Income Tax Appellate Tribunal - Mumbai
K. E. C. International Ltd. vs Income-Tax Officer on 21 April, 1997
Equivalent citations: [1997]63ITD278(MUM)
ORDER
M.K. Chaturvedi, JM
1. These cross appeals are directed against the order of the Commissioner of Income-tax (Appeals), Central-II, Mumbai, and pertain to the assessment year 1981-82.
2. The main issue, apropos, these appeals, relate to the allowability of the amount paid towards foreign taxes. A sum of Rs. 1,03,77,803 being foreign tax liability was disallowed by the Assessing Officer in consequence of the direction made under section 263 of the Income-tax Act, 1961 (hereinafter called "the Act"). Being aggrieved, assessee preferred appeal there against before the CIT(A). The CIT(A) allowed the claim in respect of taxes paid in Iran being Chamber of Commerce Tax and Contractors Tax. He disallowed the claim in respect of Corporate tax. Tax paid in Libya on account of income-tax and Jehad tax was also disallowed by the CIT(A). Assessee is in appeal in relation to the additions maintained in appeal. Revenue is in appeal in relation to the additions deleted in appeal.
3. Sri Percy Pardiwalla, the learned counsel for the assessee appeared before us. It was contended that the foreign tax liability is a deductible expenditure under section 37 of the Act. It is not covered by the provisions of section 40(a)(ii). This liability was in the nature of an expenditure which was incurred wholly and exclusively for the purposes of the business, and was incidental to the activities of the trade. Bereft such expenditure running of the business was not possible.
4. Coming to the applicability of provisions of section 40(a)(ii) of the Act, learned counsel, contended, that foreign tax liability is beyond the ken of this section. Stating the position compendiously, it was submitted that the foreign tax liability, in the instant case is not based on the profits and gains as determined under section 28 of the Act. As such, the liability clearly goes beyond the ambit of section 40(a)(ii).
5. Our attention was invited on the provisions of section 2(43) of the Act, to explain the meaning of the word 'tax'. Applying this definition, to the prescription of section 40(a)(ii), it was contended that, "foreign tax" cannot be construed to be "tax" for the purposes of section 40(a)(ii).
6. Antecedents were narrated. In the assessment year 1978-79, there was addition on this count. Appeal came up before the Tribunal. The Tribunal restored the matter to the Assessing Officer. Directions were rendered to decide the issue in the light of the following two judgments.
(a) CIT v. Thomas Duff & Co. (I)(P.) Ltd. [1982] 137 ITR 798 (Cal.) and
(b) CIT v. Oriental Co. Ltd. [1982] 137 ITR 777 (Cal.) Thereafter, it was stated that the Assessing Officer allowed the claim. This claim was also allowed in the assessment years 1979-80, 1980-81. In the assessment year 1982-83, the matter came up before the Tribunal in surtax proceedings. On facts, the Tribunal took the view that it is not a tax on profit and gains of business for the purpose of surtax proceedings.
7. It was submitted that in the case of Tata Sons Ltd. (IT Appeal No. - 5708/Bom/82 and I. T. Appeal No. 5790/Bom/83) foreign tax paid on account of consultancy fees received by the assessee from a foreign party was allowed by the Tribunal. The reference applications under section 256(1) of the Act were also rejected in R. A. No. 305 and 306/B/85, dated 14-1-1986.
It was further submitted that the Bombay High Court vide its order dated 23-3-1996 rejected an application under section 256(2) of the Act. A copy of the said order was placed before us.
8. By rejecting the application under section 256(2), High Court approved the correctness of the Tribunal order. Reliance was placed on the decision of the Special Bench of the Tribunal rendered in the case of Samir Diamonds Exports (P.) Ltd. v. ITO [1988] 25 ITD 73/39 Taxman 150 (Bom.).
9. Reference was also made to the decision of the Tribunal in the case of ITO v. S. E. A. S. Co. (P.) Ltd [IT Appeal No. 223 (Bom.) of 1974 dated 9-4-1975]. In this case, it was held that the tax levied by different countries is not a tax on profits but a necessary condition precedent to the earing of profits.
10. Shri Pardiwalla further stressed that Chamber of Commerce tax and Contract tax cannot be construed to be a tax on income. In regard to the contract tax, it may be stated that 5 1/2 tax was deducted at source. At the time of full and final assessment, credit of 1 1/2% was given to the assessee. The assessee made claim only in respect of 4%. This 4% amount was not adjustable. It never accrued to the assessee. For this proposition, reliance was placed on the decision of the Jurisdictional High Court in the case of CIT v. Ambalal Kilachand [1994] 210 ITR 844 (Bom.). In this case, it was held that tax deducted at source on dividend in U. K. cannot be included in total income of the assessee. Only net dividend income can be assessed to tax.
11. Sri Modi, learned Senior Departmental Representative appeared before us. Relevant documents and papers were filed. At the outset, Sri Modi invited our attention on the decision of the Tribunal rendered in the assessee's own case for the assessment years 1982-83 and 1983-84 reported in KEC International Ltd v. ITO [1994] 51 ITD 178 (Bom.). It was stated that Tribunal in the said case analysed the nature of the taxes. It was held that these taxes were only an application of income and not incurred wholly and exclusively for the purposes of business. Income-tax represents the Governments' share of profit. It is a case of application of profits after they have been earned.
12. Reliance was placed on the decision of CIT v. Kerala Lines Ltd. [1993] 201 ITR 106 (Mad.), wherein tax paid in foreign ports was held not deductible as it was considered an application of profits earned by the assessee.
13. Commenting on the definition of the word 'tax' as given under section 2(43) of the Act, Sri Modi submitted that section 2 begins with the word "In this Act, unless - the context otherwise requires....". This indicates that the meaning as given in section 2(43) is not absolute. It is important to see the context in which the term is used.
14. Further, it was stated that section 40(a)(ii) speaks about any rate or any tax not necessarily income-tax. It was stated that the word "ANY" means 'all' except where such a wide construction is limited by the subject matter and context of the statute.
15. Coming to the allowability of the claim under section 37(1), ld. D. R. submitted that, the touchstone for testing the allowability under this section is relationship of the expenditure with the business activities. If, it is an application of income, it cannot be allowed under section 37(1). Reference was made to the decision of the Apex Court rendered in the case of Vibhuti Glass Works v. CIT [1989] 177 ITR 439/44 Taxman 182 (SC). It was held in this case that if the income accrued to the assessee and is applied consequent upon such accrual to discharge an obligation, it is application of income, it cannot be construed to be the expenditure. It was argued that payment of tax was the obligation of the assessee. Tax was paid in consequence of such obligation. Therefore, it amounts to an application of income.
16. It was further submitted that the jurisdictional High Court in the case of S. Inder Singh Gill v. CIT [1963] 47 ITR 284 (Bom.) has held that the tax paid by the assessee on his foreign income in the foreign territory cannot be deducted while computing the total income.
17. Our attention was invited on the decision of the Apex Court rendered in the case of Smith Kline & French (India) Ltd v. CIT [1996] 219 ITR 581/85 Taxman 683 (SC). In this case, it was held that surtax levied under Companies (Profits) Surtax Act, 1964 squarely falls within the mischief of sub-Section (ii)(a) of section 40 of the Income-tax Act, 1961 and cannot be allowed as a deduction while computing the business income of the assessee under the provisions of the I. T. Act.
18. We have heard the rival submissions in the light of the material placed before us and the precedents relied upon. The following three points were raised before us :
(1) What is the exact nature of the tax paid by the assessee on its foreign income in the foreign territory ?
(ii) Whether the tax paid on foreign income in the foreign territory can be allowed as deduction under section 37(1) of the Act ?
(iii) Whether its allowability can be tested on the touchstone of section 40(a)(ii) ?
19. The business of the assessee-company is that of manufacture of electricity transmission towers and of construction of laying down 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. As far as Iran was concerned, the assessee was subjected to the following types of foreign taxes governed by various articles of Iran Direct Tax Laws :
(i) Corporate tax;
(ii) Contractors' tax; and
(iii) Chamber of Commerce tax.
As far as Libya is concerned, assessee was required to pay :-
(i) Income-tax;
(ii) Jehad tax; and
(iii) Salary tax.
20. The Corporate tax in Iran was governed by Article 134 of the Iran Taxation Laws. Article 134 prescribed graded rate of taxation on the income exigible to tax. For the assessment years 1982-83 and 1983-84 in assessee's own case, Tribunal held this to be a tax on income.
As regards contractors tax, 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% of annual receipts. It was argued before the Tribunal in the Surtax appeal for the assessment year 1978-79 that there were parallels in the Income-tax Act, 1961, for charging income-tax as a percentage of gross receipts, such as section 44AC etc. However, the Tribunal only had Article 76 before it had observed that 4% of the gross receipts were 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, Article 79 of the Iran Taxation Laws cover taxable income in respect of operations referred to in Article 76. The computation of income at 8% of the annual receipts was quite similar to the quantification of income as a percentage of gross receipts in the abovementioned sections of the I. T. Act. The conclusion, therefore, was that contractors tax was also a tax on income. Chambers of Commerce tax was covered by Article 167 of the Iran Taxation Laws. Article 167 lays down only an additional tax @ 3 1/2% per thousand on the taxable income. The nomenclature, only signified the use to which this collection should be put to. The proceeds would be paid to the Chambers of Commerce, etc. The utilisation of the tax could not have any bearing on the nature of tax itself which had been clearly described as additional tax on taxable income. Thus, the Chambers of Commerce tax was also tax on income. So far as the tax paid in Libya, we for the present are concerned with the income-tax and Jehad tax. There is no dispute in regard to the salary tax. Al-Jehad tax was categorised as tax on income.
21. The Bombay High Court in the case of S. Inder Singh Gill v. CIT [47 ITR 284] has held that there is no commercial practice or principle under which tax paid on foreign income in a foreign country could be deducted in computing the foreign income for the purpose of ascertaining the total world income under the Act. Following, inter alia, the ratio of this decision, the Tribunal in the assessee's own case in KEC International Ltd.'s case (supra) for the assessment years 1982-83 and 1983-84 has held that foreign taxes were not deductible under section 37(1) since they were only in the nature of application of income and not being incurred wholly and exclusively for the business of the assessee. In the case of Ashton Gas Co. v. Attorney General (1906) AC. 10 (HL), it was held that income-tax represents the 'Crown's share of the profit.' It is a case of application of profit after they have been earned.
22. In the case of Ambalal Kilachand's case (supra), Hon'ble High Court observed (at page 852) "The amount initially available for distribution by the U. K. Company cannot be considered as income accruing to the assessee, because the assessee does not have any right to receive the amount so initially declared. He does not have any right to claim any credit for the tax which is deducted on that amount. Therefore, under no circumstances can he claim that the gross amount available for distribution has accrued to him. The company in the U. K. is liable to pay certain tax on that amount before the money goes to the hands of its shareholders. The shareholder outside the U. K. cannot claim any credit for the tax paid by the company. Therefore, the only entitlement of a shareholder outside the U. K. is to receive dividend as reduced by the deduction of the Corporation tax."
The facts of the present case are different. In the instant case income was accrued to the assessee. The contract tax was levied in addition to the tax on total income. It was in consonance with the provisions of Article 76 of Iran Taxation Laws. Therefore, the ratio of Ambalal Kilachand's case (supra) does not apply.
23. In the case of Vibhuti Glass Works case (supra), it was held that although the deed was described as a lease deed and it provided with the glass factory was demised to the State Government, the conditions set forth in the document disclosed that the State Government was given the power to manage the glass factory business for a period of 20 years from the date it took possession and in substance, possession was transferred only for the purpose of enabling the State Government to manage and run the business. Further, the profit during the year was not sufficient for the State Government to enjoy a share therein in accordance with the terms of the deed. Therefore, the profit accrued to the appellant directly and was merely applied, upon such accrual, to discharge an obligation of the appellant. The entire profit earned by the glass factory business was the income of the appellant and no question arose of any part thereof being regarded as assessable in the hands of the State Government.
24. On the basis of this decision, it was argued by the ld. D. R. that the tax was paid to discharge an obligation of the assessee. It was, therefore, profit accrued to the assessee directly and was merely applied upon such accrual. As such, no deduction can be made in the income on account of the tax paid in the foreign territory.
25. We have examined the nature of the tax paid by the assessee on its foreign income in the foreign territory. In our opinion, the taxes with which we are concerned, in this appeal, are of the nature of taxes on income. Income-tax represents the "Crown's share of the profit". This principle is propounded by the House of Lords. In our country also this principle is followed. We have perused the reasonings given in the order of the Tribunal in the assessee's own case for the assessment years 1982-83, 1983-84, reported in KEC International Ltd.'s case (supra). We are inclined to agree with the conclusion that the taxes paid by the assessee in foreign territory on the foreign income were only an application of income and were not incurred wholly and exclusively for the business of the assessee.
26. Once the decision is taken that the expenditure incurred were not wholly and exclusively for the purposes of business, the allowability of the same cannot be considered under section 37 of the Act.
27. In the case of Smith Kline & French (India) Ltd.'s case (supra) the Hon'ble Supreme Court has held that in section 40A(2) the words indicating that profits and gains spoken by them should be determined in accordance with the provisions of the I. T. Act. All they say is that it must be a rate or tax levied on the profits and gains of business or profession. Accordingly, surtax levied under the Companies (Profits) Surtax Act, 1964 squarely falls within the mischief of sub-clause (ii)(a) of section 40 of the I. T. Act, 1961, and cannot be allowed as a deduction while computing the business income of the assessee under the provisions of the I. T. Act.
28. We have perused the contents of section 40(a)(ii). We find that the word 'tax' is used, in conjunction with the words 'any rate or tax'. The word 'any' goes both with the rate and tax. The expression is further qualified as a rate or tax levied on the profits and gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains : If the word 'tax' is to be given the meaning assigned to it by section 2(43), the word 'any' used before it will be otiose and the further qualification as to the nature of levy will also become meaningless. Further more, the word 'tax' as defined in section 2(43) is subject to 'unless the context otherwise requires'. In that view of the matter, the words 'any tax' in section 40(a)(ii) includes the taxes paid by the assessee on his foreign income in the foreign territory. Accordingly, we decide this issue against the assessee and in favour of the revenue.
29. Alternatively, it was argued that in case section 40(a)(ii) held to be applicable to foreign taxes, the Assessing Officer be directed to grant appropriate double taxation relief under section 91 in respect of such taxes. Section 91 makes provision for grant of unilateral relief by the Government of India in respect of incomes which had suffered tax both in India and in the country with which there is no agreement for double taxation relief or for avoidance of double taxation. In other words, that section is attracted for giving relief against double taxation only if the income derived by the assessee is from a foreign country with which there is no reciprocal agreement between that country in India for relief or for avoidance of Double Taxation. Where, there is a reciprocal agreement, the relief is granted only under such agreement. The object of the section is that the amount of Indian Income-tax paid or the amount of tax paid in the foreign country, whichever is lower is allowed as a deduction from the tax payable under the Act on such doubly taxed income. In order or avail the benefit of section 91, it is sine qua non that -
(i) the assessee must be a resident of India in the year in which the relief is claimed;
(ii) that the income on which the relief is claimed must accrue or arise to him in a country outside India with which there is no agreement for avoidance of double taxation; and
(iii) that he paid in that country income-tax by deduction or otherwise under the law in force in that country.
30. If the assessee satisfies the above said requirements, benefit of the section 91 can be extended to him. We, therefore, direct the Assessing Officer to consider the claim of the assessee under section 91 in the light of the aforesaid directions. We find that the CIT(A) also acceded to this request of the assessee and no contrary finding to this effect is recorded in the order. Therefore, there is no infirmity in the impugned order on this count.
31. In the result, the appeal of the revenue stands allowed and the appeal of the assessee stands dismissed.