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TMI Blog2002 (11) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian Companies Act, and assessed to tax in Company Circle No. V, Bombay. In this case, we are concerned with the assessment year 1976-77 corresponding to the financial year ending November 30, 1975, and with the assessment year 1977-78 corresponding to the financial year ending November 30, 1976. On July 31, 1975, Pfizer Limited declared final dividend amounting to Rs. 50.40 lakhs. Out of that amount, Rs. 25.20 lakhs stood remitted on September 3, 1976, pursuant to the approval granted by the RBI under the FERA. Similarly, on May 31, 1976, Pfizer Limited declared final dividend of Rs. 79-80 lakhs, out of which Rs. 29.40 lakhs was remitted on July 22, 1977. According to the Department, income accrued to the assessee during the assessment year 1976-77 amounting to Rs. 25.20 lakhs as Pfizer Limited declared final dividend on July 31, 1975, whereas, according to the assessee, that income accrued to the assessee during the assessment year 1977-78 as the remittance was permitted by the RBI on September 3, 1976, i.e., during the assessment year l977-78. Similarly, according to the Department, dividend income accrued to the assessee during the assessment year 1977-78 as the final divide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that all non-residents should be asked to maintain only the mercantile system of accounting. That, it was not open to non-residents to follow the cash system of accounting. He contended that the system of accounting is a topic which is covered by section 145 of the Income-tax Act. He contended that the system of accounting comes under the computation and it does not fall within the ambit of the charging section. Mr. Kaka pointed out that section 145 of the Income-tax Act is a part of computation machinery. It decides the year in which the income is to be taxed and that it has no connection with the accrual of income which comes under section 4 and section 5 of the Income-tax Act. He contended that the case reported in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 (Mad) has no application to the facts of the case and, in the alternative, he submitted, with respect, that the judgment was erroneous. He tried to persuade this court to take a different view. Mr. R.V. Desai, learned senior counsel for the Department, contended that section 5 defines the scope of total income of a person who is a non-resident. He contended that under section 5(2) the total income of a non-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the judgment of the Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 and he submitted that if non-residents are allowed to follow the cash system of accounting then it would be difficult for the Department to deduce income chargeable to tax. That, the Tribunal was right in directing the assessee to follow the mercantile system of accounting as the assessee was the non-resident. He contended that section 5(2)(b) deals with income deemed to accrue in India in the case of non-residents and, therefore, the Tribunal was right in directing all non-residents including the assessee to follow the mercantile system of accounting. In rejoinder, learned counsel for the assessee submitted that, in this case, section 9(1)(iv) was applicable. He submitted that section 9(1)(iv) was an extension of section 5(2)(b). He relied upon page 195 of Kanga and Palkhiwala's Law and Practice of Income-tax, 7th edition, in support of his contention. He contended that but for section 9(1)(iv) of the Income-tax Act, non-residents who are not assessable in respect of income accruing abroad, could not have been charged to tax. That, in view of section 9(1)(iv), read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of section 9(1)(iv) read with section 5(2)(b) of the Act. Therefore, we say that section 9(1)(iv) is an extension of section 5(2)(b). We say so because section 5(2)(b) indicates two types of income assessable to income-tax, viz., (i) accruing or arising in India, and (ii) deemed to accrue or arise to the non-resident in the taxable territory, i.e., India. The concept of actual accrual/arising of income in India, although not dependent upon the receipt of income in India, is quite different from the concept of deemed accrual/arising of income. This distinction is very relevant. Further, section 5(2)(b) refers to income accruing/arising or deemed to accrue/arise in India. However, section 5(2)(b) may not cover income accruing/arising outside India and, therefore, the Legislature has brought in section 9(1)(iv) and has stated that even if the dividend is paid to a non-resident outside India, such payment will be deemed to be income accruing/arising in India. Therefore, but for section 9(1)(iv), payment of dividend to a non-resident outside India would not have come within section 5(2)(b). Therefore, section 9(1)(iv) is an extension to section 5(2)(b). An Indian company having a regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed approval and not in the assessment year 1976-77 when the dividend was declared by Pfizer Limited and so also the balance final dividend amounting to Rs. 29.40 lakhs became taxable in the assessment year 1978-79 when the RBI granted permission and not when the dividend was declared in the assessment year 1977-78. Accordingly, question No. 1 is answered in the negative, i.e., in favour of the assessee and against the Department. We can also answer question No. 1 on a different set of reasoning. Section 8 of the Income-tax Act refers to dividend income. Section 8, inter alia, states that for the purposes of inclusion in the total income of an assessee, any dividend declared by a company or distributed or paid by it shall be deemed to be the income of the previous year in which it is so declared, distributed or paid. Section 8 decides the previous year for taxing real and deemed dividends. In other words, section 8 is a part of computation machinery. It is not a charging section. It is indicated by the language itself of section 8. It begins by the phrase "for the purposes of including in the total income..." which shows that section 8 is a part of computation. In this case, accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see claimed that it was maintaining its account on cash basis and not on mercantile basis and in the absence of actual payment of royalty by the Indian company, the assessee was not assessable on any income by way of royalty. The Income-tax Officer completed the assessments on the basis of the assessee maintaining its accounts on mercantile basis. The assessments were confirmed by the Appellate Assistant Commissioner. However, the Tribunal held that the royalty should be assessed on the cash basis for all the assessment years, namely, 1967-68, 1968-69 and 1969-70, if the books and the balance-sheets were found to be maintained on cash basis. On a reference, the High Court took the view that the entire argument of the assessee was that royalty should be assessed to income-tax on actual receipt basis under section 5(2)(a) of the Act on the ground that it maintains its accounts on cash basis and that if such an argument of the assessee was accepted then income by way of royalty can never be taxed because section 5(2)(a) cannot apply to nonresidents receiving royalty abroad. The Madras High Court held that such assessees receiving income out of India could be assessed to tax under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to be laid down by the Madras High Court in the above case, with respect, we do not agree. There is no provision under the Income-tax Act which debars such non-resident assessees from following the cash system of accounting. Section 145(1) comes in Chapter XIV which deals with procedure for assessment. It comes under the caption "method of accounting". Section 145(1) is not a charging section. It is a part of computation machinery under the Act. It decides the year in which income becomes taxable. Section 145(1) has nothing to do with the accrual of income under section 4 and section 5 of the Income-tax Act. The method followed by an assessee in the matter of accounting cannot be said to restrict the accrual of income under section 5 of the Income-tax Act. Section 5(2)(b) of the Income-tax Act indicates accrual/deemed accrual of income whereas, section 145(1) of the Income-tax Act deals with the method of accounting. If this distinction is kept in mind then it is clear that the assessee is free to adopt any of the two methods. In the case of CIT v. Citibank N.A. [1994] 208 ITR 930 (Bom), the bank followed a hybrid system of accounting in respect of interest on problem loans. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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