We paid tax on each voyage under section 172(4) and then elected under section 172(7) for a regular assessment, which came out much lower and produced a refund. The Department has refunded the tax but refused interest, saying what we paid was not advance tax. Is that right?
No. Section 172(7) creates a legal fiction by which the payments already made under s.172(4) are treated as a payment in advance of the tax leviable for that assessment year, and the Supreme Court held that in construing that fiction all the consequences flowing from it must be assumed. The ad hoc assessment under s.172(4) is superseded and a regular assessment is made as per the provisions of the Act, so all the provisions of the Act relating to advance tax apply, and on excess payment the assessee is entitled to the excess and to interest on it.
Decided by the Supreme Court (K.S. Paripoornan J and S.P. Kurdukar J (judgment delivered by Paripoornan J)) on 1997-04-03, reported as [1997] 225 ITR 739 (SC) (citation as given in CBDT Circular No. 9/2001); appeals arising from S.L.P. (Civil) Nos. 8792-97 of 1981 against the common judgment of the Kerala High Court in I.T.R. Nos. 162-167 of 1977 dated 24 March 1981, reported at 130 ITR 301. It bears on section 172, section 172(1), section 172(4), section 172(7), section 214, section 2(1), section 207, section 213 of the Income Tax Act 1961, in Presumptive Taxation & Audit, Refunds, Interest & Condonation and Assessment & Scrutiny matters.
This is the decision that gives the s.172(7) election its content. Section 172(1) confers an absolute right on the assessing authority to levy and recover tax on a voyage in a summary manner, and the Court said in terms that the assessee has no right to object to it; the counterweight the statute gives the non-resident owner or charterer is the right in s.172(7) to demand a regular assessment on his total income, and the Court described that right as "a valuable right". What Glittre settles is that the election is not a mere arithmetical adjustment. Once made, the summary assessment is superseded and the regular assessment carries the whole apparatus of the Act with it. That cuts both ways and a practitioner should say so to the client. Favourably: the excess is refundable with interest. Unfavourably: the CBDT itself drew the consequence in Circular No. 9/2001 dated 9 July 2001, withdrawing its earlier Circular No. 730, that on a regular assessment under s.172(7) the non-resident assessee is liable to pay interest under sections 234B and 234C as well as entitled to interest under s.244A. Note also the vintage of the machinery: the Court awarded interest under s.214 and expressly recorded that the definition of "advance tax" in s.2(1) was inserted by the Direct Tax Laws (Amendment) Act 1987 with effect from 1 April 1987 and that the years before it were the years in issue. The reasoning about the fiction survives; the section number under which interest is now paid is s.244A, which is what the Board applies.
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The appellants were non-resident shippers represented by a common agent. Their ships — Fernbrook, Fernwave, Fernmoor, Ferngate and Ferndale — carried goods from the Port of Cochin to various places, calling at Cochin during the previous years relevant to assessment years between 1967-68 and 1969-70. Assessments on the freight earnings were made under s.172(4) and the shippers paid the tax so assessed. They then exercised the right conferred by s.172(7) and claimed regular assessments; returns were filed. The total income assessed on regular assessment was in every case far less than the income assessed under s.172(4), and the Income Tax Officer accordingly refunded the excess. The shippers claimed interest on the refunded amounts. The Income Tax Officer rejected the claim and the Appellate Assistant Commissioner upheld the rejection, on the ground that a payment made pursuant to a s.172(4) assessment cannot be said to be advance income tax. The Cochin Bench of the Tribunal allowed the appeals, holding that under s.172(7) the earlier payments were on a par with advance tax payments and that all the provisions relating to advance tax therefore applied, so that interest under s.214 was due; it directed the Income Tax Officer to allow the interest. On a reference the Kerala High Court answered the question against the assessees, holding that tax paid under s.172(4) is a payment on assessment and not a payment of advance tax and that the section permits only an adjustment. The assessees obtained special leave and appealed.
The appeals were allowed with costs (advocates' fees quantified at Rs. 5,000 in each appeal) and the judgment of the High Court was reversed. The Court held that the distinction the High Court drew between "advance tax" and "payment in advance of the tax" in s.172(7) has no basis; that s.172(7) creates a legal fiction by which payments made under the section are treated as advance tax, in construing which all the facts on which alone the fiction can operate must be assumed; that s.172(7) provides for a regular assessment in which all the provisions of the Act apply and is not a mere provision for adjustment; and that on the regular assessment, where there is excess payment, the assessee is entitled to the excess and to interest thereon under s.214. The question referred was answered in the affirmative, in favour of the assessees.
The Court set out the scheme of the section at paragraph 6: s.172(1) gives the Income Tax Officer an absolute right to levy and recover tax on a non-resident's ship in a summary manner notwithstanding anything in the other provisions of the Act, and the assessee has no right to object; s.172(7) then gives the assessee a right, exercisable before the expiry of the relevant assessment year, to claim a regular assessment made according to the provisions of the Act — described by the Court as a valuable right. On the exercise of that right the officer is bound to assess the total income of the previous year and "The 'adhoc' assessment made under Section 172(4) of the Act is superseded and a 'regular assessment' is made as per provisions of the Act." At paragraph 7 the Court reasoned from the deeming language: the words "shall be treated as a payment in advance of the tax" create a legal fiction, and applying the three-Judge Bench decision in Mohamed Iqbal Madar Sheikh v. State of Maharashtra on the effect of a deeming clause — that when one is bidden to treat an imaginary state of affairs as real one must also imagine as real the consequences flowing from it unless prohibited by some other statutory provision — all the provisions of the Act in respect of advance tax must apply. The Court held that the High Court had failed to give due effect to the language of s.172(7) and the scope of the fiction, that its reasoning was strained, and that it had been swayed by the heading "Adjustment" in the corresponding provision of the 1922 Act (s.44C), whereas s.172 carries no such heading.
The "adhoc" assessment made under Section 172(4) of the Act is superseded and a "regular assessment" is made as per provisions of the Act.
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Handle my notice → Ask a CA on WhatsAppNo. Section 172(7) creates a legal fiction by which the payments already made under s.172(4) are treated as a payment in advance of the tax leviable for that assessment year, and the Supreme Court held that in construing that fiction all the consequences flowing from it must be assumed. The ad hoc assessment under s.172(4) is superseded and a regular assessment is made as per the provisions of the Act, so all the provisions of the Act relating to advance tax apply, and on excess payment the assessee is entitled to the excess and to interest on it. This was decided by the Supreme Court (K.S. Paripoornan J and S.P. Kurdukar J (judgment delivered by Paripoornan J)) and bears on section 172, section 172(1), section 172(4), section 172(7), section 214, section 2(1), section 207, section 213 of the Income Tax Act 1961. It is reported as [1997] 225 ITR 739 (SC) (citation as given in CBDT Circular No. 9/2001); appeals arising from S.L.P. (Civil) Nos. 8792-97 of 1981 against the common judgment of the Kerala High Court in I.T.R. Nos. 162-167 of 1977 dated 24 March 1981, reported at 130 ITR 301. This is the decision that gives the s.172(7) election its content. Section 172(1) confers an absolute right on the assessing authority to levy and recover tax on a voyage in a summary manner, and the Court said in terms that the assessee has no right to object to it; the counterweight the statute gives the non-resident owner or charterer is the right in s.172(7) to demand a regular assessment on his total income, and the Court described that right as "a valuable right". What Glittre settles is that the election is not a mere arithmetical adjustment. Once made, the summary assessment is superseded and the regular assessment carries the whole apparatus of the Act with it. That cuts both ways and a practitioner should say so to the client. Favourably: the excess is refundable with interest. Unfavourably: the CBDT itself drew the consequence in Circular No. 9/2001 dated 9 July 2001, withdrawing its earlier Circular No. 730, that on a regular assessment under s.172(7) the non-resident assessee is liable to pay interest under sections 234B and 234C as well as entitled to interest under s.244A. Note also the vintage of the machinery: the Court awarded interest under s.214 and expressly recorded that the definition of "advance tax" in s.2(1) was inserted by the Direct Tax Laws (Amendment) Act 1987 with effect from 1 April 1987 and that the years before it were the years in issue. The reasoning about the fiction survives; the section number under which interest is now paid is s.244A, which is what the Board applies. If it applies to you, the first step is this: Do the arithmetic before the assessment year expires. The s.172(7) claim must be made before the expiry of the assessment year relevant to the previous year in which the date of departure from the Indian port falls, and the right is the owner's or charterer's.
The appellants were non-resident shippers represented by a common agent. Their ships — Fernbrook, Fernwave, Fernmoor, Ferngate and Ferndale — carried goods from the Port of Cochin to various places, calling at Cochin during the previous years relevant to assessment years between 1967-68 and 1969-70. Assessments on the freight earnings were made under s.172(4) and the shippers paid the tax so assessed. They then exercised the right conferred by s.172(7) and claimed regular assessments; returns were filed. The total income assessed on regular assessment was in every case far less than the income assessed under s.172(4), and the Income Tax Officer accordingly refunded the excess. The shippers claimed interest on the refunded amounts. The Income Tax Officer rejected the claim and the Appellate Assistant Commissioner upheld the rejection, on the ground that a payment made pursuant to a s.172(4) assessment cannot be said to be advance income tax. The Cochin Bench of the Tribunal allowed the appeals, holding that under s.172(7) the earlier payments were on a par with advance tax payments and that all the provisions relating to advance tax therefore applied, so that interest under s.214 was due; it directed the Income Tax Officer to allow the interest. On a reference the Kerala High Court answered the question against the assessees, holding that tax paid under s.172(4) is a payment on assessment and not a payment of advance tax and that the section permits only an adjustment. The assessees obtained special leave and appealed. The matter was decided on 1997-04-03 by the Supreme Court (K.S. Paripoornan J and S.P. Kurdukar J (judgment delivered by Paripoornan J)). On those facts the Supreme Court held as follows. The appeals were allowed with costs (advocates' fees quantified at Rs. 5,000 in each appeal) and the judgment of the High Court was reversed. The Court held that the distinction the High Court drew between "advance tax" and "payment in advance of the tax" in s.172(7) has no basis; that s.172(7) creates a legal fiction by which payments made under the section are treated as advance tax, in construing which all the facts on which alone the fiction can operate must be assumed; that s.172(7) provides for a regular assessment in which all the provisions of the Act apply and is not a mere provision for adjustment; and that on the regular assessment, where there is excess payment, the assessee is entitled to the excess and to interest thereon under s.214. The question referred was answered in the affirmative, in favour of the assessees.
The Court set out the scheme of the section at paragraph 6: s.172(1) gives the Income Tax Officer an absolute right to levy and recover tax on a non-resident's ship in a summary manner notwithstanding anything in the other provisions of the Act, and the assessee has no right to object; s.172(7) then gives the assessee a right, exercisable before the expiry of the relevant assessment year, to claim a regular assessment made according to the provisions of the Act — described by the Court as a valuable right. On the exercise of that right the officer is bound to assess the total income of the previous year and "The 'adhoc' assessment made under Section 172(4) of the Act is superseded and a 'regular assessment' is made as per provisions of the Act." At paragraph 7 the Court reasoned from the deeming language: the words "shall be treated as a payment in advance of the tax" create a legal fiction, and applying the three-Judge Bench decision in Mohamed Iqbal Madar Sheikh v. State of Maharashtra on the effect of a deeming clause — that when one is bidden to treat an imaginary state of affairs as real one must also imagine as real the consequences flowing from it unless prohibited by some other statutory provision — all the provisions of the Act in respect of advance tax must apply. The Court held that the High Court had failed to give due effect to the language of s.172(7) and the scope of the fiction, that its reasoning was strained, and that it had been swayed by the heading "Adjustment" in the corresponding provision of the 1922 Act (s.44C), whereas s.172 carries no such heading. In the words reproduced by the source cited on this page: "The "adhoc" assessment made under Section 172(4) of the Act is superseded and a "regular assessment" is made as per provisions of the Act." The decision followed or applied Mohamed Iqbal Madar Sheikh and others v. State of Maharashtra {1996 (1) S.C.C. 1722 at 727} — applied, on the effect of a deeming clause.
It was decided by the Supreme Court on 1997-04-03 and is reported as [1997] 225 ITR 739 (SC) (citation as given in CBDT Circular No. 9/2001); appeals arising from S.L.P. (Civil) Nos. 8792-97 of 1981 against the common judgment of the Kerala High Court in I.T.R. Nos. 162-167 of 1977 dated 24 March 1981, reported at 130 ITR 301. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 172, section 172(1), section 172(4), section 172(7), section 214, section 2(1), section 207, section 213, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed with costs (advocates' fees quantified at Rs. 5,000 in each appeal) and the judgment of the High Court was reversed. The Court held that the distinction the High Court drew between "advance tax" and "payment in advance of the tax" in s.172(7) has no basis; that s.172(7) creates a legal fiction by which payments made under the section are treated as advance tax, in construing which all the facts on which alone the fiction can operate must be assumed; that s.172(7) provides for a regular assessment in which all the provisions of the Act apply and is not a mere provision for adjustment; and that on the regular assessment, where there is excess payment, the assessee is entitled to the excess and to interest thereon under s.214. The question referred was answered in the affirmative, in favour of the assessees. It arises in Presumptive Taxation & Audit, Refunds, Interest & Condonation and Assessment & Scrutiny matters, on section 172, section 172(1), section 172(4), section 172(7), section 214, section 2(1), section 207, section 213 of the Income Tax Act 1961, and was decided by K.S. Paripoornan J and S.P. Kurdukar J (judgment delivered by Paripoornan J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Once you elect, treat the s.172(4) payments as advance tax for every purpose, not just for the refund computation — that is what "all the provisions" in Glittre means. Claim interest on the excess as of right and cite Glittre. If the officer says the payment was not advance tax, the distinction between "advance tax" and "payment in advance of the tax" is precisely the distinction the Supreme Court held to have no basis. Price the downside first. Circular No. 9/2001 makes the electing non-resident liable to interest under ss.234B and 234C on the regular assessment; if the regular assessment is going to produce a higher liability, the election is a mistake. Do not rely on the interest section named in the judgment. Interest on refunds is now governed by s.244A, and the Board's own Circular No. 9/2001 applies Glittre through s.244A.
Still good law. The CBDT itself applied this decision. Circular No. 9/2001, dated 9 July 2001, records at its paragraph 4 that "This issue has subsequently been discussed and decided by the Supreme Court in the case of A. S. Glittre D/5 I/S Garonne vs. CIT [1997] 225 ITR 739" and that the payment of tax under s.172(3)/(4) is at par with advance tax instalments, and at its paragraph 5 withdraws the Board's earlier Circular No. 730 as "no longer legally tenable". I read that circular text as reproduced in two separate judgments this pass. ONE QUALIFICATION, and it is real: the relief the Court granted was interest under s.214, and the Court expressly recorded that the years in issue preceded the Direct Tax Laws (Amendment) Act 1987. Interest on refunds is now dealt with by s.244A, which is the section the Board applies in Circular No. 9/2001. I did not carry out any search for later judicial treatment of Glittre beyond the two judgments in which I read the circular reproducing it, and I make no claim that none exists. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment as published on indiankanoon carries a number of evident transcription slips which a reader should be warned about before quoting from it: at paragraph 7 the text twice refers to "Section 172 (2)" where the sense and the quoted words are plainly those of s.172(7); paragraph 5 refers to the Direct Tax Laws (Amendment) Act 1987 taking effect "1.4.1987"; and the reproduction of s.172 within paragraph 4 contains obvious typographical corruption ("sips", "charted", "prepared and furnish", "Or receipt of the return"). I have quoted only a sentence I was able to reproduce identically on two separate fetches and have avoided every corrupted passage. One further point on structure: the judgment runs to seven numbered paragraphs and ends with the disposal at paragraph 7 — I read it through to the disposal, so this is not a truncated report. The Court records at paragraph 4 that "Section 172 occurs in Chapter XV of the Act Liability in Special Cases - and the heading of the Section is 'Profits of non-residents from occasional shipping business'"; the departmental page prints the marginal heading of s.172 as "Shipping business of non-residents", the words quoted by the Court being the Chapter XV sub-heading. The citation "[1997] 225 ITR 739" is taken from CBDT Circular No. 9/2001 as reproduced in two separate judgments read this pass, not from the indiankanoon page, which prints no report citation. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed with costs (advocates' fees quantified at Rs. 5,000 in each appeal) and the judgment of the High Court was reversed. The Court held that the distinction the High Court drew between "advance tax" and "payment in advance of the tax" in s.172(7) has no basis; that s.172(7) creates a legal fiction by which payments made under the section are treated as advance tax, in construing which all the facts on which alone the fiction can operate must be assumed; that s.172(7) provides for a regular assessment in which all the provisions of the Act apply and is not a mere provision for adjustment; and that on the regular assessment, where there is excess payment, the assessee is entitled to the excess and to interest thereon under s.214. The question referred was answered in the affirmative, in favour of the assessees.
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