COMMISSIONER OF INCOME TAX Vs. KERALA LINES LIMITED

JUDGEMENT

(1.) IN this tax case reference under section 256(1) of the INcome-tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the Revenue, the following questions of law have been referred to this court, for its opinion :

(2.) THE assessee is a resident company carrying on business in operating cargo ships. Two of the ships of the assessee M. V. Fareeda and M. V. Jameela sailed from Basrah and Chalna ports in Bangladesh and in the counting year relevant to the assessment year 1974-75, the assessee had paid a sum of Rs. 53,410, such levy being akin to that under section 172 of the Act, to enable the securing of a port clearance and its collection as under section 195 of the Act by way of deduction at source. In Basrah, the levy and deduction way 7 1/2 per cent. of the gross freight, while that in Chalna was 10 per cent. In the course of the proceedings before the Income-tax Officer, in respect of the assessment year 1974-75, by letter dated October 23, 1976, the assessee claimed that income-tax of Rs. 53,410 paid at the foreign ports should be allowed as a deduction. In addition, the assessee also claimed relief under section 80-J of the Act without deducting the balance of the unpaid purchase money of Rs. 17,56,614 for acquiring a shop and a loan borrowed by the assessee in a sum of Rs. 24,82,000 from the Shipping Development Fund Committee, in respect of which, the amount owed by the assessee, on the computation date, was Rs. 19,85,600. THE Income-tax Officer disallowed that amount of Rs. 53,410 paid by the assessee at the foreign ports by way of income-tax, claimed as a deduction by the assessee. In regard to the relief claimed by the assessee under section 80J of the Act, applying rule 19A(5) of the Rules, the Income-tax officer treated the amount of Rs. 17,56,614 owed by the assessee in acquiring the ship and also the amount of Rs. 19,85,600 from out of Rs. 24,82,000 borrowed by the assessee from the Shipping Development Fund Committee as amounts owed by the assessee, as on the computation date, on account of moneys borrowed or debts incurred in acquiring the ship and in view of the resulting excess of liability over the written down value of the assets, negatived the claim of the assessee for relief under section 80J of the Act. On appeal by the assessee before the Appellate Assistant Commissioner, on the basis of the undisputed fact that what was paid by the assessee in the foreign ports was income-tax, which was also described in the certificates issued by the concerned authorities of the foreign countries as such, it was held that the income-tax paid by the assessee, in the foreign countries, was not an admissible deduction. It was also found that even on the basis of the application of section 40(a)(ii) of the Act, the disallowance was in order. Adverting to the claim made by the assessee under section 80-J of the Act, the Appellate Assistant Commissioner concurred with the view taken by the Income-tax Officer and upheld the disallowance of the relief claimed by the assessee under section 80-J of the Act. On further appeal by the assessee before the Tribunal, it took the view that the expenditure incurred by the assessee in a sum of Rs. 53,410 had been laid out wholly and exclusively for purposes of carrying on the business of the assessee and the amounts were paid by the assessee to earn profits, as, without such payment, the ships of the assessee would to have been allowed to sail from the ports and the contract of carriage of goods also would have been frustrated. THE Tribunal ultimately found that the amounts paid by the assessee at the foreign ports amounting to Rs. 53,410 would be an allowable deduction under section 37 of the Act. In regard to the relief claimed by the assessee under section 80-J of the Act, the Tribunal took the view that the amount of Rs. 17,56,614 owed by the assessee in acquiring the ship should be deducted from the written down value on the application of rule 19A(5) of the Income-tax Rules, but that the amount of Rs. 19,85,600 out of the borrowing of Rs. 24,82,000 by the assessee from the Shipping Development Fund Committee, was in the nature of a collateral transaction, not amounting to moneys borrowed or debts incurred in acquiring the ship and that was not deductible from the written down value of the ship for purposes of computing the relief under section 80-J of the Act, purporting to rely on the decision in Madras Industrial Linings Ltd. v. ITO . That is how the questions of law set out earlier have arisen.

(3.) REGARDING the third and the fourth questions, relating to the relief under section 80-J of the Act, we may point out that the view taken in Madras Industrial Linings Ltd. v. ITO , relied on by the Tribunal with regard to rule 19A(3) of the Income-tax Rules, had been overruled by the decision of the Supreme Court in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 (SC) and, therefore, the availability or otherwise of the relief under section 80-J of the Act has to the determined on the basis of rule 19A(5) of the Rules. In regard to amounts owed by the assessee on the computation date, it is seen that a sum of Rs. 17,56,614 was outstanding in respect of the acquisition of a ship by the assessee, after payment of consideration in instalments to Deustche Bank, Hamburg. In regard to the other amount of Rs. 24,82,000 borrowed by the assessee from the Shipping Development Fund Committee, the assessee had deposited that amount with Indian Overseas Bank, on the strength of which that bank gave a guarantee to a foreign bank which, in its turn, guaranteed the payment of the value of the ship by the assessee to the foreign vendors of the ship. The assessee had also secured the loan borrowed from the Shipping Development Found Committee by mortgaging the vessel in its favour and on the computation date, there was an outstanding balance of Rs. 19,85,600. With reference to the first amount of Rs. 17,56,614 owed by the assessee to Deustche Bank, Hamburg, as on the computation date, the Tribunal took the view that that amount has to the deducted from the written down value of the ship, as an amount owed by the assessee on account of money borrowed in acquiring the ship. However, with reference to the other amount of Rs. 24,82,000 borrowed from the Shipping Development Fund Committee, out of which, on the computation date, the assessee owed Rs. 19,85,600, the Tribunal took the view that the amount borrowed was not utilised for the purchase of the ship and there was no nexus between the borrowing and the purchase of the ship, as the amount was taken to induce the foreign bank to give a guarantee and, therefore, that amount cannot be deducted from the written down value of the ship. In so holding, the Tribunal was plainly in error. Rule 19A(5) of the Income-tax Rules provides that the capital employed in a ship shall be taken to be the written down value of the ship as reduced by the aggregate of the amounts owed by the assessee as on the computation date on account of moneys borrowed or debts incurred in acquiring that ship. With reference to the amount of Rs. 24,82,000 borrowed by the assessee of which Rs. 19,85,600 was outstanding on the computation date, we find that the amount borrowed was a debt incurred in acquiring the ship. The amount had been borrowed by the assessee from the Shipping Development Fund Committee and the ship purchased had also been mortgaged in favour of the Shipping Development Fund Committee, by way of security. Unless it be that the money borrowed by the assessee from the Shipping Development Fund Committee had been employed in the acquisition of the ship, there was no need for the assessee to have created a mortgage of the ship in favour of the Shipping Development Fund Committee. The view taken by the Tribunal that the money borrowed must have some direct or immediate nexus with the purchase of the ship and that was absent in this case, is incorrect. The borrowing made by the assessee was invested in the Indian Overseas Bank, which, in turn, issued a guarantee to a foreign bank, which, in turn, guaranteed prompt payment of the value of the ship by the assessee to the vendors of the ship. Though the amount borrowed by the assessee from the Shipping Development Fund Committee had not been directly utilised in acquiring the ship, yet, it is clearly seen that but for the amount borrowed by the assessee from the Shipping Development Fund Committee, the assessee would not have been able to acquire the ship. The borrowing by the assessee in this case would undoubtedly be in the nature of a debt incurred in acquiring the ship, that is, a debt incurred by the assessee in the process of acquiring a ship, though the borrowing had not been applied directly for the purchase and acquisition of the ship. We are of the view that the amount of Rs. 24,82,000 taken by the assessee from the Shipping Development Fund Committee would fall within the scope of a debt incurred by the assessee in acquiring the ship, under the latter part of rule 19A(5) of the Income-tax Rules and the amount of Rs. 19,85,600 outstanding as on the computation date had necessarily to be deducted while applying rule 19A(5) of the Rules in working out the relief under section 80-J of the Act. We, therefore, answer the third and the fourth questions in the affirmative and in favour of the Revenue. There will be, however, no order as to costs.