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The Commissioner of Income Tax Versus V.S. Dempo and Company Pvt. Ltd.

2015 (9) TMI 1056 - BOMBAY HIGH COURT

Demurrage claim paid to a non-resident shipping company - AO disallowed part of the above expenditure for failure to deduct tax at source under Section 195 - Held that:- The respondent-assessee placed reliance upon Section 172 of the Act in respect of payments made by it to a non-resident shipping company by way of demurrage charges. The tax which is deducted at source by the assessee company is on behalf of the recipient of the charges. The issue before the Court was whether demurrage charges w .....

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the prism of the non-resident shipping company in respect of it's income. It is in the above view that Section 172 of the Act and Circular No. 723 issued by the CBDT was relied upon by the respondent-assessee to point out that as Section 172 of the Act provides a complete code itself for levy recovery of tax ship wise and journey wise. Thus there is no occasion to deduct tax under Chapter XVII of the Act.

It is a settled position under the law of precedents that, it is not open to us .....

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Rule of Law.

We direct the Registry to place papers and proceedings of the present two appeals before the Hon'ble The Chief Justice to obtain suitable directions to place the following question of law for the opinion of the Larger Bench of this Court as under:

Whether while dealing with the allowability of expenditure under Section 40(a)(i) of the Act, the status of a person making the expenditure has to be a non-resident before the provision to Section 172 of the Act can b .....

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Per M. S. Sanklecha, J. ) The challenge in these two appeals under Section 260A of the Income Tax Act, 1961 (the 'Act') is to the common order dated 11 December 2006 passed by the Income Tax Appellate Tribunal (the 'Tribunal') allowing the appeals filed by the respondent-assessee. The Assessment Years involved are A.Y. 1999-00 and 2000-01. 2. Both these appeals were admitted on 12 October 2007 on the following substantial questions of law: (I) Whether in facts and circumstances .....

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income excess of interest received or paid provided there is direct nexus between interest earned and paid after establishing the fact that all the interest income except the interest on income tax is forming part of the profits of the business and not income from other sources ? (III) Whether the findings of the ITAT while restoring the issue of interest income to the file of the A.O. to exclude 90 % of 'net' interest income is valid in law ? (IV) Whether in the facts and in the circums .....

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income falling within the exclusionary provisions of clause (baa) of Explanation to section 80HHC, is right in law ? (VI) Whether the findings of the ITAT, that 90 % of the net income from receipts on account of 'stevedoring agency business' and 'travel agency business' are falling within the exclusive provision of clause (baa) of explanation to section 80HHC, is right in law ? (VII) Whether the findings of the ITAT, that only 90 % of 'net' income from the 'transfer o .....

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garding Question No.1: 3. The respondent-assessee had claimed expenditure of ₹ 1.8 crores being the demurrage claim paid to a non-resident shipping company. The Assessing Officer disallowed part of the above expenditure for failure to deduct tax at source under Section 195 of the Act. 4. In appeal, the respondent-assessee contended that there was no obligation to deduct tax at source as the amount paid to non-resident shipping company which was engaged in operation of ships and therefore g .....

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erefore, the requirement of deducting tax at source would not be applicable in such a case thus the consequent disallowance of expenditure under Section 40(a)(i) of the Act was not warranted. However, the CIT(A) did not accept the contention of the respondent-assessee and held Section 44B of the Act would apply as it relates to computation of profits and gains and from shipping business. In the above view, the appeal of the respondent-assessee was dismissed. 5. On further appeal, the Tribunal by .....

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pplies. It was not disputed by the revenue that in this case Section 172 of the Act applies. The impugned order specifically holds that Section 172 of the Act is a charging as well as a machinery provision in respect of non-resident shipping companies. It provides for determination and collection of tax. Thus Chapter XVII of the Act in respect of deducting tax at source would not apply in such cases. Consequently, the disallowance of expenditure on account of Section 40(a)(i) of the Act was dele .....

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a) may require reconsideration. 8. The substantial question interalia which arose for consideration of this Court in Orient (Goa)(P) Ltd. (supra) was as under: (B) Whether on the facts and in the circumstances of the case, the assessee was entitled to claim deduction of the demurrage charges of ₹ 1,08,53,980/paid to foreign company, without deducting tax on it, under s. 40(a)(i) of the IT Act, in view of the Circular No. 723 dt. 19Th September 1995 [(1995) 128 CTR (St) 6], issued by the CB .....

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0(a)(i) of the Act. (b) In appeal, the CIT(A) held that demurrage charges had been paid by assessee. However in the hands of recipient M/s Mitsui & Co. Ltd. It was in the nature of profits of a non-resident from occasional shipping business. Placing reliance upon the CBDT Circular No. 723 and Section 172 of the Act, the CIT(A) allowed the appeal. (c) The revenue's appeal to the Tribunal was dismissed. 10. This Court held that Section 172 of the Act is applicable only in respect of non-re .....

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tarting from s. 159, till s. 171 from this Chapter XV. Sec. 172 comes under subtitle "H.Profits of non-residents from occasional shipping business". Title of s. 172 is "Shipping business of non-residents". For bringing a case under Chapter XVH of the Act 1961, one has to establish a case of profits of non-residents from occasional shipping business. "Non-resident" is defined u/s. 2(30), as a person who is not a "resident" and for the purpose of ss. 92, 93 .....

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the present case, the respondent assessee cannot lay fingers on s. 172, since we are not dealing with profits of non-residents. The other aspect is that such profits of non-residents should be from occasional shipping business. It is not the case that the respondent assessee has earned some profit from occasional shipping and is a non-resident. In our view, s. 172 does not have application in relation to the respondent assessee and in the facts and circumstances of the present case. The company .....

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ort in India by a ship, under the provisions of s. 172. In this view, these observations of the learned Vice President of Tribunal have no concern with the factual aspect that it is a case of occasional shipping, pleaded or raised by assessee. There is no dispute about interpretation of s. 172 or s. 195. Crucial point is as to how s. 172 applies to the facts of the present case wherein the respondent assessee is an Indian company, incorporated under the provisions of Indian Companies Act, 1956. .....

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assessee company is on behalf of the recipient of the charges. The issue before the Court was whether demurrage charges which are paid by the respondent-assessee to a non-resident company would be allowed as an expenditure in the absence of deduction of tax at source in view of Section 40(a)(i) of the Act. Although the Court was concerned with the issue in an appeal concerning a resident company. The introduction of section 172 of the Act by the assessee was to determine whether in view thereof, .....

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