The non resident assessee got certain amount under the contract entered into by the shipping company with the charterer firm for carrying certain cargo. This amount included dead freight recoverable on account of certain cargo which were not shipped from the port as per the contract. The Assessing Officer while computing income under section 172(2) , however, took into consideration the entire amount received by the assessee including the amount of dead freight. The AAC accepted the contention advanced by the assessee that the amount earned as dead freight could not be said to have been paid on account of the carriage of goods and, therefore, the said amount could not have been taken into account in determining the income under section 172(2) and directed the ITO to modify the order of assessment by deduction of the amount of dead freight. The Tribunal, confirmed the order of AAC on appeal of the revenue.
The Gujarat in case of Pestonji Bhicajee vs Cit held vide its order dt:1/19/1976 as under :
There was no dispute that the conditions laid down in section 172(2) were satisfied in the instant case and that the assessee was liable to be taxed in accordance with the special provisions of section 172(2). Under sub-section (2), so far as it is relevant, the legislative flat is clear and specific. A certain proportion of the amount which is either actually paid or becomes payable, “on account of such carriage” to the owner of a ship or a character or to any person on his behalf, is to be treated as the income accruing in India to such owner or character on account of “such carriage”, whether the amount is paid or payable in or out of India. The fiction is enacted for the purpose of treating a prescribed portion of the amount received by a non-resident ship owner or character for the carriage of passengers, cargo, etc. shipped at a port in India as his income (irrespective of the place of payment) so that it could be brought to tax in his hands as such. However, the amount must be paid or payable on account of such carriage, that is, as freight, and not on account of non-carriage of goods by such ship from a port in India. A legal fiction must be limited to the purpose for which it was created and, therefore, any payment made otherwise than by way of freight would not fall within the deeming provisions of sub-section (2) of section 172 and it could not be treated as income.
The disputed amount was paid to the assessee in the instant case on account of dead freight.
The “dead freight” is not freight, that is, a payment made on account of carriage of goods, but it is in reality damages for breach of contract. It is in the substance and effect unliquidated compensation for the loss of freight an amount recoverable in the place and stead of freight. It is not freight at all properly so called and it is merely called as such for convenience.
Once this true meaning of the expression “dead freight” is ascertained, it becomes evident that any payment made on account of “dead freight” cannot be treated as payment made on account of carriage of goods in a ship. It is in fact payment by way of damages for non-carriage of goods on account of the charter?s failure to fulfil his obligation.
Sub-section (2) of section 172 which enacts a fiction and makes special provision for the levy and recovery of tax from a non-resident ship-owner irrespective of the place where the freight is paid must be construed on its plain language. In a taxing statute of that nature, there is no justification for adding words, a payment made not for carriage of goods but for non-carriage of goods cannot, therefore, be brought within the ambit thereof.
Therefore, the Tribunal was right in the view that it took as regards the non-inclusion of the amount of dead freight in the amount which was to be taken into account for computing income under section 172(2).
Reference 107 ITR 837