2009 (10) TMI 575 - HC - Income Tax

Demurrage charges of Rs.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 - Disallowance - Deduction of tax at source - Amount paid to non-resident without deducting tax at source - Disallowance under section 40(a)(i) justified.

Issues Involved:
1. Applicability of section 40(a)(i) of the Income-tax Act, 1961.
2. Entitlement to claim deduction of demurrage charges without tax deduction.
3. Relevance of Circular No. 723 dated September 19, 1995, issued by the CBDT.
4. Application of section 172(8) introduced by the Finance Act, 1997.

Issue-wise Detailed Analysis:

1. Applicability of Section 40(a)(i) of the Income-tax Act, 1961:
The primary issue is whether the Income-tax Appellate Tribunal was correct in holding that disallowance under section 40(a)(i) was not warranted due to a circular issued by the CBDT. The court observed that section 40(a)(i) mandates tax deduction on amounts payable outside India. The assessee's failure to deduct tax on demurrage charges paid to a foreign company necessitated disallowance. The court emphasized that the assessee admitted to not deducting tax, thus making the claim non-deductible under section 40(a)(i).

2. Entitlement to Claim Deduction of Demurrage Charges:
The court examined whether the assessee was entitled to claim deduction of demurrage charges of Rs. 1,08,53,980 paid to a foreign company without deducting tax. The Assessing Officer initially disallowed this deduction, and the Commissioner of Income-tax (Appeals) and the Appellate Tribunal later reversed this decision. The court scrutinized the factual admission by the assessee that no tax was deducted on the demurrage amount. It concluded that the assessee's claim without tax deduction was incorrect and upheld the Assessing Officer's disallowance.

3. Relevance of Circular No. 723 dated September 19, 1995, issued by the CBDT:
The court analyzed the relevance of CBDT Circular No. 723 in applying the provisions of section 40(a)(i). The circular clarifies the scope of sections 172, 194C, and 195 of the Act. The court noted that the circular cannot override the explicit provisions of the Act. The court found that the Commissioner of Income-tax (Appeals) and the Appellate Tribunal misinterpreted the circular, leading to an incorrect application in favor of the assessee. The court held that the circular does not aid the assessee in avoiding the tax deduction requirement under section 40(a)(i).

4. Application of Section 172(8) Introduced by the Finance Act, 1997:
The court considered whether the assessee could claim deduction under the provisions of section 172(8) introduced retrospectively from April 1, 1976. Section 172 pertains to profits of non-residents from occasional shipping business. The court determined that the assessee, being an Indian company, could not invoke section 172, which applies to non-residents. The court clarified that section 172 does not apply to the assessee's case and that the demurrage paid to the foreign company does not fall under occasional shipping profits.

Conclusion:
The court concluded that the facts of the case are governed by section 40(a)(i) of the Income-tax Act, 1961. The order passed by the Assessing Officer was deemed legal and proper, leading to the quashing of the orders by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal. The appeal filed by the Revenue was allowed, and the Assessing Officer's order was upheld.

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