Section 5(2)(a) - receipt of income is at place where services are rendered. In case of payment by cheque, DD,TT etc. receipt of income is at place where cheque is given or posted or dispatched to payee - and not where cheque is realized and bank account of payee is credited

[CA DEV KUMAR KOTHARI]

Relevant provisions: Section 5(2) (a) of Income-tax Act, 1961.

Settled legal position by:

CIT Versus Ogale Glass Works Limited  1954 (4) TMI 3 - SUPREME Court  -  Posting of cheque  in Delhi, in law, amounted to payment in Delhi. ( thus receipt in Delhi)

Some judgment of ITAT which decided issue against assessee:

Capt. A.L. Fernandes Versus Income Tax Officer 2001 (12) TMI 873 - ITAT MUMBAI Other Citation: (2002) 81 ITD 203, [2002] 75 TTJ 714

Shri Tapas Kr. Bandopadhyay Versus Deputy Director of Income-tax, (International Taxation) -3 (1) , Kolkata 2016 (6) TMI 215 - ITAT KOLKATA in I.T.A No. 70/Kol/2016  Dated: - 01 June 2016

Shri Tapan Krishna Pattanaik, ... vs Assesses sing Officer [2016 (6) TMI 1174 - ITAT KOLKATA] dt. on 10 June, 2016

KOLKATA BENCH 'C',KOLKATA(Before Shri P. M. Jagtap, A.M. & Shri S.S.Viswanethra Ravi, J.M.) ITA No.68/Kol/2016

Judgments of ITAT in favour of assessee:

Arvind Singh Chauhan Versus Income Tax Officer 2014 (3) TMI 18 - ITAT AGRA

Other Citation: [2014] 31 ITR (Trib) 105 (ITAT [Agra])

Synopsise:

Un-necessary controversy and litigation is going on about taxability of salary earned by NRI, for services performed  out of India, merely because salary earned out of India,  was remitted in bank account of NRI in India.

In some judgments matter has been decided in favour of assessee, by applying judgment of the Supreme Court in Ogale Glass,( though no reference is found). Whereas in some judgments matter was decided against the assessee  by wrongly holding that the amount remitted in Indian bank account is income received in India. In any of judgment the law laid down by the Supreme Court in case of Ogale Glass was not referred to and considered. Therefore, with respect author feels that the judgments decided against the assessee suffer from mistake which can be rectified by Tribunal to render expeditious justice and to avoid continuation of injustice. Counsels appearing before High Court in such cases and in pending and new cases on this issue before appellate authorities will do well to press to follow law laid down in Ogale Glass.

A circular from the CBDT in  accordance with law laid down in case of Ogle Glass will be very useful in proper administration of tax for the revenue and for tax payers.

Relevant provision for this article   S.5 (2) clause (a)

Scope of total income.

     5. (1)  xxx

     (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which

• is received or is deemed to be received in India in such year by or on behalf of such person ; or

As per this provision, if an income is received in India by an NRI, then it is taxable on basis of receipt. Therefore, place of receipt of income, is an important aspect.

Here we need to bear in mind that the place of receipt of income is relevant and not the place where such income appropriated, sent or is otherwise realized. In case of income by way of salary is undoubtedly the place of receipt of income is the place where services are rendered. In case of supply of goods, the receipt of income is the place from where supply is made and not the place where supply is made.

Settled legal position in case of Ogale Glass :

Place of receipt of sum is at place where cheque is drawn / posted:

Long ago law was declared and settled by honourable Supreme Court of India in CIT Versus Ogale Glass Works Limited 1954 (4) TMI 3 - SUPREME Court   that place where cheque was drawn or posted is the place where cheque was received by payee and not the place where cheque is received or realized by the payee/ drawee of cheque.

In that case Cheque was issued and posted at Delhi, therefore it was held that the sum was received in Delhi, which was at that time part of British India and taxable territory. Therefore, sum so received at Delhi was taxable. The contention of assessee that it was received out of British India, where the cheque was deposited and credited in account of assessee  was not accepted.

Tribunal: The Tribunal has decided issues in favour of assessee, that cheque received / realized out of British India resulted into income received out of taxable territory. Therefore , revenue preferred appeal, by way of reference application,  against order of Tribunal.

The Question before High Court and the Supreme Court was as follows:

        "Whether on the facts of the case, income, profits and gains in respect of sales made to the Government of India was received in British India within the meaning of Section 4(1)(a) of the Act."

The High Court affirmed order of Tribunal and decided issue in favour of assessee, therefore, revenue preferred appeal before the Supreme Court.

 The concluding paragraph of the reported judgment is reproduced below:

 “ The Government did act according to such request and posted the cheques in Delhi. It can scarcely be suggested with any semblance of reasonable plausibility that cheques drawn in Delhi and actually received by post in Aundh would in the normal course of business be posted in some place outside British India. This Posting in Delhi, in law, amounted to payment in Delhi. In this view of the matter the referred question should, with respect, have been answered by the High Court in the affirmative. We, therefore, allow the appeal and answer the question accordingly. …”      Appeal allowed.

Therefore, the place of posting of cheque by the person who paid the money is the place of receipt of money by payee.

Salary of NRI:

Non-resident Indian who render services out of India receives salary for services rendered and salary accrued out of India. The salary is credited in account of employee maintained by the employer. Payment is made by employer as per instructions or request of employee. In practice, we find that some payments are received by such NRI employees out of India to meet local expenses, some payments are received for making investment or statutory levies out of India. Some amount is remitted to bank account of NRI employees in India.

There is no doubt that the earning by working out of India as employee, is salary for working out India, where NRI employee rendered services to his employer. The right to  receive salary took place at the place of work which is out of India. 

 Place of receipt of salary by such NRI:

In view of judgment of the Supreme Court in Ogale Glass (supra.) salary of NRI for services rendered out- side India is received out of India, even if accrued salary is remitted by employer to the account of employee in India.

The employer pays by issue of cheque, draft, e-cheque, TT,  or other electronic means or instruments for transfer of funds from a bank account of employer  out of India to the  account of employee in India. IN this process first account of employer is debited on clearing of cheque or other instrument , the amount is then transferred by banker of employer to the banker of employee. The Banker of employee receives fund transferred in foreign currency and that is converted at prevailing rate and the amount may be credited in account of NRI in Indian Rupees.

In this process, the NRI receives money out of India and not in India. Therefore, such salary should not be taxable under S.5(2) (a).

Judgments of ITAT Kolkata:

In some judgments rendered by Tribunal it has been held that the amount of salary remitted and then credited in bank account of NRI is sum received in India and is therefore, taxable under S. 5(2) (a) as received in India. For example:

A .  Shri Tapas Kr. Bandopadhyay Versus Deputy Director of Income-tax, (International Taxation) -3 (1) , Kolkata 2016 (6) TMI 215 - ITAT KOLKATA in I.T.A No. 70/Kol/2016  Dated: - 01 June 2016 in this case Tribunal relied and applied judgment of Tribunal in case of Capt. A.L. Fernandes Versus Income Tax Officer 2001 (12) TMI 873 - ITAT MUMBAI and held on the following lines:

Remuneration received directly remitted from foreign to the NRE account - accrual of income - Held that:- The income in the present case did not suffer tax in any other jurisdiction nor was it received in any other tax jurisdiction. The receipt in the NRE account in India is the first point of receipt by the assessee and prior to that it cannot be said that the assessee had control over the funds that had deposited in the NRE account from the employer.

The facts of the instant case directly fits into the facts of the Third Member decision  in case of Capt. A.L. Fernandes Versus Income Tax Officer 2001 (12) TMI 873 - ITAT MUMBAI  relied upon by the Learned and respectfully following the same , we hold that the salary received in India is taxable in India in terms of section 5(2)(a).

In any of the cases decided b Tribunal as referred to above the judgment in case of Ogale Glass was not referred and considered. Therefore, Tribunals seems to have taken decision contrary to law laid down in Ogale Glass. Therefore there are rectifiable mistakes in order of Tribunal.

IN case of Shri Tapan Krishna Pattanaik the Tribunal considered other two judgments of ITAT and also rulings on issue of accrual and receipt. The Tribunal noted inter alai as follows:

The Hon'ble Supreme Court, in the case of CIT Vs Dharamdas Hargovandas 1961 (2) TMI 3 - SUPREME Court  has commented that the words 'are received' are not terms of art and their meaning must receive colour from the context in which they are used. In the context of section 5(l)(a) these words could only refer to the first receipt". In the case of Keshav Mills Ltd Vs CIT 1953 (1) TMI 5 - SUPREME Court, the Hon'ble Bench of the Supreme Court observed that 'The word receipt of Income refers to the first occasion when the appellant gets the money under his own control'. Similarly Hon'ble SC had observed in the case of CIT Vs Ashokbhai Chimanbhai 1964 (10) TMI 11 - SUPREME Court that "Income is said to be received when it reaches the appellant. Thus the term 'received' has to be understood in the context of salary having been received and not beyond.

In this case the Tribunal followed judgments in case of Captain A.L.Fernandez and Tapas Kumar.  The case of Captain A.L.Fernandez, was more on issue of accrual and deemed accrual of income and not on receipt of income. In the case of Tapas Kumar Tribunal considered that The receipt in the NRE account in India is the first point of receipt by the assessee and prior to that it cannot be said that the assessee had control over the funds that had deposited in the NRE account from the employer.
 Judgment in case of Ogale Glass was not considered. Therefore Tribunals held that when the amount is received in bank account of NRI, in India it is first occasion when assessee received money in his control.

With respect author feels that when employer made arrangement for deposit in account of assessee by transfer of funds, the assessee actually received amount out of India and not when banker of assessee converted foreign currency in Indian rupee and credited account of assessee in India. The assessee has control over salary earned out of India and employer merely remitted money to his account in India. 

This is wrong, because NRI employee received his salary when his account was credited in books of account of employer and NRI employee has control over it. He can direct employer to pay him his salary in any manner. In reality also payments are received in cash, and appropriations for savings, ESOP, payments are also made for any sum receivable by employer for any goods and services provided to NRI employee. Therefore, with due respect author feels that the finding that assessee had no control over the sum before it was received in his bank account in India is a wrong finding.

When employer, on request of NRI employee make payment to him or on his behalf, he pays on account of employee. The appropriation is on request or instructions of NRI employee. Even remittance to bank account in India is on request or instruction of such NRI employee.

In any case process of payment initiated by issue of cheque, draft, TT or other mode of electronic transfer amount to payment made by employer out of India and sum received by NRI employee , out of India – the place from where remittance is made.    

Judgment of ITAT Agra:

Judgment in case of Arvind Singh Chauhan (supra.)

Agra Bench, though did not refer to the judgment in case of Ogale Glass, yet  has decided the issue about receipt as per ruling in Ogale Glass. Paragraph 9 of the order is reproduced below with high light added:

       9. The next objection of the Assessing Officer, which has met learned CIT(A)'s approval, is that the money was received in India , since, beyond any dispute or controversy, the salary cheques were credited to the assessee's account with HSBC, Mumbai. So far as this aspect of the matter is concerned, in our considered view, the law is trite that 'receipt' of income, for this purpose, refers to the first occasion when assessee gets the money in his own control - real or constructive. What is material is the receipt of income in its character as income, and not what happens subsequently once the income, in its character as such is received by the assessee or his agent; an income cannot be received twice or on multiple occasions. As the bank statement of the assessee clearly reveals these are US dollar denominated receipts from the foreign employer and credited to non- resident external account maintained by the assessee with HSBC Mumbai. The assessee was in lawful right to receive these monies, as an employee, at the place of employment, i.e. at the location of its foreign employer, and it is a matter of convenience that the monies were thereafter transferred to India. These monies were at the disposal of the assessee outside India, and, it was in exercise of his rights to so dispose of the money, that monies were transferred to India. We may, in this regard, refer to Hon'ble Madras High Court's judgment in the case of CIT Vs AP Kalyankrishnan 1991 (6) TMI 32 - MADRAS High Court wherein Their Lordships were in seisin of a situation in which the assessee had received pension from Malaysian Government which was remitted by the Accountant General, Federation of Malaya, Kuala Lumpur to Accountant General, Madras, for onward payment to the assessee. On these facts, rejecting the contention of the revenue that the pension amounts are required to be treated as having been received in India, Their Lorships observed, inter alia, that " that the pension payable to the assessee had accrued in Malaya........... and only thereafter, by an arrangement embodied in the letter found in Annexure D to the stated case, the pension had been remitted to the assessee in India and made available to him. The assessee had, therefore, to be regarded as having received the income outside India and the pension had been remitted or transmitted to the place where the assessee was living, as a matter of convenience and that would not, in our view, constitute receipt of pension in India by the assessee, falling within s. 5(1)(a) of the Act ". This would show that once an income is received outside India, whether in reality or on constructive basis, the mere fact that it has been remitted to India would not be decisive on the question as to income is to be treated as having been received in India. The connotation of an income having been received and an amount ha ving being received are qualitatively different. The salary amount is received in India in this case but the salary income is received outside India. It is elementary that an income cannot be taxed more than once but if, at each point of receipt, the income is to be taxed, it may have to be taxed on multiple occasions. In this view of the matter, in a situation in which the salary has accrued outside India, and, thereafter, by an arrangement, salary is remitted to India and made available to the employee, it will not constitute receipt of salary in India by the assessee so as to trigger taxability under section 5(2)(a) of the Act.

Mistake apparent in order of Tribunal

Non consideration of judgment in case of Ogale Glass by Tribunal in case of Capt. A.L. Fernandes, Tapas Kumar  and  Tapan Kumar  has resulted into  wrong decisions by Tribunal. The same need to be rectified. The assessees can make petition u/s 254 (2) to make the order in conformity with law laid down in case of Ogale Glass. The Tribunal can also make rectification to make its order in conformity with law.

A circular from the CBDT is desirable:

A circular from the CBDT in  accordance with law laid down in case of Ogale Glass will be very useful in proper administration of tax for the revenue and for tax payers. The Board may direct that the law laid down in Ogale glass be applied in assessment, appeals and for decision about filing of appeals and withdrawal of appeals filed by revenue. This will go a long way in reducing un-necessary litigation and improve tax department- tax payer relationship.