TMI Blog1993 (10) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... otices to show cause why orders under section 263 of the Act should not be passed. 4. The assessee submitted, in the first instance, that the foreign tax liability had been correctly allowed on merits. It was urged that the expression 'profits and gains of business or profession', referred to in section 40(a)(ii) of the Act, has reference only to profits and gains as determined in accordance with section 29 of the Act and that any rate or tax levied upon profits calculated in another manner is outside the purview of section 40(a)(ii) of the Act. Reliance was placed on the following decisions : (i) CIT v. Gurupada Dutta [1946] 14 ITR 100 (PC); (ii) Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580 (SC); (iii) Simbholi Sugar Mills Ltd. v. CIT [1962] 45 ITR 125 (All.); and (iv) ITO v. South East Asia Shipping Co. (P.) Ltd. [IT Appeal No. 223 (Bom.) of 1974-75] (Tribunal). 5. It was the assessee's contention that the taxes levied by the authorities in Libya and Iran were not based on actual profits but were computed in a manner different from that prescribed under section 29 of the Act. 6. It was next submitted that on general principles also, only the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi); (ii) Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC); (iii) Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC); (iv) Thalibai F. Jain v. ITO [1975] 101 ITR 1 (Kar.); and (v) Addl. CIT v. Mukur Corpn. [1978] 111 ITR 312 (Guj.). 10. After invoking jurisdiction under section 263 of the Act in the above manner, the Commissioner proceeded to examine the question on merits. He observed that the primary question was whether the claims of deduction of foreign taxes could be said to be 'laid out or expended wholly and exclusively for the purposes of business', in accordance with section 37 of the Act. In this connection, he took a view that income-tax is not paid for the purpose of earning the profits but on the contrary, it is paid out of the profits. In other words, even the foreign taxes were merely a charge on the income and, therefore, an application of the income after it has been earned. He, therefore, came to the conclusion that the foreign taxes were not deductible under section 37 of the Act. He found support for his conclusion from the following decisions : (i) S. Inder Singh Gill v. CIT [1963] 47 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making proper enquiries. He directed that the foreign tax liabilities should be added back and the total income enhanced accordingly. Insofar as assessment year 1982-83 was concerned, he gave a further direction to recompute the double taxation relief under section 91 of the Act admissible to the assessee and allow such additional relief as may be admissible according to law. However, in the facts of the case, no such further double taxation relief was due for assessment year 1983-84. The assessee is aggrieved by the above decision of the Commissioner and is now in appeal before us. 16. The business of the assessee-company is that of manufacture of electricity transmission towers and of construction and laying down of electricity transmission lines. The company had contracts of laying down and construction of electrical transmission lines in India as well as in Iran and Libya. The learned counsel for the assessee submitted before us that as far as Iran was concerned, the assessee was subjected to the following types of foreign taxes governed by various Articles of the Iran Direct Taxes Act : --------------------------------------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129. It was held in that case in connection with the scope of the power of a Commissioner under section 263 of the Act, that the scope is not to set aside merely unfavourable orders and to bring to tax some more money, or, to get at sheer escapement of revenue. The prejudice that is contemplated under section 263, of the Act, the court said, is prejudice to the income-tax administration as a whole. Section 263 of the Act, the court held, is to be invoked only for the purpose of setting right distortions and prejudices to the revenue which is a unique conception and has to be understood in the context of and in the interest of revenue administration. This decision was followed subsequently by the Tribunal in the case of BBC Brown Boveri Co. Ltd. v. ITO [1989] 31 ITD 408, by Bombay Bench 'A'. According to him, these decisions also supported his contention that the jurisdiction had not been invoked validly. 20. The learned Departmental Representative, on the other hand, submitted that the jurisdiction had been invoked validly and, in this connection, pointed out that the Assessing Officer himself had filed a second appeal against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, followed the order of the first appellate authority for assessment year 1978-79. We have seen the assessment order for assessment year 1982-83 carefully and the learned Departmental Representative has also brought to our notice that the order does not contain even a single sentence referring to the deductibility of foreign taxes, let alone any reference to the decision of the first appellate authority for assessment year 1978-79. In the circumstances, how can it be said that the Assessing Officer was following the order of the CIT(A) for assessment year 1978-79? The learned counsel for the assessee has submitted in this regard that the discussion is available in the assessment order for assessment year 1979-80 and, it is not necessary to keep on repeating the reasons. We do not find force in this contention. The assessment order for assessment year 1979-80 was passed on 18th August, 1983, whereas the assessment order for assessment year 1982-83 was passed in March 1985 and the order for assessment year 1983-84 was passed in March 1986. Each order is a separate order and it cannot be presumed, in absence of any indication whatsoever, that the reasons given in another order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, copies of which are in the paper book and, therefore, it could not be said that the Assessing Officer had not applied his mind. In the circumstances, it was argued that the assessment order could not be called erroneous and the provisions of section 263 of the Act could not be invoked. 26. The learned Departmental Representative, on the other hand, took us through the assessment order to show that there was no discussion whatsoever in it to show that the Assessing Officer had applied his mind. The learned counsel for the assessee again referred to the assessment order for assessment year 1979-80 which we have described above. 27. After carefully considering the rival submissions, we are unable to accept this preliminary objection either. It may be that data was made available to the Assessing Officer but there is nothing to indicate that the Assessing Officer applied his mind to it in the manner in which the Commissioner has described. It is worth repeating that there is not even a single sentence in the assessment order discussing the deduction of foreign taxes. We, therefore, reject this second preliminary objection also. 28. Coming to the merits, the learned counsel f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Tata Sons Ltd. [IT Appeal No. 5708 (Bom.) of 1982, and ITA No. 5790 (Bom.) of 1983] for assessment year 1979-80, it had been held by the Tribunal that the CIT(A) had rightly allowed deduction on account of local tax deducted out of the consultancy fees received by the assessee in that case from a foreign party. The reference applications under section 256(1) of the Act for the said two years were also rejected in RA Nos. 305 306/Bom./1985, dated 14th January, 1986. The copies of these orders were filed before us. It was further submitted that recently the Bombay High Court had rejected an application under section 256(2) of the Act in the same matter and a copy of the newspaper report in Times of India dated 29th April, 1993 was placed before us. However, it was stated that a copy of the judgment itself was not available. 33. In this connection, it was further submitted by the learned counsel for the assessee that an application under section 256(2) of the Act is made to the High Court if the applicant is not satisfied 'with the correctness of the decision of the Appellate Tribunal' and, therefore, it would follow that where the High Court declines to direct the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Tribunal had been approved. In this connection, he invited our attention to the copies of the decisions of the Tribunal in the case of South East Asia Shipping Company (P.) Ltd., where it had been held that income-tax paid in foreign countries is an expenditure incurred by the assessee wholly and exclusively for the purpose of business and was, hence, allowable under section 37 of the Act. However, the Madras High Court had held recently in the case of CIT v. Kerala Lines Ltd. [1993] 201 ITR 106 that taxes paid in foreign ports were application of income and were not necessary for carrying on of business. In the circumstances, it was further held that it was not allowable as a deduction under section 37 of the Act. He submitted that this decision of a High Court should be followed in preference to a decision of the Tribunal. 39. The learned Departmental Representative further referred to the decision of the Tribunal in the case of Tata Sons Ltd., and the rejection of application under section 256(1). In this regard, he pointed out that the nature of business by the assessee in a foreign country was that of consultancy and quite different from construction work carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a proportion of, or otherwise on the basis of, any such profits or gains, shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession'. We have earlier held that the income-tax payments made by the assessee at the foreign ports are not allowable deductions under section 37 of the Act. Section 40 of the Act provides for disallowing claims for deduction in computing the income chargeable under the head 'Profits and gains of business or profession' in the cases provided thereunder, despite the provisions of the contrary in sections 30 to 39 of the Act. Inasmuch as we have earlier held that the income-tax payments made by the assessee in the foreign ports would not qualify for deduction under section 37 of the Act, it would really be unnecessary to consider whether those amounts shall not be deducted under section 40(a)(ii) of the Act. However, in view of the strong reliance placed by learned counsel for the assessee upon the decision of the Supreme Court in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580, we would like to point out that in that decision, there was no dispute regarding the applicability of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he important adjustments thereto was deduction of income-tax paid. It was in this context that the nature of contractors' tax levied in Iran was examined and, after considering Article 76 of the Iran Taxation Laws, the Tribunal came to a decision that contractors' tax was not a tax in respect of income and, therefore, could not be deducted in the computation of chargeable profits. 47. Firstly, we are of the opinion that even under the Companies (Profits) Sur-tax Act, what was under consideration of the Tribunal was similar to the question under consideration before us, i.e., whether the contractors' tax was a tax on income. Secondly, it has to be noted that the Tribunal examined the matter only with reference to Article 76 of Iran Taxation Laws, but Article 79 thereof was not brought to the notice of the Tribunal. Under article 76, in respect of contracts for any type of construction work, the employers were required to submit a copy of the contract to the local assessment office and withhold, when effecting each payment, 51/2 per cent of the amount thereof, to be paid to the local finance office. Thus, it is a provision for tax deduction at source at the time of making payment t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chambers of Commerce, etc. The utilisation of the taxes cannot have any bearing on the nature of tax itself which has been clearly described as additional tax on taxable income. Thus, we hold that the municipal tax and Chambers of Commerce Tax are also taxes on income. 50. As far as the taxes in Libya are concerned, it is not disputed before us that the nature of the taxes are similar to corporate tax or project tax in Iran. Thus, following our above decision, we hold that these taxes are also taxes on income. 51. The next question for consideration is whether taxes on income levied in a foreign country are deductible under section 37(1) of the Act. 52. Several cases had been cited before us in this regard, including some cases mentioned in the order under section 263 of the Act, which have been relied upon by the learned Departmental Representative. According to the learned counsel for the assessee, a rejection of application under section 256(2) of the Act, by the High Court should be equated to an approval by the High Court of the correctness of the decision of the Tribunal and, reliance has been placed on the decision of the Special Bench of the Tribunal in the case of Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Madras High Court in the case of Kerala Lines Ltd., at page 113. 54. Next, in the case of Indian Overseas Bank Ltd., the Madras High Court was considering whether the payment of excess profits tax by an assessee in Ceylon on Ceylon income was an allowable deduction under the Indian Income-tax Act, 1922. It was held that even on general principles, a tax deduction was not expenditure laid out wholly and exclusively for the purposes of earning profits. 55. In the case of A.V. Thomas Co. Ltd. v. CIT [1986] 159 ITR 431, the Full Bench of the Kerala High Court, after noticing that sur-tax was a charge on income and a levy on the profits and gains of business, held that it was an application of profits and gains of business after they have been earned and was not an allowable deduction under section 37 of the Act. A plethora of cases was considered by them before coming to the conclusion. 56. Lastly, we have the decision of the Madras High Court, recently reported in Kerala Lines Limited. It was held that taxes paid in foreign ports were only an application of income and not allowable as deduction under section 37 of the Act. They have quoted with approval, the following pas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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