(1.)THIS reference has been made under Section 256(1) of the Income-tax Act, 1961 ("the Act"), by the Tribunal, Jaipur Bench, Jaipur.
(2.)FARASOL Ltd. ("the assessee") is a foreign company having its management and control outside India. By order of the Central Board of Direct Taxes dated December 5, 1964, the assessee has been treated as a company for the purpose of the Act. The assessee submitted a tender for shallow drilling in Jaisalmer area to the Oil and Natural Gas Commission. The formal intimation of the acceptance of the said tender was given to the assessee by the Oil and Natural Gas Commission on October 11, 1963. The formal contract was executed on February 17, 1964, and the actual drilling operations were started in the, month of December, 1964. As a special case, the assessee was permitted by the Company Law Board to prepare its accounts for the period of 15 months covering the period from September 10, 1964, to December 31, 1965. The assessee submitted its return for the aforesaid period relevant to the assessment year 1966-67 wherein it declared a net loss of Rs. 5,84,746. In the said return, the assessee claimed deduction of a sum of Rs. 2,36,007 paid by it as interest to banks outside India, i.e., in Paris, on loans taken by the assessee. The assessee also claimed deduction of a sum of Rs. 3,50,172 on account of expenses. The assessee also claimed depreciation on various items of machinery and furniture.
The Income-tax Officer, Jaipur, vide his assessment order dated December 30, 1967, assessed the assessee on a total income of Rs. 9,67,427. The Income-tax Officer disallowed the deduction of Rs. 2,36,007 towards interest claimed by the assessee on the ground that the said interest had accrued to the foreign banks outside India and the assessee was liable to deduct tax under the Act and in view of the provisions of Section 40(a)(i) of the Act, the deduction of the said interest could not be allowed to the assessee. The Income-tax Officer also disallowed expenses to the extent of Rs. 3,26,794 which are related to the period prior to February 10, 1964, and also disallowed the expenses of Rs. 19,126 claimed by the assessee on account of stores consumption on the ground that the said expenses had also been incurred before February 10, 1964. In the matter of depreciation, the Income-tax Officer held that the assessee could not claim depreciation for a period of more than 12 months even though some of the assets of the assessee were worked for more than one full year and he allowed depreciation on furniture (camp equipment) at the rate of 10 per cent.
Feeling aggrieved by the aforesaid order passed by the Income-tax Officer, the assessee filed an appeal which was disposed of by the Appellate Assistant Commissioner by order dated September 26, 1970. Before the Appellate Assistant Commissioner, it was submitted on behalf of the assessee that the assessee was not liable to deduct tax on the interest paid to the foreign banks and the same was not income chargeable to tax in the taxable territory of India. This contention of the assessee was not accepted by the Appellate Assistant Commissioner who held that although the interest was paid in France for the money borrowed there, the money was brought into India in kind through transfer of capital assets and, therefore, the interest payable to the foreign banks was chargeable to income-tax in India and it was the responsibility of the assessee to deduct the income-tax thereon. The Appellate Assistant Commissioner, however, held that after the assessment order has been issued by the Income-tax Officer, the assessee had paid a sum of Rs. 2,05,264 to the State Bank of India, Bombay, on March 30, 1970, towards the assessee's liability to deduct tax at source from the payments made to non-residents and that in view of the aforesaid payment by the assessee under Part B of Chapter XVII of the Act, the Appellate Assistant Commissioner deleted the disallowance of Rs. 2,36,007 made by the Income-tax Officer. With regard to the expenses claimed by the assessee, namely, Rs. 3,26,794 and Rs. 19,126, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer and disallowed the said deductions for the reason that the said expenses did not relate to the period of assessment relevant to the assessment year under appeal and held that the said expenses formed part of capital expenditure. As regards depreciation, the Appellate Assistant Commissioner held that the assessee could claim depreciation in excess of 12 months in respect of those assets which were used on the basis of actual user in view of the fact that the assessee had been permitted to prepare the accounts for a period in excess of 12 months. With regard to the camp equipment, the Appellate Assistant Commissioner held that the depreciation should be allowed at the rate of 15 per cent. as claimed by the assessee instead of 10 per cent. allowed by the Income-tax Officer, for the reason that there were no permanent houses for the staff in the desert area where drilling operations were being carried on and the equipment and furniture were being used for the purpose of boarding and lodging provided to the staff.
Against the aforesaid order of the Appellate Assistant Commissioner, two appeals were filed before the Tribunal, one by the Revenue and the other by the assessee. In the appeal filed by the Revenue, objection was taken to the order of the Appellate Assistant Commissioner in so far as it related to the deletion of the disallowance of the sum of Rs. 2,36,007 paid as interest to the foreign banks by the assessee and also the allowance of depreciation at the rate of 15 per cent. on camp equipment. The assessee, in its appeal, raised objection to the disallowance of the expenditure of Rs. 3,26,794 and Rs. 19,126.
Both the appeals were disposed of by the Tribunal by a common order dated November 3, 1972. As regards the deduction of the amount of Rs. 2,36,007 claimed by the assessee towards interest paid to the foreign banks, the Tribunal held that interest income of the foreign banks in the present case should be taken as income chargeable under the Act within the meaning of Section 40(a)(i). In taking the aforesaid view, the Tribunal observed that for the purpose of determining as to whether the income of a non-resident is chargeable to tax, what is material is the nature of the payment that is made to the nonresident and if what is paid to the non-resident is an item which falls in the category of income, tax will have to be deducted at source and the payer cannot be and is not expected to apply himself to the scope of the activities of the nonresident and arrive at a decision whether in the particular circumstances of the payee, the income would be exempt or not in his hands. The Tribunal further held that prima facie even interest paid to a non-resident in respect of moneys charged from him would be deemed to accrue or arise in India, where the money is lent at interest to an assessee abroad and brought by the latter in India in cash or kind and, therefore, the interest income in the present case should be taken as interest chargeable under the Act within the meaning of Section 40(a)(i). The Tribunal also held that though the assessee is a foreign company, it has an office in India and it is carrying on business activities in India and it can be treated as a person in India. The Tribunal, however, held that in the context of Section 40(a)(i), the reference to a person in India must be taken to mean reference to a person in India other than the assessee. The Tribunal further held that in the present case, the tax which the assessee was liable to was deducted at source under Section 195 of the Act which in fact has been recovered from it by the Department and that for the purpose of Section 40(a)(i), tax recovered by the Department is to be treated as tax paid. The Tribunal, therefore, agreed with the Appellate Assistant Commissioner that since the assessee had paid the tax deductible on the interest amount paid to the foreign banks, the assessee was entitled to the deduction of the same. The Tribunal, however, disagreed with the Appellate Assistant Commissioner that for the allowance of depreciation, camp equipments used for the purpose of providing lodging facilities to the members of the staff would fall under the category "furniture" in a boarding house. According to the Tribunal, the asses-see was entitled only to the normal depreciation at 10 per cent. in respect of such equipment. The appeal of the Department was, therefore, allowed to this extent. With regard to the appeal of the assessee, the Tribunal dismissed the said appeal and upheld the orders of the Income-tax Officer and the Appellate Assistant Commissioner disallowing the assessee's claim for expenses of Rs. 3,26,794 and Rs. 19,126 on the ground that the said expenditure related to a period prior to the previous year.
(3.)FEELING aggrieved by the order of the Tribunal, two reference applications were submitted under Section 256(1). Reference Application No. 111(Jp.) of 1972-73 was submitted by the Additional Commissioner and Reference Application No. 116 (Jp.) of 1972-73 was submitted by the assessee. On the basis of the aforesaid applications, the Tribunal has referred the following questions for the decision of this court:
Reference Application No. 111 of 1972-73 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that tax was paid by the assessee under the provisions of Part B of Chapter XVII of the Income-tax Act, 1961, and further that the assessee was entitled to the deduction of interest amounting to Rs. 2,36,007 as the provisions of Section 40(a) of the Income-tax Act, 1961, were not applicable ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest income in the present case should be taken as interest chargeable under the Act within the meaning of Section 40(a) of the Income-tax Act, 1961 ?
3. Whether, on the facts and in the circumstances of the case, and on a true interpretation of Section 163 of the Income-tax Act, 1961, read with Section 40(a), was the Appellate Tribunal justified in holding that the assessee-company was not an agent of non-resident payee ?"
In Reference Application No. 116 of 1972-73
1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the expenditure of Rs. 3,26,794 and Rs. 19,126 incurred before February 17, 1964, from the total income for the assessment year 1966-67 ?
2. Whether the furniture used for boarding and lodging constitutes furniture used for a boarding house on which depreciation was allowable as per the Income-tax Rules, 1962, at 15 per cent. ?"
As regards question No. 2 in Reference Application No. 111 of 1972-73, the Tribunal has observed in the statement of case that the departmental representative had pointed out that the said question does not arise out of the order of the Tribunal and the Tribunal agreed to the said contention of the departmental representative and directed that the said question could not be referred. This would show that the Tribunal has referred questions Nos. 1 and 3 in respect of Reference Application No. 111 and questions Nos. 1 and 2 in Reference Application No. 116.
We have heard Shri R. N. Surolia, the learned counsel for the Revenue, and Shri S.L. Aneja, the learned counsel for the assessee.