+91 98307 56567 | info@TaxAssist.in

image

Capt. A.L. Fernandes vs ITO on 19 December, 2001 (Bombay High Court)


Posted on October 01 2020

Share:
1

For clarification, call us on +91 98307 56567 email us                                                             on NRI@TaxAssist.in
 


Capt. A.L. Fernandes vs Ito on 19 December, 2001
 
Equivalent citations: (2002) 75 TTJ Mumbai 714
 
ORDER M.K. Chaturvedi, J.M.
 
15th Dec., 1994 This appeal by the assessee is directed against the order of the Commissioner (Appeals)-XXII, Bombay (Mrs. Shobha Majumdar), and pertains to the assessment year 1983-84.
 
2. The solitary dispute neatly identified by Shri V.H. Patil, is crystallized here as under :
 
2. The solitary dispute neatly identified by Shri V.H. Patil, is crystallized here as under :
 
"Whether, on the facts and in the circumstances of the case, the amount of salary received by the assessee from Mogul Lines Ltd. for rendering services on the board of a ship, when the ship was floating outside the territorial water of India, can be considered as salary received for rendering services outside India?
 
How it is to be treated for the tax purposes?"
 
3. The assessee is an employee of the Mogul Lines Ltd., a Government of India undertaking. He was holding the rank of Master. He rendered services on the ship "Lok Nayak" from 1-5-1982 to 9-9-1982 and on "Lok Vinay" from 15-10-1982 to 31-3-1983. On these dates abovenamed ships were floating outside the territorial water of India. It is mentioned on the certificate dated 27-7-1983, issued by the Mogul Lines Ltd. that during this period, the assessee rendered services outside India. On 31-9-1983, the assessee filed its return of income in the status as "Resident". Subsequently, the return was revised and the status was taken as non-resident. The amount of salary as reflected in the original return was consequently reduced on the ground that the, assessee had rendered services outside India from 1-5-1982 to 9-9-1982, and from 15-10-1982 to 13-3-1982. The assessing officer held that the claim of the assessee was not tenable since the employer of the assessee M/s. The Mogul Lines Ltd. was a Central Government undertaking. The contract of the employment was entered in India. The services had been rendered by the assessee in accordance with the terms of employment. The final settlement of accounts regarding the payment had also been settled in India. The assessee was on board of an Indian vessel flying the Indian flag and, therefore, according to him, the payment deemed to be accrued and arising in India. On this factual backdrop the entire salary income was held exigible to tax in India. The order of the assessing officer was confirmed by the Commissioner (Appeals).
 
3. The assessee is an employee of the Mogul Lines Ltd., a Government of India undertaking. He was holding the rank of Master. He rendered services on the ship "Lok Nayak" from 1-5-1982 to 9-9-1982 and on "Lok Vinay" from 15-10-1982 to 31-3-1983. On these dates abovenamed ships were floating outside the territorial water of India. It is mentioned on the certificate dated 27-7-1983, issued by the Mogul Lines Ltd. that during this period, the assessee rendered services outside India. On 31-9-1983, the assessee filed its return of income in the status as "Resident". Subsequently, the return was revised and the status was taken as non-resident. The amount of salary as reflected in the original return was consequently reduced on the ground that the, assessee had rendered services outside India from 1-5-1982 to 9-9-1982, and from 15-10-1982 to 13-3-1982. The assessing officer held that the claim of the assessee was not tenable since the employer of the assessee M/s. The Mogul Lines Ltd. was a Central Government undertaking. The contract of the employment was entered in India. The services had been rendered by the assessee in accordance with the terms of employment. The final settlement of accounts regarding the payment had also been settled in India. The assessee was on board of an Indian vessel flying the Indian flag and, therefore, according to him, the payment deemed to be accrued and arising in India. On this factual backdrop the entire salary income was held exigible to tax in India. The order of the assessing officer was confirmed by the Commissioner (Appeals).
 
4. Shri V.H. Patil, the learned counsel for the assessee, appeared before us. It was vehemently argued that the theory, that the ship bearing the National flag of the State, is for the purpose of jurisdiction be treated as if it is the floating island of that state, has undergone many changes and now this fiction had been rejected by modern authorities and by court decisions. Our attention was invited on page 107 of the book by the title "Basic Concepts of International Law" by Charles S. Rhyne, CLB Publishers, 1971 Edition.
 
4. Shri V.H. Patil, the learned counsel for the assessee, appeared before us. It was vehemently argued that the theory, that the ship bearing the National flag of the State, is for the purpose of jurisdiction be treated as if it is the floating island of that state, has undergone many changes and now this fiction had been rejected by modern authorities and by court decisions. Our attention was invited on page 107 of the book by the title "Basic Concepts of International Law" by Charles S. Rhyne, CLB Publishers, 1971 Edition.
 
5. Keeping in view, the changes in International Law and considering the practical aspect of the matter, the Central Board of Direct Taxes has also adopted a pragmatic view. In Circular No. 526, dated 28-11-1990, it is clarified that the term "Indian" as defined in section 2(25A) of the Income Tax Act, 1961, does not extend to Indian ships operating beyond Indian territorial waters. Our attention was also invited on the CBDT Circular No. 356, dated 17-3-1983 (published at (1983) 37 CTR (St) 1) wherein similar view was taken.
 
5. Keeping in view, the changes in International Law and considering the practical aspect of the matter, the Central Board of Direct Taxes has also adopted a pragmatic view. In Circular No. 526, dated 28-11-1990, it is clarified that the term "Indian" as defined in section 2(25A) of the Income Tax Act, 1961, does not extend to Indian ships operating beyond Indian territorial waters. Our attention was also invited on the CBDT Circular No. 356, dated 17-3-1983 (published at (1983) 37 CTR (St) 1) wherein similar view was taken.
 
6. Shri Patil took us through some Tribunal decisions in order to demonstrate that on this aspect there was a cleavage of judicial opinion. In the case of Capt. A.L. Kapoor, I.T.A. No. 3241/Bom/84, dated 25-3-1988, the Tribunal dismissed the assessee's appeal, following the floating island theory. In the case of Shri Avtar Singh Wadhwan, ITA No. 5140/Bom/1982, dated 11-8-1986, the Tribunal decided the issue in favour of the assessee following the CBDT Circular No. 356, dated 17-3-1983 (1983) 142 ITR (St) 117-120).
 
6. Shri Patil took us through some Tribunal decisions in order to demonstrate that on this aspect there was a cleavage of judicial opinion. In the case of Capt. A.L. Kapoor, I.T.A. No. 3241/Bom/84, dated 25-3-1988, the Tribunal dismissed the assessee's appeal, following the floating island theory. In the case of Shri Avtar Singh Wadhwan, ITA No. 5140/Bom/1982, dated 11-8-1986, the Tribunal decided the issue in favour of the assessee following the CBDT Circular No. 356, dated 17-3-1983 (1983) 142 ITR (St) 117-120).
 
7. Coming to the applicability of the decision of the Gujarat High Court rendered in the case of CIT v. S. G. Pgnatale (1980) 124 ITR 391 (Guj), Sri Patil submitted that the effect of this decision has been nullified as a result of the insertion of Explanation to section 9(1)(ii) by the Finance Act, 1983, with retrospective effect from 1-4-1979.
 
7. Coming to the applicability of the decision of the Gujarat High Court rendered in the case of CIT v. S. G. Pgnatale (1980) 124 ITR 391 (Guj), Sri Patil submitted that the effect of this decision has been nullified as a result of the insertion of Explanation to section 9(1)(ii) by the Finance Act, 1983, with retrospective effect from 1-4-1979.
 
 
 
 
8. Shri Manohar Chudji, the learned Departmental Representative, appeared before us. It was contended that the ship bearing national flag of the state is for the purposes of jurisdiction treated as if it were territory of that state on the principle that it is virtually a floating island. This theory still holds good in the International Law. The learned Departmental Representative further submitted that in the famous "Law of the Flag" case of National Maritime Union and McCulloch v. Sociedad Nacional de Marineros de Honduras, 372 U.S. 937, 83 Sup. Ct. 877. 9 L.Ed. 2d 767 (1963), the Supreme Court of the United States, upheld the 4000 year old rule of International Law that the law of the flag governs in matters relating to seamen on board a ship. In this background, it was argued that the Tribunal took a correct view in the case of Capt. A.L. Kapoor (supra) and the issue in the present case may be decided accordingly.
 
8. Shri Manohar Chudji, the learned Departmental Representative, appeared before us. It was contended that the ship bearing national flag of the state is for the purposes of jurisdiction treated as if it were territory of that state on the principle that it is virtually a floating island. This theory still holds good in the International Law. The learned Departmental Representative further submitted that in the famous "Law of the Flag" case of National Maritime Union and McCulloch v. Sociedad Nacional de Marineros de Honduras, 372 U.S. 937, 83 Sup. Ct. 877. 9 L.Ed. 2d 767 (1963), the Supreme Court of the United States, upheld the 4000 year old rule of International Law that the law of the flag governs in matters relating to seamen on board a ship. In this background, it was argued that the Tribunal took a correct view in the case of Capt. A.L. Kapoor (supra) and the issue in the present case may be decided accordingly.
 
9. It was further submitted that the words occurring in section 9(1)(ii), "earned in India", ought to be interpreted as "arising or accruing in India". So long as the liability to pay the amount under the head "Salaries" arises in India, section 9(1)(ii) can be invoked. For this preposition, the learned Departmental Representative relied on the case of CIT v. S.G. Pgnatale (supra). It was stated that in the instant case the contract of employment was in India.
 
9. It was further submitted that the words occurring in section 9(1)(ii), "earned in India", ought to be interpreted as "arising or accruing in India". So long as the liability to pay the amount under the head "Salaries" arises in India, section 9(1)(ii) can be invoked. For this preposition, the learned Departmental Representative relied on the case of CIT v. S.G. Pgnatale (supra). It was stated that in the instant case the contract of employment was in India.
The final settlement of account was also made in India. Therefore, the ruling of the Gujarat High Court can be applied in the facts of the present case.
 
10. We have heard the rival submissions in the light of the materials placed before us and precedents relied upon. We have noted that the Tribunal in some of the cases followed the law of the flag theory and treated the ship as a floating island. Following quotation from "Introduction to International Law" by J. G. Starke (8th Edition) is relevant in the matter :
 
10. We have heard the rival submissions in the light of the materials placed before us and precedents relied upon. We have noted that the Tribunal in some of the cases followed the law of the flag theory and treated the ship as a floating island. Following quotation from "Introduction to International Law" by J. G. Starke (8th Edition) is relevant in the matter :
"For the purpose of territorial jurisdiction, besides actual territory, it has been customary to assimilate the following to state territory
(a) ........
(b) A ship bearing the national flag of the state wishing to exercise jurisdiction.
(c) ......
(at P. 264) "Floating Island-A ship bearing the national flag of a state is for purposes of jurisdiction treated as if it were territory of that state, on the principle that it is virtually a 'floating island'. (at p.266).
 
11. Mr. Charles S. Rhyne discussed the issue in his book at page 107. It was observed by the learned author that states have some jurisdiction over both public and private vessels within their own waters. For many years it was held by the fiction of extra territoriality, that a merchant ship was "part of the territory of the country whose flag it flies", but this fiction has been rejection by modern authorities and by court decisions. Claims to jurisdiction over foreign vessels, when within the waters of a given state, have varied. According to United States practice, private merchant ships are subject to the jurisdiction of the United States only when they disturb the 'public peace', acts involving the "internal order of the vessel", are under the jurisdiction of the State whose flag the ship flies. France, on the other hand, assumes jurisdiction only when a certain act adversely affects a person other than those belonging to the ship. A British law provides that all acts committed within a marine league are subject to British jurisdiction.
 
11. Mr. Charles S. Rhyne discussed the issue in his book at page 107. It was observed by the learned author that states have some jurisdiction over both public and private vessels within their own waters. For many years it was held by the fiction of extra territoriality, that a merchant ship was "part of the territory of the country whose flag it flies", but this fiction has been rejection by modern authorities and by court decisions. Claims to jurisdiction over foreign vessels, when within the waters of a given state, have varied. According to United States practice, private merchant ships are subject to the jurisdiction of the United States only when they disturb the 'public peace', acts involving the "internal order of the vessel", are under the jurisdiction of the State whose flag the ship flies. France, on the other hand, assumes jurisdiction only when a certain act adversely affects a person other than those belonging to the ship. A British law provides that all acts committed within a marine league are subject to British jurisdiction.
 
12. In the case of Regina v. Anderson (Cox's Criminal Cases 198), it was decided by the court of Criminal Appeal of Great Britain in 1868, that an individual may be subject to the State of which he is a citizen, the state in whose port the offence was committed, and the State which flies the flag of the vessel on which the act was committed.
 
12. In the case of Regina v. Anderson (Cox's Criminal Cases 198), it was decided by the court of Criminal Appeal of Great Britain in 1868, that an individual may be subject to the State of which he is a citizen, the state in whose port the offence was committed, and the State which flies the flag of the vessel on which the act was committed.
 
13. From the aforesaid discussion, it appears that the law has undergone change on this aspect. The floating island theory though remained alive even after the flux of 4000 years, but the undercurrent of the theory passed through many vicissitudes. Correct profile of law emerges only when things are decided in consonance with the principles of justice. Law is not a brooding omnipotence in the sky, but a pragmatic instrument of social order. It is an operational art controlling economic life, and interpretative effort must be imbued with the statutory purpose. The mariners of Indian origin who worked on the foreign ship got favoured tax treatment in view of the floating island theory. Those who worked on the ships belonging to their own country had difficulty in obtaining the tax concessions. Mariners working on foreign ships while in high seas were treated as rendering service in a foreign country, whereas the mariners rendering service on Indian ships while in high sea were treated as rendering service in India. This caused disparity in the tax treatment.
 
13. From the aforesaid discussion, it appears that the law has undergone change on this aspect. The floating island theory though remained alive even after the flux of 4000 years, but the undercurrent of the theory passed through many vicissitudes. Correct profile of law emerges only when things are decided in consonance with the principles of justice. Law is not a brooding omnipotence in the sky, but a pragmatic instrument of social order. It is an operational art controlling economic life, and interpretative effort must be imbued with the statutory purpose. The mariners of Indian origin who worked on the foreign ship got favoured tax treatment in view of the floating island theory. Those who worked on the ships belonging to their own country had difficulty in obtaining the tax concessions. Mariners working on foreign ships while in high seas were treated as rendering service in a foreign country, whereas the mariners rendering service on Indian ships while in high sea were treated as rendering service in India. This caused disparity in the tax treatment.
 
14. The Central Board of Direct Taxes made a clarification to remove such disparity. We reproduce the relevant Central Board of Direct Taxes circular :
 
14. The Central Board of Direct Taxes made a clarification to remove such disparity. We reproduce the relevant Central Board of Direct Taxes circular :
 
"Clarification regarding liability to income-tax in India and deduction of tax at source of members of the crew of foreign-going Indian ship.
 
1. A person resident in India in any year is liable to pay tax in India on his global income. A non-resident, on the other hand, is charged to tax in India only on income which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise to him in India. Thus, in the case of a non-resident, income which accrues or arise outside India and is also received outside India is not subjected to tax in India.
 
2. After the amendment made in section 6 of the Income Tax Act, 1961 by the Finance Act, 1990 with effect from 1-4-1990, an Indian citizen who is a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958, is regarded as a resident in India only if he is in India for 182 days or more during the relevant year irrespective of the extent of his stay in India in earlier years. For this purpose, it is necessary to note that the term "India" as defined in section 2(25A) of the Income Tax Act, 1961, does not extend to Indian ships operating beyond Indian territorial waters. However, if he is outside India and comes on a visit to India in any year, and leaves India otherwise than as a member of the crew of an Indian ship, he will be regarded as a resident in India if his stay in India during that year is for 150 days or more if during the 4 years preceding that year he has been in India for 365 days or more.
 
3. Thus, generally, Indian members of the crew of foreign-going Indian ship would be non-resident in India if they are on board such ship outside the territorial waters of India for 182 days or more during any year. Accordingly, such seamen will be charged to tax in India only in respect of earnings received in India or the earnings for the period when, they are working within the Indian waters on coastal ships, etc.
 
4. Under section 192 of the Income Tax Act, persons responsible for paying salary and other incomes chargeable under Income Tax Act under the head "Salaries" are required to deduct income-tax from such income at the time of payment. For this purpose, the amount of tax to be deducted is computed at the average rate of income-tax arrived at by applying the rates in force for the financial year in which the payment is made on the estimated income of the persons to whom salary is paid. Since, as explained above, in the case of members of crew of foreign-going Indian ships, who are not likely to be in India-for a period or periods exceeding 182 days in a year, income which accrues or arises outside India and is also received outside India is not liable to tax in India, the shipping companies and other persons responsible for paying salary to such members of crew may take these factors into account while computing the amount to be deducted as tax and deduct only so much of tax as would be chargeable on the estimated income liable to tax in India. If the shipping company or other person responsible for paying to such members of crew subsequently finds that any person who was earlier considered as not likely to be resident in India and deduction of tax at source was made on that basis is not likely to be resident in India, the shipping company or the other person responsible for making the payment, may increase the deduction so as to adjust Ally deficiency arising out of an earlier short-deduction or non-deduction during the same financial year."
 
15. In view of the above, the Indian members of the crew of foreign-going Indian ship would be non-resident in India if they rendered services on the board of such ship outside the territorial waters of India for 182 days or more during that year. The circular of Central Board of Direct Taxes, therefore, mitigated the hardship and removed the disparity.
 
15. In view of the above, the Indian members of the crew of foreign-going Indian ship would be non-resident in India if they rendered services on the board of such ship outside the territorial waters of India for 182 days or more during that year. The circular of Central Board of Direct Taxes, therefore, mitigated the hardship and removed the disparity.
 
16. Coming now to the applicability of section 9(1)(ii), we find that the controversy is now set at rest by the insertion of Explanation. The relevant portion of the section is reproduced here as under :
 
16. Coming now to the applicability of section 9(1)(ii), we find that the controversy is now set at rest by the insertion of Explanation. The relevant portion of the section is reproduced here as under :
 
"9. Income deemed to accrue or arise in India(1) The following income shall be deemed to accrue or arise in India :
 
"9. Income deemed to accrue or arise in India(1) The following income shall be deemed to accrue or arise in India :
(i) ......................
(ii) income which falls under the head "Salaries", if it is earned in India.
Explanation : For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for service rendered in India shall be regarded as income earned in India."
Explanation : For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for service rendered in India shall be regarded as income earned in India."
This Explanation was inserted by the Finance Act, 1983 (11 of 1983) with retrospective effect from 1-4-1979.
This Explanation deals with the declaratory law. Therefore, it falls within the ken of Totidam Verbis (retroactive legislation). It declares that income chargeable under the head 'Salaries' payable for services rendered in India shall only be regarded as income earned in India. If the services are rendered outside India, the Explanation stipulates that the same shall not be considered as income earned in India. Therefore, the effect of the decision in S.G. Pgnatale (supra) has been nullified as a result of the insertion of this Explanation.
 
17. Reading the law as clarified in Explanation to section 9(1)(ii) in unison with the circular issued by Central Board of Direct Taxes, it is clear that the amount of salary in question which was received by the assessee for rendering services on the board of ship, while the ship was floating outside the territorial water of India, is not taxable in the facts of the present case.
 
17. Reading the law as clarified in Explanation to section 9(1)(ii) in unison with the circular issued by Central Board of Direct Taxes, it is clear that the amount of salary in question which was received by the assessee for rendering services on the board of ship, while the ship was floating outside the territorial water of India, is not taxable in the facts of the present case.
 
18. In the result, appeal of the assessee stands allowed.
 
18. In the result, appeal of the assessee stands allowed.
G.E. Veerabhadrappa, A.M.
 
TA
>
 +91 98307 56567 |  info@TaxAssist.in