Judgment:
1. This application for stay-relates to the assessment year 1980-81 and arises out of the demand raised consequent to an order passed under the provisions of Section 154 dated 24-3-1987. We would narrate the factual sequence of events which culminated in the passing of the order Under Section 154 referred to above.
2. The assessee, a non-resident company, had filed on the 5th January, 1982, a return showing a loss of Rs. 31,12,590. This was arrived at as under :Revenue from Indian Stations 92,89,200Revenue Systemwide 15,15,55,533Net loss as per profit & loss account for the7 months ended 31-03-1980 (systemwide).
5,07,82,690Net loss attributed to Indian Stations on Subsequently, the company filed a letter dated 18th March, 1983 referring to the figure of loss of Rs. 41,25,537 of which the particulars are as under :Revenue from India 92,89,200 ------------Systemwide revenue 15,15,55,533 ------------Indian Stations fixed expenses 5,52,406Allocated expenses on the basis of IndianLess revenue from India 92,89,200 ___________ They also stated that the return filed originally needed revision in view of the bilateral agreement between the Governments of Sri Lanka and India exempting the whole of the income arising in India. They referred to a Gazette Notification of the Government of Sri Lanka dated 17-9-1982 in this regard and stated that Air Lanka Ltd., i.e., the assessee, was incorporated in Ceylon and its effective management originated from Ceylon only and, therefore, the entire income was taxable only in Ceylon. In view of the new Convention coming into force, it was stated the earlier Agreement on Double Taxation Avoidance stood terminated by virtue of Article 29(1)(b) of the new Convention.
The assessee company has filed a return on 5-1-1982 admitting loss of Rs. 31,12,590. Subsequently, during the course of hearing, the assessee's representative by Ms letter filed on 19-3-1983 stated that the return filed on 5-1-1982 may be taken as a NIL return.
Air Lanka was incorporated as a public limited company on 11-1-1979 according to the laws of Sri Lanka with the object of carrying on business as a local and international airline or transport undertaking and to operate air transport services for passengers and cargo and to undertake any allied and ancillary services to the public of Sri Lanka or any part of the world. The assessee's representative claims that according to the agreement for Double Taxation Avoidance entered into between Sri Lanka and India, the income arising to Air Lanka Ltd. from the operations of aircraft is chargeable only in the country where the effective management is situated. Since the effective management in this case is Sri Lanka, the income is exempt. The assessee's representative has shown the copy of the Sri Lanka Gazette dated 17-8-1982 wherein the agreement as passed by the Sri Lanka Parliament is printed. It is not known when the Indian Parliament has ratified this agreement. In the circumstances, the assessment is completed applying the provisions of Section 44-C of the Income Tax Act, as indicated below : Rs. Note : The collection of this sum of Rs. 66,40,617 is held in abeyance pending consideration of the Double Income-tax Avoidance Agreement between India & Sri Lanka which is yet to be ratified by the Indian Parliament. Penalty proceedings Under Section 271(1)(a) are not initiated in view of the above.
The demand raised of Rs. 66,40,617 by this order was accordingly kept in abeyance. Subsequently, another order was passed, also under the provisions of Section 154, on September 28, 1983, which reads as under : The assessment for the year 1980-81 was completed Under Section 143(3) on 30-3-1983 on a total income of Rs. 88,24,740 raising a demand of Rs. 66,40,617. As the company is a non-resident incorporated at Sri Lanka having all its effective management at Sri Lanka, the whole of the income arising in India is exempt from tax in accordance with the convention between the two countries which came into force on 24-3-1983, communication in F. No. 501/1/77-ITD dated 19-4-1983 of the Central Board of Direct Taxes. Hence, the original assessment requires revision as follows : Thus, the demand of Rs. 66,40,617, which was held in abeyance, stood reduced to 'Nil' by this order determining the taxable income at 'Nil'.
Sometime later, the ITO noticed that in terms of Article 29(2) of the Convention between the Government of India and the Government of Sri Lanka for Avoidance of Double Taxation which was notified on 19-4-1983, the provisions of Article 29 on the basis of which the total income originally computed was reduced to nil and demand also was consequently reduced to nil, came into effect only from 1-4-1981, i.e., the assessment year 1981-82 and not the assessment year 1980-81. He, therefore, issued a notice Under Section 154. The assessee sought for time, but after granting a couple of adjournments, a fresh order was passed on 24-3-1987. According to this order, the ITO considered "the total income is to be assessed at 100%" as the agreement applied from 1981-82 onwards only. The total tax payable was computed as under :-dt. 30-3-1983 92,89,200Expenses Under Section 44-C 4,64,460 _________Income-tax thereon at 70 % 61,77,318Surcharge at 7 1/2% 4,63,299 _________Total demand due : 66,40,617 _________Total demand due : 66,40,617Add : Interest Under Section 139(8) from 11,28,9021-8-80 to 5-1-82Interest Under Section 217(1A) from 23,24,2101-4-80 to 30-3-83Total tax payable : 1,00,93,729 ___________ 4. The assessee appealed and challenged the rectification order Under Section 154. The appeal was dismissed. Recovery proceedings were initiated and the assessee sought for the recovery being stayed from the various authorities which had been declined. But, as seen from the various orders, recovery is being pressed only of the amount of tax of Rs. 66,40,617 and recovery is not being pressed for the balance which represents interest.
5. Before us, the assessee has pleaded for stay on the ground that they have fair chance of success in appeal and there are not free liquid resources and that they are prepared to offer security for the grant of stay. The learned counsel for the assessee also placed before us a photo copy of the Gazette Extraordinary issued by the Government of Sri Lanka dated 17-9-1982 wherein Article 29(2) reads as under :- (2). The Convention shall enter into force upon the exchange of instruments of ratification and its provisions shall have effect : (i) in respect of income assessable for any year of assessment commencing on or after 1 April, 1980 ; (ii) in respect of capital assessable for any year of assessment commencing on or after 1 April, 1980.
(i) in respect of income assessable for any year of assessment commencing on or after 1 April, 1981 ; (ii) in respect of capital assessable for any year of assessment commencing on or after 1 April, 1981.
He submitted that in the first portion at least, there was a mention that the Article came into force in respect of assessments commencing from 1-4-1980 and, therefore, it applied to the assessment year 1980-81 and the order Under Section 154 cancelling the demand was, therefore, correct.
6. The learned Departmental Representative, on the other hand, stated that as far as the Gazette Notification published in India was concerned, Article 29(2) read as under :- 29.(2) The Convention shall enter into force upon the exchange of instruments of ratification and its provisions shall have effect : (i) In respect of income assessable for any year of assessment commencing on or after 1 April, 1980 ; (ii) In respect of capital assessable for any year of assessment commencing on or after 1 April, 1980.
(i) in respect of income assessable for any year of assessment commencing on or after 1 April, 1981 ; (ii) in respect of capital assessable for any year of assessment commencing on or after 1 April, 1980.
He submitted that Article 29(2)(b)(i) clearly snowed that the Convention applied in respect of income (other than capital) assessable only in respect of the assessment commencing on or after 1 April, 1981, i.e., assessment year 1981-82 in India. Since this was very clear, he stated that no stay should be granted. He relied on the decision of the Supreme Court in Assistant Collector of Central Excise v. Dunlop India Ltd. [1985] 154 ITR 172 and submitted that the assessee was in a position to pay and merely because the assessee may have an arguable case, that would not be a ground for granting any stay. He particularly emphasised that offering of bank guarantee was not a substitute.
7. We have considered the rival submissions. The official version of the Convention as published in India by the Directorate of Inspection (Income-tax) is as relied upon by the learned Departmental Representative and to which we have referred. We would only mention that at the first hearing when we had looked into A.K. Aiyar's Indian Tax Laws Rules (1984), at page 1088 against the entry 2(b)(i) after 1st April, 1981, there was a question mark. This entry read as under :- (i) in respect of income assessable for any year of assessment commencing on or after 1st April, 1981 (?).
This led us to ask for the official version. There is a difference in the version as printed in the Sri Lankan Gazette of 17-9-1982 and the official version here. But, going by the official version relied on by the learned Departmental Representative, the Convention would come into effect only from the 1st April, 1981 and, therefore, for the assessment year 1981-82. This is only a stage of consideration of a stay petition and we therefore, do not consider it necessary to look into the difference between the two versions any further.
8. However, the provisions of Article 29(3), according to the official version in India states as under :- 29(3). The Agreement between the Government of Ceylon and the Government of India for relief from or the avoidance of double taxation of income, signed on 10 September, 1956 shall terminate and cease to have effect as respect taxes on income to which the present Convention applies in accordance with the provisions of paragraph (2) of this Article.
Hence, if according to the Revenue the new Convention came into effect only from 1st April, 1981, i.e., from the assessment year 1981-82, then the Double Taxation Agreement between India and Ceylon which was in force from 1957 would prima facie have remained applicable for asstt.
year 1980-81. Article III of the Schedule, in item 5(g) of such agreement reads as under :-(g) Transport by 100 per cent by the country Nil by sea or air in which the traffic the originates other The percentage referred to is 100 per cent "of income which each country is entitled to charge under the Agreement.
9. In the present case, the question of computation in terms of Double Taxation Avoidance Agreement between the two countries is involved. In Circular No. 333 (F. No. 506/42/81-ITD) dated 2-4-1982, issued by the Central Board of Direct Taxes, it has been stated as under :- It has come to the notice of the Board that sometimes effect to the provisions of double taxation avoidance agreement is not given by the assessing officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income-tax Act, 1961.
2. The correct legal position is that where a specific provision is made in the double taxation agreement, that provision will prevail over the general provisions contained in the Income-tax Act. In fact the double taxation avoidance agreements which have been entered into by the Central Government Under Section 90 of the Income-tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the agreement.
3. Thus, where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act.
Where there is no specific provision in the agreement, it is the basic law, i.e., the Income-tax Act, that will govern the taxation of income.
The Supreme Court in the case of O.A.P. Andiappan v. CIT [1971] 82 ITR 876 has stated as under :- In considering what taxes are attributable to the tax laws of a particular country, one has to take into consideration all the provisions of the statutes levying tax. In other words, for determining the tax due from an assessee, we have not merely to look to the charging section but also to the provisions providing exemptions and allowances.
We have set out the computation of income as made by the ITO Under Section 154 in his order dt. 24-3-1987. The only deduction allowed from gross earnings in India is Under Section 44-C of the IT Act, 1961. It cannot be said ex facie from the order that it has been examined whether any of the provisions providing exemptions and allowances under the Act are admissible. The High Court of Kerala had occasion in the case of N. Rajan Nair v. ITO [1987] 165 ITR 650 to consider the factors which must weigh with the ITO in dealing with a request for extension of time. The Court observed as under : The power under Clause (6) of Section 220 is indeed a discretionary power. However, it is one coupled with a duty to be exercised judiciously and reasonably (as every power should be), based on relevant grounds. It should not be exercised arbitrarily or capriciously or based on matters extraneous or irrelevant. The Income-tax Officer should apply his mind to the facts and circumstances of the case relevant to the exercise of the discretion, in all its aspects. He has also to remember that he is not the final arbiter of the disputes involved but anly the first amongst the statutory authorities. Questions of fact and of law are open for decision before the two appellate authorities, both of whom possess plenary powers. In exercising his power, the Income-tax Officer should not act as a mere tax-gatherer but as a quasi-judicial authority vested with the power of mitigating hardship to the assessee. The Income-tax Officer should divorce himself from his position as the authority who made the assessment and consider the matter in all its facets, from the point of view of the assessee without at the same time sacrificing the interests of the Revenue. Says Viswanatha Sastri J. in Vetcha Sreeramamurthy v. ITO [1956] 30 ITR 252 (AP) (at pages 268 and 269) : The Legislature has, however, chosen to entrust the discretion to them. Being to some extent in the position of Judges in their own cause and invested with a wide discretion Under Section 45 of the Act, the responsibility for taking an impartial and objective view is all the greater. If the circumstances exist under which it was contemplated that the power of granting a stay should be exercised, the Income-tax Officer cannot decline to exercise that power on the ground that it was left to his discretion. In such a case, the Legislature is presumed to have intended not to grant an absolute, uncontrolled or arbitrary discretion to the officer but to impose upon him the duty of considering the facts and circumstances of the particular case and then coming to an honest judgment as to whether the case calls for the exercise of that power.
Being a matter of discretion, it is not possible to strait-jacket or lay down the principles on which the discretion is to be exercised. The question as to what are the matters relevant and what should go into the making of the decision by the Income-tax Officer in such circumstances has been explained by D.N. Sinha, J. (in the context of the corresponding provisions of the Wealth-tax act) in Aluminium Corporation of India Ltd. v. C. Balakrishnan [1959] 37 ITR 267 (Cal.).
The learned Judge states (at pages 269 and 270) : A judicial exercise of discretion involves a consideration of the facts and circumstances of the case in all its aspects. The difficulties involved in the issues raised in the case and the prospects of the appeal being successful is one such aspect. The position and economic circumstances of the assessee is another. If the officer feels that the stay would put the realisation of the amount in jeopardy, that would be a cogent factor to be taken into consideration. The amount involved is also a relevant factor. If it is a heavy amount, it should be presumed that immediate payment, pending an appeal in which there may be a reasonable chance of success, would constitute a hardship. The Wealth-tax Act has just come into operation. If any point is involved which requires an authoritative decision, that is to say, a precedent, that is a point in favour of granting a stay. Quick realisation of tax may be an administrative expediency, but by itself it constitutes no ground for refusing a stay. While determining such an application, the authority exercising discretion should not act in the role of a mere tax-gatherer.
An order similar to the one challenged in this case came up for consideration before this court in Yusuf Jan Sahib v. Addl. ITO [1961] 42 ITR 637 (Ker.), Velu Pillai, J. held that the Income-tax Officer had not exercised any discretion and quashed the order in question and directed the officer to dispose of the application in accordance with law.
I may also point out the instructions issued by the Central Board of Direct Taxes in their F. No. 1/6/69-IT OC dated August 21 1969 (reproduced at page 4,190 of volume 4 of Iyengar on Income Tax, Seventh edition) (See Direct Taxes Circulars by J.P. Bhatnagar, Vol. 1, p.
1,308) which runs as follows :- 1020. MINUTES OF THE 8TH MEETING OF THE INFORMAL CONSULTATIVE COMMITTEE HELD ON 13TH MAY, 1969 -IMPLEMENTATION OF ASSURANCE GIVEN REGARDING STAY OF RECOVERY IN CERTAIN CASES-ITEM l(vi) One of the points that came up for consideration in the 8th meeting of the Informal Consultative Committee was that income-tax assessments were arbitrarily pitched at high figures and that the collection of disputed demands as a result thereof was also not stayed in spite of the specific provision in the matter in Section 220(6) of the Income-tax Act, 1961.
Where the income determined on assessment was substantially higher than the returned income, say, twice the latter amount or more, the collection of the tax in dispute should be held in abeyance till the decision on the appeals provided there were no lapses on the part of the assessee.
3. The Board desire that the above observations may be brought to the notice of all the Income-tax Officers working under you and the powers of the stay of recovery in such cases up to the stage of first appeal may be exercised by the Inspecting Assistant Commissioner/Commissioner of Income-tax.
The instructions indicate the departmental thinking on the subject which is also relevant in the context of exercising the discretion Under Section 220(6).* * ** * * Questions of fact and of law are all open to the assessee before the first appellate authority and before the Tribunal. There is also a remedy of reference to this court. In these circumstances, it is not open to the Income-tax Officer to place himself merely in the position of an assessing authority and then to adjudicate whether collection of the tax should be stayed or not, pending the appeal.
He is bound to apply his mind to relevant factors and circumstances like the assessment history of the assessee, his conduct and co-operation in relation to the Department, points raised in the appeal, chances of recovery in case the appeal is dismissed, the hardship to the assessee by insistence on immediate payment and the like. He is not entitled to project his mind as an Income-tax Officer or as to what he did in the assessment, in exercising his discretion Under Section 220(6).
The officer is bound to act in a reasonable manner, in a manner intended to subserve the purpose of section, namely, to alleviate the distress that may be caused to the assessee by insistence on immediate payment of the tax, keeping in mind the fact that the entire assessment is open for adjudication before higher forums of fact and law. It is true that Governments cannot run on bank guarantees or assurances, but that does not absolve the Income-tax Officer from exercising his discretion fairly, impartially and judiciously.
We have now the judgment of the Supreme Court in the case of CIT v.Bansi Dhar & Sons [1986] 157 ITR 665 where the Court has held that even if a reference is pending before the Hon'ble High Court, the question of grant of stay would remain within the jurisdiction of the Tribunal and the pendency of a reference does not detract from the jurisdiction of stay vested in the Tribunal. The Supreme Court observed in particular at page 681 as under :- In an appropriate case, if the assessee feels that a stay of recovery pending disposal of the reference is necessary or is in the interests of justice, then the assessee is entitled to apply before the appellate authority to grant; stay until disposal of reference by the High Court or until such time as the appellate authority thought fit. But in the case the appellate authority acted without jurisdiction, then the decision of such appellate authority can be corrected by the High Courts by issuing appropriate writs under Articles 226 and 227 of the Constitution, It is, therefore, clear that even if the decision of the Tribunal has gone against the assessee, it is still open to the assessee to seek for stay and it is the duty of the Tribunal to consider such request for stay in the light of the well-enunciated judicial principles notwithstanding that the decision of the Tribunal was adverse to the assessee and in appropriate cases to grant stay on terms or otherwise.
Therefore, it becomes incumbent on us in the present case though the appeal had been decided by the first appellate authority against the assessee, to apply the well-enunciated principles to decide whether in the judicial exercise of discretion, stay should be granted or not.
What these factors should be have been set out in the various judgments to which we have referred. In particular, we have set out the judgment of the Kerala High Court in extenso though it deals with the grant of stay by the assessing officer because that judgment refers to the judicial principles relating to stay which have been laid down from time to time over the years. We have kept the relevant principles in mind in examining the facts having due regard to the fact that the first appellate decision is over in the present case. Apart from the differences in the printed versions of the Convention entered into between the Governments of India and Sri Lanka, already adverted to, even if the earlier Double Taxation Avoidance Agreement was alone to apply, it cannot ex facie be said that it is prima facie clear that in making the computation as has been done at present of the total income assessable in India, the requirements of such agreement and the statute have been taken full note of and all appropriate exemptions and deductions given from the gross receipts was taken.
10. In these circumstances, we consider that this is a fit and proper case, giving due weight to public interest, to grant stay on terms. The stay will be granted subject to (a) the assessee furnishing a bank guarantee to the satisfaction of the ITO for securing the payment of the amount in respect of which recovery is demanded of Rs. 66,40,617, (b) that no repatriation of funds is made out of India and (c) the assessee pays Rs. 10 lakhs by the 14th of every month starting from the month of July 1987.
11. The appeal will be posted for hearing in the 3rd week of Angust, 1987. In the meanwhile, notice of appeal filed will immediately issue to the respondent so that Cross Objection, if any, can be filed.