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TMI Blog1992 (1) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... ipping Development Fund Committee is money borrowed or debt incurred in acquiring the ship ? " The assessee is a resident company carrying on business in operating cargo ships. Two of the ships of the assessee M. V. Fareeda and M. V. Jameela sailed from Basrah and Chalna ports in Bangladesh and in the accounting year relevant to the assessment year 1974-75, the assessee had paid a sum of Rs. 53,410, such levy being akin to that under section 172 of the Act, to enable the securing of a port clearance and its collection as under section 195 of the Act by way of deduction at source. In Basrah, the levy and deduction was 71/2 per cent. of the gross freight, while that in Chalna was 10 per cent. In the course of the proceedings before the Incometax Officer, in respect of the assessment year 1974-75, by letter dated October 23, 1976, the assessee claimed that income-tax of Rs. 53,410 paid at the foreign ports should be allowed as a deduction. In addition, the assessee also claimed relief under section 80J of the Act without deducting the balance of the unpaid purchase money of Rs. 17,56,614 for acquiring a ship and a loan borrowed by the assessee in a sum of Rs. 24,82,000 from the Ship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elief claimed by the assessee under section 80J of the Act, the Tribunal took the view that the amount of Rs. 17,56,614 owed by the assessee in acquiring the ship should be deducted from the written down value on the application of rule 19A(5) of the Income-tax Rules, but that the amount of Rs. 19,815,600 out of the borrowing of Rs. 24,82,000 by the assessee from the Shipping Development Fund Committee, was in the nature of a collateral transaction, not amounting to moneys borrowed or debts incurred in acquiring the ship and that was not deductible from the written down value of the ship for purposes of computing the relief under section 80J of the Act, purporting to rely on the decision in Madras Industrial Linings Ltd. v. ITO [1977] 110 ITR 256 (Mad). That is how the questions of law set out earlier have arisen. Learned counsel for the Revenue, on the first question, referring to the undisputed payments made by the assessee as and by way of taxes, as shown by the very receipts produced by the assessee, contended that the business of operating cargo ships was carried on by the assessee for the purpose of earning profits and not for payment of taxes and the amounts paid by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as such in the certificates issued by the concerned authorities of the foreign countries. Before the Tribunal also, the character of the payments made by the assessee as and by way of tax had not in any manner been questioned, though the Tribunal took the view that the payments made would be allowable under section 37 of the Act, as expenditure laid out wholly and exclusively by the assessee for the carrying on of the business. The taxes paid by the assessee at the foreign ports had been determined on the basis of a percentage of the freight, viz., either 71/2 per cent. or 10 per cent. of the freight. Subject to the terms of contract of carriage, ordinarily, freight is earned on the delivery or discharge of the cargo at the foreign port and the tax paid by the assessee had been determined with reference to the freight so earned, as a percentage thereof. The payment of taxes by the assessee at the foreign ports cannot, therefore, be regarded as an expenditure incurred by the assessee for earning profits by way of freight. The taxes paid by the assessee could, at best, be considered as an application of profits earned by the assessee and division thereof between the assessee and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was not expenditure laid out wholly and exclusively for the purpose of earning profits. In Chief CIT v. Eastern Extension Australasia and China Telegraph Co. Ltd. [1921] 1 ITC 120 (Mad), a Full Bench pointed out that in arriving at the total profits of a company for purposes of rule 2 framed under section 43(2)(c) of the Income-tax Act, 1918, income-tax and excess profits tax payable by the company in England and elsewhere, cannot be deducted. In Kameshwar Singh (Maharajadhiraj Sir) v. CIT [1961] 42 ITR 774 (Patna), it has been laid down that the amount of income-tax paid by an assessee cannot be deducted as a business expenditure, as it is not an expenditure for the purpose of, earning profits, but, on the contrary, a case of application of profits after they have been earned and not an expenditure necessary to earn such profits. In so holding, the following passage in Ashton Gas Co. v. Attorney-General [1906] AC 10 (HL) had been referred to with approval (at page 12 ) (at page 777 of 42 ITR "My Lord, so presented the case appears to me to be perfectly clear. The fallacy has been in arguing as if you can deduct from the income tax which you have got to pay something which al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that surtax required to be paid after the determination of the profits will not be a payment incidental to the business and that payment of surtax is not a permissible deduction under section 37 of the Act. The principles referred to in the aforesaid decisions clearly point out that if there is a diversion or application of profits even by way of payment of taxes, after they are earned, then, that could not be equated to an expenditure wholly and exclusively laid out for business purposes and such payment of tax could not be considered to be an allowable item of expenditure under section 37 of the Act. We are, therefore, unable to agree with the Tribunal that the amount of Rs. 53,410 paid by the assessee by way of income-tax at the foreign ports is deductible under section 37 of the Act. We, therefore, answer the first question in the negative and in favour of the Revenue. We may now proceed to consider the second question, the answer to which would depend upon the answer to the first question. Under section 40(a)(ii) of the Act, notwithstanding anything to the contrary in sections 30 to 39 of the Act, any sum paid on account of any rate or tax levied on the profits or gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship by the assessee, after payment of consideration in instalments to Deustche Bank, Hamburg. In regard to the other amount of Rs. 24,82,000 borrowed by the assessee from the Shipping Development Fund Committee, the assessee had deposited that amount with Indian Overseas Bank, on the strength Of which that bank gave a guarantee to a foreign bank which, in its turn, guaranteed the payment of the value of the ship by the assessee to the foreign vendors of the ship. The assessee had also secured the loan borrowed from the Shipping Development Fund Committee by mortgaging the vessel in its favour and on the computation date, there was an out-standing balance of Rs. 1,9,85,600. With reference to the first amount of Rs. 17,56,614 owed by the assessee to Deustche Bank, Hamburg, as on the computation date, the Tribunal took the view that that amount has to be deducted from the written down value of the ship, as an amount owed by the assessee on account of money borrowed in acquiring the ship. However, with reference to the other amount of Rs. 24,82,000 borrowed from the Shipping Development Fund Committee, out of which, on the computation date, the assessee owed Rs. 19,85,600, the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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