Accrual of income - Scope of ICDS - If there is conflict between Section 5 and Section 145, which would prevail

Manual - ICDS I : Accounting Policies

The Madras High Court in the case of CIT v Standard Triumph Motor Co. Ltd. [ 1978 (3) TMI 27 - MADRAS High Court] has held that:

"So it is clear that there can be cases of non-residents to whom s. 5(2)(a) will never apply in regard to a particular income. The question then is, whether in such circumstances the assessee concerned (non-resident to whom income had accrued in India) can insist that, since he has kept his accounts in regard to that income on the cash basis, he is not liable to be taxed on the accrual basis. In other words, the question is whether s. 145(1) can be applied in such circumstances. The effect of applying the section would be to take the income outside the purview of taxation, though the charge of tax on that income had taken effect on the accrual basis. Further, no occasion for imposing tax on receipt outside India would arise in the case of a non-resident, because s. 5(2)(a) will apply only to receipt in India. In such circumstances, to apply s. 145(1) would be to defeat the charge under s. 4 and to obliterate the provisions of s. 5(2)(b) and let the income which is taxable escape tax. Such a result is not certainly intended by the statute. Section 145(1) is only an enabling provision to effectuate the charge. The section cannot be used for destroying the charge to tax and the provisions of s. 5(2)(b), though by merely looking at the wording of s. 145(1) it may appear that in all cases the method of accounting must be followed, unless in any case where the accounts are correct, but the method is such that, in the opinion of the ITO, the income cannot properly be deduced therefrom.

But, it must be remembered that s. 145 is only a machinery provision and cannot qualify the charging section so as to make the latter otiose. So s. 145(1) should not be permitted to be applied in such circumstances as those which arise from the facts of this case. It is, therefore, immaterial whether the assessee is keeping his accounts in regard to a particular income regularly on the cash basis. Even if the assessee is keeping his accounts on the cash basis in regard to his income, the assessee is liable to tax under s. 5(2)(b). To hold otherwise would be to take the income outside the purview of taxation under the Act, though such income had accrued in India to a non-resident and under s. 5(2)(b) the charge to tax had taken effect and there is no possibility of s. 5(2)(b) ever coming into operation. We cannot give to s. 145(1) such an overriding effect as to defeat the charge and the provisions of s. 5(2)(b)."

Assessee took the matter before the Supreme Court. Honorable Apex Court in [1993 (2) TMI 9 - SUPREME Court] has held that:

" The assessee was assessed as the statutory agent of the non-resident company. The Income-tax Officer assessed the amounts credited in the accounts of the assessee as the income of the non-resident company. The contention of the assessee was that mere entry in the books of the assessee cannot amount to receipt and that the amounts cannot be assessed until they were actually paid over to the non-resident company or dealt with according to its directions. Rejecting the contention, it was held by this court that, as soon as the monies were credited to the account of the non-resident ( Japanese ) company, it must be held that it " received " the same and are taxable.

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In this view of the matter, it must be held that, in the circumstances of the case, the method of accounting adopted by the assessee for the relevant accounting years is really irrelevant. As explained hereinbefore, the very concept of " receipt " as espoused by the assessee is untenable and unacceptable. "

On the issue of conflict between section 5 and Section 145, Apex Court (supra) has observed that:

"In the circumstances, we do not think it necessary to express any opinion on the question whether there is any conflict or inconsistency between section 5(2) and section 145 of the Act nor is it necessary to express ourselves on the view expressed by the High Court that, in the case of a non-resident assessee like the petitioner, clause (a) of sub-section (2) of section 5 has no application whatsoever and that section 5(2)(b) governs it irrespective of the fact whether it maintains its accounts on cash basis or mercantile basis. The question referred did not really arise in the facts and circumstances of the case and need not have been answered."

Dated: 4-10-2017