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TMI Blog1978 (3) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of all Standard motor cars and components sold by the Indian company. For the assessment years 1967-68 and 1968-69 the assessee submitted returns admitting royalty income of Rs. 7,21,600 and Rs. 4,57,311 respectively for the years ended September 30, 1966, and September 30, 1967, respectively. The assessee stated in the returns that it was maintaining accounts on the mercantile system, and did not dispute its liability to assessment. But, for the assessment year 1969-70 the assessee admitted a royalty of Rs. 9,25,257 for the year ended September 30, 1968 and filed a nil return saying that it was maintaining accounts on the cash basis and not on the mercantile basis and that no part of the royalty has been received and that it is not taxable. The ITO found that the original agreement dated October 19, 1959, between the assessee and the Indian company expired on November 24, 1965, and a fresh agreement had been entered into between them in June, 1966, with retrospective effect from November 25, 1965, and he assessed the royalty of Rs. 6,46,395 earned after that date at 50 per cent. for the assessment year 1967-68 and levied interest of Rs. 31,610 under s. 139(8) of the I.T. Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found that the assessee had been rightly assessed on accrual basis and dismissed the appeals. The assessee filed three further appeals before the Income-tax Appellate Tribunal. It was contended before the Tribunal, as can be seen from page 70 of the typed set of papers, that the assessee was not following any regular method of accounting while returning the income and that it was the Indian company which was finally filing the returns of income on behalf of the assessee by incorporating the figures in its profit and loss account, not being aware of the assessee's system of accounting in regard to royalty and that the assessee came forward to correct the mistake after it noticed the same and mentioned in the return submitted for the assessment year 1969-70 that the method of accounting was on cash basis. The Tribunal found that in respect of the assessment year, 1963-64 nothing had been mentioned about the method of accounting and that in respect of the assessment year 1964-65, the method of accounting was mentioned as cash basis. As already stated, the assessee had mentioned the method of accounting in the returns filed for the assessment years 1967-68 and 1968-69 as mercantile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the end of each half-yearly period during the continuance of the agreement, a royalty of five per centum less Indian tax, etc., in sterling and states that all such payments shall be made by confirmed irrevocable letters of credit drawn on an acceptable bank in London within ninety days of the end of each such half-yearly period or by such other methods of payment as the assessee may , from time to time, agree in writing. The net royalty thus becomes payable to the assessee at the end of each half-yearly period in sterling, and the Indian company is bound by the agreement to make such payments by confirmed irrevocable letters of credit drawn on an acceptable bank in London within ninety days of the end of each half-yearly period or by other method of payment as may, from time to time, be agreed in writing between the assessee and the Indian company. This would show that it is open to the assessee to obtain payment of the royalty from a bank in London under confirmed irrevocable letters of credit drawn by the Indian company within 90 days of the end of each half-yearly period. As mentioned above, it had been contended before the Tribunal that the assessee was not following any r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax all income, profits or gains from whatever source derived, accruing or arising or received in British India or deemed under the provi- sions of the Act to accrue, arise or to be received in British India. The question that arose for the determination of the courts was whether, under the mercantile system, profits which were credited in the books could be taxed even though they had in fact not been received and the conclusion reached by the courts was that these profits credited in the books of account were earned and could be charged as having accrued or arisen within British India even though they were in fact not received. In none of these cases were the courts concerned with a non-resident claiming to have received profits or gains outside British India under the mercantile system of accounting and claiming exemption from liability to tax under section 4(1)(a) in respect of profits actually received in British India. It follows from the above that the mercantile system of accounting treats profits or gains as arising or accruing at the date of the transaction notwithstanding the fact that they are not received or deemed to be received, and under that system, book profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting, purporting to act under the proviso to section 13 of the Act, on the ground that the income, profits and gains cannot be properly deduced therefrom, when the Income-tax Officer, although he has not expressly said so, must be taken to have accepted the self-same method of account ? The answer to the question depends on a correct interpretation of sections 13 and 31 of the Act. We shall first read section 13 of the Act. '13. Income, profits and gains shall be computed, for the purposes of sections 10 and 12, in accordance with the method of accounting regularly employed by the assessee : Provided that, if no method of accounting has been regularly employed, or if the method employed is such that, in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.' The section enacts that for the purposes of section 10 (profits of business, profession or vocation) and section 12 (income from other sources) income, profits and gains must be computed in accordance with the method of accounting regularly employed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e method of accounting regularly employed by the assessee is a subjective determination of the Income-tax Officer alone, and the opinion of no other officer or authority can be substituted therefor. The Appellate Assistant Commissioner had, therefore, no jurisdiction to go behind that opinion. We are unable to accept this line of argument as correct ......." This decision does not help the assessee except to the extent that it clarifies that s. 145(1) of the Act of 1961 makes it obligatory on the ITO to compute the income chargeable under the head " Profits and gains of business or profession " or " Income from other sources " having regard to the method of accounting regularly employed by the assessee. The learned counsel for the revenue relied upon the decision of the Supreme Court in Raghava Reddi v. CIT [ 1962] 44 ITR 720. In that case, the assessee-firm was exporting mica to Japan, and it appointed a Japanese company to negotiate on the gross proceeds of the sales effected in Japan. The Japanese company instructed the assessee to credit the amount of commission due to it in the books of the assessee without remitting them to Japan until definite instructions were given. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , because that income will have to be remitted to the non-resident by obtaining an irrevocable letter of credit and will thus be received only outside India. We have already noticed that the principle of the decision in Raghava Reddi v. CIT [1962] 44 ITR 720 (SC) will not apply, because there is no direction for crediting the income by the Indian company in any particular manner to the credit of the assessee, to constitute " receipt in India ". 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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