2016 (2) TMI 308 - HC - Income Tax

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. 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 legislature cast the obligation to deduct tax at source on the person responsible to make payment to a non-resident in shipping 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 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 provisions of this Act not being income chargeable under the head Salaries , would have to deduct the tax thereon at the rates in force.

Issues Involved:
1. Application of Section 172 vs. Section 40(a)(i) of the Income Tax Act.
2. Whether interest income qualifies as business income or income from other sources.
3. Deductibility of demurrage charges under Section 40(a)(i) r/w Section 195.
4. Exclusion of 90% of net income for computing profits under Section 80HHC.
5. Classification of various incomes (interest, lease income, barge freight, etc.) for tax purposes.

Detailed Analysis:

Issue 1: Application of Section 172 vs. Section 40(a)(i) of the Income Tax Act
The primary issue was whether Section 172, which deals with the levy and recovery of tax for non-resident shipping companies, overrides the obligation to deduct tax at source under Section 195, thus impacting the applicability of Section 40(a)(i). The court concluded that Section 172, being a complete code for non-resident shipping companies, indeed overrides the provisions of Section 195. Therefore, in cases where Section 172 applies, there is no obligation to deduct tax at source under Section 195, and consequently, Section 40(a)(i) does not apply.

Issue 2: Interest Income as Business Income or Income from Other Sources
The court examined whether the interest income declared by the assessee could be classified as business income or income from other sources. The court held that the interest income on bank deposits and other sources should be considered as income from other sources, not business income. This classification is crucial for determining the applicability of Explanation (baa) to Section 80HHC.

Issue 3: Deductibility of Demurrage Charges under Section 40(a)(i) r/w Section 195
The Assessing Officer had disallowed the demurrage charges claimed by the assessee under Section 40(a)(i) because no tax was deducted at source. The court held that, given Section 172's applicability, there was no obligation to deduct tax at source under Section 195 for demurrage charges paid to non-resident shipping companies. Thus, the disallowance under Section 40(a)(i) was not warranted.

Issue 4: Exclusion of 90% of Net Income for Computing Profits under Section 80HHC
The court addressed whether the ITAT was correct in directing the exclusion of 90% of net interest income for computing profits of the business under Section 80HHC. The court upheld the ITAT's decision, affirming that 90% of net interest income should be excluded, provided there is a direct nexus between interest earned and paid.

Issue 5: Classification of Various Incomes for Tax Purposes
The court examined the classification of various incomes, such as lease income, barge freight, and proceeds from other services, claimed by the assessee. The court held that these incomes should be classified as gross receipts received in the course of business and not subject to Explanation (baa) of Section 80HHC. The court also affirmed that only 90% of net income from these sources should be excluded for computing business profits under Section 80HHC.

Conclusion:
The court resolved that Section 172 overrides the obligation to deduct tax at source under Section 195, impacting the applicability of Section 40(a)(i). It also clarified the classification of interest income and other business receipts for tax purposes, ensuring that only 90% of net income from specific sources is excluded for computing business profits under Section 80HHC. The judgment harmonizes the provisions of the Income Tax Act, ensuring no part is rendered otiose or redundant.

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