Ita 728/09 v. Ratan Melting & Wire Industries],A Decision Of The Constitution Bench Of The Hon'blesupreme Court, Is Relied On To Urge That The Circularissued By The Board Tho

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON THURSDAY ,THE 04TH DAY OF OCTOBER 2018 / 12TH ASWINA, 1940 ITA.No. 728 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 429/COCH/2004 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 05-03-2007 APPELLANT/S:/APPELLANT/REVENUE THE COMMISSIONER OF INCOME TAX,COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S:/RESPONDENT/ASSESSEE NORASIA LINES (MALTA) LTD.AGENT TRANS ASIAN SHIPPING SERVICES LTD., SURYODAYA BUILDING, MULLASSERY CANAL ROAD, COCHIN - 682011. BY ADVS.SRI.R.VIJAYA RAGHAVANSRI.SABU S.KALLARAMOOLA THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 13.09.2018, THE COURT ON 04.10.2018 DELIVERED THE FOLLOWING: ITA 728/09 -2- “C.R.” J U D G M E N T Vinod Chandran, J. The Revenue is in appeal from the order of theIncome Tax Appellate Tribunal. The assessment year is1996-97 and the issue relates to the regular assessmentmade under Section 143(3) of the Income Tax Act, 1961('Act', for short) on an option exercised by the assessee, a non-resident shipping Company, underSection 172(7). The questions of law raised as seen from the memorandum are as below:- “(1).Whether, on the facts and in thecircumstances of the case and also on thebasis of the grounds urged, the Tribunal isright in law and fact in interfering with theorder of rectification? (2).Whether, on the facts and in thecircumstances of the case and in the light ofthe decision of the Supreme Court in 225 ITR739 read with decision in 195 CTR (SC) 12: i)is not the Circular No.730 dated 14.12.95non est? ii)Is not the rectification based oncircular No.9, dated 9.7.2001 in accordance with law? iii) Is not the error in the earlierproceedings an error apparent from therecord? (3). Whether, on the facts and in thecircumstances of the case, the Tribunal isright in law and in fact in highlightingvarious extraneous questions and finding theissue/issues debatable and is not such anapproach and the conclusion reached wrong,perverse, unsustainable and uncalled for andunwarranted?” 2. The assessee is a non-resident shippingCompany, represented by its agent at that point oftime, who also filed an option under Section 172(7) tobe assessed regularly under the provisions of the Act,before the expiry of the assessment year. Assessmentwas initiated by an intimation under Section 143(1) asper Annexure-A, which indicated that interest has beenlevied under Section 234A, B and C of the Act.Subsequently under Section 143(3), scrutiny assessmentwas made as per Annexure-C, when circular No.730 dated14.12.1995, produced as Annexure-B was taken intoaccount. The assessment at Annexure-C was passedlevying interest under Section 234A, but not levyinginterest under Section 234B and C. Thereafter, noticingAnnexure-D circular, bearing No.9/01 dated 9.7.2001, arectification order was passed at Annexure-E levyinginterest under Section 234B and C. ITA 728/09 -4- 3. Circular No.9/01 was issued noticing thejudgment of the Hon'ble Supreme Court in (1997) 225ITR 739 [A.S. Glittre D/5 I/S Garonne and Others v.Commissioner of Income Tax]. The assessee challengedthe rectified order in appeal. The first appellateauthority held in favour of the assessee and deletedinterest under Section 234B and C. The Tribunalaffirmed the order of the first appellate authority. ITA 728/09 -4- 3. Circular No.9/01 was issued noticing thejudgment of the Hon'ble Supreme Court in (1997) 225ITR 739 [A.S. Glittre D/5 I/S Garonne and Others v.Commissioner of Income Tax]. The assessee challengedthe rectified order in appeal. The first appellateauthority held in favour of the assessee and deletedinterest under Section 234B and C. The Tribunalaffirmed the order of the first appellate authority. 4.The learned Standing Counsel, Governmentof India (Taxes) submits that what was attempted to berectified is only a mistake apparent on the face of therecord. True, the CBDT had come out with a circularwhich directed the officers not to levy interest underSection 234B and 234C for reason of the non-residentshipping Companies being subjected to a summaryassessment under Section 172(4) and a regularassessment being contemplated only on an option beingexercised by such non-resident shipping Companiesbefore the closure of the assessment year. The optionhaving been permitted to be exercised at any timebefore expiry of the assessment year, the CBDT was ofthe opinion that the provisions of advance tax would ITA 728/09 not apply to such assessees and the levy of interestcannot be made in accordance with the provisions asseen above. The assessees were also held to be notentitled to interest under Section 244A. The said viewheld force for quite some time until the Hon'bleSupreme Court in A.S.Glittre(supra) found otherwise.It was argued that the Tribunal erred insofar asfinding that there is no error apparent on the face ofthe record. 2005 (3) SCC 57 [Commissioner ofCentral Excise v. Ratan Melting & Wire Industries],a decision of the Constitution Bench of the Hon'bleSupreme Court, is relied on to urge that the circularissued by the Board though binding on the authoritiesunder the Act, the same cannot go against declarationof law made by the Supreme Court or the High Court. Arectification, on the basis of law declared by theSupreme Court or the High Court is permissible as hasbeen found in 1988 (174) ITR 579 [Kil Kotagiri Teaand Coffee Estates Co. Ltd. v. Income Tax AppellateTribunal & Others]. 5.The learned counsel appearing for therespondent however would seek to sustain the order of ITA 728/09 the Tribunal. It is argued that the Hon'ble SupremeCourt in A.S.Glittre(supra) was concerned with aspecific issue: whether there was an entitlement forinterest under Section 214 and had merely declared suchentitlement on the basis of a fiction, as evident fromthe words employed in Section 172(7). There cannot beany declaration ferreted out from the decision as tothere being a liability on the assessee, who exercisedoption under Section 172(7) to make payment of advancetax. The assessee hence is also not obliged to payinterest under Section 234B and C. 6.It is argued that the option to beexercised is prior to the expiry of the assessment yearwhich could be on 31[st] of March of the year subsequentto the previous year. The advance tax payment has to bemade quarterly, in the previous (financial) year of theassessment year and there could be no insistence ofinterest under Section 234B and C from the date ofadvance tax payable as contemplated under the statute.The liability to advance tax stands reduced to theextent tax would be deductible and collectible atsource during the financial year by virtue of Section ITA 728/09 6.It is argued that the option to beexercised is prior to the expiry of the assessment yearwhich could be on 31[st] of March of the year subsequentto the previous year. The advance tax payment has to bemade quarterly, in the previous (financial) year of theassessment year and there could be no insistence ofinterest under Section 234B and C from the date ofadvance tax payable as contemplated under the statute.The liability to advance tax stands reduced to theextent tax would be deductible and collectible atsource during the financial year by virtue of Section ITA 728/09 209(c). The respondent-assessee, a non-resident havingopted out of the assessment under Section 172(1) to(6); the payer has a responsibility to deduct theentire tax due at source under Section 195 and pay itto the department. Any failure on that count could onlyresult in such payer being treated as an 'assessee indefault' under Section 201 and there could be nointerest levied on the payee non-resident. To advancethe above contention reliance is placed on the decisionof the Delhi High Court reported in [2011] 330 ITR 578[Director of Income Tax Vs. Jacabs CivilIncorporated]. It is also argued that, as of now, theagent representing the respondent has been terminatedfrom such agency and there is another agent appointed,who has also filed an application for substitution. Itis further urged that Section 172 is a non-obstanteclause and there can be no application of the otherprovisions nor could there be levy of interest underSection 234B and C. 7. At the outset, we reject the contentionthat the agency of the person who filed the returns andalso exercised the option under Section 172(7), being ITA 728/09 -8- not continued, is not liable to be assessed on behalfof the Principal. We notice the operative portion ofour order dated 6.8.2018 in I.A.No.17/2017, which readsas under: “Looking at Chapter 50 of the Income TaxAct, 1961 (for brevity, the Act] being theliability in special cases, we are of theopinion that the agent, who had filed thereturn and also approached the statutoryauthorities, is an agent of the non-resident shipping Company and is arepresentative assessee, whose rights andliabilities have been specifically statedin Sections 162 and 161 of the Act. Insuch circumstances, we do not think thatany substitution is called for.” 8.A.S.Glittre(supra) was a case in which the assessee had been paying tax on the basis of theirreceipts over the course of the financial year and hadchosen to go under the regular assessment by exercisingan option under Section 172(7). On a regular assessmentbeing carried out, there was a refund due to theassessee on which they claimed interest under Section214.{Pausing here for a moment, Section 214 as per sub-section (3) is not applicable to the assessment yearcommencing on 01.04.1989 or the subsequent years and'Interest on refunds' for those years will be underSection 244A.} The Assessing Officer declined the ITA 728/09 claim, but the Tribunal allowed it, which decision ofthe Tribunal was reversed by the High Court. TheHon'ble Supreme Court reversing the judgment of thisCourt found that the payment of tax would, on exerciseof such option, be treated as advance tax and in thatcircumstances, there would be an entitlement forinterest on a refund being ordered of the amounts paid.It was held that all “the provisions of the Act in thedetermination of tax liability, including theancillary, incidental or consequential matterspertaining to it are necessarily attracted” (sic), onsuch option being exercised. ITA 728/09 claim, but the Tribunal allowed it, which decision ofthe Tribunal was reversed by the High Court. TheHon'ble Supreme Court reversing the judgment of thisCourt found that the payment of tax would, on exerciseof such option, be treated as advance tax and in thatcircumstances, there would be an entitlement forinterest on a refund being ordered of the amounts paid.It was held that all “the provisions of the Act in thedetermination of tax liability, including theancillary, incidental or consequential matterspertaining to it are necessarily attracted” (sic), onsuch option being exercised. 9.The assessee, who under a summaryassessment, pays amounts and then seeks regularassessment on completion of which, he is entitled to arefund, would be entitled to interest under Section244A. As a corollary if there is any shortfall, theassessee would necessarily be liable to interest; onexercise of such option, under Section 234A, B and C.A.S.Glittre(supra) was on the question of entitlementof an assessee who exercises an option under Section172(7) to get interest, if eventually there is a refund due; on the amount of tax paid in advance under Section172(3) & (4) being in excess of the assessed tax underSection 172(7). The Scheme of 172 was explained so: “The scheme of Section 172 of the Actappears to be this: Section 172(1) of the Actgives a right to the Income Tax Officer to levyand recover tax in the case of any shipbelonging to a non-resident, in a summarymanner, (ad hoc assessment) notwithstandinganything contained in the other provisions ofthe Act. It is an absolute right conferred onthe assessing authority. The assessee has noright to object to the same. Normally, thiswill be assessment of the assessee for theyear. But, under Section 172(7) of the Act aright is given to the assessee to claim beforethe expiry of the assessment year relevant tothe previous year in which the date ofdeparture of the ship from the Indian portfalls, that an assessment, according to theprovisions of the Act, in a regular manner bemade. Thus, a right is given to the assessee toopt for a regular assessment although a “roughand ready” or a “summary assessment” hasalready been made under Section 172(4) of theAct. It is a valuable right. If the assesseeexercises the right conferred on him underSection 172(7) of the Act, the Income TaxOfficer is bound to make an assessment of thetotal income of the previous year of theassessee and the tax payable on the basisthereof “should be determined in accordancewith the other provisions of the Act” and anypayment made under the section (earlier) “shallbe treated as a payment in advance of the tax”leviable for that assessment year and thedifference between the sum so paid and theamount of tax found payable by him on suchassessment, shall be paid to the assessee orrefunded to him. The “ad hoc” assessment made under Section 172(4) of the Act is supersededand a “regular assessment” is made as per theprovisions of the Act. In such a case, it isonly proper and appropriate to hold that all“the provisions” of the Act in thedetermination of the tax liability includingthe ancillary or incidental or consequentialmatters pertaining to it are necessarilyattracted”. under Section 172(4) of the Act is supersededand a “regular assessment” is made as per theprovisions of the Act. In such a case, it isonly proper and appropriate to hold that all“the provisions” of the Act in thedetermination of the tax liability includingthe ancillary or incidental or consequentialmatters pertaining to it are necessarilyattracted”. 10.The legal fiction created by sub-section(7) to treat the tax paid under the adhoc assessment asadvance tax, according to the Hon'ble Supreme Court,can be given its full effect only if all the provisionsof the Act in respect of payment of advance tax isapplied, and thus entitling the assessee who exercisedan option under sub-section (7), to any interest on taxpaid in advance, if there is a refund ordered onregular assessment. As a corollary, we have tounderstand that when an option is exercised by theassessee to go under the regular assessment ascontemplated under the Act necessarily the rights andliabilities as provided for in the provisions under theAct kicks in and the non-obstante clause no more hasany effect. It is the assessee's option not to beassessed under Section 172 in a summary manner and whensuch option is willingly exercised under sub-section ITA 728/09 (7) then, the provisions of Section 172 cease to haveany effect and in such circumstance, the overridingeffect of the provision by reason of the non-obstanteclause also cease to have any effect. Necessarily, theassessee who exercised such option under sub-section(7) would have to comply with all the formalities andwhen entitled to such rights available there-underwould also be equally liable to any injuriousconsequence of payment of interest as contemplatedunder the Act. 11.The Hon'ble Supreme Court held that thewords “shall be treated as a payment in advance of thetax” is a fiction created by statute. The learnedJudges found no perceptible distinction between thewords “advance tax” as used otherwise in the statuteand “payment in advance of the tax” as used in Section172(7). On how statutory fictions can operate it wasreiterated that; when one is bidden to treat animaginary state of affairs as real, by a fictioncreated by statute, all the consequences flowing fromit would also have to be treated as real, unless thereis a statutory prohibition. Here the fiction created, ITA 728/09 on an option exercised for regular assessment, is thatthe amounts paid on summary assessment be treated asadvance tax. Hence, the fiction has to be given fullplay and all such consequences which follow, whether itbenefits the assessee or favours the department, has tobe necessarily borne. If the advance tax payment is inexcess then the assessee is entitled to interest onrefund. Likewise if there is shortfall, the Departmentcan demand, validly, interest for such shortfall asprovided in the statute. The fiction having been madeto operate, on the option exercised by the assessee; ifthere is a shortfall in payment of advance tax, wecannot allow the mind to boggle when it comes toinjurious consequences for the assessee. 1952 AC 109[East End Dwellings Co. Ltd. v. Finsbury BoroughCouncil] as quoted often by the Apex Court, withapproval, is apposite : “If you are bidden to treat animaginary state of affairs as real, you must surely,unless prohibited from doing so, also imagine as realthe consequences and incidents which, if the putativestate of affairs had in fact existed, must inevitablyhave flowed from or accompanied it. ... The statute says that you must imagine a certain state of affairs;it does not say that having done so, you must cause orpermit your imagination to boggle when it comes to theinevitable corollaries of that state of affairs”. says that you must imagine a certain state of affairs;it does not say that having done so, you must cause orpermit your imagination to boggle when it comes to theinevitable corollaries of that state of affairs”. 12.We have to also observe that the assesseewho comes under Section 172 is given an option eitherto be summarily assessed under that provision or go forregular assessment under the statute; the later optionbeing exercised at any time after the financial yearand before the expiry of the assessment year. Theassessee has within their knowledge the entire figuresfor the subject year and could very well arrange itsaffairs accordingly. Hence, the assessee exercising anoption under Section 172(7) does so voluntarily withopen eyes and when the regular assessment brings inadditional liability; it cannot be wriggled out of. 13.On the question of rectification andthere being in existence a mistake/error apparent fromthe face of the record, we have to briefly state thechronology of events. The decision of the Supreme Courtwas in the year 1997 and Annexure D Circular withdrewAnnexure B circular on 09.07.2001. The assessment order ITA 728/09 Annexure C was dated 23.01.1998; subsequent to thedecision of the Supreme Court and without noticing theauthoritative pronouncement.The learned Counsel forthe respondent had an argument that the levy was onlyon account of withdrawal of the earlier circular andit was not a valid cause for rectification; since it isa mere change of opinion of the Department. We arehowever not inclined to accede to such contentionespecially noticing that the 2[nd] circular was on thebasis of the decision of the Hon'ble Supreme Court inA.S.Glittre(supra) which was passed before theassessment order. 14.With the interpretation placed on theprovision by the Hon'ble Supreme Court, the circular atAnnexure B has absolutely no effect as has been foundin Ratan Melting & Wire Industries(supra). The FullBench decision in (119) ITR 334 [Commissioner ofIncometax v. B.M.Edward India Sea Foods, Cochin] alsowould not have any application in view of theConstitution Bench decision of the Hon'ble SupremeCourt. In B.M. Edward (supra) the issue considered wasthe effect of withdrawal of a Circular of the Board of Revenue which was valid for the subject assessment year.There was no issue, as in the present case, of a circularhaving been rendered ineffective for reason of adeclaration made by the Apex Court which declarationapplies and overrules any Circular issued by a statutoryauthority. The question of rectification being made onthe basis of a binding decision of the ConstitutionalCourt is covered by the Division Bench decision of thisCourt in Kil Kotagiri Tea and Coffee Estates Co. Ltd.(supra). Even otherwise here the rectification was not onaccount of a cancellation of the Circular. The AssessingOfficer failed to notice the change in law whichoccurred prior to the assessment being framed, and reliedon a Circular, the terms of which were no longersustainable. 15.Yet another argument is that the interestliability would not arise under Section 234B & 234C sincethe same can only be cast on the payer who has aliability and statutory responsibility to deduct theentire tax due from a non-resident under Section 195.Jacabs Civil Incorporateddealt with the demand ofinterest under Sections 234B & 234C, made againstCompanies incorporated outside India; non-residents ITA 728/09 15.Yet another argument is that the interestliability would not arise under Section 234B & 234C sincethe same can only be cast on the payer who has aliability and statutory responsibility to deduct theentire tax due from a non-resident under Section 195.Jacabs Civil Incorporateddealt with the demand ofinterest under Sections 234B & 234C, made againstCompanies incorporated outside India; non-residents ITA 728/09 earning income within India on execution of variousprojects undertaken by resident entities. The learnedJudges found that under Section 195 the projectproponents who engaged the non-residents for executionof work; who also paid the project proponents, had astatutory duty to deduct the tax due at source, whichin the case of non-residents was the entire tax due, asper Section 195. The advance tax component payableunder Clause (a),(b) & (c) of Section 209 stood reducedby the advance tax “deductible or collectible” atsource. Since under Section 195 the entire tax payableby a non-resident was “deductible and collectible” atsource, no interest can be levied on the non-residentfor the amounts which were so “deductible andcollectible” at source, is the finding. It was alsoheld that in that context such interest would be liableto be recovered from the resident-payer who is deemedto be an assessee in default under Section 201. 16.What distinguishes the above cited casefrom the instant one is the status of the respondentherein, a charterer or owner of a ship, termed as aSpecial Case under Chapter XV of the Act, liable under Section 172. Being engaged in shipping business theappellant is treated as a special case and assessedunder Section 172 (1) to (6) during the previous yearin which the tax deduction at source would have beenpossible. Section 172 is a non obstante clause asevident from sub-section(1); providing a separate modeof levy and collection of tax in the case of a cargoor passenger ship belonging to or chartered by a non-resident. It is hence a complete code in itself forlevy and collection of tax from ships of non-residents;subject only to the option provided under sub-section(7). Sub-section (2) deems seven and a halfpercent of any payment made to the owner or chartererof ships, for such carriage, either directly or throughany person, whether it be paid or payable in and out ofIndia, to be income accruing in India. Sub-section (3)mandates that the Master of the ship, shall file areturn of the full amount paid or payable before theAssessing Officer, before its departure. The provisospeaks of the departure being permitted on thesatisfaction of the A.O that the filing of such return,before departure is impossible and the Master has made ITA 728/09 sufficient arrangements through another to file suchreturn. The proviso also deems any return filed by thatagent within 30 days of the ships departure to besufficient compliance of the provisions. Sub-section(4) speaks of the manner in which assessment is to beframed at rates as applicable under Section 194. Sub-section (4A) provides a limitation period of ninemonths for completion of assessment, from the end ofthe financial year in which the return is furnished.Sub-section (5) enables the A.O to call for theaccounts or documents required by him and sub-section(6) empowers the Collector of Customs or such otherofficer to refuse port clearance unless he is satisfiedof the payment of the tax due or of the satisfactoryarrangements made for such payment. This is a code initself and the option to be exercised for going underthe regular assessment as provided in sub-section (7)is before the close of the assessment year. 17.The non-resident charterer or owner andhis agent, interested in the clearance of the ship afterits cargo is unloaded; invariably subjects themselves tothe assessment under Section 172. There is hence no ITA 728/09 17.The non-resident charterer or owner andhis agent, interested in the clearance of the ship afterits cargo is unloaded; invariably subjects themselves tothe assessment under Section 172. There is hence no ITA 728/09 obligation on the payer to deduct tax and the paymentis ensured by the non-resident or agent beforedeparture or at least within 30 days from departure.The complete code under Section 172 ensures assessmentand payment of tax within a time frame; after which theassessee opts out of the scheme under Section 172 tomove under the regular assessment; when necessarily theassessee would be entitled to all benefits and mulctedwith all liabilities flowing from the other provisionsof the Act. On the questions of law framed, we find thatthe Tribunal has erred insofar as interfering with theorder of rectification especially since therectification was made on the basis of a decision ofthe Hon'ble Supreme Court which was the declared laweven when the original order which was rectified waspassed. Circular No.730 dated 14.12.95 has lost itssignificance and validity, on the Supreme Courtauthoritatively speaking on the provision under Section172(7) and the effect of the option exercised, inA.S.Glittre(supra). There was hence an error apparenton the face of the record and the Tribunal erred in setting aside the order of rectification. On the abovefindings, we answer the questions of law framed by theRevenue in favour of the Revenue and against theassessee. The appeal is allowed setting aside the orderof the Tribunal and that of the first appellateauthority and restoring that of the assessingauthority. There will be no order as to costs. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENONJUDGE APPENDIX PETITIONER'S EXHIBITS:ANNEXURE -A COPY OF INTIMATION U/S.143(1)(a) DATED 27/10/1997 OF THE ASST. YEAR 1996-97. ANNEXURE -B COPY OF CBDT'S CIRCULAR NO.730 DATED 14/12/1995. ANNEXURE -C COPY OF ORDER U/S. 143(3) DATED 23/01/1998 FOR THE ASST. YEAR 1996-97. ITA 728/09 -22- jg