TMI Blog1987 (12) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... o the ITO. The assessees filed their respective returns and paid tax on self-assessments. Thereafter, on the basis of various opinions, the assessee filed revised returns on 5-11-1983 with Nil taxable income on the ground that the Notification under 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 assessees contended that the Notification dated 31-3-1983 applies only prospectively and not retrospectively. The assessee's contention that the Notification referred to earlier applies only from assessment year 1984-85 onwards was not accepted by the ITO since according to him the Notification came into force with effect from 1-4-1983 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 assessees herein were completed by including the salary income. 3. Aggrieved, the assessees filed appeals before the Commissioner of Income-tax (Appeals). On appeals before the CIT (Appeals) the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore made the Income-tax Act, 1961 applicable in respect of income pertaining to the assessment year 1983-84 as per the principle of law laid down by the Hon'ble Supreme Court in Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966] 60 ITR 262 and Punjab and Haryana High Court in L. Rajeshwar Pershad v. CIT [1986] 159 ITR 920. Another submission made by the learned Departmental Representative was that the CIT (Appeals) misconstrued the said Notification of the Government of India when he stated that it was an amendment of the Act and as such could not have any retrospective application unless specifically made to have such effect, when the said Notification was meant to extend the Income-tax Act, 1961 to the Continental Shelf and the Exclusive Economic Zone of India. Such misconception regarding the Notification has vitiated his findings. The learned Departmental Representative further submitted that the CIT (Appeals) erred in holding that during the year under consideration the assessee was not coming within the definition of "assessee" as his place of employment was located outside India. The learned Departmental Representative further submitted that the jurisdiction over the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act to the Economic Zone of India w.e.f. 1-4-1983 in respect of certain types of income derived by every person from the prospecting or extraction, etc., of mineral oils in the zone, etc. It was stated that the Economic Zone of India under the Act of 1976 have been extended up to 200 nautical miles. Therefore, in the relevant previous year 1982-83 the assessee-employees had rendered services in the Economic Zone. 6. The learned Departmental Representative thereafter contended that a legal fiction is to be carried out to its logical conclusion, but only within the field of the definite purpose for which the fiction is created CIT v. Amarchand N. Shroff [1963] 48 ITR 59 (SC) and CIT v. Ajar Products Ltd. [1965] 55 ITR 741 (SC). Our attention was invited to a passage occurring in CIT v. S. Teja Singh [1959] 35 ITR 408, wherein the Supreme Court referred to the following oft-quoted observations of the Privy Council : "If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequence and incidents which if the putative state of affairs had in fact existed, must inevitably have flowed fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard our attention was invited to a decision of the Supreme Court in the case of Karimtharuvi Tea Estate Ltd. , wherein it was held that "it is well settled that the Income-tax Act, as it stand amended on the 1st day of April or any Financial Year must apply to the assessment of that year". Following this decision the Punjab and Haryana High Court in another judgment in the case of L. Rajeshwar Pershad held that "different phraseologies are employed while making amendments to the Income-tax Act, 1961 but whenever amendments are made with effect from the first day of April of any financial year, the amendment would apply to the assessments to be made for that year. Therefore, in view of the amendment to sec. 2(14) (ii) of the I. T. Act, 1961 with effect from April 1, 1973, capital gains on sale of jewellery/ornaments will be taxable for the assessment year 1973-74". 10. Our attention was also invited to the judgment of the Gujarat High Court in the case of Maneklal Vallabhdas Parikh Sons v. CIT [1969] 72 ITR 637 where it was held that "now it is well settled that though the subject of charge is the income of the previous year, the law to be applied is that in force in the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entative further pointed out that it will be pertinent to note that the Income-tax Act, 1961 itself was brought into force w.e.f. 1-4-1962, i.e., for and from the assessment year 1962-63 and accordingly, income of the previous year relevant to assessment year 1962-63 was taxable under the Income-tax Act, 1961 even though the Act received the assent of the President of India on 13-9-1961, i.e., in the financial year 1961-62. Thus, even the income of the previous year beginning from the date prior to 13-9-1961 relevant to assessment year 1962-63 became taxable and such an application of the Income-tax Act, 1961 has never been challenged on the ground that it was retrospective in nature, according to the learned Departmental Representative. 13. The learned Departmental Representative further argued that the Tax Laws (Extension to Union Territories) Regulations, 1963 whereby the Income-tax Act was extended to the Union Territories of Dadra and Nagar Haveli, Goa, Daman, Dui and Pondicherry w.e.f. 1-4-1963. Here again, according to the learned Departmental Representative, income in these territories in the previous year relevant to assessment year 1983-84 became taxable which in certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice the judgment of the Supreme Court in the case of CIT v. H. E. H. Mir Osman Ali Bahadur [1966] 59 ITR 666 wherein the Supreme Court summarised the legal position in this type of cases as under : "The legal position as we apprehend may be stated thus : Under the Act an individual is assessed to income-tax on the income of the previous year 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 allowances 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 to the Hyderabad State the charge was under the Act and not under the provisions of the previous law. Thereafter, the charge as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reignty are unfettered and unlimited. There are always certain limitations imposed by international treaties and conventions. Therefore, at the most there is only a difference of degree and not of kind as far as powers of sovereignty are concerned. 19. Thereafter the learned Departmental Representative submitted that the declarations by various sovereign States about the Exclusive Economic Zone is a unilateral act by a sovereign State. As per the International Law the rights for E. E. Z. and continental shelf are inherent with a sovereign State and by passing an Act it is brought to the statute and made known to the other sovereign States. Therefore, in the exclusive economic zone of India, the Government of India as exclusive rights and no other sovereign power can make use of the resources located therein. Therefore, it is fictional part of the territory of India. The learned Departmental Representative thereafter pointed out that the earlier definition in 1922 Act was applicable to the whole territory of India. The Indian Income-tax Act, 1961 is applicable to "whole of India" as per sec. 1(2) of the Act. The definition of Art. 1(3) of the Constitution of India defines India on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial waters, continental shelf, exclusive economic zone and other maritime zones of India. The learned counsel pointed out that according to sec. 3(1) of the abovesaid Act the sovereignty of India extends and has always extended to the territorial waters of India and to the seabed and subsoil underlying and air space over. 22. The contiguous zone of India is an area beyond and adjacent to the territorial waters and the limit of the contiguous zone is the line every point of which is at a distance of 12 nautical miles from the nearest point of the base line referred to in sub-sec. (2) of sec. 3. The learned counsel pointed out that according to sec. 6(1) the continental shelf of India, hereinafter referred to as the continental shelf, comprises the seabed and sub-soil of the submarine areas that extend beyond the limit of its territorial waters throughout the natural prolongation of its land territory to the outer edge of the continental margin or to a distance of two hundred nautical miles from the base line referred to in sub-sec. (2) of sec. 3, where the outer edge of the continental margin does not extent up to that distance. It was pointed out that according to sec. 6(2) India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el, the word contained in sec. 3(1) in the Act No. 80 of 1976 is "sovereignty" and the words contained in sec. 6(2) is "full and exclusive sovereign rights". The learned counsel pointed out that there is difference between these two. He submitted that continental shelf, exclusive economic zone and other maritime zones of India are originally not part of India. It is only by the abovesaid Notification for the purpose of Income-tax Act, 1961 the continental shelf, exclusive economic zone and other maritime zones of India was brought into the purview of the Income-tax Act as taxable territory. He further pointed out that under sec. 1(2) of the Income-tax Act, 1961 the Act is made applicable to whole of India. While so, according to him,.if the Act, 1961 is applicable to the whole of India, there was no necessity to pass this legislation, namely Act No. 80 of 1976. Therefore, it was argued that the Income-tax Act, 1961 will not apply to the continental shelf, exclusive economic zone and other maritime zones of India during the financial year relevant to the assessment year 1983-84 because the assessees were doing their work beyond the territorial jurisdiction which is in extra territor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er necessary for facilitating the enforcement of such enactment. Where any such enactment is so extended, it will have the effect as if the said zone or any part thereof the which it has been so extended were a part of the territory of India. It is proposed to issue a Notification in terms of the Territorial Waters, etc., Act, 1976 to extend the direct tax enactments to the Exclusive Economic Zone." 25. The learned counsel thereafter contended that so far as the Income-tax Act is concerned up to March 31, 1981 the exclusive economic zone did not form part of the territory of India. Therefore, up to and including the assessment year 1980-81 any income accruing or arising to or received by a non-resident in such zone was not chargeable to income-tax even in relation to the assessment year 1981-82 the exclusive economic zone does not form part of territory of India as no Notification under sec. 7(7) up to 31-3-1981 has been issued. The learned counsel pointed out that after the Notification is issued by the Central Government under sec. 7(7) of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 extending, inter alia, the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as self speaking as according to that Notification the Income-tax Act had been extended to these areas only with effect from 1st April, 1983. The learned counsel further contended that the assessing officer has also proceeded on the basis that the income arising to the respondents 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. It is submitted that it is not open to the Department to change the basis of assessment in appeal and make submissions contrary to the assessment. The learned counsel also placed reliance on a passage occurring in a Text Book called "J. G. Starke International Law", 9th Edn. The learned counsel also contended that the sovereign rights conferred on India in respect of these areas falls short of sovereignty. The learned counsel pointed out that this is also brought out by the Convention of the Law of the Sea, 1982. 29. According to the learned counsel Art. 297 of the Constitution of India occurs in Chapter III of Part XII of the Constitution, which, inter alia, deals with the division of property, assets, rights and obligations of the Union and of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the previous year in question. The learned counsel, in support of the abovesaid contention, relied upon the decisions in the cases of CIT v. Valliammai Achi [1938] 6 ITR 720 (Mad.) (FB); Rawji Dhanji Co., In re [1940] 8 ITR 1 (Bom.) and E. M. V. Muthappa Chettiar [1945] 13 ITR 311 (Mad.). These decisions were rendered in the context of the separation of Burma from British India w.e.f. 1-4-1937. According to the learned counsel the present situation is closely similar to the situation before the Courts in those cases. According to the learned counsel, the principle laid down by the various High Courts as pointed out above would show that the taxable territories of India is to be considered in the previous year would equally apply to the present case. The learned counsel then contended that this view if also supported by legislative practice. Thereafter the learned counsel pointed out as to how the Indian Income-tax Act, 1922 was extended and made applicable to the whole of India by virtue of amendments made by the Finance Act, 1950. He also pointed out that similarly, on the liberation of Goa, Daman and Diu the Income-tax Act was extended to these territories w.e.f. 1-4-1963 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year of a non-resident company known as Sedco International S. A. The said company is incorporated under the laws of Panama. The said company has entered into a contract with the Oil and Natural Gas Commission for exploring oil in the seas adjoining the territories of India. The said contract was entered into on 5th November, 1981 and expired on 22nd January, 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 oil rig itself operated on the seas above the Continental Shelf of India. It was not embedded in the continental shelf. 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. 34. In 1976 Parliament made the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976. Except for the provisions of sections 5 and 7, the said Act came into force on 25-8-1976. Sections 5 and 7 have been brought into force by the Government of India on 15-1-1977. Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been extended is a part of the territory of India. Thus, sections 6(6) and 7(7) create 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 enactment as are extended to those areas by the Central Government by Notification in the Official Gazette. 37. On 31-3-1983 the Government of India issued Notification GSR 304(E) extending the Income-tax Act to the continental shelf of India and the exclusive economic zone of India w.e.f. 1-4-1983 subject to the restrictions and modifications that the said Act would apply only in respect of income derived by every person from all or any of the activities specified therein. Thus, as a result of the said Notification read with sections 6(6) and 7(7) of the Territorial Waters Act the continental shelf of India and the exclusive economic zone of India are to be treated as a part of India for the purposes of the types of income derived by a person from the activities specified in the said Notification. 38. The first point that was argued by the learned Departmental Representative was that the continental shelf and exclusive economic zone were always a part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions, 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, 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, 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 undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so proceeded on the basis that the income arising to the assessee 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, Income-tax Act, 1961 would apply. 39. Section 3(1) of the Territorial Waters Act declares India's sovereignty to the territorial waters. Moreover, in respect of Continental Shelf and the Exclusive Economic Zone, India has been given only certain sovereign rights. These rights are exclusive in the sense that if India does not exploit of explore these nobody can undertake activities without its express consent. These rights do not depend on occupation, effective or notional nor do they depend on any express proclamation. It was stated in the Book "International Law of D. T. Harris Cases and Materials" that sovereign rights conferred on India in respect of these areas falls short of sovereignty. This is also brought out by the convention on the Law of the Sea, 1982. 40. The learned Departmental Representative placing reliance on Art. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification issued thereunder are in conformity and in pursuance of or in accordance with Art. 297 of the Constitution of India. Art. 297 has been amended by the Constitution (40th Amendment) Act, 1976, which came into force from 27th May, 1976. The Territorial Waters Act has been framed by Parliament as a sequel to the Constitution (40th Amendment) Act, 1976. 42. If Art. 297 is construed so as to mean that the continental shelf and the exclusive economic zone have always been a part of India it would mean that the Income-tax Act, 1961 always extended thereto as it applies to the whole of India, according to section 1(2) of the Income-tax Act. If that is so the employees like the assessees were always chargeable to Indian income-tax in respect of their salaries for periods prior to the assessment year 1983-84, which is not even the contention of the Department. Further, if such understanding is given, then apart from the salary income, all other income in the said area would be chargeable to income-tax under the Income-tax Act, 1961 which is also opposed to the Income-tax Act, 1961. 43. Thus, on a plain reading of sections 6(6) and 7(7) of the Territorial Waters Act, the letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." Another decision cited by the learned Departmental Representative was that reported in S. A. Hareford's case in the case of Wallace Bros. Co. Ltd. , wherein the Bombay High Court held as under : "I gather that the argument before the Tribunal was that retrospective effect could not be given to the impugned sub-section but as the Tribunal points out, there is no question of giving retrospective effect. No doubt, the Act came into operation after the close of the previous year has to be ascertained in accordance with the provisions of the amended Act in order to determine the assessment for the current year." Placing reliance on the abovesaid decision, the learned Departmental Representative contended that the Notification dated 31-3-1983 applicable w.e.f. 1-4-1983 would be applicable in respect of income for the previous year relevant to the assessment year 1983-84. The answer to this question was given by the learned counsel appearing for the assessee as that if the said Notification is construed to cover type income arising before 1-4-1983 and during the previous year 1982-83 relevant to the assessment year 1983-84, particularly in an area which was during that time not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether there is a taxable territory of India in existence during the previous year relevant to the assessment year under consideration. 46. In this respect we would also point out that this view of supported by legislative practice. For instance, the Indian Income-tax Act, 1922 was extended and made applicable to the whole of India by virtue of amendments made by the Finance Act, 1950. The said Finance Act inserted sec. 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 dealt with residence of a person. Thus, this amendment deemed Indian States, such as Rajasthan or 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 world income. In the absence of section 2(14A) they would have been non-resident during the previous year and the income would have arisen to them during the previous year outside India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the High Court. The Supreme Court held that under sub-clause (1) of clause (b) of the proviso to section 2(14A), the whole of the Territory of India including Rajasthan was to be deemed taxable territories for the purposes of section 4A as respects any period before or after 31st March, 1950. After considering the provisions of sec. 2(14A) of the Income-tax Act the Court observed : "If Rajasthan was a taxable territory in the year 1949-50, the Respondent would be chargeable in respect of his income whether derived within or without Rajasthan." 49. The decision was followed and applied by the Supreme Court in a subsequent case of H. E. H. Mir Osman Ali Bahadur . According to the facts appearing in that case, the respondent who was the Nizam of Hyderabad claimed exemption from tax under the Indian Income-tax Act, 1922 for assessment year 1950-51. The Court considered the provisions of sec. 2(14A) and held that in view of that provision Hyderabad would be deemed to be included therein as respects any period after 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 purposes of making any assessment for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier decision in the case of Madan Gopal kabra and summarised it as laying down that Parliament under the provisions of the Constitution can make laws with respect to taxes on income for the whole of the territory of India with retrospective effect. According to the Supreme Court, the effect of the decision in Kabra's case was "that though by reason of Finance Act, 1950 the assessee was assessable to income-tax only from 1-4-1950 his income of the previous year was taxable even though the said income was not liable to tax before the Indian Income-tax Act was made applicable to Rajasthan. To that limited extent it had retrospective operation. Therefore, according to the Supreme Court the effect of charging income which during the previous year accrued outside India would, be to give retrospective effect to the provisions of the Income-tax Act. We are also aware that a subordinate authority cannot exercise its powers in such a manner that its action has retrospective effect. Therefore, it cannot be considered that the Notification as 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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