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TMI Blog1987 (3) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment years 1979-80 and 1980-81. This claim was made in support of the further claim that the dividend income which was receivable by the assessees on the shares held by them in Hongkong Shanghai Banking Corporation (" Hongkong Bank " for short), was not taxable for these two years because such dividend income was received abroad and did not attract tax for the years in which the assessees were non-residents. For the assessment year 1979-80, the ITO accepted the claim of the assessees and did not include the dividend income receivable by the assessees from Hongkong Bank. The CIT, Bombay City-XII, however, passed an order u/s 263 holding that the ITO had committed an error in excluding foreign dividend from the computation of income and in not properly determining the residential status of the assessee. For the assessment year 1980-81, the ITO, in an order u/s 143(3) read with sections 144A B, held that although the assessees were non-residents, foreign dividend was received by them only when it was remitted to India and was therefore taxable in their hands u/s 5(2)(a) of the IT Act. This decision of the ITO was confirmed in appeal by the CIT(A) in a fairly detailed or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us on the plea that it was not available. In reply to this undated letter, the Hongkong Bank wrote a letter on 25-4-1978 to the assessees on their Bombay address in which they stated, inter alia, as under :--- " You also indicated in the letter that you wish future dividends on your Bank shares to be forwarded by us to the Chartered Bank, Hongkong for onward transmission to you through their Bombay Branch. It occurs to us that this is only possible if you maintain a bank account with the Chartered Bank, Hongkong. Please confirm this point to us through Chartered Bank, Hongkong as soon as possible. In the event that this point is confirmed by the Chartered Bank, Hongkong, we would appreciate your advising us of your account number in due course." The suggestion to open an account with the Chartered Bank, Hongkong, made by the Hongkong Bank as above was not accepted by the assessees who through their solicitors' letter dated 7-5-1978 informed the Hongkong Bank inter alia, as under : " Unfortunately under the prevailing foreign exchange regulations our clients cannot open an account with foreign banks without permission of the Reserve Bank of India and ordinarily Reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1978 to pay All dividends, fractional entitlements, etc., now due or which may become due on these shares held by M/s. K.N.J. Dady and H.N.J. to the Chartered Bank, Hongkong office, G.P.O. Box 21, 4-4 Des Voeux Road Central, Hongkong, whose receipts would be treated as full and sufficient discharge. Thus, a direct authorisation was given by the Chartered Bank, Bombay, in terms of their letter dated 20-9-1978 to Hongkong Bank authorising the letter to pay all dividends on shares held by assessees to the Hongkong office of the Chartered Bank and such authorisation was given on the basis of the Power of Attorney issued by the assessees to Chartered Bank, Bombay. The number of shares held by the assessees were specifically mentioned. The Hongkong Bank was asked to forward the reports and balance sheets directly to the Chartered Bank, Bombay. The Hongkong Bank declared final dividend for the year 31-12-1978 on the two lots of shares of HK dollar 80,797.80 and HK dollar 44,585.40 in each of the two cases. The rupee equivalent of this dividend was Rs. 1,26.637.93 and Rs. 69,878 which amounts were remitted by way of foreign inward remittances on 8-5-1979 in each of the two cases. Thus, a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India on assessees' behalf, argued Shri Dastur, the receipt is where the cheque is collected and where the Bank making payment is situated. Shri Dastur cited a catena of judgments---Sir Sobha Singh v. CIT [1950] 18 ITR 998 (Punj.), Keshav Mills Co. Ltd. v. CIT [1950] 18 ITR 407 (Bom.) and Hira Mills Ltd. v. CIT [1965] 57 ITR 103 (Bom.)---in support of his arguments. Shri Dastur next argued that CIT(A)'s reliance on FERA (Foreign Exchange Regulation Act) was totally irrelevant, that we were concerned with determining the residential status of the assessees under the Income-tax Act and that it was not disputed that the assessees were non-residents during the two accounting years relevant to the assessment years 1979-80 and 1980-81. Finally, Shri Dastur argued that section 9(1) of the Act would not be attracted in view of clause (i) of sub-section (1) which spoke of income accruing or arising through or from any asset or source of income in India. According to Shri Dastur, the assets, namely, the shares, which were also the source of income, were located outside India since the registered office of the company, namely, Hongkong Bank, was located outside India. 6. Shri Raju for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a device for avoiding payment of tax on a substantial dividend income. He relied on Supreme Court's decision in McDowell Co. Ltd. v. CIT [1985] 154 ITR 148. Finally, he argued that the dividend could be said to have been received in India or deemed to be received in India because the assessees acquired effective control over such income when the rupee equivalent of such dividends was remitted to their accounts in the Bombay office of the Chartered Bank. The assessees had no control over the dividend income as long as it was with the Hongkong office and assessees could not have withdrawn any amount from such income from the Chartered Bank, Hongkong, for the simple reason that they had no account with that Bank. 7. We have carefully considered the submissions made by on behalf of either side. It must be firstly stated that for both the assessment years in both the cases, the department has accepted that the assessees were non-residents. Therefore, it would be futile at this stage to suggest or insinuate that the assessees were in fact not outside India during this period. The short question for consideration is whether the assessees had appointed the Hongkong office of the Charte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The copy of the letter of authority reproduced in this letter has already been reproduced hereinabove in the recital of facts. Apparently, no specific power of attorney was executed by the Bombay Branch of the Chartered Bank in favour of their Hongkong office as suggested by the assessees. In this context, it may further be noted that the Chartered Bank at Bombay wrote directly to Hongkong Bank on 20-9-1978 in which the account numbers in the books of the Hongkong Bank and the number of shares held by the two assessees were clearly stated. A reference was made to the power of attorney granted to them by their constituents, namely, the assessees herein, and the Hongkong Bank was authorised to pay all dividends, fractional entitlements, etc., due to the assessees. They were also asked to send all reports and balance-sheets to Bombay. This authorisation, it may be noted, was given to the Hongkong Bank by the Bombay office of the Chartered Bank and not by the Hongkong office of the Chartered Bank. These two facts have to be considered together. On the other hand, there was no letter of authority as suggested by the assessees' solicitors executed by the Chartered Bank, Bombay, in favou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 25-4-1978 in reply to their undated letter received by them on 25-4-1978, a copy of which letter was not produced before us, they specifically suggested that collection of dividends on shares held by the assessees to be forwarded by them to the Chartered Bank, Hongkong, for onward transmission to their Bombay Branch would only be possible if the assessees were to maintain an account with the Chartered Bank, Hongkong. This suggestion was not accepted and the reason given was that under the prevailing Foreign Exchange Regulations Act the assessees could not open an account with the foreign Bank without the permission of Reserve Bank of India. It is in this context that the reference by the CIT(A) to FERA is very relevant. All the relevant provisions and notifications under the FERA have been discussed and referred to in detail by the CIT(A) in para 7 onwards of his order. Shri Dastur argued that the assessees had gone to Nepal for other purposes and for an uncertain period. This argument cannot be accepted in view of the several facts which have now come to our notice. The assessees had a permanent place of residence in India. It is seen from the papers filed before us that even af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch were also referred to and relied upon by Shri Dastur, are also reproduced below :--- " (a) A directs B his solicitor, to sell his estate by auction, and to employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-agent, but is A's agent for the conduct of the sale. (b) A authorises B, a merchant in Calcutta, to recover the moneys due to A from C Co. B instructs D, a solicitor, to take legal proceedings C Co. for the recovery of the money. D is not a subagent, but is solicitor for A." It was Shri Dastur's case that the Hongkong office of the Chartered Bank was acting as a substitute for the Bombay office of the same Bank and the relation between the assessees and the Hongkong office of the Chartered Bank was that between the principal and the agent. For deciding whether the Hongkong office was functioning as a substitute for the Bombay office for all purposes, qua the assessees, we have to see from facts the extent of the authority that the Hongkong office enjoyed, the sources from which such authority flowed and the manner in which such authority, if any, was given. When we look for answers to these questions, we find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t necessary for the Bombay Office to have written the letter of authorisation that it did to the Hongkong Bank on 20-9-1978 giving details of shares held by both their constituents and authorising the Hongkong Bank to pay dividend on the shares to the Hongkong office. We are not, therefore, satisfied that the Hongkong office was in fact functioning as the substituted agent for the assessees on the basis of the papers that have been placed before us. 10. Shri Dastur first relied on Supreme Court's decision in Turner Morrison Co. Ltd.'s case. This judgment, we find, only supports the case of the department. At page 161 of the report, the Supreme Court made the following observations :--- " Section 42 only speaks of deemed income. The whole object of that section is to make certain income, profits and gains to be deemed to arise in India so as to bring them to charge. The receipt of the income, profits and gains being one of the tests of liability, where the income, profits and gains are actually received in India it is no longer necessary for the revenue authorities to have recourse to the fiction and this has been held quite clearly in Hira Mills Ltd. v. Income-tax Officer, Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssees wrote : " Please pay by cheque to the Imperial Bank, Indore ". The question was whether the sale proceeds were received by the assessee in British India within the meaning of sec. 4(1)(a) of the Indian Income-tax Act, 1922. The Bombay High Court held that the instruction as to payment merely constituted the Imperial Bank at Indore, a nominee of the assessees, to receive payment on its behalf and the words " at India " did not have the effect of constituting " Indore ", the place of payment. As the assessee had instructed that the payment be made by cheques and the normal course of sending the cheques was by post, there was an implied request to send the cheques by post and the Post Office, receiving the cheques posted by the Supply Department, was the agent of the assessees receiving the payment of the bills. The sale proceeds received by the cheques were therefore received in British India within the meaning of sec. 4(1)(a). However, as there was no request to make the payment by drafts, there was nothing to show that a request to make payment by cheque was ordinarily understood in the commercial world to mean allowance to make payment either by cheque or by draft, the posti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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