1989 (9) TMI 164 - AT - Income Tax

Summary

Issues Involved:
1. Whether royalty income should be assessed on a cash basis or on an accrual basis.
2. Finality of Tribunal orders and their binding nature on subsequent assessments.
3. Application of Section 5(2)(a) and Section 5(2)(b) of the Income-tax Act, 1961.
4. Consistency and regularity in the method of accounting.

Issue-wise Detailed Analysis:

1. Whether royalty income should be assessed on a cash basis or on an accrual basis:
The core issue in these appeals is whether the royalty income earned by the non-resident German company from an Indian company should be assessed on a cash basis, as claimed by the assessee, or on an accrual basis, as determined by the assessing officer. The assessee consistently maintained its accounts on a cash basis for royalty income, which was accepted by the assessing officer for the assessment years 1973-74 and 1974-75. The Tribunal, in its order dated 16-11-1978, had directed that if the royalty amounts were shown on a receipt basis, the assessment should be made on a receipt basis. The CIT (Appeals) followed this direction and held that the royalty income should be assessed on a receipt basis for the assessment years 1975-76 and 1976-77. For the assessment year 1980-81, the CIT (Appeals) also upheld the assessee's contention that the royalty income should be taxed on a receipt basis.

2. Finality of Tribunal orders and their binding nature on subsequent assessments:
The Tribunal's order dated 16-11-1978 became final as no reference was sought by the Revenue against it. According to Section 254(4) of the Income-tax Act, the orders passed by the Appellate Tribunal on appeal are final unless rectified under Section 254(2) or referred under Section 256. The Tribunal's finding that the royalty income should be assessed on a receipt basis for the assessment years 1975-76 and 1976-77 could not be reagitated by the Revenue in subsequent appeals. This principle is supported by several judicial decisions, including Trikamlal Maneklal, In re [1958] 33 ITR 725, CIT v. Rao Thakur Narayan Singh [1965] 56 ITR 234, and R.K. Sawhney v. CIT [1987] 166 ITR 128/32 Taxman 546.

3. Application of Section 5(2)(a) and Section 5(2)(b) of the Income-tax Act, 1961:
Section 5(2) defines the scope of total income for non-residents, including income received or deemed to be received in India (Section 5(2)(a)) and income that accrues or arises or is deemed to accrue or arise in India (Section 5(2)(b)). The Tribunal's earlier decision for the assessment years 1977-78 and 1978-79 held that royalty income should be assessed on an accrual basis under Section 5(2)(b). However, this decision did not consider the method of accounting regularly employed by the assessee, which is crucial under Section 145(1). The Tribunal, in the present judgment, emphasized that the assessee's consistent use of the cash basis for accounting royalty income should be respected, and the income should be assessed on a receipt basis under Section 5(2)(a).

4. Consistency and regularity in the method of accounting:
Section 145(1) requires that income from business or other sources be computed according to the method of accounting regularly employed by the assessee. The assessee consistently followed the cash system of accounting for royalty income since the assessment year 1973-74. The Tribunal held that this consistent method could not be unilaterally changed by the assessing officer to an accrual basis. The decision of the Madras High Court in Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 (Mad.) was distinguished on the grounds that the facts were materially different, as the assessee in that case denied its liability to tax, whereas, in the present case, the assessee did not dispute the chargeability of its royalty income to tax.

Conclusion:
The Tribunal confirmed the orders of the CIT (Appeals) for the assessment years 1975-76, 1976-77, and 1980-81, holding that the royalty income should be assessed on a receipt basis. The Departmental appeals were dismissed, reinforcing the principle that the method of accounting regularly and consistently employed by the assessee should be respected, and the finality of Tribunal orders must be upheld.