If section 172 deals with shipping business of non-residents and contains a non-obstante clause and applies for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident which carries passengers etc. shipping at a port in India, then, is there any obligation to deduct the tax at source in terms of section 195 ?
Held
Provisions of Section 172 are to apply notwithstanding anything contained in the other provisions of the Act. Therefore, in such cases, the provisions of Section 194C and 195 relating to tax deduction at source, are not applicable. The recovery of tax is to be regulated for voyage undertaken from any port in India by a ship, under the provisions of Section 172
HIGH COURT OF BOMBAY
Commissioner of Income-tax
v.
V.S. Dempo & Co. (P.) Ltd.
S.C. DHARMADHIKARI, R.D. DHANUKA
AND B.P. COLABAWALLA, JJ.
IT APPEAL NOS. 948, 957, 989 & 991 OF 2015
FEBRUARY 5, 2016
J.D. Mistry, Ms. Fereshte Sethna, Mrunal Parekh, Ms. Khushboo Shah, Vijendra Vatsa, Manan Shukla, Adhiraj Malhotra and Shantanu Singh for the Appellant. Mihir Naniwadekar for the Respondent.
JUDGMENT
S.C. Dharmadhikari, J. – On 8th September, 2015, a Division Bench of this Court hearing Income Tax Appeal No. 989 of 2015 and Income Tax Appeal No. 991 of 2015 was unable to agree with the view taken by another Division Bench of this Court in the case of Commissioner of Income-tax v. Orient (Goa) Private Limited reported in 3 Vol. 325 Income Tax Reporter Pg. 554. It, therefore, came to the conclusion that judicial discipline demands that instead of taking a contrary view it should request that a larger bench be constituted so as to resolve the disagreement. It, therefore, directed the Registry to place the papers and proceedings of the two Appeals before the Hon’ble The Chief Justice so as to obtain suitable directions for placing the following question of law for opinion of a larger bench.
“Q. Whether, while dealing with the allowability of expenditure under section 40(a)(i) of the Income Tax Act, 1961, the status of a person making the expenditure has to be a nonresident before the provision to section 172 of the Act can be invoked ?”
2. The Registry placed the papers before the Hon’ble The Acting Chief Justice on 8th October, 2015, and on 9th October, 2015, the Hon’ble The Acting Chief Justice directed constitution of this larger Bench. Accordingly, the question has been placed before us for our opinion and answer.
3. Before that question is answered it would be necessary to refer to the facts. A reference to the same is made only to appreciate the contentions of both sides. Income Tax Appeal No.989 of 2005 was filed by Commissioner of Income Tax under section 260A of the Income Tax Act, 1961, aggrieved and dissatisfied with the order of the Income Tax Appellate Tribunal , Panaji Bench, dated 11th December, 2005, passed in Income Tax Appeal Nos. 240/PN/2004 and 273/PN/2004. The Assessment Year is 1999-2000.
4. The assessee-respondent before this Court is a company engaged in the business of mining and export of processed iron ore as also in construction business.
5. The assessee filed its return of income on 31st December, 1999, declaring taxable income of Rs.6,19,82,540/-. The assessee claimed deduction u/s 80-HHC of Rs.12,78,82,552/-. The case was selected for scrutiny and notices u/s. 143(2) were issued to the assessee. Assessee, in response, filed details. The assessee declared other income at Rs.9,67,50,252/-. The main item of this is interest income on Bank deposits and others. The basic issue which arises is whether the entire interest income as claimed by the assessee could be said to be business income, to which explanation (baa) to section 80HHC, is applicable or whether the said interest income is income from other sources. The assessee also claimed income received from ‘Lease income’, ‘income from transfer of vessels’, ‘Barge freight’, ‘proceeds from other services’ and ‘miscellaneous income’, as gross receipts received in the course of its business and therefore there is no question of applying Explanation (baa) to it. The assessee also charged the demurrage charges under the head export expenses to profit and loss account on which no tax has been deducted during the year under consideration. The Assessing Officer held that in view of section 40(a)(i) r/w section 195, the amount paid as demurrage charges are liable for addition under section 40(a). The assessee also claimed miscellaneous expenses, which has been disallowed by the Assessing Officer. On scrutiny, the Assessing Officer passed an assessment order on 26th March, 2002, and allowed deductions under section 80HHC to the extent of Rs.8,07,35,598/-. A copy of the Assessment Order dated 26th March, 2002, is annexed as Annexure-A to the appeal paper-book. Being aggrieved by the said order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The CIT (A) by order dated 2nd August, 2008, partly allowed the assessee’s appeal. A copy of the order dated 2nd August, 2004, passed by the CIT (Appeals) is annexed as Annexure-B to the appeal paper-book. Being aggrieved by the CIT(A)’s order dated 12th March, 2002, the assessee as well as the Revenue filed appeals before the Income Tax Appellate Tribunal, Panaji. The Tribunal, by an order dated 11th December, 2006, partly allowed both assessee’s as well as the Revenue’s appeal, directing the Assessing Officer to exclude 90% of the net income eligible for inclusion for the purpose of computing profits of the business for the purpose of determining 80HHC deductions. A copy of the order dated 11th December, 2006, passed by the Income Tax Appellate Tribunal is annexed as Annexure-C to the appeal paper-book.
6. That is how the Revenue requested this Court to admit this appeal as it raises substantial questions of law. The appeal together with other Tax Appeals was placed before a Division Bench of this Court and it came to be admitted on the following substantial questions of law :
(I)
Whether in facts and circumstances of the case, the ITAT has erred in applying the provision of Section 172 in holding that section 40(a)(i) is not applicable, particularly when section 172 concerned with levy and recovery of tax in a case of any ship, as against section 195 r/w 40(a)(i) of the IT Act, refers to non-resident assessee as in the present case ?
(II)
Whether in the facts and in the circumstances of the case, the ITAT has erred while referring the issue to the file of A.O., to exclude 90% of ‘net’ interest income excess of interest received or paid provided there is direct nexus between interest earned and paid after establishing the fact that all the interest income except the interest on income tax is forming part of the profits of the business and not income from other sources ?
(III)
Whether the findings of the ITAT while restoring the issue of interest income to the file of A.O., to exclude 90% of ‘net’ interest income is valid in law. ?
(IV)
Whether in the facts and in the circumstances of the case, the ITAT is right in law in taking into account the ‘interest on bank deposits’, ‘interest on intercorporate deposits’, ‘interest on debentures’, and ‘interest from sister concerns’ and ‘other interest’ is forming the part of the head “Profits and gains of business or profession”?
(V)
Whether the findings of the ITAT that the receipts on account of ‘professional services’ and ‘proceeds electronic data processing’ are not income falling within the exclusionary provisions of clause (baa) of Explanation to section 80HHC, is right in law ?
(VI)
Whether the findings of the ITAT, that 90% of the net income from receipts on account of ‘stevedoring agency business’ and ‘travel agency business’ are falling within the exclusive provision of clause (baa) of explanation to section 80HHC, is right in law ?
(VII)
Whether the findings of the ITAT, that only 90% of ‘net’ income from the ‘transfer of vessel’ and ‘barge freight’ has to be excluded for the purpose of computing profits of the business under clause (baa) of Explanation to section 80HHC, is right in law?
(VIII)
Whether the findings of the ITAT that only 90% of the ‘net’ income from the ‘lease hire charges’ received by the assessee apart from depreciation has to be excluded for the purpose of computing profits of the business under clause (baa) of Explanation to Section 80HHC, is right in law ?”
7. Out of the above substantial questions, we are concerned with Question No. I.
8. After admission, the present appeal and the other appeals came to be placed for final hearing before a Division Bench of this Court and the Division Bench noted the stand of the assessee in paragraph 4 of its order. In paragraph 5, the Division Bench noted the reference by the Tribunal to its decision in Deputy Commissioner of Income Tax v. Orient (Goa) and following it, the Tribunal allowed the assessee’s appeal. The order passed by the Tribunal holds that section 40(a)(i) of the Income Tax Act, 1961 (for short “IT Act”) would apply only when there is an obligation to deduct tax at source. Reliance was placed upon the Circular No.723 issued by the Central Board of Direct Taxes to support the conclusion that there was no obligation to deduct tax at source in respect of payment made towards demurrage charges in cases where section 172 of the IT Act applies. The Revenue did not dispute in the present case that section 172 applied. The Tribunal held that section 172 is a charging as well as machinery provision in respect of non-resident shipping companies. It provides for determination and collection of tax. Thus, Chapter XVI of the Act in respect of deducting tax at source would not apply in such cases. Consequently, the disallowance of expenditure on account of section 40(a)(i) of the Act was deleted.
9. The Revenue placed reliance, before the Division Bench hearing present appeals, on the decision of Orient (Goa) by which this Court reversed the Tribunal’s order in that assessee’s case.
In other words, the Tribunal’s view taken in the case of DGIT v. Orient (Goa) was expressly rejected by this Court was the submission of the Revenue. On the other hand, the assessee contended that this decision requires reconsideration. In dealing with these contentions, the Division Bench in the order referring the question held as under :
“8. The substantial question interalia which arose for consideration of this Court in Orient (Goa) (P) Ltd. (supra) was as under :
“(B) Whether on the facts and in the circumstances of the case, the assessee was entitled to claim deduction of the demurrage charges of Rs.1,08,53,980/- paid to foreign company, without deducting tax on it, under s. 40(a)(i) of the IT Act, in view of the Circular No. 723 dt. 19th September 1995 [(1995) 128 CTR (St) 61], issued by CBDT?”
9. The above question arose for consideration by this Court on the following facts :
(a)
M/s. Orient (Goa) (P) Ltd. (assessee) had for A.Y. 1997-98 declared an income of Rs.2.10 crores. It had paid an amount of Rs.1.08 crores as demurrage charges to a non-resident shipping company viz. M/s. Mitsui & Co. Ltd. However as the assessee had not deducted tax at source on the demurrage charges paid, the Assessing Officer disallowed the expenditure of demurrage charges in view of Section 40(a)(i) of the Act.
(b)
In appeal, the CIT(A) held that demurrage charges had been paid by assessee. However in the hands of recipient M/s. Mitsui & Co. Ltd. it was in the nature of profits of a non-resident from occasional shipping business. Placing reliance upon the CBDT Circular No.723 and Section 172 of the Act, the CIT (A) allowed the appeal.
(c)
The revenue’s appeal to the Tribunal was dismissed.
10. This Court held that Section 172 of the Act is applicable only in respect of non-resident carrying on shipping business while assessee i.e. Orient (Goa) (P) Ltd. is admittedly a resident and therefore Section 172 of the Act cannot be applied. Thus the expenditure of demurrage charges cannot be allowed in the absence of tax being deducted at source. The relevant observations of this Court is found in paragraph 8 as under :
“8. Sec. 172 of the Act 1961 is carefully considered by us. Chapter XV titles as “Liability in special cases”. We have no concern with sections, starting from s. 159, till s. 171 from this Chapter XV. Sec. 172 comes under sub-title “H.-Profits of non-residents from occasional shipping business”. Title of s. 172 is “Shipping business of non-residents”. For bringing a case under Chapter XV-H of the Act 1961, one has to establish a case of profits of non-residents from occasional shipping business. “Non-resident” is defined u/s. 2(30), as a person who is not a “resident” and for the purpose of ss. 92, 93 and 168, includes a person who is not ordinarily resident within the meaning of cl. (6) of s. 6. The respondent assessee is a company, incorporated under the provisions of Indian Companies Act, 1956, is fairly an admitted position. The assessee cannot be said to be non-resident. We have also taken notice of s. 6 i.e. “residence in India”. In short, respondent assessee cannot be said to be non-resident. The present appeal pertains to the respondent assessee. In our view, in the facts of the present case, the respondent assessee cannot lay fingers on s. 172, since we are not dealing with profits of non-residents. The other aspect is that such profits of non-residents should be from occasional shipping business. It is not the case that the respondent assessee has earned some profit from occasional shipping and is a non-resident. In our view, s. 172 does not have application in relation to the respondent assessee and in the facts and circumstances of the present case. The company from Japan viz., Mitsui & Co. Ltd., Japan, recipient of demurrage amount is not before us. In other words, we are not examining the tax liability of the foreign company i.e., Mitsui & Co. Ltd., Japan. … … … … Provisions of s. 172 are to apply notwithstanding anything contained in the other provisions of the Act. Therefore, in such cases, the provisions of ss. 194C and 195 relating to TDS, are not applicable. The recovery of tax is to be regulated for voyage undertaken from any port in India by a ship, under the provisions of s. 172. In this view, these observations of the learned Vice President of Tribunal have no concern with the factual aspect that it is a case of occasional shipping, pleaded or raised by assessee. There is no dispute about interpretation of s. 172 or s. 195. Crucial point is as to how s. 172 applies to the facts of the present case wherein the respondent assessee is an Indian company, incorporated under the provisions of Indian Companies Act, 1956. In our view, the learned Vice President of the Tribunal has recorded a perverse observation/finding in para 3 regarding application of ss. 44B and 172 of the Act 1961.”
11. We are unable to agree with the above view of this Court in Orient (Goa)(P) Ltd. (supra). This is for the reason 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 nonresident 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 payee-assessee. Section 172 of the Act has to be examined through the prism of the nonresident 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 in itself for levy and recovery of tax ship wise and journey wise. Thus there is no occasion to deduct tax under Chapter XVII of the Act.
12. It is a settled position under the law of precedence 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-incuriam. 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.”
10. It is in the above circumstances that the question falls for our answer and opinion.
11. After the constitution of the larger Bench, the matter was listed for directions. With the consent of all advocates, we fixed the hearing on 27th November, 2015. It is extremely unfortunate that the advocate engaged by the Revenue chose to inform the Court Registry just a day or two before the hearing that she would not be appearing. In fact, an e-mail was sent on 26th November, 2015 and prior thereto, there was a message sent by i-phone requesting for rescheduling the hearing before the Full Bench. The learned advocate informed the Registry that the Department / Revenue has expressed its desire to appoint the Additional Solicitor General and, therefore, she would not be appearing before the Bench. Three weeks’ time was sought for that purpose.
12. It is indeed unfortunate that when the Bench is constituted to resolve a conflict of opinion between two Division Bench judgments of this Court and answer a question of law that such requests are made by the Revenue. Since we had decided upon this date and with the consent of all the parties, it was not possible to reschedule the hearing and, therefore, this request was rejected. It is in these circumstances that we requested Mr. Mistri, learned senior counsel appearing for some of the assessees and desiring to address this Court that he must assist us in an overall manner. Meaning thereby, the perspective of both sides and on the legal provision and its interpretation ought to be placed before us. In all fairness, Mr. Mistri has taken us through the scheme of the Act and invited our attention to some of the judgments on the point. We are thankful to him.
13. The emphasis of Mr. Mistri was that section 172 of the IT Act is a complete code that applies to the non-resident Indians. Inviting our attention to section 40 of the Act, Mr. Mistri would submit that the assessee is not liable to deduct the tax at source. Our attention is also invited to section 195 of the Income Tax Act to urge that the status of the recipient is most relevant. Our attention was also invited to the non obstante clause as emerging from sub-section (1) of section 172. Mr. Mistri has also taken us through Chapter XVI of the IT Act to submit that section 195 is part of recovery provisions. Even with regard to Chapter XVI of the IT Act, its title, according to Mr. Mistri, must be noticed as it is extremely relevant. The title is “Collection and Recovery of Tax”. Our attention is invited to sections 190, 192, 195 and 199 (1). Mr. Mistri would submit that deduction of tax at source would arise in cases where employees receive salary. To meet the tax liability of the employee the deductions of tax is made. That is at source, meaning while payment. Inviting our attention to sections 202 and 205 of the IT Act it is submitted that such deduction is clearly a recovery. If tax to be deducted at source is a recovery, then, section 172(1) would prevail over other provisions of the Act. Mr. Mistri would submit that the Revenue’s stand, if accepted, would render section 172 otiose and redundant. There is no double payment contemplated. The provisions of the Act, therefore, ought to be construed in such a way as not rendering any part of it otiose or any provision meaningless. It is in these circumstances that Mr. Mistri would submit that even the Circulars referred to in the Division Bench judgment though not binding on the Court, can be given effect to as they bind the Revenue. In other words, the Circular issued by the Revenue is binding upon it and it cannot argue anything contrary to that. Mr. Mistri’s attempt is to show that if the interpretation of the Revenue official harmonizes with that placed before the Court, then, even that Circular can be referred to by this Court.
14. All the counsel have adopted the arguments of Mr. Mistri.
15. Mr. Mistri has thus pointed out that the Revenue’s stand is that the judgment rendered by this Court’s Goa Bench in Orient’s case lays down the correct law. It must be read in its proper perspective and in the backdrop of the controversy before this Court.
16. For properly appreciating the contentions raised before us, it would be necessary to refer to the Income Tax Act, 1961. The arrangement of sections therein commencing from and divided into several Chapters would indicate that Chapter II titled “Basis of charge” is preceded by the preliminary provisions in Chapter I and which also contains some definitions. For the purposes of the Act and unless the context otherwise requires, the term “income” is defined in an inclusive manner. Section 2(24) contains that definition and the term includes all that is enumerated from section 2 clause (24)(i) to (xviii). The term “resident” is defined in section 2 clause (42) to mean a person who is resident in India within the meaning of section 6. The word “tax” is defined in section 2 clause (43) and in relation to the assessment year commencing on the first day of April, 1965, and any subsequent assessment means income tax chargeable under the provisions of this Act, prior to the aforesaid date. The term “total income” is defined in section 2 clause (45) to mean the total amount of income referred to in section 5 computed in the manner laid down in this Act.
17. Chapter II contains the basis of charge and by section 4 subsection (1), it is stated that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income tax at that rate or those rates will be charged for that year in accordance with and subject to the provisions including provisions of the levy of additional income tax in respect of the total income of the previous year of every person. The proviso thereto is not relevant for our purpose, but subsection (2) of section 4 states that in respect of income chargeable under sub-section (1), income tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. The source of the total income is set out in section 6 and we are not concerned with the apportionment of income contemplated by section 5-A. Residents in India is a matter dealt with by section 6 and that reads as under :
“6. For the purposes of this Act, –
(1) An individual is said to be resident in India in any previous year, if he
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or
(b) **
**
**
(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.
[Explanation. I]. – In the case of an individual –
(a)
being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted.
(b)
‘being a citizen of India, or a person of Indian origin within the meaning of the Explanation to clause (c) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause
(c)
shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted.
[Explanation 2.- For the purposes of this clause, in the case of an individual being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.]
(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during the year the control and management of the affair is situated wholly outside India.
(3) A company is said to be a resident in India in any previous year, if, –
(i)
it is an Indian company; or
(ii)
its place of effective management, in that year, is in India.
Explanation. – For the purposes of this clause “place of effective management” means a place where key managements and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made.
(4) Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.
(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income.
(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is –
(a)
an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of or periods amounting in all to, seven hundred and twenty nine days or less; or
(b)
a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.”
18. A perusal of this section would indicate as to how an individual can be said to be a resident of India, a Hindu undivided family, firm or association of persons can also be said to be a resident in India, a company also can be a resident of India and equally other persons. The term “not ordinarily resident” in India is also contemplated by section 6(6). By section 7, income stipulated therein is deemed to be received in the previous year. Section 8 deals with dividend income and section 9 deems certain income to accrue or arise in India. Explanation-I which is an explanation for clause (1) sub-clause (b) states that in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export. Then, case of a non-resident engaged in the business of running goods agency or publishing newspaper is dealt with and in case of a nonresident being a company which does not have any shareholder who is a citizen of India or a resident in India no income shall be deemed to accrue or arise in India to such individual firm or company through or from operations which are confined to the shooting of any cinematographic film in India. The Explanation II for the removal of doubts declares that “business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident or has no authority and, therefore, from a reading of this section together with the explanations, it is apparent as to income which is deemed to accrue or arise in India may or may not include such income which is not attributable to the operations carried out in India. Therefore, various categories of non-resident Indians and the income that they derive or may derive by control or through somebody who is a resident of India is, accordingly, dealt with. The other part of this section is not relevant for our purpose. We are also not concerned with insertion of section 9A by the Finance Act 2015 with effect from 1st April, 2016.
19. By Chapter III, incomes which do not form part of total income are dealt with. In that appears section 10 and the clauses thereof do not include the income specified therein in computing the total income of a previous year of any person. Clause 4 deals with the case of a non-resident and the income by way of interest on such securities or bonds as the Central Government may, by Notification in the Official Gazette, specify in this behalf, including income by way of premium on the redemption of such bonds. Section 10(4) (4B) deals with the income by way of interest earned by a non-resident on moneys standing to his credit in a non resident (External) account in any bank in India. Then, we have several clauses in section 10, but we are not concerned with all of them, save and except section 10(6A),(6B), (6BB) and (6C) thereof. After this somewhat longish provision, we have section 10AA which enacts special provision in respect of newly established undertaking in free trade zone etc. By section 10B, there are special provision in respect of newly established 100% export oriented undertakings. Section 10B sets out the meaning of computer programmes in certain cases. Section 10C contains special provision in respect of certain industrial undertakings in North Eastern region. Section 11 deals with income from property held for religious or charitable purposes. Section 12 deals with income of trust or institutions from contributions. By section 12A conditions for applicability of sections 11 and 12 are set out. Section 12AA sets out the procedure for registration. Section 13 states that section 11 will not apply in certain cases. By section 13A, special provision is made relating to incomes of political parties. Section 13B contains special provision relating to voluntary contributions received by electoral trust. After all this comes Chapter IV which is titled as Computation of Total Income. The heads of income classified by section 14 are salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources. By section 14A expenditure incurred in relation to income not includible in total income is set out. We are not concerned in the instant proceedings with all the heads. We are concerned really with profits and gains of business or profession. Therefore, we do not make any reference to sections 15 to 17 and section 22 to 27 which deal with salaries and income from house property.
20. As far as profits and gains of business or profession are concerned by section 28 these are set out. The income therein shall be chargeable to income tax under this head and the clause thereof would indicate as to how the sub-headings of compensation, income derived by trade, professional or similar association from specific service performed for its members, profits on sale of a licence granted under the Imports and Exports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947, cash assistance, drawback or some other form in which any duty of customs or excise is repaid or repayable. We have, therefore, several such incomes which are derived by Duty Entitlement Pass Book Scheme or otherwise. We also have several incomes which are generated in the form of any benefit or perquisite whether convertible into money or not arising from business or the exercise of a profession, any sum whether received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business or not sharing any know-how, patent, copyright, trademark, licence, franchise etc. Income generated by way of any arrangement or understanding as also derived by rendering of any service received under a Keyman insurance policy are all part of section 28. The income referred to in section 28 shall be computed in accordance with the provisions contained in section 30 to 43D. These provisions enable computation of income after deducting rent, rates, taxes, repairs and insurance for building repairs and insurance of machinery, plant and furniture, depreciation, investment allowance, investment deposit account, investment in new plant or machinery, investment in new plant or machinery in notified backward areas in certain States, development rebate, development allowance, reserves for shipping business, rehabilitation allowance. The conditions for depreciation allowance and development rebate are set out in section 34 and by section 34A, there is a restriction on unabsorbed depreciation and unabsorbed investment allowance for limited period in case of certain domestic companies. Section 35 deals with expenditure on scientific research, section 35AB deals with expenditure on know-how and section 35ABB deals with expenditure for obtaining licence to operate telecommunication services. Section 35AC deals with expenditure on eligible projects or schemes and section 35AD deals with deduction in respect of expenditure on specified business. We have several expenditures and provided in sections 35CCA, 35CCB, 35CCC and 35CCD. Section 35D deals with amortization of certain preliminary expenses and amortization of expenditure in other cases is dealt with by section 35DD and 35DDA. Section 35E deals with deduction for expenditure on prospecting etc. for certain minerals. Section 36 deals with other deductions. Section 37 deals with general expenditure and not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business or profession. That shall be allowed in computing the income chargeable under the head Profits or Gains of Business or Profession. Section 38 deals with building etc., partly used for business etc., or not exclusively so used. Section 39 stands omitted. Then comes section 40 which is titled Amounts Not Deductible. This section reads as under:
“40. Notwithstanding anything to the contrary in section 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession:,-
(a) in the case of an assessee –
(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,-
(A) outside India; or
(B) in India to a non-resident, not being a company or to a foreign company,
on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid [during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200] :
Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
The following proviso shall be substituted for the existing proviso to sub-clause (i) of clause (a) of section 40 by the Finance (No. 2) Act, 2014, w.e.f 1-4-2015 :
Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Explanation.-For the purposes of this sub-clause,-
(A) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;
(B) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub section (1) of section 9;
(ia)[any interest, commission or brokerage, [rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work)], on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, [has not been paid on or before the due date specified in sub-section (1) of section 139 :]
[Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, [ thirty per cent of] such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :]
[Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.]
Explanation.- For the purposes of this sub-clause,-
(i) “commission or brokerage” shall have the same meaning as in clause (i) of the Explanation to section 194H;
(ii) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of subsection (1) of section 9;
(iii) “professional services” shall have the same meaning as in clause (a) of the Explanation to section 194J;
(iv) “work” shall have the same meaning as in Explanation III to section 194C;
[(v) “rent” shall have the same meaning as in clause (i) to the Explanation to section 194-I;
(vi) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;]
(ib) **
**
**
[(ic) any sum paid on account of fringe benefit tax under Chapter XIIH;]
(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.
[Explanation 1. – For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.]
[Explanation 2.- For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;]
(iia) any sum paid on account of wealth-tax.
Explanation.-For the purposes of this sub-clause, “wealth-tax” means wealth-tax chargeable under the Wealth-tax Act, 1957 (27 of 1957), or any tax of a similar character chargeable under any law in force in any country outside India or any tax chargeable under such law with reference to the value of the assets of, or the capital employed in, a business or profession carried on by the assessee, whether or not the debts of the business or profession are allowed as a deduction in computing the amount with reference to which such tax is charged, but does not include any tax chargeable with reference to the value of any particular asset of the business or profession;]
[(iib) any amount –
(A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or
(B) which is appropriated, directly or indirectly, from,
a State Government undertaking by the State Government.
Explanation. – For the purposes of this sub-clause, a State Government undertaking includes –
(i)
a corporation established by or under any Act of the State Government;
(ii)
a company in which more than fifty per cent of the paid-up equity share capital is held by the State Government;
(iii)
a company in which more than fifty per cent of the paid-up equity share capital is held by the entity referred to in clause (i) or clause (ii) (whether singly or taken together);
(iv)
a company or corporation in which the State Government has the right to appoint the majority of the directors or to control the management or policy decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders agreements or voting agreements or in any other manner;
(v)
an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government;
[(iii) any payment which is chargeable under the head “Salaries”, if it is payable—
(A) outside India; or
(B) to a non-resident,
and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B;
(iv) any payment to a provident or other fund established for the benefit of employees of the assessee, unless the assessee has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head “Salaries” ;
[(v) any tax actually paid by an employer referred to in clause (10CC) of section 10;]
[(b) in the case of any firm assessable as such,—
(i)
any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as “remuneration” ) to any partner who is not a working partner; or
(ii)
any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or
(iii)
any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorisation for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or
(iv)
any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of [twelve] per cent simple interest per annum; or
(v)
any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :-
(a)
on the first Rs. 3,00,000 of the book-profit or in case of a loss Rs. 1,50,000 or at the rate of 90 per cent of the book-profit, whichever is more;
(b)
on the balance of the book-profit at the rate of 60 per cent :]
Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment.
Explanation 1.-Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as “partner in a representative capacity” and “person so represented”, respectively),-
(i)
interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause;
(ii)
interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause.
Explanation 2. – Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.
Explanation 3. – For the purposes of this clause, “book-profit” means the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.
Explanation 4. – For the purposes of this clause, “working partner” means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;]
(ba) in the case of an association of persons or body of individuals [other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India], any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such association or body to a member of such association or body.
Explanation 1.- Where interest is paid by an association or body to any member thereof who has also paid interest to the association or body, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the association or body to the member exceeds the payment of interest by the member to the association or body.
Explanation 2.- Where an individual is a member of an association or body on behalf, or for the benefit, of any other person (such member and the other person being hereinafter referred to as “member in a representative capacity” and “person so represented”, respectively), –
(i)
interest paid by the association or body to such individual or by such individual to the association or body otherwise than as member in a representative capacity, shall not be taken into account for the purposes of this clause;
(ii)
interest paid by the association or body to such individual or by such individual to the association or body as member in a representative capacity and interest paid by the association or body to the person so represented or by the person so represented to the association or body, shall be taken into account for the purposes of this clause.
Explanation 3.- Where an individual is a member of an association or body otherwise than as member in a representative capacity, interest paid by the association or body to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.]
(c) Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989. Earlier, it was amended by the Finance Act, 1963, w.e.f. 1-4-1963, Finance Act, 1964, w.e.f. 1-4-1964, Finance Act, 1965, w.e.f. 1-4-1965, Finance Act, 1968, w.e.f. 1-4-1969, Finance (No. 2) Act, 1971, w.e.f. 1-4-1972, Finance Act, 1984, w.e.f. 1-4-1985 and Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.
(d) Omitted by the Finance Act, 1988, w.e.f. 1-4-1989.”
21. A perusal of section 40 reveals that firstly it starts with a non obstante clause. Secondly, it states that notwithstanding anything to the contrary in sections 30 to 38, the amounts as specified in the clauses to section 40 shall not be deducted in computing the income chargeable under the head “Profits or Gains of Business or Profession”. In the case of any assessee what sub-clause (i) of this section states is that any interest not falling in the bracket portion, unspecified royalty, fees for technical services or other sum chargeable under the Income Tax Act, which is payable outside India or in India to a non-resident, not being a company or to a foreign company on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid, will be covered by the prohibition enacted as above.
22. The proviso to this sub-clause (i) reveals that where in respect of such sum, tax has been deducted in any subsequent year or has been deducted during the previous year, but paid after the due date specified in sub-section (i) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
23. Then section 40(a)(ia) refers to the thirty per cent of any sum payable on which tax is deductible at source under the same chapter as above and such tax has not been deducted or after deduction has not been paid.
24. We have reproduced the entire section for the simple reason that the amount mentioned in section 40(a)(i) shall not be deducted in case it is payable in India to a non-resident, not being a company or to a foreign company. Therefore, in the case of any assessee if any interest, royalty, fees or technical service or other sum chargeable under the Income Tax Act payable outside India or payable in India to a non-resident not being a company or a foreign company on which tax is deductible at source under chapter XVII-B, is covered.
25. Such tax has not been deducted or after deduction has not been paid, then, the deduction shall not be made in computing the total income chargeable.
26. It is for this reason that we have to refer to Chapter XVII— B. Chapter XVII deals with Collection And Recovery of Tax. It contains general provisions with regard to deduction at source and advance payment in section 190 and in section 191 it makes provisions regarding direct payment. It has a separate Chapter under sub-heading “B – Deduction at Source.” In the instant case, it is common ground that reference is made to sections 192 to 195. They pertain to salary and, therefore, any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. If payment of accumulated balance to an employee is made, then also this obligation comes in vide section 192A. If the Interest on Securities is the income head involved, then, the person responsible for paying to a resident any income of this nature shall make the deduction. The same obligation would arise in the case of dividend vide section 194. Interest other than interest on securities with regard to which any payment is made then that aspect is covered by section 194A. Winnings from lottery or cross-word puzzle and winning from horse races are covered by section 194B and 194BB.
27. Payments to contractors, if made, particularly resident contractors, then the obligation to deduct the income-tax at source flows from section 194C. Similarly, insurance commission, payment in respect of life insurance policy, payments to nonresident sportsmen or sports association, payments in respect of deposits under the National Savings Schemes etc. attract the deduction of tax at source. The other payments including the category of commission or brokerage fall within the obligation to pay tax. Payment for transfer of certain immovable property other than agricultural lands invites deduction of income-tax at source vide section 194IA. Then the fees for professional or technical service invites the same obligation by section 194J. Several other sections of this nature where amount is paid to a resident or the income is generated or earned by a resident would attract the deduction of tax at source. Section 194LC deals with income by way of interest from Indian company and where any income by way of interest referred to in sub-section (2) of this section is payable to a non-resident, being a company or to a foreign company by a specified company or business trust, the person responsible for making the payment at the time of credit of such income to the account of the payee or at the time of payment in cash or by issue of cheque or draft or by any other mode, whichever is earlier, deduct the income-tax thereon at the rate of five percent. Therefore, the tax is to be deducted at source, the manner of its deduction and the time are specified so also the rate. After section 194LC and 194LD comes section 195 which reads as under:
“195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest not being interest referred to in section 194LB or section 194LC or section LD or any other sum chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force;
Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode.
Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.
Explanation 1.-For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
Explanation 2. – For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has –
(i)
a residence or place of business or business connection in India; or
(ii)
any other presence in any manner whatsoever in India.
(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.
(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-t