Section 172:No tax Deamand if No Freight Charges Are Paid

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The assessee was clearing and forwarding and steamship agents.It acted as the shipping agent of foreign non resident company. The foreign company time-chartered a ship belonging to a non-resident company called ‘S’. The said ship called at the port of Betul, Goa, and left for Alfred port, Canada after being loaded 13,000 long tons of bauxite belonging to the time – charterers. It was allowed to leave the port of Betul on the basis of a guarantee bond executed by the assessee agent undertaking to pay the income-tax payable by the time-charterers under section 172. On 15-4-1970, the ITO issued a demand notice to the respondent for payment of income-tax under the aforesaid provision. The assessee agent filed Special Civil Application in the Court of the Judicial Commissioner, asking for a writ of mandamus directing the ITO to withdraw the demand notice. The Judicial Commissioner allowed the respondent’s writ petition and passed an order quashing the demand notice.


The Supreme court in case of Gosalia Shipping (P.) Ltd vs Union of India held vide its order dt:5/5/1978 as under :

Section 172 occurs in ChapterXV which is entitled “Liability in special cases” and the sub-heading of the section is “Profits of non-residents from occasional shipping business”. It creates a tax liability in respect of occasional shipping by making a special provision for the levy and recovery of tax in the case of a ship belonging to or chartered by a non-resident which carries passengers, live-stock, mail or goods shipped at a port in India. The object of the section is to ensure the levy and recovery of tax in the case of ships belonging to or chartered by non-residents. The section brings to tax the profits made by them from occasional shipping, by means of a summary assessment in which one-sixth of the gross amount received by them is deemed to be the assessable profit. Before the departure of the ship, the master of the ship has to furnish to the ITO a return of the full amount paid or payable to the owner or charterer on account of the carriage of passengers, goods etc., shipped at the port in India since the last arrival of the ship at the port. In the event that, to the satisfaction of the ITO, the master is unable so to do, he has to make satisfactory arrangements for the filing of the return and payment of the tax by any other person on his behalf. A port clearance cannot be granted to the ship until the tax assessable under the section is duly paid or satisfactory arrangements have been made for the payment thereof.

The assessee in the instant case was the company which had time-chartered the ship and on whose behalf its shipping agent, the respondent, had executed the guarantee bond. Since the company was a non-resident and the ship carried goods which were shipped at a port in India, the conditions specified in sub-section (1) were satisfied and the provisions of section 172 would apply for the purpose of levy of tax, notwithstanding anything contained in the other provisions of the Act.

It is true that one cannot place over-reliance on the form which the parties give to their agreement or on the label which they attach to the payment due from one to the other. One must have regard to the substance of the matter and, if necessary, tear the veil in order to see whether the true character of a payment is something other than what, by a clever device of drafting, it is made to appear. In the instant case, there was no reason to hold that the real intention of the parties was something different from what the words used by them convey in their accepted sense. The charter-party was drawn in a standard form approved by the “New York Produce Exchange” and there was no warrant for supposing that though the payment which the charterers bound themselves to make to the owners of the ship was on account of the carriage of goods, the parties described it as being payable for the use and hire of the vessel, in order to avoid the payment of Indian income-tax. Indeed, the other terms of the charter-party and the general tenor of the document showed that the payment was in fact to be made by the time-charterers for use and hire of the ship. Under the agreement, charterers had the “liberty to sublet” the vessel for all or any part of the time covered by the agreement. The captain of the ship was to be under the orders and directions of the charterers as regards employment and agency. And if the vessel be lost, money paid in advance and not earned was to be returned by the owners to the charterers at once. These terms and conditions of the contract between the parties were not consistent with the theory that the charterers were liable to pay to the owners any amount on account of the carriage of goods. In order that it may be said that the amount was payable on account of the carriage of goods, it would be necessary to show that one is the consideration for the other, that is to say, that the payment which the charterers had agreed to make to the owners of the ship was in consideration of the carriage of goods. If the charterers were liable to pay the amount irrespective of whether they carry the goods or not, it would-be difficult to say that the amount was payable on account of the carriage of goods. Under the terms of the charter-party, the owners of the ship received the amount as charges for the use and hire of the ship. The character of the payment could not change according to the use to which the charterers put the ship or according as to whether the ship was loaded with goods in a port in India. What was payable as hire charges for the use of the ship could not transform itself into an amount payable on account of the carriage of goods, by reason of the circumstance that the ship was loaded with goods in India.

It was relevant, for the decision of the question under consideration, that the time-charterers loaded the ship at Betul, Goa, with their own goods. They did not sublet the ship for the purpose of carriage of goods nor did they load the ship with goods belonging to a third party in which event they might have earned some freight on account of the carriage of goods. They paid hire charges to the owner of the ship for the use of the ship and since they loaded the ship with their own goods, they received nothing on account of the carriage of the goods. Neither the one nor the other, therefore, received any amount on account of the carriage of the goods.

For the above reasons, the judgment of the Judicial Commissioner was confirmed and the appeal was dismissed.