1984 (9) TMI 91 - AT - Income Tax

Account Books, Cash Basis, Foreign Exchange Regulation Act, Income Tax Act, Interim Dividend

Issues Involved:
1. Date of accrual of income by way of dividend for a non-resident company.
2. Maintenance of books of account on a cash basis by the non-resident company.
3. Applicability and interpretation of the Foreign Exchange Regulations Act (FERA) in relation to the Income-tax Act, 1961.

Detailed Analysis:

1. Date of Accrual of Income by Way of Dividend:

The primary issue revolves around whether the income from dividends declared by an Indian company accrues to a non-resident company on the date of declaration or the date of remittance approved by the Reserve Bank of India (RBI). The assessing authority included the dividend income in the year it was declared, while the Commissioner (Appeals) opined that it should be assessed in the year RBI permitted the remittance.

The Tribunal clarified that interim dividends do not create an enforceable obligation until actual payment, aligning with the Supreme Court's decision in J. Dalmia v. CIT [1964] 53 ITR 83. Therefore, interim dividends are assessable in the year of remittance. However, for final dividends, the Tribunal held that income accrues on the date of declaration as per Section 8 of the Income-tax Act, 1961, which specifies that income accrues on the date of declaration of dividend.

The Tribunal further analyzed the provisions of the Foreign Exchange Regulations Act (FERA), particularly Sections 9 and 19, and concluded that these do not override the accrual provisions under Section 8 of the Income-tax Act. The Tribunal emphasized that the non-resident shareholder has an enforceable right to the dividend once declared, and FERA's provisions do not prevent this right but only regulate the remittance process.

2. Maintenance of Books of Account on Cash Basis:

The non-resident company argued that since it maintains its accounts on a cash basis, the income should be assessed on the date of receipt. The Tribunal rejected this argument, citing the Madras High Court's decision in CIT v. Standard Triumph Motors Co. Ltd. [1979] 119 ITR 573, which held that for non-residents, income must be assessed on the basis of accrual. The Tribunal distinguished this from the Orissa High Court's decision in CIT v. American Consulting Corpn. [1980] 123 ITR 513, noting that the latter did not address whether non-residents could maintain accounts on a cash basis for income accruing in India.

3. Applicability and Interpretation of FERA in Relation to the Income-tax Act:

The Tribunal examined whether FERA's provisions, particularly Sections 9 and 19, affect the accrual of income under the Income-tax Act. It concluded that FERA regulates foreign exchange but does not prevent the accrual of income. Section 47 of FERA allows for the enforcement of debts, including dividends, despite regulatory provisions. The Tribunal reasoned that once the RBI permits a non-resident to hold shares, it implicitly allows the enjoyment of dividends, making the procedural aspects of FERA non-suspensive of income accrual.

The Tribunal also addressed practical concerns, noting that assessing dividend income on an accrual basis could lead to complications in tax credit for non-residents. It suggested that the department consider the balance of convenience, which favors assessing on a remittance basis to avoid unnecessary administrative burdens and potential legal issues for the non-resident company.

Conclusion:

The Tribunal set aside the assessments and directed the assessing authority to re-do the assessments based on the principles laid down, particularly that final dividends accrue on the date of declaration. The cross-objections regarding the cash basis of accounting were dismissed, and the Tribunal emphasized the practical implications of their decision, suggesting a remittance basis for practical convenience.

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