2015 (9) TMI 1056 - HC - Income Tax

Demurrage claim paid to a non-resident shipping company - AO disallowed part of the above expenditure for failure to deduct tax at source under Section 195 - Held that - The respondent-assessee placed reliance upon Section 172 of the Act in respect of payments made by it to a non-resident shipping company by way of demurrage charges. The tax which is deducted at source by the assessee company is on behalf of the recipient of the charges. The issue before the Court was whether demurrage charges which are paid by the respondent-assessee to a non-resident company would be allowed as an expenditure in the absence of deduction of tax at source in view of Section 40(a)(i) of the Act. Although the Court was concerned with the issue in an appeal concerning a resident company. The introduction of section 172 of the Act by the assessee was to determine whether in view thereof was there any obligation to deduct tax at source by the payerassessee. Section 172 of the Act has to be examined through the prism of the non-resident shipping company in respect of it s income. It is in the above view that Section 172 of the Act and Circular No. 723 issued by the CBDT was relied upon by the respondent-assessee to point out that as Section 172 of the Act provides a complete code itself for levy recovery of tax ship wise and journey wise. Thus there is no occasion to deduct tax under Chapter XVII of the Act. It is a settled position under the law of precedents that it is not open to us (Division Bench) to take a view contrary to the view taken by another Division Bench of this Court. In case we are unable to agree with the view of the earlier Division Bench and it does not fall within the exclusionary categories of binding precedent by being contrary to and/or in conflict with a decision of the Apex Court or rendered per-incurrim. In such a case it is best that the issue is resolved at the hands of a Larger Bench of this Court. Certainty of law is an important ingredient of Rule of Law. We direct the Registry to place papers and proceedings of the present two appeals before the Hon ble The Chief Justice to obtain suitable directions to place the following question of law for the opinion of the Larger Bench of this Court as under Whether while dealing with the allowability of expenditure under Section 40(a)(i) of the Act 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? It is made clear that all the substantial questions of law would be considered after the receipt of the view of the Full Bench of this Court.

Summary

Issues:
1. Application of Section 172 vs. Section 40(a)(i) of the Income Tax Act.
2. Exclusion of 90% of 'net' interest income for computing profits.
3. Validity of excluding 90% of 'net' interest income.
4. Classification of various interest income under 'Profits and gains of business or profession.'
5. Exclusion of receipts on account of 'professional services' and 'proceeds from electronic data processing' under section 80HHC.
6. Inclusion of 90% of net income from 'stevedoring agency business' and 'travel agency business' under section 80HHC.
7. Exclusion of 90% of net income from 'transfer of vessel' and 'barge freight' under section 80HHC.
8. Exclusion of 90% of 'net' income from 'lease hire charges' for computing profits under section 80HHC.

Analysis:

1. Application of Section 172 vs. Section 40(a)(i): The case involved a dispute regarding the obligation to deduct tax at source under Section 195 of the Act for payments made to a non-resident shipping company. The Tribunal allowed the appeal, citing Section 172 as a self-contained provision for levy and recovery of taxes in cases involving non-resident shipping companies. The High Court, however, disagreed with this interpretation, emphasizing that Section 172 applies only to non-residents engaged in shipping business, not resident companies. The Court directed the matter to a Larger Bench for clarification on the applicability of Section 40(a)(i) concerning the status of the payer.

2. Exclusion of Interest Income for Computing Profits: The Tribunal's decision to exclude 90% of 'net' interest income for computing profits raised questions about the validity of this exclusion. The Court examined the nexus between interest earned and paid, emphasizing the need to establish a direct connection between interest income and business profits. The issue of proper classification of various interest income under the head 'Profits and gains of business or profession' was also addressed for clarity in computation.

3. Exclusion of Receipts under Section 80HHC: The Tribunal's findings regarding the exclusion of receipts from 'professional services' and 'proceeds from electronic data processing' under section 80HHC were challenged. The Court evaluated whether these receipts fell within the exclusionary provisions of the clause, emphasizing the need for a thorough analysis of the income sources to determine their eligibility for exclusion under the relevant section.

4. Inclusion of Income under Section 80HHC: The Tribunal's decision to include 90% of net income from 'stevedoring agency business' and 'travel agency business' under section 80HHC was scrutinized for its legal validity. The Court assessed the applicability of the clause to these specific income sources, emphasizing the need for accurate classification and computation to ensure compliance with the provisions of the Act.

5. Exclusion of Specific Income for Computing Profits: The Tribunal's findings on the exclusion of 90% of 'net' income from the 'transfer of vessel,' 'barge freight,' and 'lease hire charges' for computing profits under section 80HHC were examined. The Court analyzed the rationale behind these exclusions, emphasizing the importance of accurate computation and adherence to the provisions of the Act for determining taxable profits.

Overall, the judgment delves into intricate tax law provisions, highlighting the need for precise interpretation and application to ensure compliance and accuracy in income computation and tax liability assessment.