Meghna Petroleum Limited Vs. Commissioner of Taxes (East Zone) Dhaka, 50 DLR (AD) (1998) 165

Case No: Civil Appeal No. 62 of 1993

Judge: ATM Afzal ,

Court: Appellate Division ,,

Advocate: Mr. Rafique-ul-Huq,Mr. A. B. M. Matiar Rahman,,

Citation: 50 DLR (AD) (1998) 165

Case Year: 1998

Appellant: Meghna Petroleum Limited

Respondent: Commissioner of Taxes

Subject: Income Tax, Fiscal Law,

Delivery Date: 1997-7-29

 
Supreme Court
Appellate Division
(Civil)
 
Present:
ATM Afzal CJ
Mustafa Kamal J
Md. Abdur Rouf J
Bimalendu Bikash Roy Choudhury J
 
Meghna Petroleum Limited
……………………Appellant
Vs.
Commissioner of Taxes (East Zone) Dhaka
…………………..Respondent 
 
Judgment
July 29, 1997.
 
The Income Tax Act, 1922
Section 23(3)
Read with
The Income Tax Ordinance, 1984
Section 160
The price differential or the windfall profit having been credited in favour of the BPC under a Government decision before it became an income in the hands of the appellant, the principle of diversion of income by over-riding title is fully attracted. The disputed amount never reached the appellant as its income.………………………(23)
 
Cases Referred to-
S Naseem Anwar vs. Income Tax Officer 15 DLR 414; Tata Iron & Steel Co Ltd. vs. NC Upadhaya 96 ITR 1; Navaitlal C Javin vs. KK Sen App Comm 56 ITR 198; Dhaka Vegetable Oil Industries Ltd. vs. Commissioner of Taxes, Dhaka (North) Zone, 2 MLR (AD) 41=49 DLR (AD) 136; Commissioner of Income Tax. Kerala vs. Tranvancore Sugars and Chemicals Ltd. (Ker) (1973) 90 TTR 307; Raja Bejoy Singh Dudhuria vs. Commissioner of Income Tax (1933) 1 ITR 135, 138 (PC); Commissioner of Income Tax vs. Sitaldas Tirathdas, (1961) 41 ITR 367; PC Mullick vs. Commissioner of Income-Tax, (1938) 6 ITR 206.
 
Lawyers Involved: 
Rafique-ul-Huq, Senior Advocate, instructed by Mvi Md. Wahidulla, Advocate-on-Record— For the Appellant. 
Matiur Rahman, Advocate, instructed by Md. Sajjadul Haque, Advocate-on-Record — For the Respondent.
 
Civil Appeal No. 62 of 1993
 
JUDGMENT
ATM Afzal CJ.
 
1. This appeal, by leave, at the instance of the assessee-company arises out of an Income-tax matter and is directed against the judgment and order dated 30-11-1992 passed by a Division Bench of the High Court Division in Application No.133 of 1991 filed by the appellant under section 160 of the Income Tax Ordinance, (XXXVI of 1984) deciding the questions of law referred to it against the appellant. 
 
2. Material facts of the case are that, the appellant is a private limited company registered under the Companies Act, 1913 and established by the Bangladesh Petroleum Corporation, briefly BPC, a statutory Corporation established under the Bangladesh Petroleum Corporation Ordinance, 1974. The appellant was established by the BPC for the purpose of marketing its petroleum products. Both the appellant and the BPC are fully owned by the Government of Bangladesh. The shares of the appellant-company are subscribed in the names of the nominees of the Government of Bangladesh and BPC. 
 
3. The appellant was assessed under section 23(3) of the Income Tax Act, 1922 for the accounting year ended on 30 June, 1981 and the assessment year 1981-82. The Deputy Commissioner of Taxes, Companies Circle-III, Dhaka (East Zone), while making the said assessment treated a sum of Taka 8,15,79,411.00 (disputed issue) as a windfall profit in the hands of the assessee-appellant and added the same to its total income. 
 
4. The aforesaid amount which was profit on account of price differential surplus arising out of stock of petroleum products of the assessee on 21-7-80, 3-5-81 and 4-6-81 as a result of refixation of the price of petroleum products by the Government was shown to have been credited in a note in the audited balance sheet of the appellant- company as payable to the BPC on Government account as per instruction of the corporation. 
 
The appellant’s contention has been that the disputed amount was not an income accruing unto it but was credited to the account of the BPC as per the decision of the Government. In support of its contention a written explanation was submitted by the appellant which, inter alia, reads as follows: 
 
Subsequently an inter-Ministerial meeting held on 17-11-1979 with representatives from Ministry of Finance, Ministry of Petroleum and Mineral Resources and Ministry of Law & Parliamentary Affairs with the then State Minister of Finance in the Chair decided on a procedure to ensure that the windfall gains thus accrued be transferred to Bangladesh Petroleum Corporation Tax free and it was decided that Bangladesh Petroleum Corporation would enter into an agreement with all the Petroleum Marketing Companies at ERL transfer price obtaining before the revision of petroleum products price inclusive of all the stocks held by their agents and dealers and reselling the same immediately afterwards to the Oil Marketing Companies at the new fixed ERL transfer price. In this connection we also enclose herewith a photocopy of the Minutes of the Inter-Ministerial Meeting held on November 17, 1997 as Annexure-B. 
 
5. The Corporation accordingly, entered into an agreement with Meghna Petroleum Limited through which the price differential surplus was to accrue and arise to the Corporation in pursuance of the decision of the Inter-Ministerial Meeting. The windfall gains not being the income and, as such, not credited to Company’s income should not be taxed in its hands. From the accompanying agreement executed between the company and Bangladesh Petroleum Corporation it would appear beyond any shadow of doubt that this item will from Bangladesh Petroleum Corporation’s income in the relevant year, and therefore taxing this in the hands of the Company will fall not only constitute an offence against the fundamental tax law that same item cannot be taxed twice, but further the company will be taxed on an income although it never accrued to it as its income. A photocopy of the said agreement dated 25th October, 1982 is enclosed as Annexure-C. 
 
6. While rejecting the contention of the appellant the Deputy Commissioner of Taxes, inter alia, observed in his long order that the decision of the Inter-Ministerial meeting held on 17-11-79 had never been executed at all through any circular or Government order nor the National Board of Revenue which was a party to the said meeting issued any circular or Notification against standing circular No.9 II of 1976 issued under No.8(19)IT/III/71 dated 10-8-1976 (which was opposed to the stand taken by the appellant). The DCT also noticed that the agreement between the BPC and the appellant as required under the aforesaid decision was executed long after on 25-10-82 which was beyond the accounting year and that such post-dated agreement can have no validity in the eye of law as it was not even executed during the accounting year under review. Finally the DCT held: 
 
“In my view, neither the decision at inter-Ministerial meeting dated 17-11-79 as referred to by the BPC to transfer surplus profit tax free to BPC nor the direction of Bangladesh Petroleum Corporation to Meghna Petroleum Ltd. which has separate entity as company registered under the Companies Act, 1913 to treat the profit arising out of refixation of price by the Government on the stocks of the company as payable to the BPC can have any legal force to override provisions of IT Act. 
 
Considering all the facts, factors & circumstances detai1ed the profits arising out of refixation of price of stocks of petroleum products of the assessee-company are, in my opinion, the profits of the assessee company and not that of BPC as claimed. So such profits of Taka 8,15,79,411.00 is added as income of the assessee-company for the year under review”. 
 
7. The appellant took an appeal against the aforesaid order of the DCT and the Appellate Joint Commissioner of Taxes, by his order dated 21-1-90, upon noticing the Government Decision dated 17-11-79 and the NBR circular No.11(61) T-1/80 dated 25-9-83 deleted the disputed amount from total income “since the windfall gain from price differential surplus has indeed been transferred in the hands of Bangladesh Petroleum Corporation (BPC) who is being separately assessed by the department.” 
 
8. The respondent filed appeal before the Taxes Appellate Tribunal, Bangladesh. Additional Bench, Dhaka-3. Dhaka against the said order of the Appellate Joint Commissioner of Taxes and the appeal was allowed by judgment and order dated 16-8-90. 
 
9. On behalf of the appellant reliance was placed, among others, on the Tribunals (Head Quarter Bench) own judgment in IT No.4 142 of 1982-83 in respect of the assessment year 1980-81 where it was held that the addition made by the DCT on account of windfall profit due to price refixation by the Government was illegal and accordingly deleted. It was also argued on the basis of authority that the transfer of the price differential in favour of the Corporation was a clear case of diversion of income by over-riding title and that it is established law that income so diverted cannot be assessed in the hands of the person diverting it. 
 
10. The Appellate Tribunal without applying its mind to the points raised almost mechanically dittoed the order of the DCT whereupon the appellant made the application before the High Court Division under section 160 of the Income Tax Ordinance, 1984 referring two questions of law for decision which are as follows: 
 
“(i) Whether in the facts and circumstances of the case the Tribunal was legally justified in holding that the difference arising out of refixation of price of stock of petroleum products is windfall profit of the appellant and not in the hands of the BPC though the said profit was transferred and paid to the BPC. 
(ii) Whether in the facts and circumstances of the case the Tribunal was justified in holding that the transfer of price differential in favour of the BPC is a clear case of diversion of income by over-riding title and, as such, the applicant is liable to be taxed though the Government direction is to treat the same as revenue expenditure?” 

As already noticed the High Court Division by the impugned judgment and order found the two points of law against the appellant and hence this appeal by leave. 
 
Leave was granted to consider whether the questions of law raised by the appellant were correctly answered by the High Court Division. 
 
11. We shall see that of the two questions of law as above, the second was formulated under a misconception and the High Court Division failed to get over the said misconception and decided that matter in a manner which was apparently misconceived. But let us first deal with question No. 1 which appears to be comprehensive and is enough for deciding the point at issue. 
 
It may be recalled that the appellant’s consistent case has been that the disputed amount (Taka 8,15,79,411.00) which was a windfall profit on account of price differential surplus arising out of stock of petroleum products of the assessee- appellant as a result of refixation of the price of petroleum products by the Government was credited in favour of the BPC as per the decision of the Inter-Ministerial meeting dated 17-11-79 and the said amount never accrued as income in the hands of the appellant. The Deputy Commissioner of Taxes refused to give any importance to the decision of the Inter Ministerial meeting because, as his order shows.
 
“It has never been executed at all through any circular or Government order nor National Board of Revenue who was the party in the meeting issued any-circular or Notification”. The Deputy Commissioner of Taxes would have surely accepted the appellant’s contention had there been a Government order or circular or Notification issued by the NBR for implementation of the Inter-Ministerial decision dated 17-11-79."
 
12. Mr. Rafiqul Huq, learned Counsel for the appellant submitted that except the Appellate Joint Commissioner of Taxes, who accepted the appellant’s contention, nobody including the High Court Division noticed that the decisions of the meeting dated 17-11-79 were communicated by the NBR for compliance by issuing circular No.11(61) T-1/80 dated 25-9-83 and thus at every stage the error was committed by adding the disputed amount to the total income of the appellant which was in contravention of the decisions of the meeting which were again ordered to be complied with by the National Board of Revenue by issuing a circular. 
 
13. A photocopy of the minutes of the Inter-Ministerial meeting dated 17-11-79 was annexed to the written explanation submitted to the DCT and it is clear from the minutes that it was, inter alia, decided that BPC should issue a circular advising the oil marketing companies......... “with further instructions that the surplus so made on account of price differential shall be transferred to the Corporation by the oil marketing companies in order to enable the Corporation to meet the deficit sustained by it on the import of crude oil and petroleum products.”

It was also decided that oil marketing Companies may be asked to treat transfer of all approved amounts due to BPC as revenue expenditures. 

The Hon’ble Minister of State for Finance who presided over the meeting desired that the decisions taken in the meeting be implemented forthwith. 
 
The circular of the NBR for implementation of the decisions reads as follows: 
 
“c. No.11(6) T/80 dated 25-9-1983.
Approved.
Copy forwarded to:
Sd/- Atauddin Khan 
Minister of State for Finance Government of the People’s Republic of Bangladesh. 
1. The Commissioner of Taxes, Dhaka (North) Zone South/Zone East/West Zone, Dhaka/Chittagong (South) Zone, Chittagong/ Khulna Zone, Khulna/Rajshahi Zone, Rajshahi/Int & Invt. Zone, Dhaka for information with request to direct the Deputy Commissioner of Taxes for compliance with the decision contained in the minutes of the meeting as above held on 17-11-79 at National Board of Revenue with the then Minister of State for Finance presiding. 
2. The Director of Inspection & Trading (Taxes), Dhaka.
3. Mr. KM Mamun, Director (Finance with reference to his letter No.55-57/12070 dated 18-10-83 addressed to Secretary and endorsed to Board for information”. 
 
14. Now the legal position which is not disputed is that, all officers and other persons engaged in the performance of any functions under the Income Tax Ordinance, 1984 shall, in the matter of discharging those functions, observe and follow such orders, directions or instructions as the NBR may issue from time to time (vide SB). Similar was the provision under section 5(8) of the repealed Income-tax Act, 1922. Several decisions were cited in the High Court Division for the proposition that a circular of the NBR has binding force on the income tax authorities : S Naseem Anwar vs. Income Tax Officer 15 DLR 414; Tata Iron & Steel Co. Ltd. vs. NC Upadhaya 96 ITR 1 : Navaitlal C Javin vs. KK Sen App Comm 56 ITR 198. Mr. Rafiqul Huq refereed to yet another decision of this Court while arguing before us and that is, Dhaka Vegetable Oil Industries Ltd. vs. Commissioner of Taxes, Dhaka (North) Zone, 2 MLR (AD) 41=49 DLR (AD) 136
 
15. The learned Judges of the High Court Division expressed to have no doubt as to the legal effect of a circular by the NBR but regrettably without noticing the circular which was on record went on to consider matters which were wholly unnecessary. A simple matter has been made utterly complex by dealing with all kinds of argument which is difficult to follow. The High Court Division should have noticed that the circular was acted upon by the Appellate Joint Commissioner of Taxes but the Appellate Tribunal made no reference to it at all and merely contented itself by reproducing the reasoning of the Deputy Commissioner of Taxes. In the face of the circular of the NBR, there was no scope for the revenue to contend that the disputed amount which was transferred to the account of the BPC as per decision of the Inter-Ministerial meeting dated 17-11-79 was an income in the hands of the appellant and, as such, chargeable to income-tax. Mr. Matiar Rahman, learned Counsel representing the revenue, has no answer to the proposition as found above. 
 
16. Now coming to the second question, it appears that the formulation has been whether the Tribunal was justified in holding that the transfer of price differential in favour of the BPC is a clear case of diversion of income by over-riding title and, as such, the appellant is liable to be taxed. The formulation is apparently misconceived because the appellant’s contention in the Tribunal was that the transfer of price differential in favour of the BPC attracted the principle of diversion of income by over-riding title and the appellant was not liable to tax to that extent, the amount not being income in the hands of the appellant. The appellant in support of his contention referred to Commissioner of Income Tax, Kerala vs. Travancore Sugars and Chemicals Ltd. (Ker) (1973) 90 TTR 307. The Tribunal without even considering either the facts of the case or the principle invoked rejected the contention of the appellant outright. 
 
17. So, the correct formulation of question No. 11 should be, whether on the facts and in the circumstances of the case, the Tribunal was justified in rejecting the aforesaid contention of the assessee-appellant. 
 
18. In order to understand the principle of diversion of income by over-riding title, three cases, two of the Privy Council and one of the Indian Supreme Court, which were referred to in the aforesaid Kerala case fall to be considered. In the Kerala case the assessee was obliged to pay certain amounts of its profits to the Government under an agreement. The question which fell for consideration of the High Court was whether the payment of the amounts to the Government is a diversion of profits by title paramount and whether the assessee is entitled to deductions of the amounts in question under the relevant provisions of the Income-tax Act (of 1922 and 1961). 
 
19. In the case of Raja Bejoy Singh Dudhuria vs. Commissioner of Income Tax (1933) 1 ITR 135, 138 (PC), the assessee on the death of his father succeeded to the family ancestral estate. His step-mother brought a suit for maintenance which was compromised. By the terms of the compromise decree the assessee was directed to pay her maintenance every month. The assessee claimed that the maintenance paid by him to his step-mother should be excluded in computing his income for assessment under the Indian Income-tax Act, 1922. Lord Macmillan, on behalf of the Board observed: 
 
“When the Act by section 3 subjects to charge ‘all income’ of an individual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the court by charging the appellant’s whole resources with a specific payment to his step-mother has to that extent diverted his income from him and has directed it to his step-mother; to that extent what he receives for her is not his income. It is not a case of the application by the appellant of part of his income in a particular way, it is rather the allocation of a sum out of his revenue before it becomes income in his hands.” 
 
The claim of the assessee in that case was upheld. 
 
20. In PC Mullick vs. Commissioner of Income-tax (1938) 6 ITR 206 the assesses were appointed executors by the testator under his will and they were directed to pay Rs 10,000.00 out of the income on the occasion of his Addya Sradh and also the costs of taking out probate of his will. The executors paid Rs.5,537.00 for Sradh expenses and Rs.1,25,000.O0 for probate duty and claimed deduction of this money to determine the assessable income. Their Lordships of the Judicial Committee observed: 
 
“The payment of the Sharadh expenses and the costs of probate were payments made out of the income of the estate coming to the hands of the appellants as executors, and in pursuance of an obligation imposed by their testator. It is not a case like the case of Raja Bejoy Singh Dhudhuria vs. Commissioner of Income-tax, in which a portion of income was by an overriding tide diverted from the person who would otherwise have received it. It is simply a case in which the executors having received the whole income of the estate apply a portion in a particular way pursuant to the directions of their testator, in whose shoes they stand.”
 
21. The Kerala High Court then referred to Commissioner of Income Tax vs. Sitaldas Tirathdas (1961) 41 ITR 367 decided by the Indian Supreme Court upon reviewing the said decisions of the Judicial Committee and other decisions of the High Courts and observed that the principles enunciated therein should afford guidance for the decision of the point mooted before them.
 
In the Supreme Court decision the assesses in computing the total income for purposes of income-tax sought to deduct amounts paid by him as maintenance to his wife and children under decree of court passed by consent. There was no charge created in favour of the wife and children for their maintenance in the properties of the assessee. Hidayatullah J (as he then was), speaking for the court enunciated the guiding principles in the following words: 
 
“In our opinion, the true test is whether the amount sought to be deducted, in truth, never reaches the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence in law, does not follow. It is the first kind of payment which can truly be excused and not the second, the second payment is merely an obligation to pay another a portion of one’s own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable”.
 
22. Then the learned Judge examined the face of the case in the light of the principles stated by him thus:
 
“In our opinion, the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and not a case in which by an over-riding charge the assessee became only a collector of another’s income. The matter in the present case would have been different, if such an over-riding charge had existed either upon the property or upon its income, which is not the case. In our opinion, the case falls outside the rule in Bejoy Singh Dudhurias case, and rather falls within the rule stated by the Judicial Committee in PC Mullick’s case”. 
 
The Kerala High Court ultimately held that the amounts payable by the assessee under the agreement are on the basis of a paramount right created by the contract between the parties and they are liable to be deducted under the relevant provisions of the income-tax Act. 
 
23. We are of the view that having regard to the principles enunciated by the Judicial Committe in the case of Raja Bejoy Singh Dudhuria (supra) and the Indian Supreme Court in the case of CIT vs. Sitaldas Tirathdas (and followed by the Kerala High Court (Supra) with which we are in agreement, there can be no hesitation in holding, in the facts of the case before us, that the price differential or the windfall profit having been credited in favour of the BPC under a Government decision before it became an income in the hands of the appellant, the principle of diversion of income by over-riding title is fully attracted. The disputed amount never reached the appellant as its income. The obligation of the appellant was not to be discharged out of its own income but the amount was to be treated at its origin as income to the credit of the BPC. Not only the government decision but there was also an agreement entered into, on 25-10-82, between the BPC and the appellant under which the stipulation that the income was that of the BPC was clear. The relevant clauses of the agreement read as follows: 
 
“Now, therefore, in pursuance of the aforementioned decision of the meeting, the parties hereto, hereby agree as follows:
1. The Bangladesh Petroleum Corporation shall purchase the entire stock of refined petroleum products held by Meghna Petroleum Limited at the close of business on 12 November, 1979 at the existing transfer price from the MPL and resell the same to MPL immediately at the revised price through the process of invoicing and re-invoicing.
2. The difference in value arising out of the process as in above shall be income of BPC and additional cost of products to MPL.
3. This agreement and arrangement shall be deemed to have come into operation with effect from 12 November, 1979 and shall remain in force until otherwise agreed so as to apply the same process of treatment to all price revisions after 12 November, 1979.”
 
24. The High Court Division, in our opinion, failed to appreciate the rationale behind the concept of diversion of income by paramount or over-riding title as contended by the appellant and held unwittingly that the windfall profit was that of the appellant and subsequent payment of the amount to the Corporation was not revenue expenditure for carrying out the business of the assessee but it was a diversion of income of the assessee under over-riding title. The High Court Division equally failed to appreciate and apply the principles enunciated in the case of CIT vs. Sitaldash Tirathdas (Supra) correctly in the facts of the present case. It also failed to appreciate the Kerala High Court case which followed the above case.
 
25. Since we find that the windfall profit was not income in the hands of the appellant but was diverted to the account of the BPC under a paramount title, it is not necessary to consider the various other matters dealt with (unnecessarily) by the High Court Division, namely, whether it was a revenue expenditure by the appellant or whether it was liable to tax also in the hands of the appellant according to the dictum of Rowdatt. J in the case of Commissioners of Inland Revenue vs. FB Sanderson 8 Tax Cases 38, 44.
 
26. In view of the discussion above, we hold that the questions of law referred to by the appellant were not correctly answered by the High Court Division. The answer to both the questions (question No.11 reformulated) would be in the negative.
 
In the result, the appeal is allowed without any order as to costs. Copy of this judgment be sent forthwith to the High Court Division for taking necessary steps in accordance with the Income Tax Ordinance, 1984.
 
Ed.