Holding

Payments made under Section 172(4) are deemed advance tax by the legal fiction of Section 172(7), and any excess amount is refundable with interest under Section 214.

Summary

The appellants, non‑resident ship owners, had tax assessed on their shipping earnings under Section 172(4) of the Income Tax Act, 1961 and paid the tax. They later exercised their right under Section 172(7) to obtain a regular assessment, which showed that the tax previously paid was in excess. The Income Tax Appellate Tribunal held that the tax paid under Section 172(4) was to be treated as advance tax by legal fiction, and therefore the excess amount was refundable with interest under Section 214. The Kerala High Court disagreed, holding that the payment was merely an adjustment and not advance tax, and denied interest. The Supreme Court reversed the High Court, ruling that Section 172(7) creates a legal fiction treating the earlier payment as advance tax, so all provisions relating to advance tax, including interest on excess, apply. Consequently, the appeal was allowed and the appellants were awarded interest on the refunded amount.

Issues considered

Whether a payment made under Section 172(4) of the Income Tax Act, 1961, when the assessee later opts for a regular assessment under Section 172(7), is to be treated as advance tax for the purposes of Section 214.
Whether the legal fiction created by Section 172(7) brings the payment within the ambit of the provisions relating to advance tax.
Whether excess tax paid under the ad‑hoc assessment is refundable with interest.

Legislation cited

Income Tax Act, 1922s. 44C
Income Tax Act, 1961s. 172(4), s. 172(7), s. 2(1), s. 214

Subjects

non‑resident shippingadvance taxlegal fictionSection 172interest on excess taxrefundregular assessment

Judgment

?'"···

A AS. GLITTRE D/5 I/S GARONNE AND ORS.
v.
COMMISSIONER OF INCOME TAX, KERALA-II

APRIL 3, 1997

B [K.S. PARIPOORNAN AND S.P. KURDUKAR, .JJ.j

Income Tax Act, 1961: Sections 172(4) & (7) and 214.

Advance Ta.:c-lnterest 01r--E11titlement to--AYs. 1967-68 and 1969-
C 7{}--Assessee non-resident shipper paid tax assessed under S.172(4)--0n
regular assessme/lf under S.172(7) assessee was found to have made excess
payment-Held : Such excess payme11t was liable to be refu11ded to the
assessee together with interest as the payment already made by the assessee
under S.172(4) had to be treated as advance tax by legal fiction under
D S.172(7~Hence, such payment would attract all the provisions relating to
advance tax-Corresponding provision in the predecessor Act not identical to
S.172(7; of the 1961 Act--lncome Tax Act, 1922, S.44-C.

Words and Phrases :

E ''Advance Tax''-Meaning of-In the context of S.2 of the Income Tax
Act, 1961.

The appellant-assessees were non-resident shippers who tram-
ships called at the port during the AYs. 1967-68 and 69-70. The assessee
paid tax assessed under Section 172(4) of the Income Tax Act, 1961.
F Thereafter, the assessees exercised their right under Section 172(4) of
the Act and claimed "regular assessment" to be made it turned out that
the assessees were found to have made excess payment and accordingly
the excess amount was refunded. The Income Tax Appellate Tribunal
upheld their claim to interest on the amount so refunded. However, the
G High Court held that the tax paid under Section 172(4) of the Act was
a payment on assessment and not a payment of advance tax under the

--
Act. The High Court further held that Section 172(4) of the Act per-
mitted only "an adjustment" of the payment made under the Section as
"payment in advance of the tax leviable for the assessment year" and
H not a payment of advance tax made under the Act. Thus, High Court
556
AS. GLITTRE 0/5 l/S GARONNE v. C.I.T. 557

rejected the appellant's claim to interest. Hence this appeal. A
Allowing the appeal, this Court

HELD : 1.1. Section 172 (7) of the Income tax Act, 1961 gives the
assessee non-resident shippers a valuable right to opt for a regular assess·
ment although a "rough and ready" or a "summary assessment" has already B
been made under Section 172(4) of the Act. If the assessee exercises this
right, the "adhoc" assessment made under Section 172(4) of the Act is
superseded and a "regular assessment" is made as per the provisions of
the Act. In such a case all "the provisions" of the Act in the determination
of the tax liability including the ancillary or incidental or consequential C
matters pertaining to it are necessarily attracted. (562-C, E-F]

1.2. Section 172(7) creates a legal fiction by which the payments have
been treated as advance tax. That is the purpose for which the legal fiction
is created. In construing the said legal fiction, it will be proper and
necessary to assume all those facts on which alone the fiction can operate. D
[562-G-H]
Mohamed Iqbal Madar Sheikh & Ors. v. State of Maharashtra, [1996]
1 sec 722, relied on .

. 2. On effecting the regular assessment, if there is any excess payment E
made by the assessee, then the assessee would be entitled to the excess
amount paid and also interest, for payment made in excess of the tax
assessed. The High Court erred in drawing a distinction between "advance
tax" and "payment in advance of the tax" mentioned in Section 172(7) of the
Act. The distinction so drawn bas no basis. In holding that the payment
made under Section 172(4) of the Act is not a payment ofadvance tax within F
the meaning of the Act, the High Court failed to give due effect to the
language employed in Section 172(7) of the Act and the scope of the legal
fiction enshrined therein. Section 172(7) of the Act provides for a regular
assessment, wherein all the provisions of the Act will apply. It is not a mere
provision for adjustment. The High Court was swayed by tl1e title used in G
the corresponding provision of the predecessor Act (Income Tax Act, 1922
·Section 44C), wherein there was a heading to the Section· "Adjustment".
Section 172 of the Act contains no such heading. The Income Tax Appellate
Tribunal was justified in holding that since the payment made under Sec·
ti on 172 (4) of the Act is, by fiction, treated as advance tax, all the provisions
in respect of the advance tax will apply and if on regular assessment made H
558 SUPREME COURT REPORTS (1997] 3 S.C.R.

A under Section 172(7) of the Act, there is any excess payment made by the
assessee, then the assessee would be entitled to it and also interest thereon
under Section 214 of the Act. [563-E-H, 564-A]

CIVIL APPELLATE JURISDICTION Civil Appeal Nos. 8-13
(NT) of 1984.
B
From the Judgment and Order dated 24.3.81 of the Kerala High
Court in I.T.R. Nos. 162-167 of 1977.

G.B. Pai Mrs. AK. Verma for Ms. Lakshmi Iyangar for the Appel-
C lant.
Ranvir Chandra, B.K. Prasad, Rajiv Sharma and Radhakrishnan for
the Respondents.

The Judgment of the Court was delivered by
D PARIPOORNAN, J. This batch of appeals is preferred against the
common judgment delivered by the High Court of Kerala in ITR Nos.
162-167 of 1977 dated 24th March, 1981. The judgment is reported in 130
ITR 301.

E 2. The appellants - assessees, are non-resident shippers represented
by one common agent. The ships carry goods from the Port of Cochin to
various places. The ships concerned are, Pembrook, Fernwave, Fernmoor,
Ferngate and Ferndale. Pembrook called at the Cochin Port during the
previous years relating to the assessment years 1967-68, and 1969-70;
Ferndale called at the Cochin Port during the year relating to the assess-
F ment year 1967-68 and the other ships, Fernwave, Fernmoor and Ferngate
called at the Cochin Port during the year relating to the assessment year
1969-70. In respect of the freight earnings, assessments were made on the
shippers under Section 172(4) of the Income tax Act, hereinafter referred
to as 'the Act'. The said provision enables the Income Tax Officer to make
G "adhoc" assessment, on the tram-ships. The assessees paid tax so assessed
under Section 172(4) of the Act. Thereafter the assessees exercised the
right conferred on them under Section 172(7) of the Act and claimed
"regular assessments" to be made. Returns were filed. It turned out that
the total income assessed in all the cases were far less than the one earlier
H assessed under Section 172(4) of the Act and on which taxes were paid by
\
AS. GLITIRE D/5 l/S GARONNE v. C.I.T. [PARIPOORNAN, J.] 559

the assessees. Reckoning this, the Income Tax Officer held that the asses- A
sees are entitled to refunds of the excess amount paid by them. Such
amounts were refunded. The assessees claimed that the they are entitled
to interest for the excess amounts paid by them, which were refunded. Such
claims were rejected by the Income-tax Officer. The said rejection was
upheld in the appeals by the Appellate Assistant Commissioner. The claim B
for interests were rejected on the ground that the payment made in
pursuance to assessments under Section 172(4) of the Act cannot be said
to be "advanced income tax: . In the further appeals filed by the assessees,
the Income Tax Appellate Tribunal, Cochin Bench, after review of the
relevant provisions of the Act, held that under Section 172(7) of the Act, C
the payments made (earlier in the Assessments under Section 172(4) of the
Act) would be on par with "advance tax" payments. It was further held that
since these payments have, by fiction, been treated as advance tax, it
necessarily follows that all the provisions in respect of the payment of
advance tax in the Act will apply. From the point of regular assessment,
i.e. if there is any excess payment made by the assessee, then the assessee D
would be entitled to the interest under Section 214 of the Act. The
Appellate Tribunal directed the Income Tax Officer to allow the interest
claimed by the assessees.

3. As directed by the High Court, the Income Tax Appellate Tribunal E
referred the following question of law in all the cases for the decision of
the High Court :

"Whether the amount directed under Section 172 clause (7) of
the Income-tax Act, to be treated as a payment in advance of the F
tax leviable for the assessment year in question, would carry
interest as the amount of advance tax would under Section 214 of
the same is payable under Section 207 to 213 of the Act."

The High Court of Kerala, by a common judgment, delivered in all
the References took the view that the tax paid under Section 172(4) of the G
Act is a payment on assessment and not a payment of advance tax under
the Act. It was held that Section 172(7) of the Act permits only "an
adjustment" of the payment made under the Section as "payment in ad-
vance of the tax leviable for the assessment year" and not a payment of
advance tax made under the Act. The question referred to the High Court H
560 SUPREME COURT REPORTS [1997) 3 S.C.R.

A was answered in the negative, in favour of the Revenue and against the
assessees. It is thereafter, the assessees moved this Court in S.L.P. (Civil)
Nos. 8792-97/1981 and obtained special leave to appeal against the
aforesaid judgment of the High Court of Kerala.

4. We heard counsel. For the purposes of resolving the controversy
B in this case, it will be useful to read Section 172 of the Act :

"S.172. Shipping business of non-residents. - (1) The provisions of JI
this section shall, notwithstanding anything contained in the other
provisions of this Act. apply for the purpose of the levy and recove1y
c of tax in the case of any ship, belonging to or chartered by a
non-resident, which carries passengers, live-stock, mail or goods
shipped at a port in India.

(2) ········································
D (3) Before the departure from any port in India of any such ship,
the master of the ship shall prepare and furnish to the Assessing
Officer a return of the full amount paid or payable to the owner or
charterer or any person on his behalf, on account of the carriage
of all passengers, live-stock, mail or goods shipped at that port
E since the last arrival of the ship thereat :

Provided that where the Assessing Officer is satisfied that it is
not possible for the master of the ship to furnish the return
required by this sub-section before the departure of the ship from
the port and provided the master of the ship has made satisfactory
F
arrangements for the filing of the return and payment of the tax
by any other person on his behalf, the Assessing Officer may, if
the return is filed within thirty days of the departure of the ship,
deem the filing of the return by the person so authorised by the
master as sufficient compliance with this sub-section.
G
(4) On receipt of the returned, the Assessing Officer Shall assess
the income referred to in sub-section (2) and detemiine the sum

H
payable as tax thereon at the rate or rates in force applicable to
the total income of a company which has not made the arrange-
ments referred to in section 194 and such sum shall be payable by
--
\

AS. GLITfRE D/5 I!S GARONNE v. C.I.T. [PARIPOORNAN, J.] 561

the master of the ship. A
(5) For the purpose of determining the tax payable under sub-sec-
tion (4), the Assessing Officer may call for such accounts or
documents as he may require.

(6) ....................... . B

(7) Nothing in the section shall be deemed to prevent the owner or
charterer of a ship from claiming before the expiry of the assessment
year relevant to the previous year in which the date of departure
of the ship from the Indian port falls, that an assessment be made C
of his total income of the previous year and the tax payable on the
basis thereof be detennined in accordance with the other provisions
of this Act, and if he so claims, any payment made under this
section j, respect of the passengers, live-stock, mail or goods
shipped at Indian port during that previous year shall be treated D
as payment in advance of the tax leviable for that assessment year,
and the difference between the sum so paid and the amount of tax
found payable by him on such assessment shall be paid by him or
refunded to him, as the cases may be."

(Emphasis &upplied) E
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".

5. At this juncture, it will be useful to bear in mind that Section 2(1) F
of the Act defines "advance tax". It is as follows : -

"S. 2. Definitions. - In this Act, unless the context otherwise
reqmres, --
G
(1) "advance tax" means the advance tax payable in accordance
with the provisions of Chapter XVII-C;"

The above sub-section was inserted in the Act by Direct Tax Laws
(Amendment) Act, 1987 with effect from 1.4.1989. We are concerned in this
case relating to the periods before the said Amendment Act. H
~- -

562 SUPREME COURT REPORTS [1997) 3 S.C.R.

A 6. The scheme of Section 172 of the Act appears to be this: Section
172( 1) of the Act gives a right to the Income Tax Office to levy and recover
tax in the case of any ship belonging lo a non-resident, in a summary
manager(ad hoc assessment) notwithstanding anything contained in the
other provisions of the Act. It is an absolute right conferred on the
B assessing authority. The assessee has no right to object to the same.
Normally, this will be assessment of the assessee for the year. But, under
Section 172(7) of the Act a right is given to the assessee to claim before
the expiry of the assessment year relevant to the previous year in which the
date of departure of the ship from the Indian port falls, that an assessment,
according to the provisions of the Act, in a regular manner be made. Thus,
C a right is given to the assessee to opt for a regular assessment although a
"rough and ready" or a "summary assessment" has already been made under
Section 172(4) of the Act. It is a valuable right. If the assessee exercises
the right conferred on him under Section 172(7) of the Act, the Income
Tax Officer is bound to make an assessment of the total income of the
D previous year of the assessee and the tax payable on the basis thereof "should
be detennined in accordance with the other provisions of the Act" and any
payment made under the Section (earlier) "shall be treated as a payment in
advance of the tax" leviable for that assessment year and the difference
between the sum so paid and the amount of tax found payable him on such
assessment, shall be paid to the assessee or refunded to him. The "ad hoc"
E assessment made under Section 172(4) of the Act is superseded and a
"regular assessment" is made as per the provisions of the Act. In such a
case, it is only proper and appropriate to hold that all "the provisions" of
the Act in the determination of the tax liability including the ancillary or
incidental or consequential matters pertaining to it are necessarily at-
F tracted.

7. Section 172(7) of the Act provides that payment made under the
Section shall be treated as a payment in advance of the tax leviable for that
assessment year. It only means that such payment would be treated as
advance of the tax leviable. Such payments are treated on par with advance
G income tax payments. It is implicit from the tenor and phraseology
employed in Section 172(7) of the Act to the effect, "payment made under
the Section ........ shall be treated as a payment in advance of the tax leviable
for that assessment year, that in substance, a legal fiction is created by which
the payments have been treated as advance tax, That is the purpose for which
H the legal fiction is created. In construing the said legal fiction, it will be
~.
\

A.S. GLITfRE D/5 I/S GARONNE v. C.LT. [PARIPOORNAN, J.] 563

proper and necessary to assume all those facts on which alone the fiction A
can operate. The law on the point has been stated in innumerable decisions
of this Court. In Mohamed Iqbal Madar Sheikh and Others v. State of
Maharashtra, [1996) 1 S.C.C: 722 at 727 a three member Bench of this
Court stated that law thus :

".......... The effect of a legal fiction by a deeming clause is well B
known. Legislature can introduce a statutory fiction and courts
have to proceed on the assumption that such state of affairs exists
on the relevant date, because when one is bidden to treat an
imaginary state of affairs as real he has to also imagine as real the
consequences which shall flow from it unless prohibited by some C
other statutory provision."

(Emphasis supplied)

So, necessarily aJI the provisions in the Act in respect of the payment of D
advance tax will apply. On effecting the regular assessment, if there is any
excess payment made by the asscssee, then the assessee would be entitled
to the excess amount paid and also interest, for payments made in excess
of the tax assessed. We are u11able to appreciate the distinction drawn by
the High Court between "ad.dnce tax" and "payment in advance of the tax"
mentioned in sub-section 172(7) of the Act. We hold that the distinction E
so drawn has no basis. The High Court has further held that the payment
made under Section 172(4) of the Act is not a payment of advance tax
within the meaning of the Act, as the tax paid under Section 172(4) of the
Act is a payment on assessment and not a payment of advance tax under
the Act. We are afraid that the High Court has failed to give due effect to F
the language employed in Section 172(7) of the Act and the scope of the
legal fiction enshrined therein. The reasoning of the High Court is rather
strained as the distinction drawn is without any substance or difference.
Section 172(7) of the Act provides for a regular assessment, wherein all
the provisions of the Act will apply. It is not a mere provision for adjust-
ment. The High Court was swayed by the title used in the corresponding G
provision of the predecessor Act (Income-tax Act, 1922 - Section 44C),
wherein there was a heading to the Section - "Adjustment". Section 172 of
the Act contains no such heading. We hold that the Income-tax Appellate
Tribunal was justified in holding that since the payment made under
Section 172(4) of the Act is, by fiction, treated as advance tax; all the H
564 SUPREME COURT REPORTS [1997] 3 S.C.R.

A provisions in respect of the advance tax will apply and if on regular
assessment made under Section 172(7) of the Act, there is any excess
payment made by the assessee, then the assessee would be entitled to it
and also interest thereon under Section 214 of the Act. We answer the
question referred to the High Court ·in the affirmative, in favour of the
B assessees and against the Revenue. The judgment of the High Court is
reversed and this batch of appeals allowed with costs, including Advocates'
fees quantified as Rs. 5,000 payable in each appeal.

v.s.s. Appeal allowed.