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Issues Involved:
1. Whether the royalty income had accrued to the assessee in the relevant accounting year. 2. Whether the method of accounting employed by the assessee in the USA is relevant for the purposes of Indian taxation. 3. The impact of the Reserve Bank of India's permission on the accrual of income. 4. The relevance of past acceptance by the department of the assessee's method of accounting on a receipt basis. 5. The application of various legal precedents and statutory provisions to the case. Detailed Analysis: 1. Accrual of Royalty Income: The primary issue was whether the royalty income had accrued to the assessee in the relevant accounting year. The Tribunal confirmed that under the agreement dated 24-1-1975, the assessee was entitled to receive royalty based on sales, calculated and paid every quarter. The amount of Rs. 10,19,655 was determined based on sales for the relevant previous year. The Tribunal cited Section 5(2) of the Income-tax Act, 1961, which includes income that accrues or arises in India during the relevant year in the total income of a non-resident. The Tribunal held that the income had indeed accrued to the assessee in the relevant accounting year, supported by the decision of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573. 2. Relevance of Method of Accounting: The assessee claimed to follow the cash system of accounting in the USA and argued that the royalty income should be assessed when received. The Tribunal rejected this argument, stating that the method of accounting employed by the assessee in the USA is irrelevant for Indian taxation purposes. It emphasized that for Section 145 of the Act, the method of accounting presupposes the maintenance of regular books of account for income assessable in India, which the assessee failed to maintain. The Tribunal cited the Supreme Court decision in Keshav Mills Ltd. v. CIT [1953] 23 ITR 230, which held that the method of accounting followed by a non-resident outside India is immaterial when taxing events occur in India. 3. Impact of Reserve Bank of India's Permission: The assessee argued that without the Reserve Bank of India's permission, the right to receive the income did not exist. The Tribunal dismissed this argument, referencing the Tribunal's decision in ITO v. Pfizer Corpn. [1985] 12 ITD 351 (Bom.), which held that the provisions of the Foreign Exchange Regulation Act prescribe procedures for remittance but do not suspend the accrual of income. Therefore, the royalty income accrued in the relevant year under the agreement, regardless of the Reserve Bank's permission. 4. Past Acceptance by the Department: The assessee contended that the department had previously accepted the royalty income on a receipt basis, and thus it should continue. The Tribunal rejected this, stating that past acceptance does not prevent the department from assessing income on an accrual basis when legal provisions dictate so. The Tribunal emphasized that the assessee had financial interests in the Indian company and chose not to receive the amount for several years, which cannot postpone the taxing event. 5. Legal Precedents and Statutory Provisions: The Tribunal relied on several legal precedents and statutory provisions to support its decision. It cited: - Section 5(2)(b) of the Income-tax Act, which includes income that accrues or arises in India. - Section 9, which deems royalty income payable by a resident to accrue or arise in India. - The decision of the Special Bench of the Tribunal in Siemens Aktiengesellschaft v. ITO [1987] 22 ITR 87 (Bom.), which held that income is taxable on an accrual basis. - The decision in CIT v. American Consulting Corpn. [1980] 123 ITR 513 (Ori.), which was considered but not followed. The Tribunal concluded that the royalty income accrued in the relevant accounting year and was taxable on an accrual basis, rejecting all submissions made by the assessee. The decision was confirmed, and the addition of the amount in question to the total income was upheld.
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