1. The common question involved in all these appeals by the common local agent of certain non-resident shipping companies is whether the grant of Double Taxation Avoidance (DTA) relief at a stage earlier to the assessment under Section 172(7) of Income-tax Act, 1961 (the Act) makes a mistake apparent from record rectifiable under Section 154 of the Act in a way which results in total denial of such relief. This question arises under the following circumstances.
2. Non-resident ships, viz., MV. Belstar, M.V. Heroas, M.V. Suerte, M.V. Medsun, under Greek flags, and M.V. Aegis, under German flag, had earned profits from their occasional shipping business in India during the assessment years involved in their respective cases. Before the departure of the ships their masters or within thirty days of such departures their local agents had prepared and furnished to the concerned ITOs the returns of their gross receipts from freight and carriage. The ITOs had assessed their taxable incomes at 7.5 per cent of the gross-receipts and determined the amounts payable as tax thereon by passing orders under Section 172(4). The assessed tax was duly paid, in excess too in some cases. DTA relief, which all the ships were entitled to under the relevant condition of the agreements for avoidance of double taxation between India and their countries, had been allowed in the case of German ship, viz., M.V. Aegis, only. Rest of the non-resident claimed such relief s after the passing of the orders under Section 172(4) but, admittedly, before the expiry of the assessment years relevant to the previous years in which the dates of departure of their ships from Indian ports fell. The ITO granted such reliefs to them by passing orders under Section 154/155 of the Act. In all the cases there had been one transaction each of carriage or shipment during the relevant previous year.
3. After a lapse of two to four years of the grant of DTA reliefs to the appellants the succeeding ITO issued notice to them notifying his intention to withdraw the DTA reliefs by actions under Section 154 on the ground that as per instruction No. 915 of CBDT dated 30-1-1976 such reliefs could have been granted in regular assessment under Section 172(7) only and not at an earlier stage. The appellants unsuccessfully challenged the proposed action mainly contending that there was no mistake apparent from record in the orders granting DTA reliefs and if any could be visualised the same be not rectified to their prejudice and their claims be treated as having been made under Section 172(7).
Without expressing any opinion on such contentions of the appellants the ITO withdrew DTA reliefs by passing orders under Section 154 and in appeals the CIT(A) confirmed such orders.
4. Mr. Anil Harish, Advocate appearing for the appellants, has mainly urged that the grant of DTA reliefs to the appellants, either through the orders under Section 172(4) in the case of the German ship or through orders under Section 154 in the cases of Greek ships did not amount to mistakes apparent from record so as to be rectifiable by recourse to actions under Section 154 by the succeeding ITO and that too after the expiry of the periods within which the appellants could have claimed such reliefs byway of assessments under Section 172(7).
The learned counsel further submitted that, in any case, the claims made by the appellants either in the returns furnished under Section 172(3) or subsequent to the passing of orders under Section 172(4) could have been treated as having been made under Section 172(7) as they had been admittedly made prior to the expiry of the relevant assessment years. Mr. Harish supported his arguments with a large number of cases.
5. The learned D.R. has, on the other hand, supported the orders under appeals with the same reasons as have found favour with the CIT( A). He has mainly urged that the conditions contained in the relevant DTA Agreements as also the instruction issued by the CBDT required the ITO to grant DTA reliefs to the appellants in the regular assessment to be made under Section 172(7) and not at any earlier stage or through any other mode. Violation of such conditions of the DTA Agreement and instruction of CBDT, whether made in the orders under Section 172(7), original or as amended by orders under Section 154, amounted to mistakes apparent from record and as such rectifiable under Section 154 by passing orders withdrawing the same.
6. After hearing the parties we felt convinced that twice the income-tax authorities have failed the appellants in their just claims but, in the facts and circumstances of these cases, we should fail them not.
7. Section 154 is a general provision enabling the income-tax authorities to amend any order passed by them under the provisions of the Act. Such powers may be exercised by them either suo moto or on application by the assessee within four years from the date of the order sought to be amended (as the law stood at the relevant time). But amendment of the relevant order may be made only with a view to rectify any mistake apparent from record. A mistake apparent on record, as held by the Supreme Court in the case of T.S. Balaram, ITO v. Volkart Bros.
[1971] 82 ITR 50 (SC) must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on the points on which there may be conceivably two opinions. A decision on a debatable point of law would not be a mistake apparent from record.
8. Section 172 makes provisions for levy and recovery of tax on profits of nonresidents from occasional shipping business in India. This section provides for a summary procedure for that purpose and, for all practical purposes, is a code in itself on that subject. It starts with a non obstante clause in Sub-section (1) excluding the application of all other provisions of the Act to the matters of computation of taxable profits of the non-residents from occasional shipping business in India and levy and recovery of tax thereon. Sub-section (2) treats 7.5 per cent of the gross receipts of the non-resident from such business as his taxable income accruing in India, and for that purpose Sub-section (3) requires the master of the ship, before the departure of the ship from the port in India, or his duly authorised local agent, within thirty days of such departure of the ship, to prepare and furnish to the ITO a return of full amount paid or payable to the owner or charterer or any person on his behalf on account of carriage. No particular form for such a return has been prescribed.
9. Sub-section (4) requires the ITO to assess the taxable income and determine the amount payable as tax thereon. Sub-section (5) empowers him to call for relevant accounts or documents for the said purpose.
And finally Sub-section (6) prohibits the Collector of Customs from granting to the ship a port clearance certificate unless he or other officer authorised to grant the same is satisfied that the tax assessable under Section 172 has been duly paid or that satisfactory arrangements have been made for the payment thereof.
10. The scheme underlying Section 172(1) to (6) clearly shows that the taxable income of the non-resident is to be assessed and the tax payable thereon to be determined and paid each time the ship departs from the Indian port. Sub-section (4) thus contemplates the possibility of one or more orders by the ITO assessing non-resident's income and determining the tax payable thereon. The determination of correct tax payable by the non-resident on his taxable income under Section 172(4) may involve the adjustment of his claim for such reliefs, as he may be legally entitled to. Therefore, grant of such relief and adjustment thereof against the tax liability of the non-resident at the stage of making assessment under Section 172(4), or at the subsequent stage of amendment of that order to that effect, would not amount to a mistake apparent from record so as to be rectifiable under Section 154 of the Act by withdrawal of the relief. We think, this view of ours stands supported by the ratio of the decisions in the cases of CIT v. Rajnagar Tea Co. Ltd. [1973] 87 ITR 669(Cal), National Rayon Corporation Ltd. v.G.R. Bahmani, ITO [1965] 56 ITR 114 (Bom.), Nilgiris Potatoe Growers Co-operative Marketing Society Ltd. v. CIT [1978] 111 ITR 375 (Mad.).
11. Sub-section (7) of Section 172 expands and enlarges rather than limits or restricts the rights of the non-resident for claiming assessment of his total income during the assessment year involved and determination of the tax payable thereon after taking into consideration for adjustment the tax paid by him in consequence of order(s) passed under Section 172(4). This sub-section provides that: 172(7). Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the Indian port falls, that an assessment be made of his total income of the previous year and the tax payable on the basis thereof be determined in accordance with the other provisions of this Act, and if he so claims, any payment made under this section in respect of the passengers, livestock, mail or goods shipped at Indian ports during that previous year shall be treated as a payment in advance of the tax leviable for that assessment year, and the difference between the sum so paid and the amount of tax found payable by him on such assessment shall be paid by him or refunded to him, as the case may be.
It is evident that the right to claim assessment under Section 172(7) is an optional right of the non-resident which he may or may not chooses to exercise. If he opts to exercise that right, that shall have to be done before the expiry of the assessment year relevant to the previous year in which the date of departure of his ship from Indian port falls. If he does not opt to do so or fails to do so the order(s) passed under Section 172(4) would become final on the expiry of the relevant assessment year. Loss of his right to claim assessment under Section 172(7) would not and could not deprive him of any relief, concession or benefit already given to him under any order, whether original or as subsequently amended, passed under Section 172(4).
Consequently a vested right to hold the relief granted under order passed under Section 172(4), which would include an amended order also, would accrue in favour of the non-resident.
12. The limitation prescribed under Section 154 for amending an order passed under Section 172(4) shall have to be read as substantially controlled and limited by the provisions of Section 172. A combined reading of Sub-sections (1), (4) & (7) of Section 172 clearly shows that once an order passed under Section 172(4) has become final, on the expiry of the assessment year involved without non-resident exercising his right to claim assessment under Section 172(7) the same could not be amended by action under Section 154 in a way which results in taking away any relief, concession or benefit already granted to the non-resident. A DTA relief, being the consequence of a legal right created in non-resident's favour by the contractual obligation of the Govt. of India under the DTA Agreement cannot be considered a mistake apparent from record so as to be amenable to rectification under Section 154 after the expiry of the period of limitation prescribed by Section 172(7) of the Act.
13. At this stage a study of the relevant condition in the DTA Agreements between India and Germany and Greece may be made. Article VI of the relevant DTA Agreement provides as under: Article VI - (1) Where an enterprise of one of the territories derives profits through shipping operations the tax leviable on such profits in the other territory shall be reduced by an amount equal to fifty per cent, thereof.
(2) Paragraph (1) shall not apply to profits arising as a result of coastal traffic; the term 'coastal traffic' means traffic which originates and terminates in the territorial waters of the same territory.
(3) This article shall not, in the case of India, affect the provisions of Sections 44 A and 44B of the Indian Income-tax Act, 1922, relating to the assessment of profits from occasional shipping or tramp steamers. When an adjustment is to be made under Section 44C of the Indian Income-tax Act, 1922, in the case of occasional shipping or tramp steamers, the provisions of paragraph (1) will apply.
Article VI - (1) When a resident of Greece, operating ships, derives profits from India through such operations carried on in India, such profits may be taxed in Greece as well as in India; but the tax so charged in India shall be reduced by an amount equal to 50 per cent thereof, and the reduced amount of Indian tax payable on the profits shall be allowed as a credit against Greek tax charged in respect of such income. The credit aforesaid shall not exceed the Greek tax charged in respect of such income.
(2) (a) When a resident of India, operating ships, derives profits from Greece, through such operations carried on in Greece, such profits may be taxed in Greece as well as in India; but the tax so charged in Greece shall be reduced by an amount equal to 50 per cent thereof and the reduced amount of Greek tax payable shall be allowed as a credit against Indian tax charged in respect of such income.
The credit aforesaid shall not exceed the Indian tax charged in respect of such income.
(b) Sub-clause (a) of Clause 2 shall not, however, apply as long as the laws in Greece do not impose any tax on income derived from the operation of ships belonging to foreign enterprises operating in the Greek territory. In such cases, the profits referred to in Sub-clause (a) of Clause 2 may be taxed only in India.
(3) Paragraphs (1) and (2) shall not apply to profits arising as a result of coastal traffic.
(4) The provisions of Clause (1) shall not in the case of India affect the application of Sub-sections (1) to (6) of Section 172 of the Income-tax Act, 1961, for the assessment of profits from occasional shipping or tramp steamers; but the provisions of that clause will be applied, when an adjustment is to be made under Sub-section (7) of the aforesaid section of the Income-tax Act, 1961, in such cases.
14. It may be noted that Clause (1) of Article VI above in both the DTA Agreements creates a right in favour of the non-resident to get 50 per cent rebate in tax payable on his income accruing in India. This right in his favour flows from the contractual obligation of the Government of India undertaken by her under the DTA Agreements. This substantive right cannot be jeopardised or defeated by procedural formalities or irregularities.
15. In the case of German ship (MV Aegis) the DTA relief had been given by the orders passed under Section 172(4) on 7-5-1983 and that order had become final. The ITO proposed to withdraw that relief on the ground that the grant was made in violation of CBDT instruction No. 915 dated 30-1-1976. For that purpose he issued notice under Section 154 on 13-2-1986. Without considering appellants' contentions raised in reply dated 24-2-1986 and which were to the effect that the last date for claiming refund had already expired on 31-3-1984, the refund received had already been disbursed to the owner or charterer of the ship and that the return filed under Section 172(3)/(4) be either treated as filed under Section 172(7) or extension of time to file one be given, the ITO withdrew the DTA relief by his order dated 19-3-1986 passed under Section 154 of the Act. Not only that no mistake apparent from record existed in the order under Section 172(4) dated 7-5-1983 but also that the order withdrawing the relief was passed after a lapse of about three years of the order under Section 172(4) having become final. On the face of it, ITO's order under Section 154 is bad in law and on facts and hence not sustainable.
16. In the cases of the Greek ships MV Belstar, DTA relief had been given on 14-12-1984 by an order under Section 154/155. The same was withdrawn on 14-3-1986. Similarly such relief had been given on 11-1-1984 in the cases of MV Heroas and MV Suerte and on 21-12-1984 but the same was withdrawn on 28-12-1986 by similar actions.
17. Clause (4) of Article VI in DTA Agreement with Greece certainly spoke of the allowability of DTA relief at the time of making assessment under Section 172(7). Almost to the same effect was CBDT instruction No. 915. The direction contained in Clause (4) of Article VI and the instruction given by CBDT related to the time and manner of giving DTA relief. They simply regulated the procedure of awarding such relief without affecting the substantive right of the non-resident of getting such relief in view of the agreement contained in Clause (1) of Article VI of the Agreement. They directed and instructed the officer concerned to do an act in a particular way. They did not authorise him to undo the act already done which was not illegal or unlawful either at the time of being done or at the time of being undone. Procedural irregularity, if any, committed in the grant of DTA reliefs was not to affect the very right of the non-resident to its grant. Procedural sins do not cause deaths of substantive rights. For these reasons and also for the other reasons mentioned above in connection with the cases of M.V. Belstar & M.V. Aegis we find the orders withdrawing DTA reliefs in the cases of all these three ships also as bad in law and on facts.
18. In the final analysis we hold that the orders granting DTA reliefs to the appellants suffered from no mistakes apparent from record, that DTA reliefs granted under those orders created a substantive right in favour of the appellants, that such rights having become vested by lapse of period of limitation could not have been taken away by recourse to action under Section 154 and that the orders of withdrawals of such DTA reliefs passed by the ITO in all these cases were bad in law and on facts, arbitrary, without jurisdiction and amounted to abuse of the process of court besides being totally unjust in the facts and circumstances of these cases. Consequently those are not at all sustainable.