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TMI Blog2008 (8) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in the case of Iraqi 29 ITD 115 [(sic)-Iraqui Airways vs. IAC (1987) 66 CTR (Trib)(Del) 56 : (1987) 23 ITD 115 (Del))Ed.]. The AO completed assessment under s. 143(3) by invoking provision of s. 44BBA of the IT Act. The AO computed income @ 5 per cent of aggregate amount specified in sub-s. (2) of s. 44BBA as the income chargeable to tax. The assessee preferred further appeal before the learned CIT(A). The learned CIT(A) for asst. yrs. 1995-96, 1996-97, 1997-98 and 1998-99 deleted the addition and held that the income of appellant is not taxable in India. However, the learned CIT(A) for asst. yr. 2000-01 confirmed the action of the AO. Aggrieved from the aforesaid orders of the learned CIT(A), further appeals were preferred by the assessee and Revenue. Special Bench of the Tribunal was constituted to dispose of the appeals as there were apparent contrary decisions of the Tribunal. Special Bench of the Tribunal in paras 75 and 76 of its order [order reported as Dy. CIT vs. Royal Jordanians Airlines (2005) 97 TTJ (Del)(SB) 434-Ed.] held as under: "75. In view of the discussion in the foregoing paras, we hold that RJA did not enjoy any immunity from taxation in India. Its income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be taxed in India while computing the income under the provisions contained in s. 44BBA of the Act. In support, reliance was placed on the judgment of apex Court in the case of Union of India vs. A. Sanyasi Rao & Ors. (1996) 132 CTR (SC) 81 : (1996) 219 ITR 330 (SC) at p. 332. Apart therefrom, details in respect of confirmations of refunds, receipts from M/s Royal Jordan Airlines were also furnished. 4.2 The AO vide order dt. 27th Dec., 2006 for each of the five assessment years has held that, despite the losses incurred by the appellant both in India and globally, income to be computed at 5 per cent of the gross receipts. He has also held that, in view of the findings contained in the order of Hon'ble Tribunal dt. 31st Oct., 2005 in para 75, he further held that, income of the assessee has to be computed in accordance with provisions contained in s. 44BBA of the Act and there is no scope of deviation. 5. The appellant being aggrieved from all the five orders of assessment preferred appeals before CIT(A). 6. Before learned CIT(A), the main contentions of the appellant were as under: (a) The provisions of presumptive taxation under s. 44BBA can only be invoked, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to s. 44BBA of the Act as has been held by the apex Court in the cases of Padmasundara Rao (Decd) & Ors. vs. State of Tamil Nadu (2002) 176 CTR (SC) 104 : (2002) 255 ITR 147 (SC); Shatrushailya Digvijay Singh Jadeja vs. CIT (2002) 177 CTR (Guj) 508 : (2003) 259 ITR 149 (Guj). The appellant being aggrieved has thus preferred the instant appeals. 7. The grounds of appeals raised by the appellant in all five appeals are primarily regarding following two issues: (A) Whether provisions contained in s. 44BBA of the Act can be interpreted to compute an income, despite the fact that admittedly, appellant has incurred losses in each of the assessment years under consideration? (B) If answer to the aforesaid question is in the affirmative, whether the levy of interest under s. 234B of the Act on the facts of the instant case was in accordance with law? 8. Shri Salil Aggarwal, learned advocate appearing for the appellant made detailed submissions. He invited our attention to the provisions of s. 44BBA of the Act extracted hereunder: "44BBA. (1) Notwithstanding anything to the contrary contained in ss. 28 to 43A, in the case of an assessee, being a non-resident, engaged in the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessee subject to tax. At this juncture, it would be appropriate to state here that, s. 2(24) of the Act defines 'income' which among other things includes 'profits and gains'. It is thus submitted that in the case of the appellant, since there are no profits or gains and, in fact, there are losses, it cannot be held that, there was any income, which was subject to tax under the Act under s. 44BBA of the Act. 8.1 In support of the aforesaid submissions, Shri Aggarwal seeks to rely upon following observation from two judicial pronouncements extracted herein: (a) Saipem S.P.A. vs. Dy. CIT (2004) 86 TTJ (Del)(TM) 1 : (2004) 88 ITD 213 (Del)(TM) "35. With reference to the aforesaid, I accept the argument of the learned counsel that s. 5 is the charging provision and no income can be brought to tax unless it falls within the scope of the said section and the use of the expression 'subject to other provisions of the Act' in s. 5 would mean that if any other section operates to exclude from the total income of any person any income, which otherwise falls within the broad framework of his total income as laid down in s. 5 of the Act such section would pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a different consideration. Even according to the Revenue, the provisions (ss. 44AC and 206C) are only 'machinery provisions'. If so, why should the normal reliefs afforded to all assessees be denied to such traders? Prima facie, all assessees similarly placed under the IT Act are entitled to equal treatment. In the matter of granting various reliefs provided under ss. 28 to 43C, the assessees carrying on business are similarly placed and should there be a law, negativing such valuable reliefs to a particular trade or business, it should be shown to have some basis fair and rational. It has not been shown as to why the persons carrying on business in the particular goods specified in s. 44AC are denied the reliefs available to others. No plea is put forward by the Revenue that these trades are distinct and different even for the grant of reliefs under ss. 28 to 43C of the Act. The denial of such reliefs to trades specified in s. 44AC, available to other assessees, has no nexus to the object sought to be achieved by the legislature." 8.3 Shri Aggarwal also relied upon the decision of apex Court in the case of Hyundai Heavy Industries Co. Ltd., wherein at pp. 489 and 494 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts: (a) CIT vs. D.P. Sandu Bros. Chembur (P) Ltd. (2005) 193 CTR (SC) 578 : (2005) 273 ITR 1 (SC); (b) Arun Kumar & Ors. vs. Union of India & Ors. (2006) 205 CTR (SC) 193 : (2006) 286 ITR 89 (SC); (c) K.P. Varghese vs. ITO & Anr. (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC). It is submitted that, unlike ss. 68 and 69 of the Act which is a charging section, s. 44BBA of the Act is a machinery provision. 8.7 It is submitted that, s. 44BBA of the Act was inserted w.e.f. 1st April, 1988 and circular explaining the insertion of the provisions provides as under: "Circular No. 495, dt. 22 Sept., 1987 [(1988) 67 CTR (St) 1 : (1987) 168 ITR (St) 99]: "Simplification in the computation of income in respect of foreign airlines. 22.1 Presently the income of a non-resident engaged in the business of operation of aircraft is computed after allowing deduction for certain expenses and statutory deductions. This involves complications in determining the income accruing or arising in India to such a person. 22.2 With a view to simplify the existing provisions, the Amending Act has inserted a news. 44BBA which provides that the income from such business shall be computed at a flat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of charging provision or a provision imposing penalty but not other portion of statute which contains the machinery provisions. In the judgment of Gauhati High Court in the case of Sardar Harvinder Singh Sehgal & Ors. vs. Asstt. CIT & Ors. (1998) 144 CTR (Gau) 626 : (1997) 227 ITR 512 (Gau), it was also held that, a machinery provision has to be construed in a manner that it sub-serves the objective of the statute. 8.10 Assailing the order of the learned CIT(A), Shri Aggarwal submitted that- (1) The learned CIT(A) has denied the claim of the appellant on the ground that provisions of s. 44BBA of the Act did not specifically provide for computation of lower rate of profit, as has been provided under ss. 44AD, 44AF, 44BB and 44BBB of the Act. It is submitted that, this finding is misconceived. In fact, this issue has been adjudicated by the apex Court in the case of CIT vs. Hyundai Heavy Industries Co. Ltd., wherein the apex Court was considering the provisions contained in asst. yrs. 1987-88 to 1988-89 when the provisions to computation of lower rate of profit were absent in s. 44BB of the Act. It is thus submitted that, learned CIT(A) has fallen in error in not appre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of the assessee which warrants computation when neither a submission had been made and nor a ground raised. It is submitted that, this issue has never been examined by the Tribunal and then too, it cannot be said that, there is direction of the Tribunal in the order dt. 31st Aug., 2005. In view of the aforesaid, it is submitted that it be held that since appellant had incurred losses, no income can be brought to tax in each of the five assessment years. 9. The learned Departmental Representative Devendra Shanker, on the other hand, strongly relied upon the finding of the learned CIT(A). He submitted that in this case the assessee is a non-resident and whose income is assessable to tax under ss. 4, 5 and 9 as the assessee has a business connection. The income of the assessee as is attributable to the business connection will have to be determined as per provisions of the Act. Sec. 44BBA of the Act provides for taxation of assessee engaged in the operation of the aircraft treating the assessable income @ 5 per cent of the sum mentioned in sub-s. (2) of s. 44BBA. 9.1 The learned Departmental Representative also invited our attention to the finding of the Special Bench of T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of tax the assessee may be assessed on the basis of the books of accounts and the procedure laid down under the Act like maintenance of accounts, tax audit under s. 44AB, etc. Such provisions exist in s. 44BB as well as s. 44DA, sub-s. (2) of 44BBB, sub-s. (7) of 44AE, sub-s. (5) of 44AF, etc. However, no such option is available to the assessee under s. 44BBA which will apply in the case of the assessee. 9.4 The assessee's case of reading s. 44BBA and permitting computation at a lower rate is not warranted and cannot be accepted as this will amount to reading into the statute which is not provided by the plain and simple language which is clear and unambiguous. The principles of interpretation of a fiscal statute do not provide for such a reading of the provisions of the IT Act. Further, it is submitted with utmost respect the Hon'ble Tribunal does not have the jurisdiction to go into the validity of the provisions of the Act as the Tribunal itself is a creature of the Act. This has been held so in number of judgments and specially reference was made to the judgment of K.S. Venkataraman & Co. (P) Ltd. vs. State of Madras (1966) 60 ITR 112 (SC). 9.5 The provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construing ss. 44AC and 206C of the Act'." 9.8 In the case of Hyundai Heavy Industries Co. Ltd., which referred to asst. yrs. 1987-88 and 1988-89, the Hon'ble Supreme Court referred to computation of income at a rate provided for in the s. 44BB because of Instruction No. 1767, dt. 1st July, 1987 issued by the CBDT. 9.9 The observation of the Supreme Court at p. 494 of the judgment of the Supreme Court clearly indicates that computation of income at a lower rate than prescribed under s. 44BB provided for lower rate of determination of income in view of Instruction No. 1767 which being more beneficial to the assessee could be applicable. This is clear from the following observations of the Supreme Court: "Secondly, in the present case, the assessees themselves contended in the assessment proceedings that the AO should have computed the income relating to Indian operations under s. 44BB or under Instruction No. 1767 issued by the CBDT, dt. 1st July, 1987. Thirdly, it is important to note that Chapter IV of the Act contains provisions for presumptive taxation of business income in certain cases as prescribed in ss. 44B, 44BB, 44BBA and 44BBB of the Act. In the scheme of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the expenses normally likely to be incurred in such business. 9.13 Similarly, in the case of DHV Consultants BV, In re (2005) 197 CTR (AAR) 105 : (2005) 277 ITR 97 (AAR), have come to the conclusion that in the case of presumptive taxation income has to be computed as per the provisions and the presumption is that the expenses incurred for earning the income are deemed to have been allowed. From the above submissions it is clear that the appellant's reliance on the judgments of A. Sanyasi Rao & Ors. and Hyundai Heavy Industries Co. Ltd. is misled and the income of the appellant has to be computed under s. 44BBA of the Act. 10. We have heard the parties at length. We have perused the material on record to which our attention was drawn. We have considered rival submissions and relevant facts and various case law cited. The first and foremost contention of the learned CIT-Departmental Representative is that scope of the appeal preferred by the assessee is limited i.e. in view of the observations made in para 75 of the order of Special Bench of the Tribunal, wherein the computation of income of the appellant has to be in accordance with statutory provisions contained in s. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the agent and, the sum refunded to the customer. It is thus evident that, the Hon'ble Tribunal was not considering the issue whether in case, there are losses incurred by the appellant, still any income is assessable under s. 44BBA of the Act. In fact, on the contrary, the aforesaid issue as raised in the grounds of appeal was also not considered fit for adjudication since the Hon'ble Tribunal found that there is no serious discussion in this respect in the order of learned officer and the learned CIT(A) and accordingly, the Hon'ble Tribunal held that, "in all fairness and assessee should now be given a specific opportunity to put forth its arguments in relation to computation of income under the provisions of s. 44BBA". It is thus evident that, the Tribunal held that, in all fairness and in the circumstances of the case, the assessee should be given a specific opportunity to put forth its submissions in relation to computation of income under the provisions of s. 44BBA and, not that it was necessary that, there must be income under s. 44BBA of the Act despite the fact that, there were losses incurred by the appellant company. In fact, it is clearly stated that, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year of every person. The score of total income is contained in s. 5 of the Act. As per s. 5(2), the total income of a non-resident includes all income from whatever source derived which is either received or deemed to be received in India or accrues or deemed to be accrued in India. Thus, as per ss. 4 and 5 of the Act, which are charging sections, the prerequisite is income and if the assessee is non-resident, further condition is that such income should have been received or accrued in India. If this basic charge is attracted, the income can be computed therewith as per the scheme of the Act. As per s. 14 in Chapter IV of the Act, all income for the purpose of charge of income-tax and computation of the total income be classified under various heads, namely, salary, house property, income from business/profession, capital gains, or income from other sources. Thus, Chapter IV is attracted only for the purpose of computation of income under various heads and is not a charging section. Hence, unless and until, there is an income of the appellant under ss. 4 and 5 of the Act, there cannot be any computation in respect thereof. There is a basic distinction between deemed income and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account." On the basis of above decisions as well as decision of Hon'ble Supreme Court in the case of A. Sanyasi Rao & Ors., it is held that s. 44BBA of the Act is not a charging section but a machinery provision for computation of income. Sec. 4 of the Act is the charging section, which provides that, tax is leviable on the total income of an assessee. The income as defined in s. 2(24) of the Act provides that, income includes profits and gains. In other words, there must be both profits and gains before a sum can be brought to tax and since, in the case of the appellant, there is loss as contended, no sum can be brought to tax. In light of the finding above, we hold that provisions contained in s. 44BBA of the Act are per se not applicable to the facts of the case of the appellant and, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subordinate provision, and which must give way to the other. That would be so with regard to enactments and with regard to rules which are to be treated as if within the enactment. In that case, probably the enactment itself would be treated as the governing consideration and the rule as subordinate to it'." 12.3 In the case of the State of Gujaratvs. Chaturbhuj Maganlal (1976) 3 SCC 54, their Lordships held: "Where the language of a statutory provision is susceptible of two interpretations, the one which promotes the objects of the provision, comports best with its purpose and preserves its smooth working should be chosen in preference to the other which introduces in convenience and uncertainty in the working of the system. This rule will apply in full force where the provision confers ample discretion on the Government for a specific purpose to enable it to bring about an effective result." 12.4 In the case of Chief Justice of Andhra Pradesh vs. L.V.A. Dixitulu 1979 (2) SCC 34, a Constitution Bench of Hon'ble Supreme Court observed as under: "Where two alternative constructions are possible, the Court must choose the one which will be in accord with the other parts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been increased or reduced, as the case may be, the interest shall be increased or reduced accordingly. From this, according to the assessee, the inference to be drawn has to be that only the quantum of income on which interest is charged is varied, but the period remains fixed." Despite the plain reading suggested the interpretation as contended by the appellant, yet the Hon'ble Court rejected such a contention by holding at p. 464 that, a construction which reduces the statute to a futility has to be avoided. It was further observed as under: "A statute or any enacting provision therein must be so construed as to make it effective and operative on the principle expressed in the maximum res magis valeat quam pereat, i.e., a liberal construction should be put upon written instruments, so as to uphold them, if possible, and carry into effect the intention of the parties. A statute is designed to be workable and the interpretation thereof by a Court should be to secure that object unless crucial omission or clear direction makes that end unattainable, referred to in CIT vs. S. Teja Singh (1959) 35 ITR 408 (SC) : AIR 1959 SC 352 and Gursahai Saigal vs. CIT (1963) 48 ITR 1 (S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interpretation adopted by the AO is an absurd or inconsistent interpretation and, in the landmark case of Grey vs. Pearson (1857) 6 HL Cas 61, 62, that where the grammatical and ordinary sense of the words in the statute leads to some obscurity or inconsistency with the rest of the statute, the words are modified so as to avoid absurdity or inconsistency. Further, in the case of K.P. Varghese vs. ITO & Anr., the observations of the Court, particularly at pp. 605 and 606 are conclusive of the issue as under: "It is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even 'do some violence' to it, so as to achieve the obvious intention of the legislature and produce a rational construction : Vide Luke vs. IRC (1963) AC 557 : (1964) 54 ITR 692 (HL) : TC 38 R. 352. The Court may also in such a case read into the statutory provision, a condition which, though not expressed, is implicit as constituting the basis assumption underlying the statutory provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the provision of law. The circular is only to relax the rigour of law. If that be the case, there is no gain saying that the Tribunal cannot read such provision in the Act. The Hon'ble Court by giving independent decision has stated that, in the scheme of presumptive taxation where assessee claims that his income is less than the presumptive figure and is required to support his claim by producing books of accounts. Once there are observations of the learned apex Court, such observations cannot be overlooked and have to be followed. In fact, even the obiter dicta of the apex Court is binding. 14. The learned Departmental Representative has thereafter relied upon the following judgments: (a) Oil India Ltd. vs. CIT; (b) CIT vs. Oil & Natural Gas Commission. On the basis of the case of Oil India Ltd. vs. CIT, the learned Departmental Representative has submitted that, s. 44BB is a complete code of computation of income of profits and gains. It is submitted that, in the case of Oil India Ltd. vs. CIT, the dispute was whether the income-tax payable by Oil India Ltd. in respect of contracts with non-resident is not taxable as income of the non-resident. It was in that conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents carrying on business in India and are not much relevant in construing ss. 44AC and 206C of the Act." The appellant had relied upon on the aforesaid judgment and had made two basic submissions namely: (a) that provisions contained in s. 44BBA of the Act are machinery provisions and (b) that only real income can be brought to tax and not hypothetical income. In fact, in the case of State of Rajasthan vs. Rajasthan Chemists Association (copy placed on record), apex Court following the judgment of A. Sanyasi Rao & Ors., has again reiterated above principles as under: "44. Interpretation of the two sections came up before Andhra Pradesh High Court. The said Court while upholding the validity of the Act read down the s. 44AC of the Act and held it only to be an adjunct to s. 206C and to explain provision of s. 206C and not to dispense with the regular assessment in accordance with the provisions of the IT Act. It was held that the subject-matter of tax viz. 'income' cannot be determined notionally by making such specific provisions when in all other cases only the real income is to be computed in accordance with provisions of ss. 28 to s. 43C. This Court noted that one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n normally allowable in the computation. This is indeed clear from the omnibus nature of deductions permissible under s. 37. Hence, in a commercial sense, the concept of profits determined under s. 44BB or 44BBA, though arrived at on a statutory basis, cannot be considered to exclude such expenses as non-deductible merely because the statute fixes a percentage in this regard. The fixation of a rate so low as five per cent of the gross receipts as the net assessable profit indicates a statutory attempt at estimating the expenses normally likely to be incurred in such business. Shri Dastur gives the instance of a case where an assessee really makes a loss and yet is assessed at a profit rate of five per cent. and argues that, surely, in such a case, at least, it cannot be said that the salaries are a deductible item. But, this contention overlooks that the interpretation of a statute cannot be based on isolated possibilities and exceptional situations. The case where a person will incur a loss only by setting off the salaries paid by him is a rare one and cannot furnish a basis for interpreting the clause. The statute brings to tax only five per cent, (or ten per cent) and envisages ..... X X X X Extracts X X X X X X X X Extracts X X X X
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