1994 (5) TMI 12 - HC - Income Tax

Issues Involved:
1. Jurisdiction and correctness of the Income-tax Appellate Tribunal (ITAT) in adjudicating the accrual of consultancy fees.
2. Interpretation and application of agreements and letters concerning consultancy fees.
3. Correctness of the ITAT's decision on the accrual of consultancy income.
4. Application of Rule 115 of the Income-tax Rules.
5. Enquiry into share application money and deposits.
6. Accrual of interest on amounts deposited in a London bank.
7. Jurisdiction under section 263 of the Income-tax Act by the Commissioner of Income-tax.

Issue-wise Detailed Analysis:

1. Jurisdiction and Correctness of ITAT in Adjudicating the Accrual of Consultancy Fees:
The ITAT was questioned on its jurisdiction to entertain and adjudicate the assessee's plea that the consultancy fee accrued in the assessment year 1988-89, despite the Commissioner of Income-tax (CIT) examining assessment records for the years 1985-86 to 1987-88 and concluding the orders were erroneous and prejudicial to the Revenue. The Tribunal held that the consultancy fee accrued only upon its repatriation to India on September 11, 1987, and not during the remittance periods stated in the agreements.

2. Interpretation and Application of Agreements and Letters Concerning Consultancy Fees:
The ITAT's interpretation of the agreements dated August 30, 1984, and November 5, 1984, and subsequent letters was pivotal. The Tribunal concluded that the agreements and letters indicated that the consultancy fee's accrual was contingent upon the repatriation of funds to India, which occurred on September 11, 1987. The Tribunal rejected the Revenue's argument that the remittances to Eljay's London Bank account constituted accrual of income in the years 1985-86 to 1987-88.

3. Correctness of ITAT's Decision on the Accrual of Consultancy Income:
The Tribunal's decision to hold that the consultancy fee accrued in the assessment year 1988-89 was based on the interpretation of the agreements and letters. The Tribunal found that the right to the consultancy fee was inchoate and imperfect until the funds were repatriated to India. This interpretation was challenged by the Revenue, arguing that the fee should be assessed in the years the remittances were made.

4. Application of Rule 115 of the Income-tax Rules:
The ITAT concluded that Rule 115, concerning the conversion of foreign currency into Indian Rupees, was not applicable for the assessment years 1986-87 and 1987-88. The Tribunal held that since the consultancy fee accrued only upon repatriation to India, there was no need for artificial conversion under Rule 115.

5. Enquiry into Share Application Money and Deposits:
The Tribunal held that the CIT was not justified in concluding that due enquiry had not been made by the Assessing Officer regarding the share application money of Rs. 1,98,68,081.75 received from Eljay Consultants Inc. The ITAT found that the necessary approvals from the Reserve Bank of India had been obtained, and the information was provided to the Income-tax Officer.

6. Accrual of Interest on Amounts Deposited in a London Bank:
The Tribunal concluded that the CIT was not right in holding that the Assessing Officer failed to enquire about the accrual of interest on amounts deposited in the specified account in a London bank. The ITAT found no evidence of underassessment due to the non-application of Rule 115 or the lack of enquiry into interest accruals.

7. Jurisdiction Under Section 263 of the Income-tax Act by the Commissioner of Income-tax:
The Tribunal acknowledged that the CIT had the jurisdiction under section 263 to set aside the assessments for being erroneous and prejudicial to the Revenue. However, the ITAT modified the CIT's observations, holding that the assessments should be reframed de novo but without foreclosing the enquiry by the Assessing Officer on specific issues, including the accrual of consultancy income and the application of Rule 115.

Conclusion:
The High Court directed the Tribunal to draw up a statement of the case and refer the following questions for its opinion:
1. Whether the consultancy fee income accrued in the assessment year 1988-89 or in the prior years.
2. Whether the Tribunal was justified in concluding that the consultancy fee was assessable in the assessment year 1988-89.
3. Whether Rule 115 was applicable for the conversion of foreign currency consultancy income.
4. Whether the Tribunal was correct in holding that due enquiry was not made regarding the share application money.
5. Whether the Tribunal was justified in holding that the CIT was not right in requiring an enquiry into the accrual of interest on amounts deposited in the London bank.

The Revenue was awarded costs quantified at Rs. 1,000.

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