S.H Kapadia, J.:— For the assessment years 1977–78 and 1978–79, the following questions have been referred to this court under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee and at the instance of the Department:

Questions referred at the instance of the assessee:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amounts paid by the assessee to Mannesmann-Export AG, Dusseldorf, West Germany (non-resident), for the period from October 1, 1976, to March 23, 1977, did not get merged in the purchase price on the exercise by the assessee of the option to purchase?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee, was an agent of Mannesmann-Export AG, Dusseldorf, West Germany (non-resident) under section 163 of the Income-tax Act, 1961?”

Questions referred at the instance of the Department:

3. Whether, the Tribunal was right in holding that the provisions of section 163 and section 195 are mutually exclusive?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not liable to deduct under section 195, tax in respect of the lease money paid by the assessee to the non-resident?

5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income, if any, of the non-resident, on account of sale of the machinery and equipments to the assessee cannot be taxed in view of the agreement for avoidance of double taxation between India and the Federal German Republic and circular dated July 23, 1969, issued by the Central Board of Direct Taxes?”

Facts:

2. The assessee, Dodsal Pvt. Ltd., Bombay, entered into a lease agreement on August 16, 1976, with a West-German company (hereinafter referred to as the “non-resident”). The lease was to commence with effect from October 1, 1976. On the same day, i.e, August 16, 1976, the non-resident also entered into a sale agreement with the assessee. Both the agreements were executed in Singapore. Under the lease, a minimum guarantee period of 18 months was fixed. In the lease, it was stipulated that the lease will terminate when the equipment was returned by the assessee to the non-resident in Singapore. According to the agreement, the assessee was required to pay, in advance, US Rs. 10.80 lakhs within one month of the signing of the agreement and thereafter to pay monthly lease charges of US Rs. 1.80 lakhs.

3. The payment schedule is quoted at page 24 of the paper book. As stated above, on August 16, 1976, the parties concluded one more agreement, which was a sale/option agreement under which the assessee could exercise the option to purchase the machinery and equipment on or before March 31, 1977. Under that agreement it was stipulated that in the event of the assessee exercising the option to buy the equipment, the price payable by the assessee to the non-resident will be US Rs. 36 lakhs, less 90 per cent, of the accrued lease charges. The assessee bought the entire machinery and equipment vide invoices dated September 23, 1976, to April 12, 1977. The first instalment of remittance of US Rs. 9.92 lakhs was sent by the assessee to the non-resident with the approval of the Reserve Bank of India dated September 18, 1976. The second permission for remittance of US Rs. 4.48 lakhs was given by the Reserve Bank of India on June 6, 1977, with the condition that future remittance shall be subject to deduction of income-tax. However, before remittance of the second amount of US Rs. 4.48 lakhs on June 6, 1977, the assessee gave notice of intention to buy the machinery and equipment from the non-resident under the option agreement. Accordingly, the option came to be exercised by the assessee on March 23, 1977, i.e, prior to the remittance of the amount of US Rs. 4.48 lakhs. On March 17, 1977, the assessee moved the Chief Controller of Imports and Exports for waiver of the condition of re-export on payment of full import duty. The condition of re-export was waived by the Chief Controller of Imports and Exports vide order dated December 15, 1977. By letter dated November 24, 1977, the non-resident ultimately agreed to take the option price at US Rs. 32.38 lakhs by way of sale price instead of US Rs. 36 lakhs. On November 30, 1977, the assessee requested for NOC for remittance to the non-resident, of an amount of US Rs. 17.98 lakhs, without deduction of tax (US Rs. 32.38 lakhs being the sale/option price minus remittance already made of US Rs. 14.40). This application for remittance of US Rs. 17.98 lakhs was rejected on the ground that the lease charges payable by the assessee to the non-resident on account of the lease of machinery and equipment on and from September 15, 1976, up to March 28, 1977, when the option was exercised, constituted income, which accrued to the non-resident in India and, therefore, the non-resident was taxable in India in respect of that income. Ultimately, on April 3, 1978, the Income-tax Officer passed an order under section 195(2) in which it has been held that the income had accrued to the non-resident in India up to March 28, 1977, when the option was exercised by the assessee and, therefore, up to that date, the income arising from lease rent was taxable. That the agreement for avoidance of double taxation between India and West-Germany did not save the rental income from taxation. Accordingly, the assessee was directed to deduct the tax at the appropriate rate from 12.5 per cent, on each remittance including on the amount of US Rs. 14.40 lakhs. The Income-tax Officer, however, made it clear that the order was a provisional order and it was subject to modification at any time. The Income-tax Officer further stated that the order was being passed without prejudice to the assessment being made directly on the assessee as the agent of the non-resident.

4. For the assessment year 1977–78, the Income-tax Officer passed one more set of orders on February 29, 1980, under section 163 of the Act. After reiterating the above facts, the Income-tax Officer has held that the non-resident had received the hire charges up to the date of exercise of the option and, therefore, the assessee's case also came under section 163(1)(c) and, accord-ingly, the assessee was treated as an agent of the non-resident under the said section. Consequently, the Department applied both, section 195(2) and also section 163(1)(c) of the Act simultaneously.

5. Being aggrieved by the order of the Income-tax Officer under section 195(2), the assessee preferred appeals before the Commissioner Income-tax (Appeals). The appellate authority came to the conclusion that the two agreements dated August 16, 1976, should be read together. The appellate authority came to the conclusion that the assessee was not liable for deduction of tax at source from US Rs. 32.38 lakhs as the said amount represented the price of the equipment purchased by the assessee from the non-resident as per the sale contract dated August 16, 1976, which was saved from taxation under the Double Tax Avoidance Agreement between India and West Germany.

6. Being aggrieved by the order of the Income-tax Officer under section 163(1)(c), the assessee had also preferred appeals to the Commissioner Income-tax (Appeals). Those appeals were also decided by the Commissioner of Income-tax (Appeals) in favour of the assessee for the assessment year 1977–78, and for the assessment year 1978–79. In this connection, the appellate authority found that in the regular substantive assessment proceedings, the Department had allowed the assessee to capitalise the entire cost at US Rs. 32.38 lakhs and had allowed depreciation/investment allowance claimed by the assessee at appropriate rates under the Act. The Department had allowed the deduction in the relevant assessment years accordingly. In the light of the above facts, the appellate authority concluded that acquisition of the equipment by the assessee from the non-resident was on a principal-to-principal basis. That, no rental income had accrued to the non-resident. Therefore, section 163(1)(c) had no application.

7. Being aggrieved by the decision of the Commissioner of Income-tax (Appeals), the Department carried the matter in appeal to the Tribunal. By the impugned order, the Tribunal took the view, on the above facts, that the rental income had accrued to the non-resident from the date of the commencement of the lease up to the date of exercise of the option on March 28, 1977. Accordingly, the Tribunal took the view that the lease charges payable for the period September 15, 1976, up to March 28, 1977, constituted income, which accrued to the non-resident in India and the non-resident was accordingly liable to tax. However, the Tribunal concluded that section 195(2) had no application, but the assessee was held to be an agent of the non-resident in India and, accordingly, as an agent, it was liable to pay the tax under section 163(1)(c) of the Act. Being aggrieved, the assessee and the Department have come by way of reference to this court under section 256(1) of the Act.

Findings:

8. In our view, the questions raised before us by way of reference have become academic. It is well settled that the orders passed under section 195(2) of the Income-tax Act are provisional and tentative. These orders do not bind the Income-tax Officer in regular assessment proceedings. In the present case, the orders passed by the Income-tax Officer under section 195(2) state that the orders are provisional in nature and that they are subject to modifications in the regular assessment proceedings. In the present case, as stated above, in the regular assessment proceedings, the assessee has been given deduction on account of depreciation/investment allowance by the Department calculated on the cost of US Rs. 32,38,125.54. Therefore, in the regular assessment proceedings, the Department has conceded that the aforestated amount of US Rs. 32,38,125.54 in entirety constituted sale price. Therefore, in the present case, the order passed by the Tribunal on section 195(2) has become academic because the Tribunal has held that the income accrued to the non-resident by way of lease rent for the period October 1, 1976, up to March 23, 1977, whereas, in the regular assessment proceedings, the entire amount has been treated as sale price. We have to go by the order in the regular assessment proceedings and not by the tentative orders under section 195(2). Therefore, the questions referred to us have become academic. Further, section 163(1)(c) of the Income-tax Act will not apply in this case as in the regular assessment proceedings, for the assessment year 1977–78, the Department has allowed the assessee to capitalise the entire amount of US Rs. 32,38,125.54 as cost of equipment received during the accounting year corresponding to the assessment year in question to the plant and machinery account and further the Department has allowed depreciation on that basis for Rs. 1.04 crores. Therefore, in the present case, the subsequent event, namely, the regular assessment proceedings have made the questions quoted above academic. To sum up, according to the Tribunal, a portion of US Rs. 32,38,125.54 was income. That portion was rent received by the non-resident during the period October 1, 1976, to March 23, 1977, and that the balance amount constituted the sale price particularly after the option came to be exercised on March 23, 1977. On the other hand, in the regular assessment proceedings, the Department has allowed the assessee to capitalise the entire cost of US Rs. 32,38,125.54 during the assessment years 1977–78 and 1978–79. The Department also granted deduction on that basis for depreciation/investment allowance calculated on the entire cost of US Rs. 32,38,125.54. In the circumstances, we return the reference unanswered as the questions have become academic.

Order:

9. For the reasons stated above, the reference is returned unanswered. No order as to costs.