1987 (3) TMI 145 - AT - Income Tax

Issues Involved:
1. Residential status of the assessees.
2. Taxability of foreign dividend income.
3. Validity of the Power of Attorney and the role of the Chartered Bank, Hongkong.
4. Application of section 5(2)(a) of the Income-tax Act.
5. Relevance of the Foreign Exchange Regulation Act (FERA).
6. Allegation of tax avoidance.

Detailed Analysis:

1. Residential Status of the Assessees:

The assessees claimed non-resident status for the assessment years 1979-80 and 1980-81, supported by their absence from India between 28-3-1978 and 10-4-1980. The Income-tax Officer (ITO) accepted this claim for the assessment year 1979-80 but later, the Commissioner of Income Tax (CIT) questioned this status under section 263 of the Income-tax Act.

2. Taxability of Foreign Dividend Income:

The assessees argued that the dividend income from shares held in the Hongkong & Shanghai Banking Corporation (Hongkong Bank) was received abroad and thus not taxable in India. The ITO initially accepted this for 1979-80 but later included it for 1980-81, asserting that the income was taxable under section 5(2)(a) of the Income-tax Act when remitted to India.

3. Validity of the Power of Attorney and the Role of the Chartered Bank, Hongkong:

The assessees issued a Power of Attorney to the Chartered Bank, Bombay, authorizing it to appoint the Chartered Bank, Hongkong, as a substitute agent to collect dividends. However, no specific Power of Attorney from the Chartered Bank, Bombay, to its Hongkong office was produced. The Hongkong office acted only as a collecting agent, not a substitute agent, as argued by the department.

4. Application of Section 5(2)(a) of the Income-tax Act:

The department argued that the income was received in India when the rupee equivalent of the foreign dividend was credited to the assessees' accounts in Bombay. The Tribunal agreed, stating that the assessees had control over the income only upon its remittance to India, thus making it taxable under section 5(2)(a).

5. Relevance of the Foreign Exchange Regulation Act (FERA):

The CIT(A) considered the provisions of FERA, noting that the assessees could not open accounts with foreign banks without the Reserve Bank of India's permission. This restriction indicated that the assessees were residents under FERA, further supporting the department's stance that the income was effectively received in India.

6. Allegation of Tax Avoidance:

The department alleged that the assessees devised a plan to avoid tax by creating evidence of their non-resident status and arranging for the dividend to be collected abroad. The Tribunal found this argument persuasive, noting the meticulous steps taken by the assessees to appear as non-residents and the prompt remittance of dividends to India.

Conclusion:

The Tribunal dismissed the appeals, confirming the orders of the CIT for both assessment years. It held that the income was received in India when the rupee equivalent was credited to the assessees' accounts, making it taxable under section 5(2)(a) of the Income-tax Act. The Tribunal also found no evidence of the Hongkong office functioning as a substituted agent for the assessees, and the arrangement was seen as a tax avoidance device. The relevance of FERA further supported the department's case, establishing the assessees' resident status under that Act.

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