By Adv v. Ramachandran (Sr

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE THOTTATHIL B.RADHAKRISHNAN FRIDAY, THE 1ST FEBRUARY 2008 / 12TH MAGHA 1929 WP(C).No. 7398 of 2005(E) ----------------------------------- PETITIONER: ----------------- SOUTH INDIA CORPORATION LIMITED, RANI SEETHAI HALL, 5TH FLOOR, 603, ANNA SALAI, CHENNAI-600 006, REP. BY ITS WHOLETIME DIRECTOR, VR. VEERAPPAN. BY ADV. V. RAMACHANDRAN (SR.) SRI.K.ANAND (A.201) SMT.LATHA KRISHNAN RESPONDENTS: ----------------------- 1. THE ADDL.COMMISSIONSER OF INCOME TAX, RANGE-2, C.R. BUILDINGS, I.S. PRESS ROAD, ERNAKULAM, COCHIN-18. 2. THE JOINT COMMISSIONER OF INCOME TAX RANGE-2, C.R. BUILDINGS, I.S. PRESS ROAD, ERNAKULAM, COCHIN-10. 3. UNION OF INDIA, REP. BY THE SECRETARY TO GOVERNMENT, MINISTRY OF FINANCE, NEW DELHI. BY ADV. SRI.P.K.R.MENON(SR.),SR.COUNSEL FOR IT SRI.GEORGE K. GEORGE, SC FOR IT SMT.MINI R.MENON, ADDL.CGSC THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 17/09/2007, THE COURT ON 01/02/2008 DELIVERED THE FOLLOWING: WP(C) NO: 7398/2005 APPENDIX PETITIONER'S EXHIBITS EXT.P1. COPY OF THE APPLICATION DT. 3/12/2004. EXT.P2. COPY OF THE LETTER DT. 14/1/2005 FROM THE R1 TO THE PETITIONER. EXT.P3. COPY OF THE LETTER DT. 27/1/2005 FROM THE R1 TO THE PETITIONER.EXT.P4. COPY OF THE LETTER DT 27/1/2005 FROM THE PETITIONER TO THE R1. EXT.P5. COPY OF THE EXT. P5 ORDER. RESPONDENT'S EXHIBITS NIL. True copy THOTTATHIL B. RADHAKRISHNAN, J. = = = = = = = = = = = = = = = = = = = = = = = = WP(C).No.7398 of 2005-E = = = = = = = = = = = = = = = = = = = = = = = = Dated this the 1[st] day of February, 2008.JUDGMENT 1.Arising for decision in this case are certainquestions relating to the interpretation of someof the provisions in Chapter XII-G of the IncomeTax Act, 1961, the “Act”, for short, providingspecial provisions relating to income ofshipping companies, as per the Finance Act,2004, hereinafter referred to as the “FinanceAct”.questions relating to the interpretation of someof the provisions in Chapter XII-G of the IncomeTax Act, 1961, the “Act”, for short, providingspecial provisions relating to income ofshipping companies, as per the Finance Act,2004, hereinafter referred to as the “FinanceAct”. 2.Chapter XII-G of the Act provides, among otherthings, a tonnage tax scheme, which is optional.That Chapter, comprising of Sections 115V to115VZC, was inserted in the Act, with effectfrom 1-4-2005.things, a tonnage tax scheme, which is optional.That Chapter, comprising of Sections 115V to115VZC, was inserted in the Act, with effectfrom 1-4-2005. 3.The petitioner opted for the tonnage tax scheme WP(C)7398/2005 -: 2 :- by making an application in terms of Section115VP of the Act. The first respondentAdditional Commissioner issued Ext.P5 decisionrejecting that application. This is underchallenge. 4.The petitioner company alleges that it acquiredfour ships between 1995 and 2001 and that it hasbeen regularly assessed to income tax in respectof income earned by it, including the income fromthe business of operating ships. It has alsopleaded the particulars of income earned by it inrespect of the business relating to the operationof ships between 1995-1996 and 2003-2004. On thebasis of such pleadings, it is asserted that theview taken in the impugned Ext.P5 refusing toaccept the option of the petitioner for thetonnage tax scheme is without jurisdiction andthat the Joint Commissioner ought to have actedon the option of the petitioner which, it isasserted, is a qualifying company in terms of Section 115VC of the Act. 4.The petitioner company alleges that it acquiredfour ships between 1995 and 2001 and that it hasbeen regularly assessed to income tax in respectof income earned by it, including the income fromthe business of operating ships. It has alsopleaded the particulars of income earned by it inrespect of the business relating to the operationof ships between 1995-1996 and 2003-2004. On thebasis of such pleadings, it is asserted that theview taken in the impugned Ext.P5 refusing toaccept the option of the petitioner for thetonnage tax scheme is without jurisdiction andthat the Joint Commissioner ought to have actedon the option of the petitioner which, it isasserted, is a qualifying company in terms of Section 115VC of the Act. 5.Learned senior advocate Sri.V.Ramachandran arguedon behalf of the petitioner that the effect ofthe provisions contained in Section 115VA of theAct, whereby the income from the business ofoperating qualifying ships is available forcomputation on the basis of option in terms ofthe provisions of Chapter XII-G, as available toa company, cannot be whittled down by restrictingthe scope of the term “company” in Section 115VAby applying Section 115VC, which provides that acompany is a qualifying company for the purposeof Chapter XII-G if, among other things, the mainobject of the company is to carry on the businessof operating ships. On such premise, it isargued that the concept of “main object”, in sofar as Section 115VC(d) is concerned, has to beunderstood in the context of the business ofoperating qualifying ships and it is not as if acompany, which has multi-dimensional business WP(C)7398/2005 -: 4 :- activities, cannot claim the benefit of option under Chapter XII-G. In support of thiscontention, it was pointed out that the FinanceMinister, introducing the provisions in questionas part of the Finance Bill, 2004, stated in theLok Sabha on 8[th] April, 2004 as follows: “The shipping industry has demandedthe levy of a tonnage tax to make itinternationally competitive. Tonnage taxwill also induce more ships to fly theIndian flag. I propose to accept therequest. Consequently, the concessionalregime under Section 33AC will bewithdrawn and shipping companies will nowhave only an option to pay the tonnage taxor normal corporate tax on profits.” In the Notes on Clauses appended to the Bill,relating to the provisions in Chapter XII-G, it isstated as follows: “The proposed section 115VA relatingto computation of profits and gains of shipping business and provides that atonnage tax company, may, at its option,compute the income from the business ofoperating qualifying ships in accordancewith the provisions of the Chapter andsuch income shall be deemed to be theincome chargeable to tax under the head“Profits and gains of business orprofession.” 6.On the strength of the aforesaid, it was arguedon behalf of the petitioner that, if at all thereis any ambiguity in the matter of construingSection 115VC, the statement of the Minister,introducing the Bill, clearly throws lightremoving it. It was also argued that if amongtwo competing constructions, one results inequity rather than in the injustice that wouldarise out of the other, then the former, whichadvances justice, should be preferred to theliteral construction. It was argued that thepetitioner is a company incorporated way back in1935 and obviously, had, within the concept of WP(C)7398/2005 6.On the strength of the aforesaid, it was arguedon behalf of the petitioner that, if at all thereis any ambiguity in the matter of construingSection 115VC, the statement of the Minister,introducing the Bill, clearly throws lightremoving it. It was also argued that if amongtwo competing constructions, one results inequity rather than in the injustice that wouldarise out of the other, then the former, whichadvances justice, should be preferred to theliteral construction. It was argued that thepetitioner is a company incorporated way back in1935 and obviously, had, within the concept of WP(C)7398/2005 its Memorandum and Articles, all businessactivities as could be conceived from the pointof view of a company, then established in Madras,during the British Regime and that fordetermining the “main object of the company”, atthis distant point of time, mere reference to itsMemorandum and Articles is insufficient. It isargued that the real thrust of the businessactivities that the company carries on at therelevant time, that is, while it seeks optionunder Chapter XII-G of the Act, has to bereckoned. On the basis of such contention, it isargued that the provisions of Chapter XII-G,having been introduced with effect from 1-4-2005,it ought to have been considered that thepetitioner had established that operating shipsas contemplated in that Chapter is one of themain objects of the petitioner for the purpose ofthe said Chapter. 7.On behalf of the department, learned senior -: 7 :- advocate Sri.P.K.R.Menon, argued that though theissue in hand involves the interpretation of twostatutory provisions, including the question asto the scope and content of the term “mainobject” in Section 115VC(d) of the Act, thepetitioner has an alternate statutory remedyagainst the impugned order by way of an appealunder Section 246A(1)(a) of the Act and has, infact, filed an appeal before the Commissioner ofIncome Tax (Appeals) against the impugned orderon 1-3-2005. It is urged that the assesseehaving taken recourse to the alternate remedy byfiling the appeal, this Court may be disinclinedto consider the case on its merits. It is alsopointed out that the impugned order has beenpassed after considering all the factual aspectsof the case and by a speaking order. 8.In answer to the question as to the availabilityof alternate statutory remedy, which has,admittedly, been invoked by the petitioner, theof alternate statutory remedy, which has,admittedly, been invoked by the petitioner, the learned senior counsel for the petitioner reliedon the decision of the Apex Court in State ofH.P. v. Gujarat Ambuja Cement Ltd. (AIR 2005 SC3936) and argued that once the fact situation forapplication of Chapter XII-G is established andthe assessee is entitled to opt for the tonnagetax scheme, the statutory authority has nojurisdiction to refuse to act on the company'sdiscretion to opt for the tonnage tax scheme andthat, therefore, the impugned order is void andthat even on the teeth of the availability of astatutory remedy by way of an appeal, which thepetitioner has invoked, it is entitled to sustainthis writ petition. It is further argued that,indisputably, the issues raised revolve aroundthe interpretation of the provisions in ChapterXII-G and the answer to the arguments raisedwould necessarily affect the decision as to thejurisdiction and that, therefore, it is mostappropriate that the writ court decides the issuerather than relegate to the statutory authority, WP(C)7398/2005 -: 9 :- to decide on the question of jurisdiction underthe Act. It was also pointed out that this writpetition was admitted on 4-3-2005 and with thepassage of time, the availability of an alternateremedy by way of an appeal may not be consideredas the sole ground on which the questions of lawraised in this writ petition should go undecidedby this constitutional court. WP(C)7398/2005 -: 9 :- to decide on the question of jurisdiction underthe Act. It was also pointed out that this writpetition was admitted on 4-3-2005 and with thepassage of time, the availability of an alternateremedy by way of an appeal may not be consideredas the sole ground on which the questions of lawraised in this writ petition should go undecidedby this constitutional court. 9.The impugned Ext.P5 has been issued on the groundthat on consideration of the facts and evidenceproduced by the assessee, it cannot be consideredthat the main object of the company is to carryon the business of operating ships. The impugnedorder states that on verification of the annualreport for the 2003-2004, it is seen that theassessee is engaged in operation of differentdivisions, namely, Civil Engineering Division,Clearing and Forwarding Division, Inland WaterTransport, Granite Division, Windmill Division,Shipping Division and Textile Division and that the Profit and Loss Account for the year ended31-3-2003 and 31-3-2004 would show that out ofthe gross income of Rs.3,30,39,61,852/- for theyear ended 31-3-2004, the ship charter income isRs.49,57,91,037/- and out of Rs.3,26,32,12,101/-for the year ended 31-3-2003, the ship charterincome is Rs.30,84,67,989/-. The firstrespondent accordingly concluded that as per thedetails available, it is seen that the incomefrom shipping business and income from thequalifying ship forms only small portion out ofthe gross income of the company. Adverting to theMemorandum and Articles of Association of thepetitioner company, the first respondent hastaken it that the business of the petitioner, asshippers, shipping agents etc. is only one of theseveral objectives and is not the mainobjective. It is also noticed that though thecompany was established in 1935, it had notentered into the shipping business until 1995when it purchased a ship and entered into the WP(C)7398/2005 -: 11 :- shipping business by diverting company's businessactivities to buy a second hand bulk carriage.Accordingly, the impugned Ext.P5 was issued. 10.Section 115VA provides that notwithstandinganything to the contrary contained in Sections 28to 43C, in the case of a company, the income fromthe business of operatingqualifying ships, may,at its option, be computed in accordance with theprovisions of Chapter XII-G and such income shallbe deemed to be the profits and gains of suchbusiness chargeable to tax under the head“Profits and gains of business or profession”.For the purpose of that Chapter, a qualifyingship, in terms of Section 115VD, is one whichsatisfies the three conditions (a), (b) and (c)thereof, but does not include the differentcategories enumerated thereunder as exclusions.The question as to whether a company is operatinga ship, has to be decided with reference toSection 115VB. These provisions will show that WP(C)7398/2005 -: 12 :- while the net effect of Section 115VA isavailable to a company which operates qualifyingships, what could be computed on the exercise ofoption under Section 115VA, has to result in theincome so computed being deemed to be the profitsand gains of such business, thereby meaning thebusiness of operating qualifying ships,chargeable to tax under the head “profits andgains of business or profession”. “Tonnage taxcompany” means a qualifying company in relationto which tonnage tax is in force - See Section115VL. Section 115VP(1) provides that aqualifying company may opt for the tonnage taxscheme by making an application to the JointCommissioner and under sub-section (3) of thatsection, the Joint Commissioner shall, on beingsatisfied about the eligibility of the company toopt for tonnage tax scheme, pass an order inwriting approving the option for tonnage taxscheme. By Section 115VC, a qualifying companyfor the purpose of Chapter XII-G, is one which is WP(C)7398/2005 -: 13 :- WP(C)7398/2005 -: 13 :- an Indian company; with the place of itseffective management being in India; owns atleast one qualifying ship and the main object ofwhich is to carry on the business of operatingships. The company satisfying the bench markfixed in Section 115VC would, thus, be treated asa qualifying company to sustain its applicationunder Section 115VP for approval of the optionfor tonnage tax scheme, which coverage wouldimmediately be referable to Section 115VA. Theoverwhelming thrust of Section 115VA is thederivation of income from the business ofoperating qualifying ships. The concept of “themain object of the company” in Section 115VC(d),in the absence of any provision to the contraryin Chapter XII-G, has necessarily to beunderstood in the manner in which that term isunderstood in common parlance, without being tieddown to any requirement of the Companies Act toclassify the objects of a company into principaland ancillary and show them distinctly in the WP(C)7398/2005 -: 14 :- object clauses in the Memorandum of Associationof the company. In the context of businessoperations by companies having different businessactivities, the purpose of providing a provisionlike Section 115VA has to be understood to be oneintended to provide a method of computation ontonnage basis, at the option of the assessee. Inthat view of the mater, the plain meaning of theterm “the main object of the company” in Section115VC(d), does not call for any restriction thatthe said provision would apply only in caseswhere the company applying for approval of itsoption, has to be one which has the business ofoperating ships enumerated as its main object,going by its Memorandum of Association. 11.The provisions in Section 13(1)(c) and (d) ofthe Companies Act, in terms of the amendment byAct 31/1965, would show that the companies thatexisted at the commencement of such amendmentwere not required to classify their objects as is WP(C)7398/2005 -: 15 :- requiredofthecompaniesincorporated thereafter. Such classification on the basis ofthe date of coming into force of the saidamendment to the Companies Act, was the effect ofthe Joint Selection Committee accepting therepresentation before it, that any effort to re-draft the object clauses of the existingcompanies would not be commensurate with theresults intended by the amendment. 12.As already noticed, the petitioner wasincorporated way back in 1935 and its memorandumtakes, within its sweep, varied activities thatcould have been conceived of at that point oftime. 13.The shipping industry moved for theconsideration of levy of a tonnage tax to makethat industry internationally competitive.Tonnage tax was intended also to induce moreships to fly the Indian flag. The Financeconsideration of levy of a tonnage tax to makethat industry internationally competitive.Tonnage tax was intended also to induce moreships to fly the Indian flag. The Finance Minister proposed to accept the request. It wasas a consequence of such decision, that theprovision for option to pay tonnage tax wasbrought in. The Notes on Clauses appended to theFinance (No.2) 2004 referring to Clause 28 asregards the introduction of Section 115VAspecifically stated that the said provisionrelates to computation of profits and gains ofshipping business. The Apex Court inK.P.Varghese v. I.T.O.[(1981) 4 SCC 173], afterreferring to their Lordships' decisions in LokaShikshana Trust v. C.I.T.[(1976) 1 SCC 254],Indian Chamber of Commerce v. C.I.T.[(1976) 1SCC 324] and Addl.C.I.T. v. Surat Art Silk ClothManufacturers' Association[(1980) 2 SCC 31],held that the speech made by the mover of theBill explaining the reasons for introduction ofthe Bill can be referred to for the purpose ofascertaining the object and purpose for which thelegislation is enacted. It was noticed that thisis in accord with the recent trend in juristic -: 17 :- thought in the western countries, as also inIndia, that interpretation of statutes being anexercise in ascertaining the meaning, everythingwhich is logically relevant should be admissible.In Kerala State Industrial Development Corpn.Ltd. v. CIT[(2003) 11 SCC 363], the Apex Courtreferred to the budget speech of Finance Ministerwhile introducing the Finance Bill to hold thatthe speech can be relied upon to throw light onthe object and purpose of the particularprovisions introduced by the Finance Bill even ifthere is any ambiguity in the matter. 14.In the light of the conclusions arrived at on aplain reading of the provisions, supported by thespeech of the Finance Minister introducing theBill, it has necessarily to be concluded that thedecision in Ext.P5 to the extent it holds thatthe business of operating ships is not a mainobject of the petitioner company, going by itsmemorandum, is illegal. 15.However, the question as to whether the mainobject of the company is to carry on the businessof operating ships in the case of companies likethe petitioner, who have not classified suchactivity as a main object in its memorandum, hasnecessarily to be decided by taking intoconsideration various aspects, including theground realities as to the nature of activitiesand different other aspects, including thecomparable turnovers of the different types ofbusiness of the company. As regards that, thefirst respondent has concluded that the detailsnoticed on the basis of the materials placedbefore him would show that the income fromshipping business and the income from thequalifying ship form only a small portion out ofthe gross income of the company. This finding isone which rests on facts, on the basis ofaccounts, and it is, therefore, improper tosubject it to judicial review in writ WP(C)7398/2005 -: 19 :- jurisdiction particularly, when the statutoryappeals of the petitioner are filed and arepending. 16.In the result, the finding in Ext.P5 thatcarrying on of the business of operating ships isnot the main object of the petitioner, to theextent it is based solely on the object clausesin the Memorandum and Articles of Association ofthe petitioner Company is quashed and thepetitioner is relegated to the statutoryappellate authority for adjudication on the otherissues, to decide whether the petitioner's optionfor tonnage tax scheme ought to have beenapproved. The writ petition is orderedaccordingly. THOTTATHIL B. RADHAKRISHNAN, JUDGE.