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The Commissioner of Income Tax, Sesa Goa Limited Versus V.S. Dempo & Co. Pvt. Ltd., The Commissioner of Income Tax

2016 (2) TMI 308 - BOMBAY HIGH COURT

Allowability of expenditure under section 40(a)(i) - scope of the term 'non resident' - whether the status of a person making the expenditure has to be a non-resident before the provision to section 172 of the Act can be invoked ? - Held that:- To our mind, the Division Bench judgment in Commissioner of Income-tax vs. Orient (Goa) Pvt. Ltd. [2009 (10) TMI 575 - Bombay High Court] seen in this light does not, with greatest respect, take into account the scheme and setting as understood above. The .....

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ng business.

The term “non-resident” means a person who is not a resident as per section 2(30) of the Income Tax Act and for the purposes of sections 92, 93 and 168, includes a person who is not ordinarily a resident within the meaning of clause (6)of section 6. The term “person” includes an individual, a HUF, a company, firm and every artificial juridical person not falling within any of the preceding sub-clauses of clause (31) of section 2. By section 2(23A), a foreign company is de .....

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Tax Appeal No. 978 of 2015 - Dated:- 5-2-2016 - S. C. Dharmadhikari, R. D. Dhanuka And B. P. Colabawalla, J. For the Petitioner : Mr. J.D. Mistry, senior counsel with Ms. Fereshte Sethna, Mr.Mrunal Parekh, Ms. Khushboo Shah, Mr. Vijendra Vatsa, Mr.Manan Shukla, Mr. Adhiraj Malhotra and Mr. Shantanu Singh i/b Duttmenon Dunmorrset For the Petitioner : Mr. Mihir Naniwadekar for the Respondents in Income Tax JUDGMENT [ Per S. C. Dharmadhikari ] 1. On 8th September, 2015, a Division Bench of this Co .....

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re, directed the Registry to place the papers and proceedings of the two Appeals before the Hon'ble The Chief Justice so as to obtain suitable directions for placing the following question of law for opinion of a larger bench. Q. Whether, while dealing with the allowability of expenditure under section 40(a)(i) of the Income Tax Act, 1961, the status of a person making the expenditure has to be a non-resident before the provision to section 172 of the Act can be invoked ? 2. The Registry pla .....

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Income Tax under section 260A of the Income Tax Act, 1961, aggrieved and dissatisfied with the order of the Income Tax Appellate Tribunal , Panaji Bench, dated 11th December, 2005, passed in Income Tax Appeal Nos. 240/PN/2004 and 273/PN/2004. The Assessment Year is 1999-2000. 4. The assessee-respondent before this Court is a company engaged in the business of mining and export of processed iron ore as also in construction business. 5. The assessee filed its return of income on 31st December, 19 .....

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ess income, to which explanation (baa) to section 80HHC, is applicable or whether the said interest income is income from other sources. The assessee also claimed income received from 'Lease income', 'income from transfer of vessels', 'Barge freight', 'proceeds from other services' and 'miscellaneous income', as gross receipts received in the course of its business and therefore there is no question of applying Explanation (baa) to it. The assessee also ch .....

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and allowed deductions under section 80HHC to the extent of ₹ 8,07,35,598/-. A copy of the Assessment Order dated 26th March, 2002, is annexed as Annexure-A to the appeal paperbook. Being aggrieved by the said order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The CIT (A) by order dated 2nd August, 2008, partly allowed the assessee's appeal. A copy of the order dated 2nd August, 2004, passed by the CIT (Appeals) is annexed as Annexure-B to the appeal .....

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of the order dated 11th December, 2006, passed by the Income Tax Appellate Tribunal is annexed as Annexure-C to the appeal paperbook. 6. That is how the Revenue requested this Court to admit this appeal as it raises substantial questions of law. The appeal together with other Tax Appeals was placed before a Division Bench of this Court and it came to be admitted on the following substantial questions of law : (I) Whether in facts and circumstances of the case, the ITAT has erred in applying the .....

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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 A.O., to exclude 90% of 'net' interest income is valid in law. ? (IV) Whether in the facts and in the circumstances of the case, the ITAT is right in law in taking .....

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lause (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 of vessel' and 'barge freight' has to be excl .....

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th Question No. I. 8. After admission, the present appeal and the other appeals came to be placed for final hearing before a Division Bench of this Court and the Division Bench noted the stand of the assessee in paragraph 4 of its order. In paragraph 5, the Division Bench noted the reference by the Tribunal to its decision in Deputy Commissioner of Income Tax vs. Orient (Goa) and following it, the Tribunal allowed the assessee's appeal. The order passed by the Tribunal holds that section 40( .....

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at section 172 is a charging as well as machinery provision in respect of non-resident shipping companies. It provides for determination and collection of tax. Thus, Chapter XVI 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 deleted. 9. The Revenue placed reliance, before the Division Bench hearing present appeals, on the decision of Orient (Goa) by which this Court revers .....

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a) (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) 61], issued by CBDT? 9. The above question arose for consideration by this Court on the following facts : (a) M/s. Orient (Goa) (P) Ltd. (asses .....

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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-resident carrying on shipping business while assessee i.e. Orient (Goa) (P) Ltd. is admittedly a resident and therefore Sec .....

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m occasional shipping business". Title of s. 172 is "Shipping business of non-residents". For bringing a case under Chapter XV-H 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 and 168, includes a person who is not ordinarily resident within the meaning of cl. (6) of s. 6. The respondent assessee .....

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sidents. 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 from Japan viz., Mitsui & Co. Ltd., Japan, recipient of demurrage amount is not before us. In other words, we are n .....

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ned 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. In our view, the learned Vice President of the Tribunal has recorded a perverse observation/finding .....

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demurrage charges which are paid by the respondent-assessee to a nonresident 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, was there any obligation to deduct tax at source by the payee-assessee. Section 172 of the Act has to .....

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it is not open to us (Division Bench) to take a view contrary to the view taken by another Division Bench of this Court. In case, we are unable to agree with the view of the earlier Division Bench and it does not fall within the exclusionary categories of binding precedent by being contrary to and/or in conflict with a decision of the Apex Court or rendered per-incuriam. In such a case it is best that the issue is resolved at the hands of a Larger Bench of this Court. Certainty of law is an imp .....

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ovember, 2015 and prior thereto, there was a message sent by i-phone requesting for rescheduling the hearing before the Full Bench. The learned advocate informed the Registry that the Department / Revenue has expressed its desire to appoint the Additional Solicitor General and, therefore, she would not be appearing before the Bench. Three weeks' time was sought for that purpose. 12. It is indeed unfortunate that when the Bench is constituted to resolve a conflict of opinion between two Divis .....

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ive of both sides and on the legal provision and its interpretation ought to be placed before us. In all fairness, Mr. Mistri has taken us through the scheme of the Act and invited our attention to some of the judgments on the point. We are thankful to him. 13. The emphasis of Mr. Mistri was that section 172 of the IT Act is a complete code that applies to the non-resident Indians. Inviting our attention to section 40 of the Act, Mr. Mistri would submit that the assessee is not liable to deduct .....

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. The title is Collection and Recovery of Tax . Our attention is invited to sections 190, 192, 195 and 199 (1). Mr. Mistri would submit that deduction of tax at source would arise in cases where employees receive salary. To meet the tax liability of the employee the deductions of tax is made. That is at source, meaning while payment. Inviting our attention to sections 202 and 205 of the IT Act it is submitted that such deduction is clearly a recovery. If tax to be deducted at source is a recover .....

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h not binding on the Court, can be given effect to as they bind the Revenue. In other words, the Circular issued by the Revenue is binding upon it and it cannot argue anything contrary to that. Mr. Mistri's attempt is to show that if the interpretation of the Revenue official harmonizes with that placed before the Court, then, even that Circular can be referred to by this Court. 14. All the counsel have adopted the arguments of Mr. Mistri. 15. Mr. Mistri has thus pointed out that the Revenue .....

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the preliminary provisions in Chapter I and which also contains some definitions. For the purposes of the Act and unless the context otherwise requires, the term income is defined in an inclusive manner. Section 2(24) contains that definition and the term includes all that is enumerated from section 2 clause (24)(i) to (xviii). The term resident is defined in section 2 clause (42) to mean a person who is resident in India within the meaning of section 6. The word tax is defined in section 2 clau .....

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that income tax shall be charged for any assessment year at any rate or rates, income tax at that rate or those rates will be charged for that year in accordance with and subject to the provisions including provisions of the levy of additional income tax in respect of the total income of the previous year of every person. The proviso thereto is not relevant for our purpose, but subsection (2) of section 4 states that in respect of income chargeable under sub-section (1), income tax shall be dedu .....

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ounting in all to one hundred and eighty-two days or more; or (b) [****] (c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty five days or more, is in India for a period or periods amounting in all to sixty days or more in that year. [Explanation. I]. - In the case of an individual - (a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (1 .....

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year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words sixty days , occurring therein, the words one hundred and eighty-two days had been substituted. [Explanation 2.- For the purposes of this clause, in the case of an individual being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may .....

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ement means a place where key managements and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. (4) Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India. (5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be de .....

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ays or less; or (b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twentynine days or less. 18. A perusal of this section would indicate as to how an individual can be said to be a resident of India, a Hindu undivided family, firm or association of persons can also be said to .....

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accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export. Then, case of a non-resident engaged in the business of running goods agency or publishing newspaper is dealt with and in case of a nonresident being a company which does not have any shareholder who is a citizen of India or a resident in India no income shall be deemed to accrue or arise in India to such individual firm or company through or from operations .....

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a reading of this section together with the explanations, it is apparent as to income which is deemed to accrue or arise in India may or may not include such income which is not attributable to the operations carried out in India. Therefore, various categories of non-resident Indians and the income that they derive or may derive by control or through somebody who is a resident of India is, accordingly, dealt with. The other part of this section is not relevant for our purpose. We are also not c .....

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Official Gazette, specify in this behalf, including income by way of premium on the redemption of such bonds. Section 10(4) (4B) deals with the income by way of interest earned by a non-resident on moneys standing to his credit in a non resident (External) account in any bank in India. Then, we have several clauses in section 10, but we are not concerned with all of them, save and except section 10(6A),(6B), (6BB) and (6C) thereof. After this somewhat longish provision, we have section 10AA whi .....

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ncome of trust or institutions from contributions. By section 12A conditions for applicability of sections 11 and 12 are set out. Section 12AA sets out the procedure for registration. Section 13 states that section 11 will not apply in certain cases. By section 13A, special provision is made relating to incomes of political parties. Section 13B contains special provision relating to voluntary contributions received by electoral trust. After all this comes Chapter IV which is titled as Computatio .....

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and section 22 to 27 which deal with salaries and income from house property. 20. As far as profits and gains of business or profession are concerned by section 28 these are set out. The income therein shall be chargeable to income tax under this head and the clause thereof would indicate as to how the sub-headings of compensation, income derived by trade, professional or similar association from specific service performed for its members, profits on sale of a licence granted under the Imports a .....

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hether received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business or not sharing any know-how, patent, copyright, trademark, licence, franchise etc. Income generated by way of any arrangement or understanding as also derived by rendering of any service received under a Keyman insurance policy are all part of section 28. The income referred to in section 28 shall be computed in accordance with the provisions contained in section 30 to 4 .....

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wance and development rebate are set out in section 34 and by section 34A, there is a restriction on unabsorbed depreciation and unabsorbed investment allowance for limited period in case of certain domestic companies. Section 35 deals with expenditure on scientific research, section 35AB deals with expenditure on know-how and section 35ABB deals with expenditure for obtaining licence to operate telecommunication services. Section 35AC deals with expenditure on eligible projects or schemes and s .....

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not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business or profession. That shall be allowed in computing the income chargeable under the head Profits or Gains of Business or Profession. Section 38 deals with building etc., partly used for business etc., or not exclusively so used. Section 39 stands omitted. Then comes sec .....

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is Act, which is payable,- (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid [during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200] : Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been de .....

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ubsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation.-For the purposes of this sub-clause,- (A) royalty shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) fees for technical services shall have the same meaning as in Explanation 2 to clau .....

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pecified in sub-section (1) of section 139 :] [Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, [thirty per cent of] such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :] [Provided further that where an assessee fails to deduct the whole or any part of the tax in accor .....

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n clause (i) of the Explanation to section 194H; (ii) fees for technical services shall have the same meaning as in Explanation 2 to clause (vii) of subsection (1) of section 9; (iii) professional services shall have the same meaning as in clause (a) of the Explanation to section 194J; (iv) work shall have the same meaning as in Explanation III to section 194C; [(v) rent shall have the same meaning as in clause (i) to the Explanation to section 194-I; (vi) royalty shall have the same meaning as .....

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vied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.] [Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of this subclause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;] (iia) any sum paid on account of wealth-tax. Explanation.-For the purposes of this .....

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charged, but does not include any tax chargeable with reference to the value of any particular asset of the business or profession;] [(iib) any amount- (A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or (B) which is appropriated, directly or indirectly, from, a State Government undertaking by the State Government. Explanation.-For the purposes of this sub-clause, a State Gover .....

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ity of the directors or to control the management or policy decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders agreements or voting agreements or in any other manner; (v) an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government; [(iii) any payment which is chargeable under the head Salaries , if it is payable- (A) outside Indi .....

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in the case of any firm assessable as such,- (i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as remuneration ) to any partner who is not a working partner; or (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or (iii) any payment of remuneration to any partner who is a w .....

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nership deed; or (iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of [twelve] per cent simple interest per annum; or (v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and .....

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partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment. Explanation 1.-Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as partner in a representative capacity and person so represented , respectively),- (i) interest paid by the f .....

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h individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person. Explanation 3.-For the purposes of this clause, book-profit means the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been de .....

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art of India], any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such association or body to a member of such association or body. Explanation 1.-Where interest is paid by an association or body to any member thereof who has also paid interest to the association or body, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the association or body to the member exceeds the pa .....

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hall not be taken into account for the purposes of this clause; (ii) interest paid by the association or body to such individual or by such individual to the association or body as member in a representative capacity and interest paid by the association or body to the person so represented or by the person so represented to the association or body, shall be taken into account for the purposes of this clause. Explanation 3.-Where an individual is a member of an association or body otherwise than .....

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969, Finance (No. 2) Act, 1971, w.e.f. 1-4-1972, Finance Act, 1984, w.e.f. 1-4-1985 and Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988. (d) Omitted by the Finance Act, 1988, w.e.f. 1-4- 1989. 21. A perusal of section 40 reveals that firstly it starts with a non obstante clause. Secondly, it states that notwithstanding anything to the contrary in sections 30 to 38, the amounts as specified in the clauses to section 40 shall not be deducted in computing the income chargeable under the head .....

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been paid, will be covered by the prohibition enacted as above. 22. The proviso to this sub-clause (i) reveals that where in respect of such sum, tax has been deducted in any subsequent year or has been deducted during the previous year, but paid after the due date specified in sub-section (i) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. 23. Then section 40(a)(ia) refers to the thirty per cent of any sum p .....

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Income Tax Act payable outside India or payable in India to a non-resident not being a company or a foreign company on which tax is deductible at source under chapter XVII-B, is covered. 25. Such tax has not been deducted or after deduction has not been paid, then, the deduction shall not be made in computing the total income chargeable. 26. It is for this reason that we have to refer to Chapter XVII- B. Chapter XVII deals with Collection And Recovery of Tax. It contains general provisions with .....

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income-tax computed on the basis of rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. If payment of accumulated balance to an employee is made, then also this obligation comes in vide section 192A. If the Interest on Securities is the income head involved, then, the person responsible for paying to a resident any income of this nature shall make the deduction. The same obligation would arise in th .....

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policy, payments to nonresident sportsmen or sports association, payments in respect of deposits under the National Savings Schemes etc. attract the deduction of tax at source. The other payments including the category of commission or brokerage fall within the obligation to pay tax. Payment for transfer of certain immovable property other than agricultural lands invites deduction of income-tax at source vide section 194IA. Then the fees for professional or technical service invites the same obl .....

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he payment at the time of credit of such income to the account of the payee or at the time of payment in cash or by issue of cheque or draft or by any other mode, whichever is earlier, deduct the income-tax thereon at the rate of five percent. Therefore, the tax is to be deducted at source, the manner of its deduction and the time are specified so also the rate. After section 194LC and 194LD comes section 195 which reads as under: 195. (1) Any person responsible for paying to a non-resident, not .....

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public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. Explanation 1.-For the purposes of this section, where any interest or other sum as aforesaid is credited to any acco .....

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to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has- (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of .....

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ibed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1). (4) A certificate granted under .....

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ons subject to which such certificate may be granted and providing for all other matters connected therewith. (6) The person responsible for paying to a nonresident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed. (7) Notwithstanding anything contained in subsection (1) and sub-section (2), the Board may, by notification .....

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e. 28. The Explanation thereto would indicate as to how the term or expression non-resident is understood. We are not referring to other sections simply because we have to appreciate the argument that tax deducted at source is a recovery and section 172(1) will prevail over other provisions of the Act. 29. In the present case, we are concerned with shipping business of non-residents and, therefore, section 172 would have to be referred in extenso. That provision reads as under : 172. (1) The pro .....

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or the charterer or to any person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income accruing in India to the owner or charterer on account of such carriage. (3) Before the departure from any port in India of any such ship, the master of the ship shall prepare and furnish to the [Assessing] Officer a return of the full amount paid or payable to the owner or charterer or any person on his behalf, on account of the carriage of all passengers, liv .....

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ed within thirty days of the departure of the ship, deem the filing of the return by the person so authorised by the master as sufficient compliance with this subsection. (4) On receipt of the return, the [Assessing] Officer shall assess the income referred to in sub-section (2) and determine the sum payable as tax thereon at the rate or rates [in force] applicable to the total income of a company which has not made the arrangements referred to in section 194 and such sum shall be payable by the .....

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b-section (4), the [Assessing] Officer may call for such accounts or documents as he may require. (6) A port clearance shall not be granted to the ship until the Collector of Customs, or other officer duly authorised to grant the same, is satisfied that the tax assessable under this section has been duly paid or that satisfactory arrangements have been made for the payment thereof. (7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the ex .....

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advance of the tax leviable for that assessment year, and the difference between the sum so paid and the amount of tax found payable by him on such assessment shall be paid by him or refunded to him, as the case may be. (8) For the purposes of this section, the amount referred to in sub-section (2) shall include the amount paid or payable by way of demurrage charge or handling charge or any other amount of similar nature. 30. A perusal thereof would reveal as to how the provisions of this sectio .....

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d Recovery - Deduction at Source. It has several sub-headings styled as A-General, B-Deduction at Source, BB-Collection at source, C-Advance Payment of Tax, DCollection and Recovery, E-Tax Payable Under Provisional Assessment (which is deleted now) and F and G titled as Interest Chargeable in Certain Cases and Levy of Fee in Certain Cases. 32. In the case at hand, we are not concerned with deduction at source of tax on payment of salary, payment of accumulated balance due to an employee, interes .....

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ad Salaries ) shall, at the time of credit of such income to the account of the payee or at the time of payment in cash or by cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. 34. The question before us is if section 172 deals with shipping business of non-residents and contains a non-obstante clause and applies for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident which carr .....

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ss 1. The Board had earlier issued Circular No. 730 regarding treatment of tax paid under section 172(3) by a non-resident engaged in the shipping business. Under the provisions of section 172, every time a ship belonging to or chartered by a non-resident makes a voyage from a port in India, carrying passengers, livestock, mail or goods shipped at a port in India, 7.5 per cent of the amount paid or payable on account of the carriage of the passengers etc. is deemed as the income and tax is levie .....

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d on his total income of the previous year in accordance with other provisions of the Act. When such option is exercised and an assessment is made accurately, the tax already paid under the provisions of section 172(4) by the non-resident owner or charterer would be treated as tax paid in advance for that assessment year before determining the amount of tax finally due. 3. The question that arose for consideration of the Board at the time of issue of Circular No. 730 was that when a regular asse .....

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ct, is neither liable to pay interest under sections 234B and 234C, nor entitled to receive interest under section 244A of the Income-tax Act, 1961. 4. This issue has subsequently been discussed and decided by the Supreme Court in the case of A. S. Glittre D/5 I/S Garonne vs. CIT [1997] 225 ITR 739. It has been held that the payment of tax under section 172(3)/(4) is at par with advance tax instalments. Hence, in case of a regular assessment under section 172(7) the assessee is entitled to refun .....

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36. It is vehemently contended that the Revenue cannot argue anything contrary to this Circular. This Circular even otherwise states the position in law correctly. It is then urged that the judgment in the case of Orient (Goa) (supra) does not lay down the correct law. 37. A closer look at the judgment is, therefore, necessary. 38. The appeal before this Court raised four questions which are reproduced hereinbelow : (A) Whether on the facts and in the circumstances of the case, the Income-tax A .....

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116), issued by the Central Board of Direct Taxes ? (C) 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 payable to foreign shipping company on which tax has not been deducted, in view of the provisions of section 172(8) introduced by the Finance Act, 1997 with retrospective effect from April 1, 1976 ? (D) Whether the circular issued by the Central Board of Direct Taxes dated September 19, 1995 .....

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of foreign tour expenses of partners being personal expenses of the partners of the assessee-company. A notice under section 148 of the Act was issued by the Revenue to the assessee pursuant to which an order of assessment was passed by the Deputy Commissioner of Income-tax, Circle 1, Panaji. That came to be challenged before the Commissioner (Appeals), Goa. Before the First Appellate Authority, the ground regarding disallowance of foreign tour expenses was not pressed. However, before the Firs .....

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an obligation to deduct the tax in view of section 40(a)(i) in relation to the amount payable outside India. The assessee relied upon the non-obstante clause in section 172 (1) in meeting this contention. It was urged that this section is a code by itself. 41. The Division Bench noted that the contentions arise in the backdrop of a deduction of tax on a sum payable or paid on account of demurrage. The demurrage is payable to a nonresident company based in Japan. It was not disputed that no tax h .....

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s of actual payment of tax on the above demurrage. The First Appellate Authority referred to the relevant provisions and observed that the demurrage debited by the assessee in the hands of the recipient are in the nature of profits of the non-resident from the occasional shipping business under section 44B read with section 172 of the Income-tax Act. The First Appellate Authority referred to sub-section (8) of section 172 and the Circular reproduced above by us. That is how the appeal came to be .....

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udgment does not help the present respondent i.e. the assessee. 9. Another Judgment relied on by the learned Senior Advocate Mr. Usgaonkar for the respondent assessee is in the matter of CBDT vs. Chowgule and Co. Ltd. and others, reported in (1991) 192 ITR 40 (Karn). There the learned Division Bench observed that The question for consideration is whether demurrage payable to a non-resident owner or charterer of a ship for the delay in loading the ore sold to the foreigner is liable to be taxed u .....

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g of the word demurrage (Black's Law Dictionary). 10. Section 172 of the Act 1961 is carefully considered by us. Chapter XV titles as Liability in Special cases . We have no concern with sections, starting from Section 159, till section 171 from this Chapter XV. Section 172 comes under sub-title H.- Profits of non-residents from occasional shipping business . Title of Section 172 is Shipping business of non-residents. For bringing a case under Chapter XV, H of the Act 1961, one has to establ .....

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tice of section 6 i.e. Residence in India . In short, respondent assessee cannot be said to be non-resident. The present appeal pertains to the respondent assessee. In our view, in the facts of the present case, the respondent assessee cannot lay fingers on section 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 fr .....

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ccasional shipping, part of para 3 from the Judgment of the learned Commissioner of Income-tax has been pointed out to us. His observations are in very few lines. We may reproduce the said portion herein below. 3. We have heard the rival submissions in the light of material placed before us. Assessee claimed deduction of ₹ 1,08,53,980/- being the amount of demurrage payable to Mitsui Co. Ltd., Japan. The Assessing Officer opined that since the assessee did not deduct tax at source, as such .....

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the learned Vice President of Income Tax Appellate 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 Section 172 or Section 195. Crucial point is as to how Section 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. In our view, the learned Vice President of the ITAT has .....

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). 12. We have considered the submission of the learned Counsel appearing for the parties pertaining to the Circular No.723 dated 19.9.1995 by CBDT (Annexure C ). Section 119 empowers the Central Board of Direct Taxes to give instructions to subordinate authorities. We have considered Section 119 of the Act 1961. We have also perused the Circular Annexure C. This Circular seems to have been issued by the CBDT , clarifying the scope of Sections 172, 194C and 195 of the Act 1961. Advocate on behal .....

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38 (SC). It is a three Bench Judgment of the Honourable Supreme Court. It has been held by the Honourable Supreme Court that the circulars issued by Commissioner of Sale Tax not binding on assessee or Court, however, binding on the Department. In the case on hand, in our view, learned Commissioner of Income-tax (Appeals) and the learned appellate Tribunal have wrongly interpreted the Circular dated September 19, 1995, issued by the CBDT. This circular, in our opinion, cannot be considered in the .....

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s section 172. The Division Bench understood the matter and as reflected from the above reproduced paragraphs by identifying the assessee before it whose income was being assessed. The Division Bench held that the respondent-assessee, a company incorporated under the provisions of the Indian Companies Act, 1956, cannot be said to be a non-resident. The appeals pertained to the respondent assessee. It, therefore, could not rely on section 172 since the Court was not dealing with profits of non-re .....

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withstanding anything contained in the other provisions of the Act. Therefore, in such cases, the provisions of section 194C and 195 relating to tax deduction at source are not applicable. The Division Bench held that there is no dispute about interpretation of sections 172 or 195. The crucial point, according to the Bench, was how section 172 applies to the facts of the case before it wherein the respondent-assessee is an Indian company, incorporated under the provisions of the Indian Companies .....

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is payable outside India or in India to a non-resident, not being a company, or to a foreign company on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or after deduction has not been paid. Section 172 has application to shipping business of non-residents and the provisions of that section have application notwithstanding anything contained in the other provisions of the Act for the purpose of levy and recovery of tax in the case of any ship, belonging t .....

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at the rates in force. It is evident, therefore, that the responsibility is on any person making payment to a non-resident. It is that person's obligation to deduct the tax at source. If the tax is deductible at source and any assessee declares his income chargeable under the head Profits and Gains of Business or Profession , while computing the income chargeable under this head, the amounts mentioned in section 40(a)(i) should not be deducted in the event there is a failure to deduct the ta .....

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9;s income under the above heads from which certain deduction has been disallowed. That is for failure to discharge the obligation to deduct the tax at source. The assessee contends that the payment is made to a non-resident / foreign company and, therefore, there maybe an obligation to deduct the tax at source in terms of sub-section (1) of section 195 but the overriding provision in section 172 will come to its assistance. 45. The shipping business of non-residents is an aspect dealt with by s .....

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esident and enacted by section 44B which falls in Chapter IV - Computation of Business Income. That section reads as under: 44B. (1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head .....

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oods shipped at any port outside India. Explanation.-For the purposes of this sub-section, the amount referred to in clause (i) or clause (ii) shall include the amount paid or payable or received or deemed to be received, as the case may be, by way of demurrage charges or handling charges or any other amount of similar nature. 46. A bare perusal thereof would indicate as to how this provision covers the case of an assessee who is a non-resident and engaged in the business of operation of ships. .....

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harges or any other amount of similar nature shall for the purposes of sub-section (1) deemed to be the profits and gains of the business, namely, shipping business chargeable to tax under that head. The amounts which are paid or payable whether in or out of India to the assessee or to any person on his behalf on account of carriage of passengers, livestock, mail or goods shipped at a port in India and the amount received was deemed to be received in India by or on behalf of the assessee on acco .....

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e clause and whereas section 44B enacts special provisions for computing profits and gains of shipping business in case of non-residents section 172 dealing with shipping business of non-residents is enacted for the purpose of levy and recovery of tax in the case of any ship belonging to or chartered by a non-resident operated from India. These sections and particularly section 172 devise a scheme for levy and recovery of tax. The sub-sections of section 44B denote as to how the amounts paid to .....

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vt. Ltd. seen in this light does not, with greatest respect, take into account the scheme and setting as understood above. There need not be apprehension because there is no escape from the levy and recovery of tax. The tax has to be levied and collected. The ship cannot leave the port or if allowed to leave any port in India, it must either pay or make arrangement to pay the tax. Hence, the apprehension of avoidance or evasion both are taken care of by the legislature. That is how advisedly the .....

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come would be taxed will have to be borne in mind. The non-resident shipping company in respect of it's income would be in a position to rely upon section 44B and consequently section 172. However, we do not see how there is an obligation to deduct tax at source on the resident assessee/Indian company before us. While computing the income of the non-resident Indian / foreign company, assistance can be derived by such non-residents from section 44B if they are in shipping business. It would a .....

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sident within the meaning of clause (6)of section 6. The term person includes an individual, a HUF, a company, firm and every artificial juridical person not falling within any of the preceding sub-clauses of clause (31) of section 2. By section 2(23A), a foreign company is defined to mean a company which is not a domestic company. Hence, any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provision .....

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172 occurs in Chapter XV which is entitled Liability in special cases and the sub-heading of the section is Profits of nonresidents from occasional shipping business . It creates a tax liability in respect of occasional shipping by making a special provision for the levy and recovery of tax in the case of a ship belonging to or chartered by a non-resident which carries passengers, livestock, mail or goods shipped at a port in India. The object of the section is to ensure the levy and recovery o .....

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at the port in India since the last arrival of the ship at the port. In the event that, to the satisfaction of the Income-tax Officer, the master is unable so to do, he has to make satisfactory arrangements for the filing of the return and payment of the tax by any other person on his behalf. A port clearance cannot be granted to the ship until the tax assessable under the section is duly paid or satisfactory arrangements have been made for the payment thereof. 4. The assessee in this case is t .....

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is contained in sub-section (2) of Section 172, the relevant part of which provides that where a ship belonging to or chartered by a non-resident carries goods shipped at a port in India, one-sixth of the amount paid or payable on account of such carriage to the owner or the charterer or to any person on his behalf shall be deemed to be income accruing in India to the owner or charterer on account of such carriage. The ship was delivered to the time-charterers at Betul, Goa, whereupon they loade .....

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Similarly, in the case of A. S. CLITTRES D/5 I/S GARONNE AND OTHERS vs. COMMISSIONER OF INCOME TAX, KERALA-II reported in (1997) 9 SCC 546, once again, after reproduction of section 172 of the IT Act, the Hon'ble Supreme Court of India explained the scheme of the section in the following words:- 7. The Scheme of Section 172 of the Act appears to be this: Section 172(1) of the Act gives a right to the Income Tax Officer to levy and recover tax in the case of any ship belonging to a non-resid .....

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port falls, that an assessment, according to the provisions of the Act, in a regular manner be made. Thus, a right is given to the assessee to opt for a regular assessment although a rough and ready or a summary assessment has already been made under Section 172(4) of the Act. It is a valuable right. If the assessee exercises the right conferred on him under section 172(7) of the Act, the Income Tax Officer is bound to make an assessment of the total income of the previous year of the assessee .....

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t is made as per the provisions of the Act. In such a case, it is only proper and appropriate to hold that all the provisions of the Act in the determination of the tax liability including the ancillary or incidental or consequential matters pertaining to it are necessarily attracted. 8. Section 172(7) of the Act provides that payment made under the section shall be treated as a payment in advance of the tax leviable for that assessment year. It only means that such payment would be treated as a .....

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he said legal fiction, it will be proper and necessary to assume all those facts on which alone the fiction can operate. The law on the point has been stated in innumerable decisions of this Court. In Mond. Iqbal Madar Sheikh v. State of Maharashtra (1996) 1 SCC 722 a three-number Bench of this Court stated the law thus: ..... The effect of a legal fiction by deeming clause is well known. Legislature can introduce a statutory fiction and courts have to proceed on the assumption that such state o .....

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unt paid and also interest, for payments made in excess of the tax assessed. We are unable to appreciate the distinction drawn by the High Court between advance tax and payment in advance of the tax mentioned in Section 172(7) of the Act. We hold that the distinction so drawn has no basis. The High Court has furtehr held that the payment made under Section 172(4) of the Act is not a payment of advance tax within the meaning of the Act, as the tax under Section 172(4) of the Act is a payment on a .....

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The High Court was swayed by the title used in the corresponding provision of the predecessor Act (Income Tax Act, 1922 - Section 44-C), wherein there was a heading to the section - Adjustment . Section 172 of the Act contains no such heading. We hold that the Income Tax Appellate Tribunal was justified in holding that since the payment made under Section 172(4) of the Act is, by fiction, treated as advance tax, all the provisions in respect of the advance tax will apply and if on regular assess .....

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a had an occasion to consider the ambit and scope of section 195 of the IT Act. After reproduction of the section, as it stood at the relevant time, the Hon'ble Supreme Court of India held as under:- 6. Under Section 195(1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) chargeable under the I.T. Act in the case of non-residents only and not in the case of residents. Failure to deduct the tax under this Section may .....

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es rendered in India are common examples of sums chargeable under the provisions of the I.T. Act to which the aforestated requirement of tax deduction at source applies. 7. The tax so collected and deducted is required to be paid to the credit of Central Government in terms of Section 200 of the I.T. Act read with Rule 30 of the I.T. Rules 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under Section 201 read with Section 221 of the I.T. Act. In add .....

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instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the I.T. Act. 9. It may be noted that Section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has an element of income embedded or in .....

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s of the Act". It is for this reason that vide Circular No. 728 dated October 30, 1995 the CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3B) of the 1922 Act. ….. 11. While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is .....

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provisions are of practical importance. This reasoning of ours is based on the decision of this Court in Transmission Corporation (supra) in which this Court has observed that the provision of Section 195(2) is a safeguard. From this it follows that where a person responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof. Submissions and findings thereon 13. If the contention of .....

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eing deducted. [See : Vijay Ship Breaking Corporation and Others Vs. CIT 314 ITR 309] 14. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression "sum chargeable under the provisions of the Act" is used only in Section 195. For example, Section 194C casts .....

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It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. 15. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, Section 195 has to be read in conformity with the charging provisions, i.e., Sections 4, 5 and 9. This reasoning flows from the words "sum chargeable .....

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ent income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from Section 195(1). While interpreting a Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. The Act is to .....

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the I.T. Act. It is true that the judgment in Eli Lilly (supra) was confined to Section 192 of the I.T. Act. However, there is some similarity between the two. If one looks at Section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income "chargeable under the head salaries". Similarly, Section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum "chargeable under the provisions of the Act .....

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tled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the I.T. Act by which a payer can obtain refund. Section 237 read with Section 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out .....

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heless collect tax. In our view, Section 195(2) provides a remedy by which a person may seek a determination of the "appropriate proportion of such sum so chargeable" where a proportion of the sum so chargeable is liable to tax. 19. The entire basis of the Department's contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TA .....

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ing made to non-residents outside India. 20. We find no merit in these contentions. As stated hereinabove, Section 195(1) uses the expression "sum chargeable under the provisions of the Act." We need to give weightage to those words. Further, Section 195 uses the word payer' and not the word "assessee". The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under Section 195(1). If the payment does not .....

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de Finance Act, 1988 w.e.f. 1.4.89, payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the I.T. Act. This provision ensures effective compliance of Section 195 of the I.T. Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable .....

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