TMI Blog1988 (4) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... from Perfect Circle Victor Ltd. in terms of agreement dated 24-1-1975. Under the agreement dated 24-1-1975, the assessee was entitled to receive the royalty at the rate of 4 per cent of the net sale price of the products sold in India and at the rate of 5 per cent on net sale price of products exported to other countries. Under the said agreement, royalty was required to be calculated and paid every quarter. According to the assessee, royalty entitlement based on sales for the relevant previous year was Rs. 10,19,655. However, the assessee objected to including this amount in the total income. It pleaded that it had adopted the practice of returning the royalty income in the year in which the amount was received in USA and not in the yea r which the right to receive amount accrued in India. It submitted that the same method should be adopted for this year also. 4. The Income-tax Officer rejected the plea of the assessee to the effect that the said royalty income should be assessed only in the year in which the same was received by the assessee-company in USA and that it should not be assessed in the year in which the income accrued. It was admitted before the Income-tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as received or deemed to be received in India by him or on his behalf or which accrued or error or was deemed to accrue or arise to him in India, In the present case, according to him, under the agreement dated 24-1-1975 the assessee became entitled to receive royalty in the relevant accounting year. Consequently, the said income had accrued to the assessee during the relevant accounting year and as such the said income formed part of the total income under section 5(2) of the Act. He relied on the decision of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573. The assessee is now in further appeal before us. 7. The first question to be determined is whether the income had accrued to the assessee in the relevant accounting year. As already stated, under the agreement dated 24-1-1975 between the assessee and M/s. Perfect Circle Victor Ltd., the assessee was entitled to receive royalty at the rate of 4 per cent of the net sales of products sold in India and the rate of 5 per cent on products exported to other countries. Under the said agreement, royalty was required to be calculated and paid every quarter. As per figures furnished by the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total income was bound to fail in view of the principle laid down by the decision of Madras High Court referred to above. 11. It was submitted by Shri B. K. Khare, the learned representative of the assessee, that the Madras High Court in said decision has not followed the decision of Supreme Court in Keshav Mills Ltd. v. CIT [1953] 23 ITR 230, and as such we should not follow the decision of Madras High Court. He relied on the following observation at page 579 of the said decision of Madras High Court. "We need not consider how far the observation of the Supreme Court is binding on us, for we proceed to deal with the matter on our own." On the basis of this observation, the above submission was made by the learned representative of the assessee. We do not agree with the said submission. In fact, the attention to the Supreme Court decision in the case of Keshav Mills Ltd. had been drawn in the Madras High Court decision by the department and not by the assessee. The contention of the department was that particular observation of the Supreme Court in the case of Keshav Mills Ltd. was in favour of the department. The contention of the assessee before the Madras High Court w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 5(2)(b) of the Act. The Supreme Court expressed this view in following words : "Mr. Kolah pressed into service the argument based on section 13 of the Act that the mercantile system of accounting regularly adopted by the assessee was obligatory on the income-tax authorities for computation of his income. While agreeing generally with that submission in case of residents, we doubt whether that position would be available to a non-resident, who maintains his books of account outside British India according to the mercantile system. The section would only be relevant where the total profits of the assessee have to be computed, in which event he would be entitled to claim that they should be computed according to the system of accounts maintained by him. But the section would hardly be relevant where stray items of income are caught in taxable territories as received in taxable territories by a non-resident." Thus the decision of Supreme Court assists the department in the present case and not the assessee. 13. Shri Khare drew our attention to last sentence in the above quotation and argued that the said principle was applied by Supreme Court because of the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of accounting as far as income from royalties was concerned. 16. We do not agree with the above submission. If the assessee claimed that it maintained accounts on case basis in respect of particular source of income should be assessed on cash basis under section 145(1) of the Act, the assessee has to show that the account for the relevant previous year were in fact maintained on cash basis. This has not admittedly been shown to us. The above extract only indicates that in the consolidated statements prepared by the assessee in respect of its global income, royalties were recorded when received. What is recorded in consolidated statements is not relevant. What is relevant is maintenance of accounts on cash basis in respect of this source of income. Besides, in the above extract dividends have also been referred to. It is an admitted position that the assessee was not returning dividend income as and when received and that dividend income was being returned as and when the dividends were declared as required by section 8 of the Act. Consequently, mere fact that dividends were mentioned in the consolidated statements when received would not mean that dividends would become assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission that was made in the said decision before the Tribunal was that since the assessee had adopted cash method of accounting, the dividend income could not be assessed on the basis of declaration but should be assessed on the basis of receipt. The Tribunal rejected the said submission relying on the decision of the Madras High Court in Standard Triumph Motor Co. Ltd.'s case on which we have relied in the present case. This decision of the Tribunal thus supports the view which we have taken. 20. We may also mention that the submission that income accruing to non-resident should be taxed on receipt basis and not on accrual basis was considered by the Special Bench of the Tribunal in the case of Siemens Aktiengesellschaft v. ITO [1987] 22 ITR 87 (Bom.) at page 122 and the Tribunal relying on the above-mentioned decision of the Madras High Court held that income was taxable on accrual basis and not on receipt basis. The decision in CIT v. American Consulting Corpn. [1980] 123 ITR 513 (Ori.), on which Shri Khare has relied, has been taken note of by the Special Bench of the Tribunal. Thus the decision of the Special Bench of the Tribunal also supports the view which we have taken. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion to remit the amount has been made. The assessee holds large number of shares in the company in question. Consequently, the assessee has financial interest in the affairs of the company in question. It can be safely presumed that it was with the consent of the assessee-company that no application to remit the amount has been made. We were informed by the learned representative of the assessee that in the y ear 1987 the assessee has chosen to accept shares of the concerned company in lieu of the amount, which was receivable by the assessee in respect of royalty income. Thus the event of remittance has been postponed because of financial considerations and not because of any difficulty in remittance of the amount. By choosing to receive the amount after a lapse of seven years, the assessee cannot postpone the taxing event by seven years. We may also further emphasise that as far as the Indian company is concerned, the amount in question representing royalty payable to the assessee has been claimed as deduction in computation of its profits and has been allowed. This indicates that the Indian company treated the royalty income as payable to the assessee-company in the relevant acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace earlier and that the income should be taxed in the year in which it arose. 26. It is well established that as far as 'accrue' and 'arise' are concerned, the locale for both the events would always be the same but the time may be different; income may accuse in one year and arise in another. However that distinction is not relevant here. As regards income arising in different year, what the learned authors have emphasised is that this would happen solely because of particular method of accounting regularly employed by the assessee under section 145 of the Act. 27. In our case, we have already stated, no account books have been maintained under section 145 of the Act for the income accruing or arising in India and no copies of any account book have been filed. We have already dealt with this aspect earlier. We are unable to accept the submission that the grant of permission by Reserve Bank for remittance to USA would be the only taxing event in the present case. As already stated no permission of Reserve Bank for remittance has ever been sought as far as this income is concerned. Accrual is one of the taxing events attracting tax and when that event has taken place, tax wou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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