Commissioner Of Income-Tax v. Poompuhar Shipping Corporation Ltd.

P.P.S Janarthana Raja, J.:— The present appeals are filed under section 260A of the Income-tax Act, 1961 by the Revenue, against the order dated July 29, 2004, in I.T.A Nos. 2075 and 2076 (Mds)/96 passed by the Income-tax Appellate Tribunal, Madras “C” Bench, raising the following substantial question of law:

“Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the contract entered into by the assessee was a mere contract of hire of ships and would therefore not fall within the purview of section 194C of the Act?”

2. The facts leading to the above question of law are as under:

The respondent-assessee is a Tamil Nadu Government Undertaking. The relevant assessment year is 1994-95 and the corresponding accounting year ended on March 31, 1994. The assessee was engaged in the business of transportation of coal from the ports of Haldia, Visakhapatnam and Paradeep to Chennai and Tuticorin under contracts executed with the Tamil Nadu Electricity Board. The assessee owned three ships. Since three ships were not sufficient to carry out the contracts entered into by the assessee with the Tamil Nadu Electricity Board, they hired ships pertaining to other shipping companies. The assessee had paid hire charges to the other shipping companies for using their ships. The assessee, however, did not deduct tax under section 194C of the Income-tax Act before making payment of hire charges to the shipping companies. Therefore, the Assessing Officer treated the assessee as in default and directed the assessee to pay the tax under section 201(1) of the Income-tax Act and also levied interest under section 201(1A) of the Income-tax Act. Aggrieved by the said order, the assessee filed an appeal to the Commissioner of Income-tax (Appeals) and submitted that the agreement in question was for mere hire of ships and that payment of hire charges were not subject to TDS obligation under section 194C. Agreeing with the contention of the assessee, the Commissioner of Income-tax (Appeals) allowed the appeal filed by the assessee. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue took up the matter on appeal before the Appellate Tribunal. The Appellate Tribunal dismissed the Revenue's appeal by confirming the order of the Commissioner of Income-tax (Appeals) that the contract in question being a contract for hire of ships would not fall within the purview of section 194C of the Act. Learned counsel appearing for the Revenue submitted that, admittedly, the assessee hired the ships belonging to other shipping companies for the purpose of transport of coal from one port to another, and therefore, Circular No. 681 dated March 8, 1994 (see [1994] 206 ITR (St.) 299), of the Central Board of Direct Taxes is squarely applicable to the facts of the present case. She further submitted that section 194C was amended with effect from July 1, 1995, incorporating the Explanation. This Explanation clarifies the existing provisions of section 194C of the Income-tax Act, and therefore it would be applicable retrospectively. Further it is also submitted that the carriage of goods and passengers was included within the expression “work”. Therefore, the carriage of coal from one port to another has to be treated as contract for carriage of goods. Hence, the provision of section 194C would be applicable.

3. We heard the arguments of learned counsel. Under section 194C, the tax is to be deducted when a contract was entered into for carrying out any work in pursuance of a contract between the contractor and the entities mentioned in sub-section (1) of section 194C.

4. In the present case, there was no contract between the assessee and the shipping companies to carry out any work. On the other hand, the assessee-company hired the ships belonging to other shipping companies for a fixed period on payment of hire charges. The hired ships were utilised by the assessee in the business of carrying the goods from one place to another in pursuance of an agreement entered into between the assessee and the Tamil Nadu Electricity Board. There was no agreement for carrying out any work or transport any goods from one place to another between the assessee and the other shipping companies. The assessee-company simply hired the ships on payment of hire charges and it was utilised in the business of the assessee at their own discretion. It is not the case of the Revenue that the assessee entered into the said contract with the shipping company for transport of coal from one place to another. The hiring of ships for the purpose of using the same in the assessee's business would not amount to a contract for carrying out any work as contemplated in section 194C. The term “hire” is not defined in the Income-tax Act. So, we have to take the normal meaning of the word “hire”. Normal hire is a contract by which one gives to another temporary possession and use of the property other than money for payment of compensation and the latter agrees to return the property after the expiry of the agreed period. Therefore, in our view, when the assessee entered into a contract for the purpose of taking temporary possession of ships in the shipping company it could not be construed as if the assessee entered into any contract for carrying out any work, and when the contract is not for carrying out any work, the Revenue cannot insist the assessee ought to have deducted tax at source under section 194C of the Act. Further, the other argument of counsel was, section 194C was amended with effect from July 1, 1995, incorporating the Explanation and the said Explanation clarifies the existing provision of section 194C of the Act. Hence, it would be applicable retrospectively. We are concerned with the assessment year 1994-95. In a recent judgment, the Supreme Court in the case of Sedco Forex International Drill Inc. v. CIT, [2005] 279 ITR 310, considering the scope of the Explanation, held that there is no principle of interpretation which would justify reading the Explanation as operating retrospectively, when the Explanation comes into force with effect from a future date. In this case, the Explanation introduced is with effect from July 1, 1995. Hence it will be applicable only for the future assessment orders and it will not be applicable to the assessment year in consideration. The Tribunal also considered the fact that the shipping companies which received the hire charges are also income-tax assessees and they had shown the hire charges in their respective income-tax returns and paid the taxes on the same. The said fact was also not disputed by the Revenue. So, we are of the view that the payment of hire charges for taking temporary possession of the ships by the assessee-company would not fall within the provision of section 194C and hence no tax is required to be deducted, and there is no error or infirmity in the order of the lower authorities. Hence, no substantial question of law arises for consideration of this court. Hence, we dismiss the above tax case. No costs. Consequently, the connected TCMP No. 1253 of 2005 is closed.