SECTION 1

Extent and application of the Act

1. Extension of direct tax laws to State of Sikkim - Clarification regarding

The Central Government has constituted a Committee to examine difficulties and find out solutions to the problems, if any, arising on account of the application of the direct tax laws to Sikkim.

According to Shri T.N. Pandey, Member, Central Board of Direct Taxes, the Convener, the Committee will meet shortly in Gangtok where members of the public, representatives of the trade organisations, etc., can bring their problems to its notice. The Committee consists of representatives of both the Central and State Governments.

With direct tax laws having been extended to Sikkim, the Income-tax Act, 1961, the Wealth-tax Act, 1957 and the Gift-tax Act, 1958, are applicable to the resident of the State with effect from April 1, 1990.

It is clarified that the income accruing to a person during the financial year 1989-90 will be subject to income-tax. The net wealth owned by a resident of Sikkim on March 31, 1990, will be subject to wealth-tax, gifts made by residents of Sikkim on or after April 1, 1989, will be taxable under the Gift-tax Act, 1958. Under the provisions of the Income-tax Act, 1961, tax will have to be deducted at source by an employer and other persons responsible for making specified payments during the current financial year. Employers will be liable to deduct tax at source at specified rates if they make payment of salary to an employee in excess of taxable salary of Rs. 18,000 per annum. Other persons responsible for making payment such as dividends (in excess of Rs. 2,500), interest on securities, interest, insurance commission, crossword puzzle prizes or payment to contractors or sub-contractors (rupees ten thousand or more) or to non-residents are also liable to deduct tax at source in accordance with the rates specified in the Income-tax Act.

Under the Income-tax Act, 1961, there is also a liability to pay advance tax in three equal instalments, i.e., on the 15th September, 15th December and 15th of March of a financial year. The advance tax is to be paid by any person who on estimating his taxable income finds that the tax payable by him for the entire year is Rs. 1,500 or more. It is necessary that these obligations are discharged well in time.

Source : PIB Press Release, dated 5-7-1989.

2. Notification under article 371F(n) - Extension of Income-tax Act, 1961, Wealth-tax Act, 1957 and Gift-tax Act, 1958, to the State of Sikkim

In exercise of the powers conferred by clause (n) of article 371F of the Constitution, the President hereby extends to the State of Sikkim the enactments specified in the Schedule annexed hereto, subject to the modifications, if any, specified in that Schedule and the following further modifications, namely:—

(1) Any reference in the said enactments to a law not in force, or to a functionary not in existence, in the State of Sikkim shall be construed as a reference to the corresponding law in force, or to the corresponding functionary in existence in that State:

Provided that if any question arises as to who such corresponding functionary, is or if there is no such corresponding functionary, the Central Government shall decide as to who such functionary will be and the decision of the Central Government shall be final.

(2) Notwithstanding anything contained in the relevant provisions, if any, of each such enactment for the commencement thereof, the provisions of each such enactment shall come into force in the State of Sikkim on such date as the Central Government may, by notification in the Official Gazette appoint:

Provided that different dates may be appointed for different provisions of the enactment and for different areas in the State of Sikkim and any reference in any such provision to the commencement of the Act shall be construed as a reference to the coming into force of that provision in the area where it has been brought into force :

Year

No.

Short title

(1)

(2)

    (3)

1961

43

Income-tax Act, 1961

1957

27

Wealth-tax Act, 1957

1958

18

Gift-tax Act, 1958

(3) The provisions of Chapter XVII of the Income-tax Act shall be made applicable with immediate effect.

(4) In the case of all assessees liable to advance tax of current income of the previous year relevant to the assessment year 1989-90, the instalment of advance tax payable on or before the 15th day of September, 1988, shall be payable on or before the 15th day of December, 1988, along with the second instalment of advance tax.

Notification : No. SO 1028(E), dated 7-11-1988.

Judicial analysis

Referred in - The above notification was referred to in Mansarovar Commercial (P.) Ltd. v. Asstt. CIT [1994] 215 ITR 715 (Sikkim), with the following observations :

“. . . . As regards cause of action, relief in all the petitions is for quashing and setting aside Notification No. S.O. 1028, dated November 7, 1988. This notification having been superseded by section 26 of the Finance Act, 1989, this relief is clearly not available . . . .” (p. 727)

Note : Section 26 of the Finance Act, 1989, referred to above, reads as follows :

“26. Application of the Income-tax Act to the State of Sikkim.—Notwithstanding anything contained in the notification of the Government of India in the Ministry of Home Affairs, No. S.O. 1028(E), dated the 7th November, 1988, and the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. S.O. 148(E), dated the 23rd February, 1989, in so far as it relates to the commencement of the Income-tax Act, 1961 (43 of 1961), in the State of Sikkim, the provisions of the Income-tax Act, 1961, shall come into force in the State of Sikkim with effect from the previous year relevant to the assessment year commencing on the 1st day of April, 1990, and any law corresponding to the Income-tax Act, 1961, which, immediately before such commencement, was in force in the State of Sikkim shall be deemed never to have ceased to have effect in relation to the previous year beginning with the 1st day of April, 1988, and ending with the 31st day of March, 1989, and shall continue to be in force for the purposes of the levy, assessment and collection of income-tax or for the purpose of imposing any penalty or for any other purpose whatsoever connected with, or incidental to, any of the purposes aforesaid, under such law.”

3. Effective dates for the applicability of the Income-tax Act, Wealth-tax Act and Gift-tax Act in the State of Sikkim

In pursuance of paragraph (2) of the notification of the Government of India in the Ministry of Home Affairs No. SO 1028(E), dated the 7th November, 1988, the Central Government hereby appoints,—

  (a)  the 1st day of April, 1989 as the date on which the Income-tax Act, 1961 shall come into force in the State of Sikkim in relation to the previous year relevant to the assessment year commencing on the 1 st day of April, 1989;

  (b)  the 1st day of April, 1990 as the date on which the Wealth-tax Act, 1957 shall come into force in the State of Sikkim in respect of the net wealth of an assessee, residing in the State of Sikkim, on the valuation date being 31 st March, 1990;

  (c)  the 1 st day of April, 1990 as the date on which the Gift-tax Act, 1958 shall come into force in the State of Sikkim in respect of the gifts made by a person, residing in the State of Sikkim, on or after the 1st day of April, 1989.

Notification : No. SO 148(E), dated 23-2-1989.

4. Extension of Income-tax Act to the Continental Shelf of India

In exercise of the powers conferred by sub-clause (a) of clause (6) of section 6, and clause (a) of sub-section (7) of section 7 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 (80 of 1976), the Central Government hereby extends the Income-tax Act, 1961 (43 of 1961), to the continental shelf of India and the exclusive economic zone of India with effect from the 1st day of April, 1983, subject to the restriction and modification that the said Act shall apply only in respect of income derived by every person from all or any of the following activities namely:—

  (a)  the prospecting for or extraction or production of mineral oils in the continental shelf of India or the exclusive economic zone of India;

  (b)  the provision of any services or facilities or supply of any ship, aircraft, machinery or plant (whether by way of sale or hire) in connection with any activities referred to in clause (a);

  (c)  the rendering of services as an employee of any person engaged in any of the activities referred to in clause (a) or clause (b).

Explanation : For the purpose of this notification, “mineral oil” includes “petroleum and natural gas”.

Notification : No. GSR 304(E), dated 31-3-1983.

JUDICIAL ANALYSIS

Explained in - In McDermott International Inc. v. Deputy CIT [1994] 49 ITD 590 (Delhi-Trib.) it was observed that the CBDT Notification No. 5147 [SO 304(E), dated 31-3-1983] states that it is restricted to the income derived by every person from all or any of the activities carried on within the Continental Shelf and Exclusive Economic Zone of India. The prospecting of or extraction of or production of mineral oil or natural gas in high seas requires digging of deep sea wells and their construction, followed by laying of pipelines for drawing of mineral oil or natural gas, and other engineering construction like platform and many other ancillaries related thereto. These structures are the basic infrastructure required without which carrying out of any of three activities described by the notification is impossible. These construction works form the foundation for enabling the carrying out the three activities and are directly connected with those activities. There is no denial that these construction works do not by themselves lead to the prospecting or extraction or production, but it is also not denied that, without the existence of these basic structures, none of the three activities can be carried out. The Government of India, with a view to augmenting its oil resources, had decided to proceed with the prospecting, extraction and production of oil from the Bombay High. In this connection, it required the services, equipment, etc., of persons who are familiar with these activities and had invited them.

The Government realised that section 5(2) had defined the scope of the total income of non-residents, but did not include in its fold the various activities in the Bombay High and the income derived therefrom. This it could do so by bringing out the notification, and by extending the Act to the activities in the Bombay High.

Since the Government of India was aware of the processes involved, such as construction of platforms, oil rigs, laying of pipelines, their installation, testing, commissioning, followed by any of the three activities and also of the processes and support that were necessary for carrying out the three activities, and since the ownership of the activities was vested in the Government of India, it had clearly spelt out that the notification would cover the income derived from the three activities and from the service or facilities provided therein in connection with those three activities. Therefore the intention being so clear, to hold that the service and facility provided in connection with the three activities is to cover post-construction works only, would defeat the very intention. The intention was to engulf into the tax net the income derived from prospecting, extraction or production of mineral oils and natural gas and the income derived in the rendering of services or provision of facilities that include supply of ship, aircraft, machinery or plant in connection with any of the three activities. There is no warrant for excluding of the operation of works before the commencement of any of the three main activities, unless it has been so specifically provided that it is intended only to include in its purview the works of services and facilities related to actual prospecting, extraction and production. The notification, as it stood at the relevant point of time, makes it abundantly clear that it is not intended to cover the income derived by any person from all or any activity carried on within the Continental Shelf and the Exclusive Economic Zone, which does not involve prospecting or extraction or production of mineral oil and natural gas or rendering of service or provision of any facility in connection with the three activities. It is clear that the notification covers all or any activities that involves rendering of any service or provision of any facility that assisted or aided in the prospecting extraction or production of mineral oil and natural gas. But for these engineering construction works, it would be impossible to carry out any of the three activities and, in that case, there is a direct and close connection between the service and facility provided and the three main activities.

Explained in - The above notification was explained in the case of ITO v. S.A. Hareford [1985] 11 ITD 569 (Delhi - Trib.), in the following words :

“10. The above notification is self-speaking since, according to this notification, the Income-tax Act has been extended to the continental shelf of India and the exclusive economic zone of India, with effect from 1-4-1983. In other words, the Act did not apply to the continental shelf of India and the exclusive economic zone of India prior to that date. This notification has been issued under the enabling provisions of the Central Act, 1976 and vide section 2 of the said enactment, ‘limit’, in relation to the territorial waters, the continental shelf, etc., has been defined as under :

‘2. In this Act, ‘limit’, in relation to the territorial waters, the continental shelf, the exclusive economic zone or any other maritime zone of India, means the limit of such waters, shelf or zone with reference to the mainland of India as well as the individual or composite group or groups of islands constituting part of the territory of India.’

According to section 3 of the said Act, sovereignty of India stands extended as under :

‘(1) The sovereignty of India extends and has always extended to the territorial waters of India (hereinafter referred to as the territorial waters) and to the seabed and subsoil underlying, and the air space over such waters.

(2) The limit of the territorial waters, is the line every point of which is at a distance of 12 nautical miles from the nearest point of the appropriate base line.

(3) Notwithstanding anything contained in sub-section (2), the Central Government may, whenever it considers necessary so to do having regard to International Law and State Practice, alter by notification in the Official Gazette, the limit of the territorial waters.

(4) No notification shall be issued under sub-section (3) unless resolutions approving the issue of such notification are passed by both Houses of Parliament.’

11. The above provision of law, read with section 1 makes it clear, that prior to 1-4-1983, the provision of the Act were not applicable to the continental shelf of India and the exclusive economic zone of India . . . .” (pp. 576-577)

referred to in - The above notification was referred to in McDermott International Inc. (No.1) v. Union of India [1988] 173 ITR 155 (Bom.), with the following observations:

“Under the Taxation Laws (Extension to Union Territories) Regulation, 1963, which came into effect from April 1, 1963, section 2(25A) was inserted in the Income-tax Act, 1961. Under sub-clause (b) of section 2(25A), it is provided as follows :

‘(25A)       ‘India’ shall be deemed to include the Union Territories of Dadra and Nagar Haveli, Goa, Daman and Diu and Pondicherry,—

    **                                                                     **                                                                                **

                     (b)   as respects any period included in the previous year, for the purposes of making any assessment for the assessment year, commencing on the 1st day of April, 1963, or for any subsequent year.’

Therefore, when it is sought to tax income arising in the previous year relevant to the assessment year from which the Income-tax Act is made applicable, an express provision has to be made to cover income accruing in the previous year. In the absence of such an express provision, income accruing in an accounting year for which the Income-tax Act was not applicable, cannot be brought to tax simply because from the relevant assessment year, the Income-tax Act is made applicable.

There is no such express provision in the notification of March 31, 1983. The income arising in the accounting year April 1, 1982, to March 31, 1983, to the petitioner in the territory beyond 12 nautical miles is not, therefore, subject to the Income-tax Act, 1961.” (p. 161)

Explained in - The above notification was explained in Dixylin Field International Drilling Co. v. ITO [1988] 27 ITD 118 (Delhi - Trib.), in the following words :

“In view of the above notification, we accepted Mr. N.A. Palkhiwala’s argument that the purpose was limited and the notification was effective from 1-4-1983 and it could not and was not in the nature of Finance Act and the related provisions of section 4 of the Income-tax Act, 1961.

13. We have taken the above view because if the said notification is considered as authorising a view that the C.S. & EEZ could be regarded as a part of India even prior to 1-4-1983, thereby authorising levy of income-tax on income of that previous year, we must also presume that the notification had retrospective effect, a presumption which we are not prepared to make in the absence of any legislative authorisation. This is because it is an accepted principle of jurisprudence that every statute particularly the one imposing tax liability has prospective effect unless it is expressly or by necessary implication, made to have retrospective effect.” (pp. 124-125)

Explained in - The above notification was explained in CIT v. Ronald William Trikard [1995] 215 ITR 638 (Mad.), in the following words :

“. . . By virtue of the notification issued by the Central Government in G.S.R. No. 304(E), dated March 31, 1983, the Income-tax Act, 1961, is extended to the continental shelf of India and the exclusive economic zone of India with effect from April 1, 1983, subject to the restriction and modification, that the said Act shall apply only in respect of income derived by every person from all or any of the activities mentioned therein. We have already found that by a legal fiction, the continental shelf and exclusive economic zone became part of India and taxable territory for the purpose of the Income-tax Act, 1961, only after the issue of Notification G. S. R. No. 304(E), dated March 31, 1983, with effect from April 1, 1983, by the Central Government in exercise of the powers conferred under sections 6(6) and 7(7) of the Act. In other words, so far as the Income-tax Act is concerned, up to March 31, 1983, the exclusive economic zone did not form part of the territory of India. Therefore, up to and including the assessment year 1983-84, any income accruing or arising to or received by a non-resident in such exclusive economic zone during the corresponding accounting year was not chargeable to income-tax in relation to the assessment year 1983-84, because, the exclusive economic zone did not form part of the territory of India, as no notification under section 7(7) of the Act has been issued up to March 31, 1983.” (p. 653)

EXPLAINED IN - The above notification was explained in Micopen S.P.A. Miland v. Dy. CIT [2002] 82 ITD 369 (Mum.) with the observation that the language used in the Notification is quite plain and clear and it only speaks about the services or facilities rendered for prospecting for or extraction or production of mineral oil. The notification does not make a distinction between the contractor and the sub-contractor.