenue that in view of article 297, the continental shelf and the exclusive economic zone always form part of India is accepted, it would render sections 6(6) and 7(7) of the Act and the notification issued by the Central Government in G.S.R. No. 304 (E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, redundant. Again such a contention of learned counsel for the Revenue cannot be countenanced as it runs counter to the provisions contained in article 1(3) of the Constitution. It is also clear from the Statement of Objects and Reasons for the Act, that article 297 has been amended by the Constitution (Fortieth Amendment) Act, 1976, which came into force from May 27, 1976, and that the Territorial waters, Continental shelf, Exclusive Economic Zone and Other Maritime Zones, Act, 1976, was enacted as a sequel to the Constitution (Fortieth Amendment) Act, 1976. Therefore, we are of the view, that the said Act and notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11) have been enacted and issued respectively only pursuant to article 297 of the Constitution.
15. The principles laid down in the decision in Jalyan Udyog v. Union of India [1989] 19 ECC 229 (Bom) relied on by learned senior counsel for the Revenue have no application to the facts of the present case, because that decision deals only with territorial waters and the questions relating to continental shelf and exclusive economic zone never came up for consideration in that case.
16. For all the reasons stated above, we have no hesitation in rejecting the contention of learned senior counsel for the Revenue that the continental shelf and the exclusive economic zone formed part of Indian even prior to the issue of Notification G.S.R. No. 304(E), (see [1983] 142 ITR (St.) 11), dated March 31, 1983, so far as the Income-tax Act, 1961, is concerned.
17. The next question which arises for consideration is whether, by virtue of Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, which came into force from April 1, 1983, the income which has accrued to the assessees within the areas of the continental shelf and the exclusive economic zone, in the accounting year 1982-83, is subject to income-tax under the Income-tax Act, 1961. Mr. S. V. Subramaniam, learned senior counsel for the Revenue, submitted that Notification G.S.R. No. 304(E) (see [1983] 142 (St.) 11), dated March 31, 1983, which came into force with effect from April 1, 1983, would be applicable in respect of income for the previous year relevant to the assessment year 1983-84. According to senior counsel for the Revenue, no doubt the Income-tax Act came into operation in the continental shelf and exclusive economic zone, after the closing of the previous year, i.e., with effect from April 1, 1983. But under the Income-tax Act, the income of the previous year relevant to the assessment year 1983-84 has to be ascertained in accordance with its provisions. He further pointed out that under the scheme of the Income-tax Act, Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, could have been made effective only from a particular assessment year. Learned senior counsel for the Revenue further contend that the assessment orders passed by the Assessing Officer in the present batch of cases are legal and proper, because, what is being taxed is the income of the previous year as per the law applicable for the assessment year 1983-84. In support of his contention, learned senior counsel for the Revenue relied on the following decisions :
1. Union of India v. Madan Gopal Kabra ; and
2. CIT. H. E. H. Mir Osman Ali Bahadur .
18. However, we are unable to accept the above contention of learned senior counsel for the Revenue. By virtue of the Notification issued by the Central Government in G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, the Income-tax Act, 1961, is extended to the continental shelf of India and the exclusive economic zone of India with effect from April 1, 1983, subject to the restriction and modification, that the said Act shall apply only in respect of income derived by every person from all or any of the activities mentioned therein. We have already found that by a legal fiction, the continental shelf and exclusive economic zone became part of India and taxable territory for the purpose of the Income-tax Act, 1961, only after the issue of Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.), dated March 31, 1983, with effect from April 1, 1983, by the Central Government in exercise of the powers conferred under sections 6(6) and 7(7) of the Act. In other words, so far as the Income-tax Act is concerned, up to March 31, 1983, the exclusive economic zone did not form part of the territory of India. Therefore, up to and including the assessment year 1983-84, any income accruing or arising to or received by a non-resident in such exclusive economic zone during the corresponding accounting year was not chargeable to income-tax in relation to the assessment year 1983-84, because, the exclusive economic zone did not form part of the territory of India, as no notification under section 7(7) of the Act has been issued up to March 31, 1983.
19. Section 4 of the Income-tax Act, 1961, is the charging section and it says that the income-tax shall be charged for any assessment year in accordance with the provisions of the Income-tax Act, in respect of the total income of the previous year of every person. Section 2(45) defined "total income" and according to section 2(45), total income means the total amount of income referred to in section 5, computed in the manner laid down in the Income-tax Act. Section 5(2) is relevant for our purpose and it reads thus :
"(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which, -
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year."
20. Section 9 deals with income deemed to accrue or arise in India and according to section 9(1)(ii) of the Income-tax Act, income which falls under the head "Salaries", if it is earned in India, shall be deemed to accrue or arise in India. Explanation to section 9(1)(ii) reads thus :
"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;"
21. On March 31, 1983, since the continental shelf and exclusive economic zone were not part of India, the services rendered by the assessees in the exclusive economic zone, till March 31, 1983, cannot be considered as services rendered in India and, therefore, such income cannot be treated as income accruing or arising to the assessees during the accounting year 1982-83 in India. As already pointed out, by Notification G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, the Income-tax Act was made applicable to the continental shelf and exclusive economic zone, from April 1, 1983, i.e., to say from the assessment year 1983-84. But the income-tax is actually levied on income which accrued during the previous accounting year which is from April 1, 1982, to March 31, 1983. Inasmuch as the territory in which the income arose was beyond 12 nautical miles, the Income-tax Act was not applicable to such income during the accounting year 1982-83. Therefore, income-tax cannot be levied on income which accrued during the said period when the territory in which it accrued was not part of India and consequently, not governed by the Income-tax Act, 1961.
22. In CIT v. Valliammai Achi [1938] 6 ITR 720 (Mad), the assessee had sustained a loss in the accounting year 1936-37 in a business carried on in Burma. Burma had ceased to be a part of British India in the assessment year 1937-38. The assessee claimed a set-off in respect of loss sustained by her in Burma in the accounting year 1936-37. The Income-tax Officer refused to allow her this set-off on the ground that on April 1, 1937, Burma had ceased top be a part of British India and the loss having been sustained outside British India, it could not be set off. This court relying on its earlier Full Bench decision in CIT v. Karuppiah Kangani [1929] 55 MLJ 844, held that under the Income-tax Act, the income of the year previous to the year of the assessment is not to be taken as merely a guide to the ascertainment of the income of the year of assessment. It is the actual sum which is subject to taxation. When the assessee sustained loss, Burma was a part of British India. The assessee, therefore, was allowed the set-off of such loss.
23. This decision was followed by the Division Bench of the Bombay High Court in the case of Rawji Dhanji and Co. [1940] 8 ITR 1. The Division Bench has observed in similar circumstances as follow : "But as you have to impose the tax for the year of assessment on the actual income of the pervious year, it seems to me plain that you must take the facts as they existed during that previous year; otherwise you are only ascertaining what would have been the income of the previous year if the facts had been as they existed in a subsequent year." The Division Bench allowed the assessee to set off the loss in Rangoon for the previous year ending on March 31, 1937, against the profits in Bombay for the assessment year 1937-38.
24. Similarly, in the case of Muthappa Chettiar (E. M. V.) v. CIT [1945] 13 ITR 311 (Mad), income accruing or arising in British India in the previous year was held assessable under the Indian Income-tax Act, 1922, though the place of accrual ceased to be a part of British India in the year of assessment. This was also a case of income arising in Burma in the accounting year 1936-37. This court in E. M. V. Muthappa Chettiar v. CIT [1945] 13 ITR 311 (Mad), after referring to the earlier decision in CIT v. Valliammai Achi [1938] 6 ITR 720 (Mad) observed as follows (at page 327) :
"The assessment, however, must stand as it has been held by this court that income accruing or arising in British India in the 'previous year' is assessable under the Income-tax Act though the place of accrual has ceased to be a part of British India in the yea of assessment (vide CIT v. Valliammai Achi [1938] 6 ITR 720 (Mad))."
25. In the three decisions referred to above, the courts were considering a situation which arose out of certain territory ceasing to form part of the taxable territory on the first day of the assessment year. The present case is a converse case in which we are concerned with a situation where the territory which did not form part of India during the previous year but formed part of India for purpose of levy of income-tax during the assessment year 1983-84, and therefore, the ratio of the three decisions referred above is directly applicable to the facts of the present case. In view of our finding recorded earlier that the continental shelf and exclusive economic zone, where the assessees worked and earned salaries in the accounting year 1982-83, did not form part of India during the accounting year, but formed part of India after the expiry of the accounting year 1982-83, with effect from April 1, 1983, by virtue of Notification No. G.S.R. 304(E) (see [1983] 142 ITR (St.) 11), we are of the view that a taxable territory of India was not in existence in the area in question during the previous year relevant to the assessment year 1983-84 and hence the salary income earned by the assessee prior to April 1, 1983, is not chargeable to tax under the provisions of the Income-tax Act, 1961, in the assessment year 1983-84.
26. This view of ours is supported by the legislative practice which is dealt with by the Tribunal in detail in paragraphs 46 and 47 of the common order, in the following terms :
"46. In this respect, we would also point out that this view is supported by legislative practice. For instance, the Indian Income-tax Act, 1922, was extended and made applicable to the whole of Indian by virtue of amendment made by the Finance Act, 1950. The said Finance Act inserted section 2(14A) in the Indian Income-tax Act, 1922, and defined taxable territories as, inter alia, including the whole of the territory of India as respects any period for the purposes of section 4A which deal with residence of person. Thus, this amendment deemed Indian States, such as Rajasthan, Hyderabad which were not part of the taxable territories during the previous year relevant to the assessment year 1950-51 as part of the taxable territories even during the previous year. As a consequence persons staying in such State became residents of India and chargeable to tax on their total income. In the absence of section 2(14A) they would have been non-residents during the previous year and the income accrued to them during the previous year would have been outside India, and consequently not liable to income-tax. There is also another instance to support this view. On the liberation of Goa, Daman and Diu, the Income-tax Act was extended to these territories with effect from 1st day of April, 1963, by the Taxation Laws (Extension to Union Territories) Regulation, 1963. These regulations, inter alia, inserted section 2(25A) of the Income-tax Act to provide that India shall be deemed to include these Union Territories (a) as respects any period for the purposes of section 6, and (b) as respects any period for the assessment year 1963-64 and subsequent years. The effect of section 2(25A)(b) is to extend the operation of the Income-tax Act to these Union Territories from the assessment year 1963-64 onwards (see Kanga and Palkhivala's Law and Practice of Income-tax, 7th edition, vol. 1, pages 58, 59). Therefore, it is clear that whenever the Legislature wanted the income of a previous year arising in territories which did not form part of India when the income arose to be assessed to tax in India, it deemed these territories to be part of India during the previous year for the purpose of the Income-tax Act.
47. According to the fact appearing in the present cases, neither the Legislature nor the Central Government has made any such provision. In fact, it is seen that sections 6(6) and 7(7) of the Territorial Waters Act indicate an intention to the contrary, inasmuch as they specifically provide for the operation of the enactment only from the date of its extension and deem the continental shelf and the exclusive economic zone to be a part of India only from the date of the notification and not earlier."
27. Now, let us consider the decisions heavily relied on by learned senior counsel for the Revenue. In Union of India v. Madan Gopal Kabra , the respondent resided and carried on business in the District of Jodhpur in Rajasthan which was one of the State specified in Part B of the First Schedule to the Constitution. The Constitution of India came into force on 26th January, 1950. The Finance Act, 1950, amended the Indian Income-tax Act, 1922, by introducing section 2(14A) and made the said Act applicable to the whole of India, except the State of Jammu and Kashmir. The respondent in that case was sought to be assessed to tax for the assessment year 1950-51, in respect of the corresponding accounting year 1949-50. The respondent field a writ petition before the High Court challenging the proposed proceedings and his claim was upheld by the High Court. On appeal, the Supreme Court reversed the decision of the High Court and held that under sub-clause (i) of clause (b) of the proviso to section 2 (14A) of the Indian Income-tax Act, 1922, the whole of the territory of India including Rajasthan was to be demand taxable territory for the purpose of section 4A as respects any period before after March 31, 1950. Taking note of the said section 2(14A), the Supreme Court further held that the income which accrued to an assessee in the accounting year 1949-50 in Rajasthan was taxable under the Indian Income-tax Act, 1922.
28. The other decision relied on by learned senior counsel for the Revenue is in CIT v. H. E. H. Mir Osman Ali Bahadur . Learned counsel for the Revenue placed strong reliance on the following observations of the Supreme Court in the above decision in support of his contention that the income-tax law applied on assessment year basis (at page 677) :
"The legal position as was apprehend may be stated thus : Under the Act an individual is assessed to income-tax on the income of the previous year the at the rate or rates fixed for the year by the annual Finance Act. The total income of the assessee during the previous year is computed in accordance with the provisions of the income-tax Act after giving the relevant allowance and deductions therefrom. If during the assessment year an individual is assessable to tax, the fact that during the previous year he was not liable to tax at all because there was no Income-tax Act in the area to which the Act was extended or because that under an Income-tax Act in force therein during that year his income was exempted from tax or because of any other law, including international law, he was so exempt from tax, would not be of any relevance. After the extension of the Act of the Hyderabad State the charge was under the Act and not under the provisions of the previous law. Thereafter, the charges as well as the manner of computation of income did not depend upon the pre-existing law, but only upon the provision of the Act. Applying the said principle to the instant case, it is manifest that after January 26, 1950, the assessee ceased to be a ruling chief and he was, therefore, liable to assessment under the Act. If he was assessable to tax, the statutory charge on his income during the previous year was only traceable to the Act, which was retroactive in operation to that extent. His right to exemption, if any, under international law during the accounting year was irrelevant to the question of taxation under the Act, as the said law ceased to apply to him during the assessment year."
29. In that case, the respondent, who prior to January 26, 1950, was the Nizam of Hyderabad, claimed exemption from tax under the Indian Income-tax Act, 1922, for the assessment year 1950-51. By virtue of the amendment introduced to the Income-tax Act, 1922, by the Finance Act, 1950, by inserting section 2(14A), the Indian States like Hyderabad, which was not part of taxable territories during the previous year relevant to the assessment year 1950-51, were by fiction made part of taxable territories even during the previous year. The Supreme Court, in the above decision, taking note of section 2(14A) of the Indian Income-tax Act, 1922, as introduced by the Finance Act, 1950, held as follows (at page 675) :
"Under section 2(14A), 'taxable territories' shall be deemed to include the merged territories as respects any period after the 31st day of March, 1949, for any of the purposes of the Act and as respects any period included in the previous year, for the purpose of making any assessment for the year ending on the 31st day of March, 1950, or for any subsequent year. The effect of these provisions is that every individual was liable to income-tax from April 1, 1950, at the rates mentioned in the Finance Act in respect of his total income of the previous year in the merged territories. It is not, and it cannot be, disputed that on April 1, 1950, the assessee was not a ruling chief but an ordinary citizen of India, residing, within the meaning of section 4 of the Act, in that part of India which was a part of the Hyderabad State and so he would be liable to income-tax on April 1, 1950, in respect of the total income he received in the previous year in the merged territory."
30. The basis of the decision of the Supreme Court in Union of India v. Madan Gopal Kabra [1954] 25 ITR 53 (SC) and CIT v. H. E. H. Mir Osman Ali Bahadur is the amendment introduce to the Indian Income-tax Act, 1922. Section 2 (14A) is the amendment introduced to the Indian Income-tax Act, 1922, by the Finance Act, 1950. The said amendment introduced by section 2 (14A) deemed Indian State such as Rajasthan and Hyderabad, which were not part of the taxable territories during the previous year relevant to the assessment year 1950-51 as part of table territories even during the previous year. As a consequence, persons staying in such States became residents of India and chargeable to income-tax under the provisions of the Indian Income-tax Act, 1922. In the absence of section 2(14A), they would have been non-residents during the previous year and the income would have arisen to them during the previous year outside India and consequently would not have been liable to income-tax. It is needless to say that when there was an amendment to the Indian Income-tax Act, 1922, in the form of section 2(14A) by the Finance Act of 1950, the said Act with its amendment has retrospective effect. But, in the present case, there is no amendment to the Income-tax Act, 1961, similar to the one introduced to the Indian Income-tax Act, 1922, by the Finance Act, 1950, inserting section 2 (14A). On the other hand, in the present case, there is only a notification issued by the Central Government in G.S.R. No. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, which came into force on April 1, 1983, and the said notification dated March 31, 1983, cannot be interpreted so as to make it operative retrospectively. It is a settled position of law that a subordinate authority cannot exercise its power in such a manner that is action has retrospective effect (vide ITO v. M. C. Ponnoose and Bakul Cashew Co. v. STO [1986] 159 ITR 565 (SC). Therefore, it cannot be held that Notification No. G.S.R. 304(E) (see [1983] 142 (St.) 11), dated March 31, 1983, is bringing to charge income which had accrued prior to the date of its coming into force as that would have the effect of giving retrospective effect to the said notification. For all the reasons stated above, we are of the view that the ratio of the decision of the Supreme Court in Union of India v. Madan Gopal Kabra [1954] 25 ITR 58 and CIT v. H. E. H. Mir Osman Ali Bahadur [1966] 59 ITR 666 cannot be applied to the facts of the present case and the said decisions relied on by learned senior counsel for the Revenue are clearly distinguishable and do not in anyway advance the case of the Revenue.
31. The settled position of income-tax law is that the law prevailing on the first date of the assessment year has to be applied for that year. However, we must find out that the income had accrued or arisen to the assessee, in the taxable territories during the previous year relevant to the assessment year before it can be taxed on the basis of the law as on first April. We have already found that the continental shelf and exclusive economic zone of India were not part of the taxable territories during the previous year relevant to the assessment year 1983-84. Therefore, the Revenue cannot contend that any income has secured or arisen to the assessees in the taxable territories during the previous year so as to bring it to tax for the assessment year 1983-84. In these circumstances, we have no hesitation in holding that the salary income earned by the assessees, prior to April 1, 1983, cannot be charged to tax under the provisions of the Income-tax Act, 1961, in the assessment year 1983-84.
32. On identical facts, a similar view was taken by a learned single judge of the Bombay High Court in McDermott International Inc. (No. 1) v. Union of India [1988] 173 ITR 155. In that case also, the petitioner-company, established under the laws of the Republic of Panama, carried on business of designing, fabrication, construction of platform jackets, decks and piles, bridges, pipelines and similar construction work on shore and off-shore. The petitioner at the relevant time was engaged in the activity of installing platform jackets, decks and laying pipelines at the Bombay High off-shore area, which was at a distance of about 100 nautical miles from the Indian coastline. The Income-tax Officer informed the petitioner-company that it came under the purview of Notification No. G.S.R. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983, issued by the Central Government and directed the petitioner to pay income-tax in respect of the personnel employed by it in the previous year relevant to the assessment year 1983-84. A notice under section 226(3) of the Income-tax Act, 1961, was also issued to the O.N.G.C. requesting them to pay forthwith any amount held by it for or on account of H of whom the petitioner was a sub-contractor which was complied with by the O.N.G.C. In that case, the question arose whether, by virtue of the notification which came into effect from April 1, 1983, the income which had accrued to the employees of the petitioner within the area of the continental shelf or economic zone, and beyond the territorial waters of India, in the accounting year April 1, 1982, to March 31, 1983, was subject to income-tax under the Income-tax Act, 1961.
33. The learned single judge of the Bombay High Court held that the relevant assessment year is 1983-84, when the Income-tax Act, 1961, was made applicable to the continental shelf and the exclusive economic zone of India by virtue of Notification No. G.S.R. 304(E) (see [1983] 142 ITR (St.) 11), dated March 31, 1983. The learned judge further found that the income-tax is actually levied on income which accrued during the previous accounting year 1982-83, and as the territory in which the income arose was beyond 12 nautical miles, the Income-tax Act was not applicable to such income during the accounting year 1982-83. The income-tax, therefore, cannot be levied on income which accrued during the period when the territory in which it accrued was not part of India and was not governed by the Income-tax Act, 1961. The learned single judge further held as follows (at page 161) :
"Therefore, when it is sought to tax income arising in the previous year relevant to the assessment year from which the Income-tax Act is made applicable, an express provision has to be made to cover income accruing in the previous year. In the absence of such an express provision, income accruing in an accounting year for which the Income-tax Act was not applicable, cannot be brought to tax simply because from the relevant assessment year, the Income-tax Act is made applicable.
There is no such express provision in the notification of March 31, 1983. The income arising in the accounting year April 1, 1982, to March 31, 1983, to the petitioner in the territory beyond 12 nautical miles is not, therefore, subject to the Income-tax Act, 1961."
34. For all the reasons stated above, we are of the view that the Tribunal is quite right in holding that the continental shelf and the exclusive economic zone were not part of India prior to the notification of the Government of India No. 5147/F. No. 133(79) /82, TPL, dated March 31, 1983, in view of the provisions of sections 6(6) and section 7(7) of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976, and consequently the salary income earned by the assessees prior to April 1, 1983, was not chargeable to tax under the Income-tax Act, 1961, in the assessment year 1983-84.
35. Accordingly, we answer the question referred to us in the affirmative and against the Revenue. However, there will be no order as to costs.