TMI Blog2002 (11) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... he first proviso to section 145(1) as it stood before April 1, 1997. - - - - - Dated:- 30-11-2002 - Judge(s) : S. H. KAPADIA., J. P. DEVADHAR. JUDGMENT The judgment of the court was delivered by S.H. KAPADIA J.-Two questions of law have been referred to us under section 256(1) of the Income-tax Act, 1961, at the instance of the assessee arising in the assessment years 1976-7/77 and 1977-78, which are as follows: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the final dividend income accrued to the assessee on the date of declaration even though the Reserve Bank of India had not granted permission under the Foreign Exchange Regulation Act, 1973? Whether, on the facts and in the circumstances of the case, the assessee, a non-resident company, can be assessed on the basis that the accounts are maintained on cash basis?" Facts: The assessee-Pfizer Corporation, is a non-resident company. The assessee is a shareholder in its Indian subsidiary-Pfizer Limited--a company registered under the Indian Companies Act, and assessed to tax in Company Circle No. V, Bombay. In this case, we are concerned with the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view of section 9(1)(c) of the FERA, no debt arose in favour of the assessee till the RBI gave its approval. He contended that declaration of final dividend did not create legal obligation in the company to pay to the assessee. That, no income accrued to the assessee till the permission was granted by the RBI. He contended that under section 5(2)(b) of the Income-tax Act income accrued to the assessee only when the right to receive dividend stood crystallised. That, at the highest, on the date of declaration of dividend, the right which accrued to the assessee was an inchoate right, which got crystallised only when the approval was granted by the RBI. He relied on several authorities in support of his arguments. In the circumstances, it was argued that the assessee could be taxed only in the year in which the RBI gave its approval and not in the assessment year when the dividend was declared by Pfizer Limited. On question No. 2, learned counsel for the assessee contended that, in this case, the Tribunal erred in accepting the contention of the Department that all non-residents should be asked to maintain only the mercantile system of accounting. That, it was not open to non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see on the date of the declaration and the assessee gets the right to receive the dividend on that date. That, section 8 of the Income-tax Act was not subject to any restrictions under the FERA. That, the FERA does not affect accrual of income. He contended that, in this case, section 9 of the Income-tax Act has no application. He contended that section 5(2)(b) and section 9 of the Income-tax Act are charging sections. That, in this case, section 9(1) is not attracted. He contended that once income accrues to the assessee, the right to receive dividend can never be postponed. That, the effect of the argument of the assessee is postponement of the right to receive dividend. In this connection, he relied upon page 198 of the Law and Practice of Income-tax by Kanga and Palkhiwala, 7th edition. He contended that the judgment cited by Mr. Kaka has no application. That none of the judgments deal with the question which arises in this case. On question No. 2, Mr. Desai contended that a non-resident cannot be allowed to follow the cash system of accounting. He relied upon the judgment of the Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to accrue in India. Section 5(2)(b) is applicable in this case. It is required to be read with section 9(1) which categorises different types of income which form part of the total income. Section 9(1) indicates income which is deemed to accrue or arise in India. Section 9(1)(iv), inter alia, lays down that a dividend paid by an Indian company outside India will constitute income deemed to accrue in India. Therefore, section 9(1)(iv) is an extension of section 5(2)(b). Under section 5 all residents and non-residents are chargeable to tax in respect of income which accrues or is deemed to accrue in India or is received in India. Non-residents who are not assessable in respect of income accruing and received abroad are rendered chargeable to tax under section 5(2)(b) in respect of income deemed by section 9(1)(iv) to accrue in India. In other words, but for section 9(1)(iv), such income could not have fallen under section 5(2)(b). Therefore, dividend declared by an Indian company and paid to non-resident out of India would be deemed to accrue in India by virtue of section 9(1)(iv) read with section 5(2)(b) of the Act. Therefore, we say that section 9(1)(iv) is an extension of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Circular No. 6 of 2001, dated 5th March, 2001, issued by the Central Board of Direct Taxes. It deals with taxation of foreign telecasting companies. It has laid down the guidelines for computation of profits of FTCs for advertisement payments received by them from India. The total income of FTCs also included income like subscription charges receivable from cable operators in respect of pay channels. This circular directs the Assessing Officer to compute the total income of FTCs by including subscription charges receivable from cable operators by FTCs outside India. The circular makes it clear that the income received under such circumstances by FTCs outside India would fall under section 5 read with section 9(1). Therefore, we repeat that where the source of accrual is in India but payment is made to the non-resident outside India, section 5(2)(b) read with section 9(1) would make the income deemed to accrue in India. Therefore, in this case, we hold that final dividend amounting to Rs. 25.20 lakhs became taxable in the assessment year 1977-78 when the RBI granted approval and not in the assessment year 1976-77 when the dividend was declared by Pfizer Limited and so also the bal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the non-resident assessee, in this case, used to pay tax on receipt basis. Thereafter, for the assessment year 1976-77 and onwards the Department directed the assessee to maintain its accounts on the mercantile system of accounting. In the present case, the Tribunal following the judgment of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 has held that the assessee was a non-resident and, therefore, the assessee was not entitled to maintain accounts on the cash basis. In that matter the facts were as follows. There was a collaboration agreement between the assessee-Standard Triumph Motor Company Ltd. (a non-resident company) and an Indian company. Under that agreement, the assessee was entitled to payment of royalty on the sale proceeds of all motor cars sold by the Indian company. For the assessment years 1967-68 and 1968-69, the assessee submitted its returns of income admitting the royalty amounts on the basis of maintenance of accounts on the mercantile basis. However, in its return, for the assessment year 1969-70, the assessee claimed that it was maintaining its account on cash basis and not on mercantile basis and in the absence of actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the assessee did. In the present case, there is no finding of the Assessing Officer on escapement of tax. Therefore, the judgment of the Madras High Court has no application to the facts of the present case. In the present case, the assessee is being assessed to tax under section 5(2)(b) of the Act. In the present case, the dividend income is deemed to accrue in India under section 5(2)(b) of the Act read with section 9(1)(iv) of the Act. Therefore, the judgment of the Madras High Court will not apply to the facts of this case. It was argued, however, on behalf of the Department that in view of the judgment of the Madras High Court, it was not open to non-residents like the assessee, in this case, to maintain accounts on receipt basis. That, all such assessees as a general rule, have to follow only the mercantile system of accounting in view of the judgment of the Madras High Court. We do not agree with this contention. The judgment of the Madras High Court is confined to the facts of the case. However, assuming for the sake of argument that a general norm is sought to be laid down by the Madras High Court in the above case, with respect, we do not agree. There is no provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintained by the counter-party on the other hand. Lastly, there is no prohibition under the Income-tax Act which prohibits, as a general rule, all non-resident assessees from maintaining accounts on cash basis. They are free to adopt the cash or mercantile system. In fact, the discretion given to the Income-tax Officer by virtue of the proviso to section 145(1), as it then stood, itself indicates that, in appropriate cases, the Income-tax Officer can direct the assessee to maintain accounts under a particular system as in the case of the Madras High Court reported in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573. Under the said proviso, it is, inter alia, laid down that in any particular case where the accounts are complete but the method employed is such that the income cannot be properly deduced then computation shall be made by the Assessing Officer upon such basis and in such manner as the Assessing Officer may determine. Therefore, this proviso to section 145(1) as it stood at the relevant time implies that the assessee is free to maintain its accounts either on the mercantile system or on the cash system as long as the Assessing Officer is in a position to deduce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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