Case: Gal Offshore Services Limited) (Now The Great Eastern Shipping ) Company Limited) Vs. The Commissioner of Income Tax ) City-V, Aayakar Bhavan, Maharshi) Karve Road, Mumbai

S.J. Kathawalla, J.1. This appeal is filed by the assessee, Gal Offshore Services Ltd. (now the Great Eastern Shipping Company Limited) impugning the order dated 7th June, 2004 passed by the ITAT, Mumbai in Assessees appeal being No.423/MUM of 1998. The said appeal pertains to the Assessment Year 1994-95.2. The present appeal was admitted by this Court on the following substantial questions of law."1. Whether the Honble Tribunal was justified in upholding the action of the lower authorities that the Appellant is not entitled to deduction under section 33AC of the Act2. Whether the Honble Tribunal was justified in not considering the material on record and the application for additional evidence to show that the assessee was engaged in the business of operation of ships during the year under consideration"3. The relevant facts giving rise to the present appeal are briefly set out hereunder.a) The main objects for which the assessee company was incorporated are reproduced hereunder:1) To promote, manage, assist, render services to and to invest in projects relating to offshore and onshore gas and oil exploration, prospecting, development and production, including but without being limited to, brokering of work contracts, construction contracts, exploration licences and financing agreements and arrangements in India and in any part of the world.2) To acquire, purchase, sell, own, lease, charter, let out to hire, administer, manage, control, operate, construct, repair, alter, equip, furnish, fit out, decorate, improve and otherwise deal in offshore and onshore rigs and platforms, works, buildings, conveniences and equipments of all kinds, including equipments for seismic, electrologging, mudlogging, perforation, cementing, production, maintenance, diving and construction, irrigation, reclamations, sewage, drainage and sanitary works, water, gas, oil, motor, electrical, telephone, telegraphic and power supply works connected with the oil and gas industry.3) To acquire, purchase, sell, own, lease, charter, let out to hire, administer, manage, control, operate, construct, repair, alter, equip, furnish, fit out, decorate, improve and otherwise deal in ships, vessels, barges and sailing craft of all kinds including supply vessels, anchor handling tugs, multi support vessels, diving support vessels, pipe laying barges, non destructive testing vessels, oil and gas production vessels, cargo vessels, storage vessels and passenger vessels.b) On 24th November, 1994, the assessee filed its return of income under section 139(1) of the Income Tax Act, 1961 (the said Act) Act declaring the total income of Rs.1,34,70,565/-. On 28th November, 1995 the assessee revised its above referred return of income returning the total income as "NIL". In the revised return the appellant claimed deduction of Rs.1,34,70,565/- under section 33AC of the said Act.c) On 27th March, 1997, the Deputy Commissioner of Income Tax, Special Range 25, Mumbai passed an order under section 143(3) assessing the assessees income at Rs.3,84,66,760/- by, interalia, disallowing the claim of deduction under section 33AC of the said Act on the ground that the assessee is not engaged in the shipping business.d) On 1st May, 1997, the assessee preferred an appeal against the said order dated 27th March, 1997 to the Commissioner of Income Tax (A). The said appeal was dismissed by the learned CIT(A) by its order dated 5th December, 1997 on the ground that section 33AC not only requires the objects but also carrying on of actual shipping business in the year under consideration.e) Being aggrieved by the order of the CIT(A) dated 5th December, 1997, the assessee preferred an appeal to the ITAT, Mumbai. On 7th June, 2004 the ITAT, Mumbai dismissed the appeal filed by the assessee upholding disallowance of deduction under sec.33AC primarily on the following grounds:i) Section 33AC contemplates actual carrying on of the business of operations of shipping in the year of claim;ii) Amendment brought by Finance Act, 1995 with effect from 1st April, 1996 is clarificatory and retrospective.iii) Circular No.554 dated 12th December, 1994 clarifies that companies should engage in the business of operation of ships.4. Being aggrieved by the said order of the ITAT the present appeal is filed and is admitted on the questions set out in paragraph 2 above.5. We have heard the learned Counsel appearing for the assessee as well as the revenue. Before we proceed to deal with the arguments advanced by the learned Advocates for the parties, it is necessary to set out section 33AC of the said Act as it existed in 1994-95 and also the amended section which admittedly came into effect only from 1st April, 1996 and is not applicable to the case in hand.Section 33AC(1): Assessment Year 1994-95 In the case of an assessee, being a Government Company or a public company formed and registered in India with the main object of carrying on the business of operation of ships, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount not exceeding the total income (computed before making any deduction under this section and Chapter VI-A) as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilized in the manner laid down in sub-section (2).Section 33AC(1) : Assessment Year 1996-97 with effect from 1st April, 1996.In the case of an assessee, being a Government Company or a public company formed and registered in India with the main object of carrying on the business of operation of ships, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount not exceeding fifty per cent of profits derived from the business of operation of ships (computed under the head "Profits and gains of business or profession" and before making any deduction under this section) as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilized in the manner laid down in sub-section (2).6. The learned Advocate appearing for the assessee submitted before us that section 33AC as it stood in the relevant assessment year (i.e. A.Y.1994-95), provided that (i) the assessee must be a Government Company or a company formed and registered in India; (ii) the assessees main object must be the carrying on of the business of operation of ships; (iii) an assessee who satisfies the above conditions would be entitled to a deduction of an amount, not exceeding the total income, as is debited to the profit and loss of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised in the manner laid down in sub-section (2). He submitted that bare perusal of the section shows that it nowhere requires that an assessee in order to be eligible for the deduction has to actually operate ships.7. The learned Advocate for the assessee after referring to the decisions of the Honble Supreme Court of India in Orissa State Warehousing Corporation Vs. Commissioner of Income Tax reported in (1999) 237 ITR 589 (SC) and Padmasundara Rao (decd) and others Vs. State of Tamil Nadu and others reported in (2002) 255 ITR 147 (SC) pointed out that the Honble Supreme Court has inter alia laid down the following well settled principles of construction of statutory provisions particularly those in a fiscal statute:(a) in case a statutory provision is clear it must be applied as it is worded(b) external aids are impermissible if the words of the statute are clear;(c) in the case of a clear statutory provision, arguments contrary to the words of the statute cannot be entertained based upon the avowed or perceived intention of the legislature or the object of the legislation.The learned Advocate for the assessee submitted that application of the above principles of statutory construction establishes beyond doubt that the claim of the revenue that section 33AC contemplates actual carrying on of business of operations of shipping in the year of claim or that the company should engage in the business of operation of shipping is totally erroneous. He submitted that a bare perusal of section 33AC as it is stood in Assessment year 1994-95 shows that it nowhere lays down the actual operation of shipping as a precondition for eligibility for deduction under sec.33AC of the said Act. He submitted that such a precondition was introduced only from the Assessment Year 1996-97 onwards by amendment of section 33AC with effect from 1st April, 1996. Without prejudice to his aforesaid contentions, the learned Advocate for the assessee also submitted that the appellant has entered into two agreements in the year under consideration i.e. during the period 1st April, 1993 to 31st March, 1994 for purchase of two ships which have been overlooked by the Tribunal and, therefore, the Tribunals finding on this count is contrary to the material on record. It was, therefore, submitted that the Tribunal ought to have held that the Appellant is engaged in the business of operation of ships for the Assessment Year 1994-95. It was further submitted that the appellant has actually operated the vessels in the subsequent year i.e. 1995-96.8. In support of the submission of the assessee that the Tribunal has erred in coming to the conclusion that the amendment made by Finance Act, 1995 to section 33AC is clarificatory and hence retrospective is erroneous, the Learned Advocate for the assessee relied on the departmental circular no.717 dated 14th August, 1995. Clauses 24.1 to 24.4 of the said Circular are reproduced hereunder."24.1: Section 33AC of the Income Tax Act, 1961 was inserted by the Direct Tax Laws (Second Amendment) Act, 1989, with effect from 1st April, 1990 with a view to provide a tax incentive to public/Government companies engaged in the business of operations of ships. This deduction is available to the extent of the total income provided the amount is credited to a reserve account and is utilised for the purchase of a new ship within the specified period.24.2: It was noticed that shipping companies have diversified into trading, real estate, business etc. and are claiming deduction under this section even in respect of their income from activities other than shipping. There is no justification for allowing 100 percent deduction with reference to income from activities other than operation of ships.24.3.: Section 33AC has been amended to restrict the deduction to 50 per cent of the income derived from the business of operation of ships only. This takes outside the purview of the deduction any income arising from businesses other than shipping business, or from sources other than business.24.4: The amendment will take effect from 1st April, 1996 and will accordingly apply in relation to the assessment year 1996-97 and subsequent years."The learned Advocate for the Assessee has relied on the decision of the Honble Supreme Court in Sedco Forex International Drill Inc. and others Vs. Commissioner of Income Tax (2005) 279 ITR 310 (SC) wherein it was held that the amendment to the Explanation to Section 9(1)(ii) brought about by the Finance Act, 1999 was deliberately introduced with effect from 1st April, 2000 and was, therefore, intended to apply only prospectively.It was also understood as such by Central Board of Direct Taxes which issued Circular No.779 dated 14th September, 1999, which though not binding on the assessee, afforded a reasonable construction of the amendment. It was, therefore, submitted by the Assessee before us that the finding of the Tribunal that the Amendment brought by Finance Act, 1995 with effect from 1st April, 1996 is clarificatory and retrospective, is erroneous and is contrary to the decision of the Honble Supreme Court, particularly as the amendment to section 33AC by the Finance Act, 1995 makes a clear departure from the old provisions and is explicitly stated to be prospective.9. Referring to the Circular No.554 of the Board dated 13th December, 1990 which speaks of the purpose of section 33AC as being the incentive for generation of internal resources by public companies for augmenting their fleets, it was submitted on behalf of the assessee that:(i) it is well settled that where the words of a statute are clear and unambiguous, a Circular of the Board cannot override the same;(ii) in any event, and without prejudice to the above, the word "augment" would also indicate a case where a shipping company having no existing vessel wishes to buy a new vessel for the first time. An interpretation which gives the benefit of Section 33AC only to companies which already own vessels would work against new entrants into the field by denying them a much needed incentive to enter the field by purchasing their first vessel and would actually go against the object of encouraging the nascent shipping industry in India.10. The learned Counsel for the revenue submitted before us that the assessee would be entitled to deduction under section 33AC only if the assessee has, in the previous year relevant to the assessment year, earned income from the shipping business. He submitted that in the instant case, the assessee had only purchased ships in the previous year relevant to the assessment year 1994-95. He, therefore, submitted that the assessee was not entitled to deduction as claimed. No case law was cited before us on behalf of the revenue nor any submissions were made as regards the case law cited in support of the assessees case.11. We have considered the arguments advanced by Learned Advocates for the assessee as well as the revenue. We have also considered the case law cited by the Advocate for the assessee. Section 33AC as applicable to the Assessment Year 1994-95 and amended section 33AC which came into effect from 1st April, 1996 are set out in paragraph 4 above. It is clear from section 33AC(1) as applicable to the Assessment Year 1994-95 that the only requirements prescribed are that the assessee must be a Government Company or a company formed and registered in India with the main object of carrying on of the business of operation of ships. If this condition is satisfied, the assessee would be entitled to deduction of an amount not exceeding the total income, as is debited to the profit and loss of the previous year in respect of which the deduction is to be allowed and credited to the reserve account to be utilised in the manner laid down in sub-section (2). There is no such requirement that the assessee in order to be eligible for deduction has to actually operate ships or that the amount in respect of which deduction is to be allowed and credited to the reserved account, had to be the income earned from shipping business. In the instant case, the assessee was a company formed and registered in India and one of its main objects was to carry on the business of operations of ships. The company had entered into agreement for purchase of ships in the relevant assessment year i.e. 1994-95 and actually operated them in the assessment year 1995-96. We agree with the submissions made on behalf of the assessee that the principles of statutory provisions laid down by the Honble Supreme Court in the case of Orissa State Warehousing Corporation (supra) and in the case of Padmasundara Rao (decd) and others (supra) squarely applies to the instant case. We, therefore, do not agree with the argument of the revenue and upheld by the Tribunal that section 33AC contemplates actual carrying on of business of operation of shipping in the year of claim.12. As regards the arguments/contentions of the revenue/Tribunal that the amendment brought by Finance Act, 1995 with effect from 1st April, 1996 is clarificatory and not retrospective, we are of the view that since clause 24.4 of the Circular No.717 dated 14th August, 1995 expressly states that the amendment will take effect from 1st April, 1996 and will accordingly apply in relation to the assessment year 1996-97 and subsequent years, establishes beyond doubt that the said amendment cannot be termed as clarificatory and/or retrospective. In this regard we are also bound by the decision of the Honble Supreme Court in the case of Sedco Forest International Drill Inc and others Vs. Commissioner of Income Tax and another (supra), cited before us by the Learned Advocate for the assessee.13. It is also the submission of the revenue which was accepted by the Tribunal that section 33AC of the said Act as applicable to the assessment year 1994-95 allowed deductions only to the company which was actually engaged in the business of shipping or that amount so deducted, had to be from the income earned from the shipping business. In our view this submission is completely erroneous. Clause 24.2 of the Departmental Circular no.717 dated 14th August, 1995 explains why section 33AC was amended with effect from 1st April, 1996 and made applicable in relation to the assessment year 1996-97 and subsequent years. The explanation given is that it was noticed that the shipping companies had diversified into trading, real estate business etc. and were claiming deductions under this section even in respect of the income from the activities other than shipping and, there was no justification for allowing 100% deduction with reference to income from activities other than operation of shipping. This shows that there was a lacunae in section 33AC(1) of the said Act because of which the assessee was in a position to claim deduction even in respect of its income from the activities other than shipping and this lacunae was corrected only by introducing an amendment to section 33AC with effect from 1st April, 1996. By the said amendment the deduction was restricted to only 50% of profits and that too derived from the business of operation of ships. It is, therefore, established that despite being conscious of the fact that prior to the amendment the assessees were claiming deduction in respect of their income from activities other than shipping, the framers of the amendment did not think it fit to make it applicable retrospectively but brought the said amendment into effect only from 1st April, 1996. The assessees were, therefore, allowed to claim the deductions even in respect of the income from the activities other than shipping prior to 1st April, 1996. In view thereof, in the instant case also, it cannot be insisted that the deduction claimed by the assessee ought to be in respect of their income from the activities from shipping and not from any other business.

Decision reasoning: 1[ds]It is clear from section 33AC(1) as applicable to the Assessment Yearthat the only requirements prescribed are that the assessee must be a Government Company or a company formed and registered in India with the main object of carrying on of the business of operation ofthe instant case, the assessee was a company formed and registered in India and one of its main objects was to carry on the business of operations of ships. The company had entered into agreement for purchase of ships in the relevant assessment year i.e.and actually operated them in the assessment yearWe agree with the submissions made on behalf of the assessee that the principles of statutory provisions laid down by the Honble Supreme Court in the case of Orissa State Warehousing Corporation (supra) and in the case of Padmasundara Rao (decd) and others (supra) squarely applies to the instant case. We, therefore, do not agree with the argument of the revenue and upheld by the Tribunal that section 33AC contemplates actual carrying on of business of operation of shipping in the year of claim.12. As regards the arguments/contentions of the revenue/Tribunal that the amendment brought by Finance Act, 1995 with effect from 1st April, 1996 is clarificatory and not retrospective, we are of the view that since clause 24.4 of the Circular No.717 dated 14th August, 1995 expressly states that the amendment will take effect from 1st April, 1996 and will accordingly apply in relation to the assessment yearand subsequent years, establishes beyond doubt that the said amendment cannot be termed as clarificatory and/or retrospective. In this regard we are also bound by the decision of the Honble Supreme Court in the case of Sedco Forest International Drill Inc and others Vs. Commissioner of Income Tax and another (supra), cited before us by the Learned Advocate for theexplanation given is that it was noticed that the shipping companies had diversified into trading, real estate business etc. and were claiming deductions under this section even in respect of the income from the activities other than shipping and, there was no justification for allowing 100% deduction with reference to income from activities other than operation of shipping. This shows that there was a lacunae in section 33AC(1) of the said Act because of which the assessee was in a position to claim deduction even in respect of its income from the activities other than shipping and this lacunae was corrected only by introducing an amendment to section 33AC with effect from 1st April, 1996. By the said amendment the deduction was restricted to only 50% of profits and that too derived from the business of operation of ships. It is, therefore, established that despite being conscious of the fact that prior to the amendment the assessees were claiming deduction in respect of their income from activities other than shipping, the framers of the amendment did not think it fit to make it applicable retrospectively but brought the said amendment into effect only from 1st April, 1996. The assessees were, therefore, allowed to claim the deductions even in respect of the income from the activities other than shipping prior to 1st April, 1996. In view thereof, in the instant case also, it cannot be insisted that the deduction claimed by the assessee ought to be in respect of their income from the activities from shipping and not from any other business.