2015 (6) TMI 709 - AT - Income Tax

Invoking the provisions of Section 172 r.w.s. 163 - non affording any opportunity of hearing - Held that - Scheme of taxation 172 lays emphasis the tax object, i.e. the activity which is to be taxed, and not the tax subject, i.e. the person who is to be taxed. Therefore, when a person assumes liability, by filing return under section 172(3) in respect of tax liability under section 172(2), such a liability is qua the taxability of income in respect of the amount paid or payable on account of carriage of passengers, livestock, mail or goods on the ship. The scheme of this Section, in our humble understanding, does not allow such a person to choose being accountable in respect of a particular person, in respect of owner of the ship or in respect of charterer of the ship. If he assumes the liability under section 172(3), it is in respect of the income earned by the activities of the ship. The assessee s claim that he is only responsible for the tax liability of the owner, and not the charterer, is only to be stated and rejected. Having said that, we may also point out that the Assessing Officer himself has assessed the UK based company, i.e. owner of the ship and not the charterer of the ship. By implication, thus, he accepts that the income was earned by the UK based company, and, if that be so, the provisions of Article 9(1) of the Indo UK tax treaty unambiguously provides that income of an enterprise of a Contracting State (i.e. Tramp Shipping Ltd. UK) from the operation of ships in international traffic shall be taxable only in that State (i.e. UK) . In this view of the matter, and in view of the fact that it has not been the case of any of the authorities below that the income belonged to the charterer based in Bahamas and not the owner based in UK, we are unable to see any legally sustainable reasons to decline the benefit of Article 9 to the assesse before us. The grievance of the assessee must, therefore, be upheld. what would constitute a reasonable time limit? - Held that - Subsequently with effect from 1st April 2007, the statute itself has considered the period of nine months from the end of the financial year, in which return under section 172(3) is filed, as reasonable time limit within which assessment order under section 172(4) is to be framed. When this time limit is statutorily treated as a reasonable time limit for the returns filed after 1st April, 2007, in our considered view, this time limit can also be treated as a reasonable time limit for the returned filed prior to 1st April 2007 as well. We do so. The assessment under section 172(4) was framed on 29th March 2005, whereas the ship had left Indian port on 29th October 2001. The assessment was thus framed almost three years after the end of the relevant previous year. Viewed in this perspective, the impugned order under section 172(4) was indeed barred by limitation. For this reason also, the assessee must succeed in this appeal. - Decided in favour of assessee.

Summary

Issues Involved:
1. Confirmation of the Tax Recovery Officer's order.
2. Invocation of provisions of Section 172 read with Section 163 without a hearing.
3. Validity of the order under Section 172(4) after the issuance of a port clearance certificate.
4. Taxability of income under the Indo-UK Double Taxation Avoidance Agreement (DTAA).
5. Timeliness of the assessment under Section 172(4).

Issue 1: Confirmation of the Tax Recovery Officer's Order
The assessee challenged the correctness of the CIT(A)'s order, which confirmed the Tax Recovery Officer's order dated 29th March 2005. The appellant argued that the CIT(A) should have canceled the order of the Tax Recovery Officer.

Issue 2: Invocation of Provisions of Section 172 read with Section 163 Without a Hearing
The appellant raised an additional ground stating that the CIT(A) erred in invoking the provisions of Section 172 read with Section 163 without affording any opportunity of hearing. This was claimed to be illegal and without jurisdiction.

Issue 3: Validity of the Order under Section 172(4) After Issuance of Port Clearance Certificate
The appellant contended that the Assessing Officer had already granted a port clearance certificate under Section 172(6) on 23/10/2001 after ensuring compliance with Section 172(3). Therefore, the subsequent order under Section 172(4) on 29/03/2005 was argued to be invalid and barred by limitation.

Issue 4: Taxability of Income under the Indo-UK DTAA
The appellant argued that the freight beneficiary, Tramp Shipping Limited based in London, should be exempt from tax in India under the Indo-UK DTAA. The Tax Recovery Officer had initially granted exemption treating the income as exempt under the DTAA. However, the officer later noticed that the tax liability was of the charterer, H C Trading International Inc., Bahamas, which did not have a DTAA with India, and thus withdrew the relief granted under Section 90.

Issue 5: Timeliness of the Assessment under Section 172(4)
The appellant argued that the assessment under Section 172(4) was framed almost three years after the ship left the Indian port, which was beyond a reasonable time frame. The statutory time limit for such assessments was later set to nine months from the end of the financial year in which the return under Section 172(3) is filed, effective from 1st April 2007.

Analysis:

Issue 1: Confirmation of the Tax Recovery Officer's Order
The Tribunal found that the CIT(A) and the Tax Recovery Officer erred in their approach. The authorities below incorrectly determined the eligibility of treaty benefits based on the domicile of the person liable to pay tax dues rather than the fact of taxability under a statute.

Issue 2: Invocation of Provisions of Section 172 read with Section 163 Without a Hearing
The Tribunal admitted the additional grounds of appeal and found that the authorities below acted erroneously by not providing an opportunity for a hearing before invoking the provisions of Section 172 read with Section 163.

Issue 3: Validity of the Order under Section 172(4) After Issuance of Port Clearance Certificate
The Tribunal noted that the Assessing Officer had already granted a port clearance certificate under Section 172(6) after ensuring compliance with Section 172(3). The subsequent order under Section 172(4) was found to be invalid and barred by limitation, as it was issued almost three years after the relevant previous year.

Issue 4: Taxability of Income under the Indo-UK DTAA
The Tribunal held that the taxability under Section 172 is related to the ship's activities and not the enterprise owning or using it under a charter agreement. The income was earned by the UK-based company, and under Article 9(1) of the Indo-UK tax treaty, the income from the operation of ships in international traffic is taxable only in the UK. Therefore, the benefit of Article 9 was applicable, and the assessee's grievance was upheld.

Issue 5: Timeliness of the Assessment under Section 172(4)
The Tribunal agreed with the appellant that the assessment under Section 172(4) was framed beyond a reasonable time frame. Even though there was no statutory time limit at the relevant time, the Tribunal applied the later-established time limit of nine months as a reasonable period for completing such assessments. Consequently, the impugned order under Section 172(4) was deemed barred by limitation.

Conclusion:
The appeal was allowed, with the Tribunal finding in favor of the appellant on all issues raised. The authorities below were found to have erred in their approach, and the assessment under Section 172(4) was invalidated both on substantive and procedural grounds.