2016 (4) TMI 592 - HC - Income Tax

Validity of Sections 44AC and 206C - Held that - The minor premise of the ratio decidendi was that a distinction had to be made in respect of assessees covered by Section 44AC of the Act between those who would be able to justify the deductions claimed and others who may not stay back for the same or have their books in order for such purpose. It is the same rule that needs to be applied to Section 44D(b) of the Act in similar circumstances as the rule was applied to Section 44BBA thereof in the case of Royal Jordanian Airlines 2015 (11) TMI 1454 - DELHI HIGH COURT . Nothing regarding the possible availability of the option to an assessee covered by Section 44D(b) of the Act to claim permissible deductions, will affect the obligation of the resident assessee while making the relevant payment to a foreign company, whether under Section 195 of the Act or otherwise. The resident assessee making a payment in respect of a matter covered by Section 44D(b) of the Act to a foreign company will be obliged to withhold the tax on presumptive basis and deposit the same with the department. However, it will be open to the concerned foreign company to subject itself to assessment by claiming the permissible deductions, notwithstanding Section 44D(b) of the Act, whereupon the burden, as always, will be on the foreign company to establish the permissibility of the deductions that it claims. The option to claim deductions cannot be denied to a foreign company covered by Section 44D(b) of the Act; but as to whether it can establish the deductions that it claims, is an entirely different matter. WP is disposed of by reading down Section 44D(b) of the Act and by holding that notwithstanding the machinery of presumptive tax being provided thereunder, a foreign company would be entitled to claim deductions under the applicable provisions of the Act upon establishing its entitlement in such regard on the basis of the material that it may produce. Usually, such exercise would imply a claim for refund as the tax on presumptive basis would already have been deducted at the time of remittance by the resident assessee and deposited with the department.

Issues Involved:
1. Vires of Section 44D(b) of the Income Tax Act, 1961.
2. Reasonableness of denying deductions under presumptive tax provisions.
3. Applicability of Article 14 of the Constitution of India.
4. Binding nature of the Authority for Advance Rulings' opinion.
5. Legislative competence and policy considerations in tax law.

Issue-wise Detailed Analysis:

1. Vires of Section 44D(b) of the Income Tax Act, 1961:
The primary challenge was to the vires of Section 44D(b) based on a Supreme Court dictum. The petitioners argued that the provision unreasonably denied assessees the option to claim deductions from gross income, thereby violating Article 14 of the Constitution. The court noted that this provision was dated and any adjudication would have limited impact, confined to agreements made between March 31, 1976, and April 1, 2003.

2. Reasonableness of Denying Deductions under Presumptive Tax Provisions:
The petitioners contended that the machinery of presumptive tax under Section 44D(b) was unreasonable as it shut out the option to claim deductions. The court referred to the Supreme Court's judgment in A. Sanyasi Rao, which held that while the imposition of presumptive tax was justified, denying deductions to assessees who could establish their claims was unreasonable. The court applied this reasoning to Section 44D(b), holding that foreign companies should be entitled to claim deductions if they could substantiate them with proper material.

3. Applicability of Article 14 of the Constitution of India:
The court examined whether the presumptive tax provisions violated Article 14, which guarantees equality before the law. The Supreme Court in A. Sanyasi Rao had upheld the legislative competence to impose presumptive tax but found that denying deductions without a rational basis was discriminatory. The court extended this reasoning to Section 44D(b), ensuring that assessees could claim deductions if they could justify them.

4. Binding Nature of the Authority for Advance Rulings' Opinion:
The Union argued that the Authority for Advance Rulings' opinion, which required the Indian company to withhold tax on payments to the foreign company, should be binding. The court clarified that while the ruling was binding on the Indian company and relevant tax authorities, it did not preclude the foreign company from challenging the denial of deductions under Section 44D(b).

5. Legislative Competence and Policy Considerations in Tax Law:
The Union emphasized that the Parliament had consciously created exceptions for certain non-resident assessees and that the court should respect legislative wisdom. The court acknowledged the policy considerations but held that the denial of deductions to assessees who could substantiate their claims was unfair. The court read down Section 44D(b) to allow foreign companies to claim deductions, provided they could establish their entitlement.

Conclusion:
The court disposed of the writ petition by reading down Section 44D(b) to permit foreign companies to claim deductions under applicable provisions of the Act, upon establishing their entitlement. This decision aligns with the principles laid down in A. Sanyasi Rao and ensures that the machinery of presumptive tax does not result in unreasonable denial of deductions. The court emphasized that the burden of proof would be on the foreign company to establish the permissibility of the deductions claimed.

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