TMI Blog1994 (8) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... s failure to deduct tax at source for the guarantee commission credited to the account of Sri Vijaya Mallya, director, for the year 1990-91, whose status is non-resident for the purpose of income-tax, the second respondent took the view that section 195 requires the company to deduct tax before making any payment of guarantee commission to Sri Vijay Mallya. The petitioner was called upon to pay the tax deducted at source along with interest at the rate prescribed under section 201 of the Act. The petitioner took the stand that section 195 of the Act would apply only when income is paid or credited to a non-resident. On the facts of the case, the guarantee commission has not accrued or arisen to the said Sri Vijay Mallya. The said Sri Vijay Mallya was not only a non-resident for the purpose of the Act, but was also a non-resident within the meaning of the Foreign Exchange Regulation Act, 1973 (for short, " the F. E. R. A."). It was explained that in view of the restriction under section 9 of the Foreign Exchange Regulation Act unless permission was obtained from the Reserve Bank of India, payment could not be made to the said Sri Vijay Mallya and, therefore, the income was not said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or an obligation to deduct tax at source in respect of certain payments made to non-residents and arises only where there is an income accrued in favour of the non-resident. Under section 9 of the Foreign Exchange Regulation Act, no person can make a payment to or for the credit of a non-resident except with the previous approval of the Reserve Bank of India and such approval had not been obtained by the petitioner as on the date when the notice was issued to the petitioner and so section 195 was not attracted. Any entry made in the books of account would not create a right to income on the part of the said Vijay Mallya inasmuch as the payee was not a non-resident when the amount was paid or the amount had not accrued to him. The entry was made only in the "outstanding liability payable account" and that entry was made only to overcome the difficulty arising under section 9 of the Foreign Exchange Regulation Act. Thereafter when the approval was given by the Reserve Bank of India on payment of the guarantee commission the said Vijay Mallya had become a resident, but not ordinarily resident and, therefore, the said payment fell outside the ambit of section 195 of the Act and so the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission payable account. Such deductions were also claimed in the returns of income filed by the assessee for the assessment years 1989-90 and 1990-91 based on the aforesaid entries in the books of account. If really the liability to pay the guarantee commission has not accrued, there was no basis to claim deduction thereof from his profits. The permission of the Reserve Bank of India was granted to the petitioner in the month of March, 1992, and, therefore, it is submitted that the point of time at which the duty to deduct tax arises is determined by the provisions of the Act and not under the Foreign Exchange Regulation Act and, therefore, it is contended that they were justified in passing the order under section 201 of the Act. It is further contended that the petitioner-company having credited the guarantee commission payable account, the assessee ought to have deducted the tax at source and paid the same to the Central Government. Taxes to be deducted and paid would not constitute violation of section 9 of the Foreign Exchange Regulation Act and, therefore, such amount could have been paid and a clarification made by the Reserve Bank of India would also make it clear. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s argument ignores the effect of the Explanation given in section 5(7A). As stated earlier, the word "case" is used in a comprehensive sense for pending proceedings as well as for proceedings to be instituted in future. Consequently, an order of transfer can be validly made even if there is no proceeding pending and the purpose of transfer in such an event will simply be that all future proceedings have to take place before the Officer to whom the case of the assessee is transferred. The effect of an order made under section 5(7A) has been considered by the Supreme Court in Pannalal Binjraj v. Union of India [1957] 31 ITR 565, wherein it is noticed that when any case of a particular assessee which is pending before an Assessing Officer is transferred from that Officer to another Officer all proceedings which are pending against the assessee under the Act in respect of the same year as also the previous years are meant to be transferred simultaneously and all proceedings under the Act which may be commenced after the date of such transfer in respect of any year whatever are also included therein so that the Assessing Officer to whom such a case is transferred would be in a positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently the provisions of the Act. Point No. 2: Except with the permission of the Reserve Bank of India no person in or resident in India shall make any payment to or for the credit of any person resident outside India. Section 9 includes not only any payment to be made or shall make any credit to any person resident outside India. The transactions in the present case are by book entries and certain amounts are sought to be debited in the books of account of the petitioner to the credit of Vijay Mallya who is a non-resident. So, the question for consideration is whether such payment or credit could be made except in accordance with the general or special permission granted by the Reserve Bank of India conditionally or unconditionally. In the present case such permission had been granted to the petitioner under section 9 of the Foreign Exchange Regulation Act, however subsequent to the date on which the actual entries were made. The question that arises for consideration is what is the effect of such a permission. In Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548; AIR 1986 SC 1370, the Supreme Court had occasion to consider the scope of section 29 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way the operation of the provisions of the Foreign Exchange Regulation Act or of any rule, direction or order made thereunder. Section 9 of the Foreign Exchange Regulation Act totally prohibits the making of any payment or for the credit of any person resident outside India without the necessary permission as contemplated under the said provision. Though a resident outside India can file a suit for recovery of money without the permission of the Reserve Bank of India or the Central Government, as the case may be, he should obtain permission for the recovery of the money. I must hold in this case that there was a liability arising as a result of the entries made in the books of account of the petitioner-company. The liability thereto being acknowledged by reason of the claim made in the deduction of the income for the relevant years would be that the income accrued for the relevant years. Therefore, the contention advanced on behalf of the petitioner that the income accrued only in the year when the permission of the Reserve Bank of India was granted would not be correct. A careful reading of section 47(2) of the Foreign Exchange Regulation Act would make it clear that such a claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade in the books of account no liability arose for the purpose of attracting the provisions of section 195 of the Act cannot be accepted. Point No. 3: Chapter XVII provides for collection and recovery of tax under the Act. In the usual course after the order of assessment is passed the Assessing Officer will raise a demand by a notice in the prescribed form specifying the sum payable and such sum shall be payable by the assessee and under section 190, it is provided that notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction at source or by advance payment, as the case may be. These provisions are enacted for the purpose of easy collection of taxes and to avoid evasion thereof by suitably tailoring the account. Under section 195 of the Act the tax has to be deducted at source from interest or other payment made in the case of non-residents only. The liability thereto would arise only in respect of payment made by person to a non-resident. It certainly arises as soon as an entry is made in the books of account. In the present case, not only has credit been shown in favour ..... 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