TMI Blog1989 (9) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... emand of the case, the C.I.T (Appeals) held that the assessments for the assessment years 1975-76 and 1976-77 should have been on receipt basis. For the assessment year 1980-81 the Income-tax Officer again assessed royalty income on accrual basis and the C.I.T (Appeals) held that the assessments should have been made on receipt basis. However, for the assessment years 1977-78 and 1978-79 Delhi Bench "E" of the Appellate Tribunal held vide its order dated 26-5-1984 in I.T.A. Nos. 1594 and 1595 (DEL)/1983 that the said income has to be assessed on accrual basis. The learned Members in view of the conflicting views of different Benches of the Tribunal in the assessee's own case, referred the matter to the President for constituting a Special Bench for resolving the controversy whether in the instant case royalty income is assessable on cash basis as claimed by the assessee or on mercantile basis as is the case of the Department. Thereafter, the President constituted a Special Bench and that is how the matter is before us. 3. In all these appeals the common ground raised by the Department is as follows:--- "On the facts and in the circumstances of the case, the Commissioner of Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in the balance-sheet of the payee (assessee company) in the same year as in the case of the paying company, it would amount to a constructive receipt by the assessee company and amounts would fall for being assessed on accrual basis. However, if the amounts of the royalty amounts were shown by the assessee company on receipt basis only, then the assessments would call for being made on receipt basis. The assessee company of course has in its favour the fact that in the earlier two years the assessments were made on receipt basis but the point, however, would call for being examined in detail." 7. Before the matter could come up before the Appellate Assistant Commissioner of Income-tax after remand of the case by the Tribunal, the Appellate Assistant Commissioner ceased to have jurisdiction in the matter and, therefore, the appeals stood restored to the file of the C.I.T. (Appeals). The C.I.T. (Appeals) in his consolidated impugned order dated28-3-1984for the assessment years 1975-76 and 1976-77, stated that he has found that the royalty received by the assessee company from the Indian company was accounted for by the assessee company on receipt basis only. Following the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the CIT (Appeals). It was contended that for the assessment years 1975-76 and 1976-77 the Tribunal vide its order dated16-11-1978has clearly expressed the opinion that if the royalty amount was shown by the assessee company on receipt basis only, then the assessment would call for being made on receipt basis. It was submitted that the lower appellate authority has found that so far as the royalty income is concerned, the assessee company maintained its account on cash basis and, therefore, the controversy for the first two assessment years stood concluded by the order of the Tribunal dated16-11-1978against which no reference was sought by the Revenue. It was then contended that the order of the Tribunal dated16-11-1978having become final, it was not open to the revenue to reagitate before the Tribunal that for the assessment years 1975-76 and 1976-77 royalty income should be assessed on accrual basis. According to Shri Vaish, so far as these two assessment years are concerned, the Tribunal cannot again go into the question whether royalty income is assessable on accrual basis or cash basis. It was pointed out that so far as these two assessment years are concerned, the C.I.T. (Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus erroneous on facts. 12. We have considered the rival submissions as also the facts on record. We have also gone through the paper book filed by the assessee. As has already been pointed out above, for the assessment years 1975-76 and 1976-77 the case was remanded by Tribunal vide its order dated16-11-1978to the lower appellate authority to enable him to examine the matter afresh. While remanding the case the Tribunal in no uncertain words expressed the opinion that if the amounts of royalty were shown by the assessee company on receipt basis only, then the assessment would call for being made on receipt basis. It is thus, clear that the Tribunal did record a categorical finding on the issue under consideration in favour of the assessee. After remand of the case, the issue was examined afresh by the first appellate authority, namely, C.I.T. (Appeals). In the consolidated order passed for the assessment years 1975-76 and 1976-77, the C.I.T. (Appeals) reproduced the following passages from the order of his predecessor passed in the appeal for the assessment year 1977-78 : "The non-resident company has its accounting year as 30th September. However, for the purpose of returnin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aper book. Thus, the evidence produced by the assessee and which was also examined by the C.I.T. (Appeals) fully established that royalty income earned in India was accounted for on receipt basis and, therefore, in view of the opinion expressed by the Tribunal in its order dated 16-11-1978 while remanding the issue to the lower appellate authority for the assessment years 1975-76 and 1976-77, the CIT (Appeals) was fully justified in holding that the assessments for these two assessment years should be made on receipt basis. 14. We find considerable force in the argument advanced on behalf of the assessee that since the matter stood concluded by the order of the Tribunal dated16-11-1978the same cannot be reagitated in these appeals for the assessment years 1975-76 and 1976-77. There is no dispute that against the order of the Tribunal dated16-11-1978no reference was sought by the Revenue. Also, no rectification petition u/s. 254(2) was moved against that order. Therefore, in view of the plain language of section 254(4) the order of the Tribunal dated16-11-1978became final between the parties. Sub-section (4) of section 254 says that save as provided in section 256, orders passed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated. It was held by the Lordships of the Bombay High Court that as the Tribunal had considered the merits of the contention of the assessee and arrived at a certain decision, the order of remand made by the Tribunal was final under Section 33(6), and it was not open to the Tribunal to permit the correctness of that order to be questioned in the proceedings subsequently brought before it against the final order of assessment, merely because the Tribunal at the later stage is advised that the previous order was erroneous in law. In Rao Thakur Narayan Singh's case from a reassessment for the assessment year 1942-43 bringing to tax certain forest income and interest income, the assessee preferred an appeal to the Appellate Tribunal objecting to the Income-tax Officer's jurisdiction to initiate reassessment proceedings in respect of the forest income on the ground that he had knowledge of such income when the original assessment was made. The Tribunal upheld his contention but by mistake set aside the entire reassessment order and restored the original assessment order. No steps were taken under Section 35 to rectify the mistake; nor was any reference to the High Court sought against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty income on cash basis only, and the certificate issued by the Chartered Accountant in West Germany was to the same effect. Apart from the above, this is the method of accounting that the assessee has been consistently following ever since 1973-74 assessment year. 17. However, the question whether royalty income earned by the assessee company is assessable on accrual basis or on receipt basis has to be examined on merit, since the order of the Tribunal dated 16-11-1978 would not cover the assessment year 1980-81. 18. Section 2(45) defines "total income" as "the total amount of income referred to in Section 5, computed in the manner laid down in this Act". It may also be noted that the principal charging Section 4 makes the total income of the previous year or previous years subject to charge of income-tax. Section 5(2) reads as under:-- "Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which --- (a) is received or is deemed to be received inIndiain such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him inInd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of keeping accounts and for that purpose to value his stock-in-trade either at cost or at market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if in the opinion of the taxing authorities income of the trade cannot be properly deduced therefrom. 20. In the instant case, the assessee company had adopted cash system of accounting in respect of royalty income since the very beginning. For the assessment years 1973-74 and 1974-75 royalty income was assessed by the assessing officer on receipt basis. The impugned orders of the Commissioner of Income-tax (Appeals) as also the documents available on the record which include extracts from the cash book maintained on behalf of the assessee company by its Indian agent and the certificate from the assessee's Chartered Accountant in Germany, go to establish beyond doubt that from the very beginning the assessee has been regularly and consistently following cash system of accounting in respect of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income inIndia. The question, however, arises as to how it should be computed for tax purposes. Whether it could be taxed on accrual basis simply because according to the provisions of collaborative agreement income accrued inIndiaor on cash basis, for there was delay on receipt which was beyond the control of the assessee. At this stage a reference may be made to the entries in the cash book maintained on behalf of the assessee company by its Indian agent, copies whereof are at pages 43 to 56 of the paper book filed by the assessee. The entries made in the cash book clearly go to show that royalty income is being accounted for on receipt basis from the very beginning. Since royalty income is accounted for on receipt basis in the cash book maintained on behalf of the assessee by its Indian agent, it clearly follows that royalty income is also received inIndia. In this connection, it may also be pointed out that in the cash book various dates of receipt of royalty income are the same as the dates of' remittance to the assessee company. In this case, therefore, by virtue of clause (a) of Section 5(2) royalty income is assessable on receipt basis and by accounting for the royalty inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was maintaining accounts on mercantile system and did not dispute its liability to assessment. But, for the assessment year 1969-70, the assessee admitted royalty of Rs. 9,25,257 but filed a nil return claiming that it was maintaining account on cash basis and not on mercantile basis and that no part of the royalty has been received and that it was not taxable. On these facts it was held by their Lordships of the Madras High Court that if the contention of the assessee that royalty should be assessed to income-tax or its actual receipt u/s. 5(2)(a) on the ground that it maintained its accounts on cash basis was accepted, the income could not be charged at all as it would be received in England and not in India. It was further held that the assessee company receiving its income outsideIndiacould be assessed to tax only under section 5(2)(b) on accrual basis. Section 5(2)(a) cannot be made applicable to such an assessee. It was further held that in the case of a non-resident, to whom income accrues inIndia, Section 5(2)(a) will have no application, unless the non-resident receives income inIndia. Their Lordships further observed that the effect of applying Section 145(1) would be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Triumph Motor Co. Ltd. is not applicable to the facts of the instant case. 24. The decision of the Supreme Court in State Bank ofIndiacited on behalf of the Department is not at all relevant for the purpose of this case. In that case it was held that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. There is no quarrel about the petition laid down in this case. Here we are concerned with an altogether different question, namely, whether in this case the royalty income earned by the assessee inIndiashould be assessed on receipt basis as claimed by it or on accrual basis as has been done by the assessing officer. 25. For the foregoing reasons, we hold that since the assessee has regularly and consistently kept its accounts in respect of royalty income on receipt basis, and as this system was accepted by the Revenue for the earlier years and approved by the Tribunal too, we hold that the revenue is not justified to convert it into Mercantile system unilaterally and therefore, income is not liable to be taxed on accrual basis and that the royalty income ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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