2014 (9) TMI 762 - HC - Income Tax

Scope of term total income u/s 5(2)(b) Finding of fact only - Whether the Tribunal is right in not appreciating that as per the provisions of section 5(2)(b) of the Act the total income of a person who is a nonresident includes all income from whatever sources derived which accrues or arises or is deemed to accrue or arise to him in India during such year Held that - The finding of the FAA and the Tribunal is based on the system of accounting of the Assessee - If, it was cash system of accounting and it was the consistent method followed and not objected to, then, the question referred cannot be termed as question of law - It is a finding of fact and which cannot be termed as perverse or vitiated by any error of law apparent on the face of the record decided against revenue.

Summary

Issues:
1. Interpretation of section 5(2)(b) of the Act regarding the inclusion of income for nonresidents derived in India.
2. Application of cash method of accounting in determining taxable income.

Analysis:
1. The primary issue in this case revolves around the interpretation of section 5(2)(b) of the Act, concerning the inclusion of income for nonresidents derived in India. The Tribunal referred a question to the High Court regarding whether the Tribunal was correct in not appreciating that the total income of a nonresident includes all income from sources derived in India during the relevant year. The dispute arose from the Assessee not showing interest income from a fixed deposit with a corporation. The Assessing Officer added this interest income to the Assessee's total income, considering it accrued during the relevant year. However, the Deputy Commissioner of Income Tax (Appeals) and the Tribunal held in favor of the Assessee, stating that the Assessee maintained its books of account on a cash method of accounting, and income should only be recognized upon actual receipt. The High Court concurred with this view, emphasizing that the finding was based on the Assessee's accounting method, which was consistent and not legally erroneous. Therefore, the High Court disposed of the reference, upholding the Tribunal's decision.

2. The second issue pertains to the application of the cash method of accounting in determining taxable income. The Deputy Commissioner of Income Tax (Appeals) and the Tribunal both ruled in favor of the Assessee, noting that the Assessee followed the cash system of accounting, and income should not be recognized until received. The High Court agreed with this assessment, highlighting that if the Assessee consistently applied the cash method of accounting without objection, the question referred could not be considered a legal issue. The High Court emphasized that the question arose from a factual finding, not tainted by legal errors or perversity. As the revenue impact was not significant, the High Court disposed of the reference without costs.

In conclusion, the High Court's judgment clarified the application of the cash method of accounting in determining taxable income for nonresidents and upheld the Tribunal's decision based on the Assessee's accounting practices.