OIL INDIA LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE Tribunal has referred the following two questions for the opinion of this Court which arises out of the second appellate order of the Tribunal :

(2.) THE aforesaid two questions arise under the following circumstances. Nowsco Well Services Ltd., a non resident firm had entered into an agreement with Oil India Limited, in connection with mineral oil exploration activity in the Mahanadi basin. Under the contract, the Indian firm, namely M/s Oil India Limited, had undertaken the liability to pay the income tax which is otherwise payable by the non resident firm. M/s Oil India Limited filed the necessary income tax return as an agent of the non resident firm. In the return it was indicated that as the non resident firm had rendered its services in connection with mineral oil exploration activities, the provisions of S. 44BB of the IT Act would apply in respect of the tax paid by the Oil India Ltd. under the agreement in question. The ITO, however, did not accept the contention and treated the amount which had been paid by Oil India towards income tax as the business profit of the non resident firm and included the same in the total income and determined the tax liability. The assessee being aggrieved by the said order preferred an appeal to the CIT(A). The appellate authority came to the conclusion that the tax paid by the Indian firm towards the liability of the non resident firm formed part of the consideration for services rendered by the said non resident firm and, therefore, under S. 44BB of the IT Act, 10 per cent of the said amount would be taken as income. The appellate authority further held that the amount paid by the Indian firm towards tax cannot be assessed as perquisite under S. 28(iv) of the IT Act. The appellate authority accordingly directed the ITO to recompute the tax liability. Against the appellate order, the Department filed second appeal before the Tribunal. The assessee also filed cross objection. While the stand of the Department before the Tribunal was that the amount paid by the Indian firm towards the tax liability of the non resident firm must be held to be a receipt in the hands of the non resident and as such taxable, the stand of the assessee was that the entire amount is non taxable by virtue of application of S. 44BB of the Act. The Tribunal, however, rejected the contention of the assessee and dismissed the cross objection, but allowed the appeal of the Department on a finding that the liability of income tax of the non resident is not the payment for the services rendered by them for exploring oil, but it is an independent liability and, therefore, the entire amount should be considered as taxable income. The assessee thereafter moved the Tribunal under S. 256(1) of the IT Act and the Tribunal having referred the questions as already stated, the matter has come before us.

(3.) THE correctness of the rival submissions would depend upon an examination of some provisions of the IT Act as well as the terms and conditions of the agreement under which the Indian firm undertook the liability of making all payments towards income tax which the non resident firm would have otherwise been liable and as to what would be the character of such payment. The learned Standing Counsel with reference to the definition of "income" in S. 2(24) and the charging section under S. 5 as well as the different heads of income defined in S. 14 contends that the income tax paid by the Indian firm which would have otherwise been paid by the non resident firm must be held to be an income from other sources of the non resident firm and, therefore, is liable to be taxed. There is no dispute that the non resident firm had entered into an agreement with the Indian firm and carried on the business of exploration of oil in the Mahanadi basin. Under the terms of the agreement, apart from payments to be made to the non resident firm by the Indian firm, it was also stipulated that the entire tax liability would be borne by the Indian firm. It is this payment made by the Indian firm towards tax liability of the non resident firm which is the subject matter of dispute. On examining the definition of 'income' in S. 2(24) as well as the heads of income as indicated in S. 14, it is difficult for us to accept the contention of the Revenue that it would be an independent income of the non resident firm. On the other hand, it would be a profit or gains of business under the head 'D' in S. 14 of the IT Act. Sec. 28 defines as to what income shall be chargeable to income tax under the head "profits and gains of business or profession". Sec. 28(iv) which came to the statute book by Finance Act of 1964 w.e.f. 1st April, 1964, provides :