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TMI Blog1988 (4) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... ed upon the assessee to furnish full details of income received on accrual basis during the accounting year and state its objections to such income being assessed on accrual basis. The assessee then furnished details of royalty receivable for the relevant accounting year from Perfect Circle Victor Ltd. in terms of agreement dated 24-1-1975. Under the agreement dated 24-1-1975, the assessee was entitled to receive the royalty at the rate of 4 per cent of the net sale price of the products sold in India and at the rate of 5 per cent on net sale price of products exported to other countries. Under the said agreement, royalty was required to be calculated and paid every quarter. According to the assessee, royalty entitlement based on sales for the relevant previous year was Rs. 10,19,655. However, the assessee objected to including this amount in the total income. It pleaded that it had adopted the practice of returning the royalty income in the year in which the amount was received in USA and not in the yea r which the right to receive amount accrued in India. It submitted that the same method should be adopted for this year also. 4. The Income-tax Officer rejected the plea of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g followed by the assessee. 6. The learned Commissioner of Income-tax (Appeals) then referred to section 5(2) of the Income-tax Act, 1961 and observed that under said section the total income of a non-resident included all income from whatever source derived, which was received or deemed to be received in India by him or on his behalf or which accrued or error or was deemed to accrue or arise to him in India, In the present case, according to him, under the agreement dated 24-1-1975 the assessee became entitled to receive royalty in the relevant accounting year. Consequently, the said income had accrued to the assessee during the relevant accounting year and as such the said income formed part of the total income under section 5(2) of the Act. He relied on the decision of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573. The assessee is now in further appeal before us. 7. The first question to be determined is whether the income had accrued to the assessee in the relevant accounting year. As already stated, under the agreement dated 24-1-1975 between the assessee and M/s. Perfect Circle Victor Ltd., the assessee was entitled to receive royalty a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A and was received by the assessee in the relevant previous year, the same was not liable to be included in the income of the assessee. Even if the assessee was maintaining its accounts on cash basis, the plea that the amount was not liable to be included in the total income was bound to fail in view of the principle laid down by the decision of Madras High Court referred to above. 11. It was submitted by Shri B. K. Khare, the learned representative of the assessee, that the Madras High Court in said decision has not followed the decision of Supreme Court in Keshav Mills Ltd. v. CIT [1953] 23 ITR 230, and as such we should not follow the decision of Madras High Court. He relied on the following observation at page 579 of the said decision of Madras High Court. "We need not consider how far the observation of the Supreme Court is binding on us, for we proceed to deal with the matter on our own." On the basis of this observation, the above submission was made by the learned representative of the assessee. We do not agree with the said submission. In fact, the attention to the Supreme Court decision in the case of Keshav Mills Ltd. had been drawn in the Madras High Court decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s maintained on mercantile basis outside India, royalty income received from India on receipt basis and not on mercantile basis, was wholly immaterial and that when taxing event takes place, that is when income accrues in India, charge to tax is attracted under section 5(2)(b) of the Act. The Supreme Court expressed this view in following words : "Mr. Kolah pressed into service the argument based on section 13 of the Act that the mercantile system of accounting regularly adopted by the assessee was obligatory on the income-tax authorities for computation of his income. While agreeing generally with that submission in case of residents, we doubt whether that position would be available to a non-resident, who maintains his books of account outside British India according to the mercantile system. The section would only be relevant where the total profits of the assessee have to be computed, in which event he would be entitled to claim that they should be computed according to the system of accounts maintained by him. But the section would hardly be relevant where stray items of income are caught in taxable territories as received in taxable territories by a non-resident." Thus th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing portion in the said comments : "Dividends, royalties and fees from these affiliates are recorded in Dana's consolidated statements when received." It is submitted that from this it should be inferred that the assessee followed cash system of accounting as far as income from royalties was concerned. 16. We do not agree with the above submission. If the assessee claimed that it maintained accounts on case basis in respect of particular source of income should be assessed on cash basis under section 145(1) of the Act, the assessee has to show that the account for the relevant previous year were in fact maintained on cash basis. This has not admittedly been shown to us. The above extract only indicates that in the consolidated statements prepared by the assessee in respect of its global income, royalties were recorded when received. What is recorded in consolidated statements is not relevant. What is relevant is maintenance of accounts on cash basis in respect of this source of income. Besides, in the above extract dividends have also been referred to. It is an admitted position that the assessee was not returning dividend income as and when received and that dividend in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crued to the assessee under the agreement in question. The said income had accrued to the assessee in the relevant year and that the accrual was not postponed because of any of the provisions of Foreign Exchange Regulation Act. 19. Another submission that was made in the said decision before the Tribunal was that since the assessee had adopted cash method of accounting, the dividend income could not be assessed on the basis of declaration but should be assessed on the basis of receipt. The Tribunal rejected the said submission relying on the decision of the Madras High Court in Standard Triumph Motor Co. Ltd.'s case on which we have relied in the present case. This decision of the Tribunal thus supports the view which we have taken. 20. We may also mention that the submission that income accruing to non-resident should be taxed on receipt basis and not on accrual basis was considered by the Special Bench of the Tribunal in the case of Siemens Aktiengesellschaft v. ITO [1987] 22 ITR 87 (Bom.) at page 122 and the Tribunal relying on the above-mentioned decision of the Madras High Court held that income was taxable on accrual basis and not on receipt basis. The decision in CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication has ever been made to Reserve Bank of India for permission to remit the amount in question to the assessee in USA. Already more than seven years have passed since the income accrued to the assessee and yet no application for permission to remit the amount has been made. The assessee holds large number of shares in the company in question. Consequently, the assessee has financial interest in the affairs of the company in question. It can be safely presumed that it was with the consent of the assessee-company that no application to remit the amount has been made. We were informed by the learned representative of the assessee that in the y ear 1987 the assessee has chosen to accept shares of the concerned company in lieu of the amount, which was receivable by the assessee in respect of royalty income. Thus the event of remittance has been postponed because of financial considerations and not because of any difficulty in remittance of the amount. By choosing to receive the amount after a lapse of seven years, the assessee cannot postpone the taxing event by seven years. We may also further emphasise that as far as the Indian company is concerned, the amount in question repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax by Kanga & Palkhivala, that there was distinction between 'accrue' and 'arise' and that it should be held that when the permission of Reserve Bank was obtained for remittance, there was arisal of income although accrual had taken place earlier and that the income should be taxed in the year in which it arose. 26. It is well established that as far as 'accrue' and 'arise' are concerned, the locale for both the events would always be the same but the time may be different; income may accuse in one year and arise in another. However that distinction is not relevant here. As regards income arising in different year, what the learned authors have emphasised is that this would happen solely because of particular method of accounting regularly employed by the assessee under section 145 of the Act. 27. In our case, we have already stated, no account books have been maintained under section 145 of the Act for the income accruing or arising in India and no copies of any account book have been filed. We have already dealt with this aspect earlier. We are unable to accept the submission that the grant of permission by Reserve Bank for remittance to USA would be the only taxing even ..... X X X X Extracts X X X X X X X X Extracts X X X X
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