High Court of Judicature at Bombay Refers Question of Law on Allowability of Expenditure under Section 40(a)(i) and Section 172 of Income Tax Act to Larger Bench. Disagreement with earlier Division Bench decision in CIT v. Orient (Goa) Pvt. Ltd. leads to referral on whether payer's non-resident status required for invoking proviso to Section 172.

Case Note & Summary

Background: The case concerns income tax appeals filed by the Revenue under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Panaji, for assessment year 1999-2000. The respondent-assessee, a company engaged in mining and export of processed iron ore and construction, had claimed deduction under Section 80HHC and had paid demurrage charges to non-resident shipping companies without deducting tax at source. The dispute primarily revolved around the disallowance of such expenditure under Section 40(a)(i) read with Section 195, and the applicability of Section 172 of the Act. ... Facts: The assessee filed its return declaring taxable income and claimed a deduction under Section 80HHC. The Assessing Officer disallowed the deduction of demurrage charges on the ground that tax was not deducted at source as required under Section 195, and consequently added back the amount under Section 40(a)(i). The assessee succeeded before the Commissioner of Income Tax (Appeals) and the Tribunal, which held that by virtue of CBDT Circular No. 723 and Section 172 of the Act, being a special provision for taxing non-resident shipping companies, the obligation to deduct tax at source did not arise, and hence disallowance under Section 40(a)(i) was not warranted. Legal Issues: The core legal question that emerged before the Division Bench was whether, while examining the allowability of expenditure under Section 40(a)(i), the status of the person making the expenditure must be a non-resident for the proviso to Section 172 to be invoked. This question arose due to an earlier Division Bench decision in CIT v. Orient (Goa) Pvt. Ltd., which had taken a view contrary to the Tribunal’s consistent interpretation. Arguments: The Revenue relied on the decision in Orient (Goa) (P) Ltd., where the High Court had held that Section 172 applies only to the non-resident carrying on shipping business, implying that the payer’s residential status is irrelevant, and therefore disallowance under Section 40(a)(i) must follow if tax is not deducted. The assessee contended that the Orient (Goa) decision required reconsideration, stressing that the special machinery under Section 172, read with the CBDT circular, exempts such payments from the rigors of Section 195 and consequently Section 40(a)(i). Court's Analysis: The Division Bench observed the conflict with the earlier binding decision. It noted that in Orient (Goa), the High Court had categorically held that Section 172 is applicable only to a non-resident carrying on shipping business, while in the present case the assessee was a resident payer. The Bench expressed its inability to agree with that view, feeling that judicial discipline required a larger bench to resolve the conflict. It accordingly framed the specific question of law and referred it to a larger bench. Decision: By order dated 5 February 2016, the larger bench of three judges was constituted to answer the referred question. The order does not record a final answer; it only sets the stage for adjudication of the conflicting interpretations between the provisions of Sections 40(a)(i), 172, and 195. Thus, the present judgment is procedural in nature, referring the legal question to a larger bench.

Headnote

Issue of Consideration

Final Decision

The Division Bench, finding itself unable to agree with the earlier Division Bench decision in CIT v. Orient (Goa) Pvt. Ltd., referred the question of law to a larger bench for resolution. No final decision on the merits was rendered.

Law Points