1994 (2) TMI 114 - AT - Income Tax

Summary

Issues Involved:
1. Non-applicability of the notification dated 31-3-1993.
2. Section 44BB and its implications on taxable income.
3. Grossing up of taxes and Surtax liability.
4. Adoption of the cash system of accounting.

Summary:
Non-applicability of the Notification Dated 31-3-1993:
The assessee, a non-resident entity engaged in contract works for Bombay High Offshore Oil Rigs, contended that the notification dated 31-3-1993 did not apply to its activities. The Tribunal held that the notification extended the applicability of the Income-tax Act, 1961 to the Continental Shelf and the Exclusive Economic Zone of India, covering all activities related to prospecting, extraction, or production of mineral oils. The Tribunal concluded that the services and facilities provided by the assessee were directly connected to these activities, thus falling within the scope of the notification.

Section 44BB and Its Implications on Taxable Income:
The assessee argued that section 44BB, which overrides sections 28 to 41, did not permit the addition of taxes paid on its behalf to its receipts for taxable income computation. The Tribunal agreed, stating that section 44BB is a complete code in itself and excludes the provisions of section 28. Therefore, the taxes paid by the main contractor should not be considered as part of the assessee's profits.

Grossing Up of Taxes and Surtax Liability:
The assessee claimed that grossing up of taxes should be done only once and that probable Surtax liability should not be treated as a perquisite. The Tribunal upheld the single-stage grossing up of income tax but deleted the multiple-stage grossing up related to Surtax liability, aligning with the decision in ONGC's case.

Adoption of the Cash System of Accounting:
The Tribunal noted that the assessee initially filed its return on a completed contract basis but later adopted the cash receipt basis following proceedings u/s 263. The Assessing Officer and CIT(A) adopted a mixed system of accounting, which was deemed proper as it aligned with CBDT's Instruction No. 1767.

Conclusion:
The appeals for the assessment years 1985-86 and 1986-87 were allowed in part, with specific directions regarding the inclusion of tax perquisites and the method of grossing up. The appeal against the order of CIT made u/s 263 for the assessment year 1984-85 was held as infructuous.