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HIGH COURT OF CALCUTTA
K. L. RAY
CZECHOSLOVAK OCEAN SHIPPING INTERNATIONAL JOINT STOCK COMPANY - Appellant
Versus
INCOME-TAX OFFICER, A-WARD - Respondent
Matter 232 Of 1968
Decided On : FEBRUARY 25, 1970
INCOME TAX - Deduction of tax at source - Freight earnings of non-resident shipping company - Whether taxable in India - Whether orders for deduction of tax under Section 195 of the Income-tax Act, 1961, were valid - Interpretation of Sections 5, 9, 160, 163, 172, 190, 195 and 246 of the Act.
Fact of the Case:
A non-resident shipping company earned freight for cargo discharged at Indian ports. The company's agent in India applied to the Income-tax Officer for confirmation that no income-tax was payable on the freight, as it was earned outside India. The Income-tax Officer, however, determined that the freight earnings were taxable under Section 5(2) of the Income-tax Act, 1961, and directed the agent to deduct tax under Section 195 of the Act.
Finding of the Court:
The court held that the freight earnings were taxable in India under Section 5(2) of the Income-tax Act, 1961, as they were received in India and accrued or arose in India through the business connection of the non-resident shipping company in India. However, the court held that the orders for deduction of tax under Section 195 of the Act were invalid, as the agent had not made an application to the Income-tax Officer under Section 195(2) to determine the proportion of the freight earnings that were chargeable to tax.
Issues: 1. Whether the freight earnings of the non-resident shipping company were taxable in India. 2. Whether the orders for deduction of tax under Section 195 of the Income-tax Act, 1961, were valid.
Ratio Decidendi: 1. The court held that the freight earnings were taxable in India under Section 5(2) of the Income-tax Act, 1961, as they were received in India and accrued or arose in India through the business connection of the non-resident shipping company in India. The court rejected the contention that the freight earnings were not taxable in India because they were earned outside India, as Section 5(2) of the Act provides that all income from whatever source derived, which is received or is deemed to be received in India in such year by or on behalf of a non-resident, is taxable in India. 2. The court held that the orders for deduction of tax under Section 195 of the Act were invalid, as the agent had not made an application to the Income-tax Officer under Section 195(2) to determine the proportion of the freight earnings that were chargeable to tax. The court held that Section 195(2) only applies where the person responsible for making the payment to the non-resident is not sure as to which part of the amount payable to the non-resident is chargeable to tax and applies to the Income-tax Officer to determine the proportion of the sum so chargeable. In this case, the agent had not made such an application, and therefore the Income-tax Officer had no jurisdiction to make the orders for deduction of tax under Section 195.
Final Decision: The court made the rule absolute and quashed the impugned orders for deduction of tax under Section 195 of the Income-tax Act, 1961. However, the court clarified that this would not prevent the respondents from proceeding according to law to realise any amount which may be due on account of income-tax from the non-resident shipping company.
( 1 ) MESSRS. Czechoslovak Ocean Shipping International Joint Stock Co. is a non-resident shipping company. On or about the 23rd September, 1965, "m. S. Jiskara", one of its vessels, discharged in the port of Calcutta, under 6 bills of lading, cargo of machinery, equipment, instruments, etc. , consigned to the Heavy Engineering Corporation Ltd. , a Government of India undertaking, and to the Government Cement Factory of the State of Uttar Pradesh. The said vessel left the port of Calcutta on the 29th September, 1965, without loading any cargo. On the 12th November, 1965, another of its vessels, "m. S. Pionyr", discharged in the port of Calcutta, cargo of various machinery, equipment, etc. , consigned to the Heavy Engineering Corporation Ltd. and left the port on the 16th November, 1965, without loading any cargo. Under the relevant bills of lading the freight was to be considered as earned whether the ship and/or cargo was lost or not and was to be paid at destination. M/s. Khemka and Co. (Agencies) Private Ltd. , the second petitioner (hereinafter referred to as "the Khemkas") acted as the agent for the non-resident shipping company and collected Rs. 1,59,352. 66 towards the freight of the cargo discharged by M. S. "jiskara", and Rs. 1,45,585. 86 as the freight for the cargo discharged by "m. S. Pionyr" and after deducting the necessary disbursements panted to remit the balance of the aforesaid freight, being the sums of Rs. 1,25,000 and Rs. 90,000, to Praha, where the head office of the nonresident company was situated and applied for the necessary sanction from the Reserve Bank of India through its own bankers, the Indian Overseas Bank Ltd. The Khemkas were informed by the Indian Overseas Bank Ltd. that the Reserve Bank required them to produce clearance certificate from the income-tax authorities that no income-tax was payable in respect of the aforesaid freights. By its letter dated the 1st April, 1966, addressed to the Income-tax Officer, A Ward, Companies District III, Calcutta, the 1st respondent herein, the Khemkas, asked the Income-tax Officer to confirm that no income-tax is payable on freight for imports discharged in Calcutta unless the vessels loaded any export. In this letter the Khemkas described themselves as "agents". By its letter dated the 4th April, 1966, the respondent No. 1 informed the Khemkas that the freight earnings received in the taxable territories on behalf of the non-resident principal on account of cargo discharged by the said two vessels were assessable under Section 5 of the Income-tax Act, 1961. The Khemkas were further requested to inform the said respondent the name of the non-resident principals on whose behalf the freight earnings were collected and whether the said principals are assessed to Indian income-tax on annual basis and, if not, to furnish the relevant particulars of income from the freight earnings on account of cargo discharged in Calcutta. Thereafter various letters were written by the Khemkas to the respondent No. 1 asking for time as they had referred the matter to Praha and such time was accordingly granted on several occasions. On the 29th April, 1966, the Khemkas again wrote to the respondent No. 1 that pending instructions from their principals it was submitted that the income was earned outside India under a contract of carriage signed outside India and was undoubtedly income accruing or arising outside India though realised in India and was saved from assessment under Explanation 1 to Section 5. To this, the respondent No. 1 replied on the 6th May, 1966, that the freight earnings received in the taxable territories on behalf of the non-resident principal were taxable under Section 5 (2) of the Act and that the Explanation to that section had no application to the present case. The material communication which has given rise to this application is the letter dated the 5/8th September, 1966, whereby the said respondent informed the Khemkas that they were
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