Income Tax Reference v. Income Tax Reference

Income Tax Reference No.43 of 1991 1 IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. 1.Income Tax Reference No.43 of 1991Smt.Trishla Jain, Faridabad ---Petitioner VersusIncome Tax Commissioner, Rohtak ---Respondent 2.Income Tax Reference No.44 of 1991Smt.Nandita Jain, Faridabad ---Petitioner VersusIncome Tax Commissioner, Rohtak ---Respondent 3.Income Tax Reference No.45 of 1991Smt.Sangya Jain, Faridabad ---Petitioner VersusIncome Tax Commissioner, Rohtak ---Respondent 4.Income Tax Reference No.46 of 1991Ashok Jain, Faridabad ---Petitioner VersusIncome Tax Commissioner, Rohtak ---Respondent 5.Income Tax Reference No.47 of 1991Smt.Ritu Jain, Faridabad ---Petitioner VersusIncome Tax Commissioner, Rohtak ---Respondent 6.Income Tax Reference No.48 of 1991Parash Dass Jain, Faridabad ---Petitioner VersusIncome Tax Commissioner, Rohtak ---Respondent Income Tax Reference No.43 of 1991 2 Date of Decision:-6.1.2009 CORAM:- HON'BLE MR.JUSTICE J.S.KHEHAR HON'BLE MR.JUSTICE NAWAB SINGH HON'BLE MR.JUSTICE NAWAB SINGH PRESENT:-S/Shri Arihant Jain and Arun Jindal, Advocates for the petitioners.petitioners. Mr.Yogesh Putney, Advocate for the respondent. J.S.KHEHAR, J.(ORAL) The instant order will dispose of Income Tax Reference Nos.43to 48 of 1991. The controversy in each of the cases being identical, acommon order is being passed to dispose of all the six references. It is not amatter of dispute that the assessees in all the six references are individualsbeing non-residents in terms of Section 6 of the Income Tax Act, 1961(hereinafter referred to as “the Act”). In so far as the factual matrix isconcerned, all the assessees had subscribed to two sets of debentures issuedby M/s Oswal Agro Mills Limited. The first set of debentures was issued on2.7.1984; whereas the second set of debentures was issued on 23.6.1986.The assessees had paid for these debentures through convertible foreignexchange by remittances from abroad. As such, the assets in the hands of theassessees were in the nature of foreign exchange assets as defined in Section115 C of the Act. The controversy in the present references pertains to theinterest income derived by the assessees from the aforesaid debentures. Theclaim of the assessees is that the aforesaid income derived as interest fromdebentures should be assessed on receipt basis, and not on accrual basis.The claim of the Revenue is to the contrary. Interest on the aforesaid two sets of debentures was payablebiannually. Interest on the debentures accrued on 1[st] July and 31[st] Decemberof every year. The issue to be adjudicated upon in the instant six references Income Tax Reference No.43 of 1991 3 is, whether interest on the debentures would be deemed to haveaccrued/arisen to the assessees on 1[st] July and 31[st] December, or whether theassessees would be liable to payment of tax on the actual receipt of theinterest from the said debentures. Interest on the aforesaid two sets of debentures was payablebiannually. Interest on the debentures accrued on 1[st] July and 31[st] Decemberof every year. The issue to be adjudicated upon in the instant six references Income Tax Reference No.43 of 1991 3 is, whether interest on the debentures would be deemed to haveaccrued/arisen to the assessees on 1[st] July and 31[st] December, or whether theassessees would be liable to payment of tax on the actual receipt of theinterest from the said debentures. On the receipt of interest by the assessees in the financial year1986-87 (which had accrued/arisen to the assessees in the precedingfinancial year 1985-86), the assessees were desirous of including the sameas taxable income for the financial year 1986-87, and not as income for thepreceding financial year i.e. 1985-86 (even though the aforesaid interest hadaccrued to them on Ist July and 31[st] December of the preceding financialyear i.e. 1985-86). Accordingly, in their returns for the assessment year1987-88, the assessees included the component of interest on the debenturesreferred to above as they have actually received the same in the financialyear 1986-87. On the same analogy as has been noticed here-in-above, theassessees did not include their income derived from interest on debentures,which had accrued/arisen to them during the financial year 1986-87 for thesame reason, namely, that they were not in receipt of the same during thesaid financial year. The same factual position continued for later years aswell, which are the subject of consideration in the connected references. The Assessing Officer did not agree with the plea raised onbehalf of the assesses. The Assessing Officer took the view that the interestincome from the debentures payable to the assessees by M/s Oswal AgroMills Limited was assessable on accrual basis. The Assessing Officer,accordingly, added to the taxable income of the assessees, interest from thedebentures, which had accrued to the assessees in the financial year 1986- Income Tax Reference No.43 of 1991 4 87, even though the same had not been received by the assessees during thesaid financial year. The Appellate Authorities i.e. the Commissioner ofIncome Tax (Appeals) as well as the Income Tax Appellate Tribunalaffirmed the view assessed by the Assessing Officer. It is in the aforesaidfactual background that the instant references have been made to this Court.The question of law referred to this Court is being extracted hereunder:- “Whether in the facts and circumstances of the case, theIncome-tax Appellate Tribunal was right to hold that incomefrom interest on debentures which was a “foreign exchangeasset” was assessable on accrual basis and not on receiptbasis.?” We have considered the submissions advanced by the learnedcounsel for the rival parties. In fact, the entire controversy revolves aroundthe interpretation of Section 5 (2) of the Act. Section 5 (2) of the Act isbeing extracted here as under:- “5.Scope of total income-(2) Subject to the provisions of thisAct, the total income of any previous year of a person who is anon-resident includes all income from whatever source derivedwhich- (a) is received or is deemed to be received in India in such yearby or on behalf of such person, or (b) accrues or arises or is deemed to accrue or arise to him inIndia during such year. Explanation 1- Income accruing or arising outside India shallnot be deemed to be received in India within the meaning ofthis section by reason only of the fact that it is taken into Income Tax Reference No.43 of 1991 5 account in a balance-sheet prepared in India. “5.Scope of total income-(2) Subject to the provisions of thisAct, the total income of any previous year of a person who is anon-resident includes all income from whatever source derivedwhich- (a) is received or is deemed to be received in India in such yearby or on behalf of such person, or (b) accrues or arises or is deemed to accrue or arise to him inIndia during such year. Explanation 1- Income accruing or arising outside India shallnot be deemed to be received in India within the meaning ofthis section by reason only of the fact that it is taken into Income Tax Reference No.43 of 1991 5 account in a balance-sheet prepared in India. Explanation 2- For the removal of doubts, it is hereby declaredthat income which has been included in the total income of aperson on the basis that it has accrued or arisen or is deemed tohave accrued or arisen to him shall not again be so included onthe basis that it is received or deemed to be received by him inIndia.” Since it is not a matter of dispute that from the two sets of debentures, theassessees were earning interest, which accrued to them on Ist July of everyyear, as well as, on 31[st] December of every year. The component of income,which accrued to the assessees (as interest on debentures) on the aforesaidtwo dates stood crystalized on Ist July and 31[st] December every year. Thusviewed the aforesaid income clearly accrued to the assessees on 1[st] July1986 and 31[st] December 1986, and likewise in every subsequent year. Boththese components of interest, which accrued/arose to the assessees in thefinancial year 1986-87, were assessed as their income for the assessmentyear 1987-88. To repudiate the aforesaid claim, it is the vehement contentionof learned counsel for the assessees that in spite of accrual of the aforesaidinterest on the debentures purchased by the assessees, they did not receivethe same during the financial year 1986-87. It is the case of the assesseesthat they had to approach this Court through Company Petition No.51 of1998 and as a consequence of the directions issued by this Court therein,vide order dated 31.10.1998, the assessees eventually received the intereston the aforesaid debentures. It is, therefore, the vehement contention of thelearned counsel for the assessees that it is neither just nor appropriate to Income Tax Reference No.43 of 1991 6 compute the interest component on the debentures purchased by them, asincome in the hands of the assessees for computing income-tax for thefinancial year 1986-87 i.e. the assessment year 1987-88. We have also analyzed scope of Section 5 (2) (b) of the Act. Aplain reading of clause (b) of Section 5 (2) of the Act, reveals that the totalincome of a non-resident in the previous year will include such incomewhich “accrues or arises to him”, as well as, such income which is “deemedto accrue or arise to him”, in the previous year. The aforesaid interpretationof the provision on its plain reading is affirmed by reading Explanation 2(recorded under Section 5 (2) of the Act), which clarifies that the income ofa person, who is a non-resident, once subjected to determine the liability oftax on accrual basis, shall not again be added to the income of the assesseeas and when the same is received by him at a later juncture, in a subsequentfinancial (assessment year). In other words, the provision leaves no roomfor any doubt or ambiguity, that if an effective and final conclusion can bedrawn, on the issue of accrual of income to a non-resident, the actual dateof receipt is inconsequential. In view of the above, we are satisfied that theincome of a non-resident has to be included in the previous year on accrualbasis, i.e. as and when such income arises (or is deemed to have arisen) tothe assessee, in a specific definite and crystalized measure. The debentures purchased by the assessees from M/s OswalAgro Mills Limited bore interest receivable by the assessees on the 1[st] dayof July of every year as well as on the 31[st] December of every year. In theaforesaid view of the undisputed factual position, the interest income fromthe debentures purchased by the assessees must be deemed to have accruedor arisen to the assessees, in specific definite and crystalized amount on 1[st] Income Tax Reference No.43 of 1991 7 July 1986, as also on, 31[st] December 1986, and as such, was required to beadded to income received by the assessees during the financial year 1986-87(i.e. the assessment year 1987-88). The same factual position applies to thesubsequent financial years as well. In the aforesaid view of the matter, it isinevitable to answer the reference in favour of the revenue and against theassessees. In spite of the submissions (and conclusions) recorded here-in-above, learned counsel for the petitioners also invited our attention to thescope of Section 195 (1) of the Act. Section 195 (1) of the Act is beingextracted here under:- 195. Other sums--(1) Any person responsible for paying to anon-resident, not being a company, or to a foreign company,any interest or any other sum chargeable under the provisionsof this Act (not being income chargeable under the head“Salaries” shall, at the time of credit of such income to theaccount of the payee or at the time of payment thereof in cashor by the issue of a cheque or draft or by any other made,whichever is earlier, deduct income-tax thereon at the rates inforce. Provided that in the case of interest payable by the Governmentor a public sector bank within the meaning of clause (23D) ofsection 10 or a public financial institution within the meaningof that clause, deduction of tax shall be made only at the timeof payment thereof in cash or by the issue of a cheque or draftor by any other mode. Provided further that no such deduction shall be made in Income Tax Reference No.43 of 1991 8 respect of any dividends referred to in section 115-O. Explanation- For the purposes of this section, where anyinterest or other sum as aforesaid is credited to any account,whether called “interest payable account” or “Suspenseaccount” or by any other name, in the books of account of theperson liable to pay such income, such crediting shall bedeemed to be credit of such income to the account of the payeeand the provisions of this section shall apply accordingly. Based on Section 195 of the Act, it is the submission of the learned counselfor the petitioners, that liability of deducting income tax on the interestcomponent of debentures purchased by the assessees from M/s Oswal AgroMills Limited, rested on the shoulders of the said Company, and that, whenM/s Oswal Agro Mills Limited eventually released the interest componentof the debentures to the assessees, it had made income-tax deductionstherefrom. It is the contention of the learned counsel for the petitioners thatthe assessees cannot be made liable to pay tax twice over for the sameincome. It is not possible for us to accept the submission advanced bythe learned counsel for the petitioners based on Section 195 (1) of the Act.The assessment towards income-tax is an issue separate and distinct fromthe actual payment of tax. It is for the purposes of determining the year ofassessment to which the income of a non-resident is to be added, that themandate of Section 5 (2) of the Act makes a specific provision, requiringincome which has accrued (or which arises) to a non-resident, to be treatedas income for the previous year in which such income has accrued (or hasarisen), and as such, reference to Section 195 (1) of the Act at the hands of Income Tax Reference No.43 of 1991 9 It is not possible for us to accept the submission advanced bythe learned counsel for the petitioners based on Section 195 (1) of the Act.The assessment towards income-tax is an issue separate and distinct fromthe actual payment of tax. It is for the purposes of determining the year ofassessment to which the income of a non-resident is to be added, that themandate of Section 5 (2) of the Act makes a specific provision, requiringincome which has accrued (or which arises) to a non-resident, to be treatedas income for the previous year in which such income has accrued (or hasarisen), and as such, reference to Section 195 (1) of the Act at the hands of Income Tax Reference No.43 of 1991 9 the learned counsel for the petitioners is wholly irrelevant. Secondly,Explanation 2 under Section 5 (2) of the Act removes all ambiguity from theissue under reference. Even if it is accepted that the assessees in the presentcase were paid the interest component on the debentures purchased by themfrom M/s Oswal Agro Mills Limited, after deduction of income-tax in termsof the mandate to Section 195, it is open to the assessees to claim anappropriate reduction in terms thereof, during the course of assessment ofthe aforesaid income towards tax, as the said income has already beensubjected to tax on accrual basis under Section 5 (2) (b) of the Act. It would be relevant to mention that during the course ofhearing, learned counsel for the rival parties placed reliance on the decisionrendered by Madras High Court in Commissioner of Income-Tax, Madras-Iv. Standard Triumph Motor Co.Ltd. 1979 Vol.119 ITR 573, as also, thedecision rendered by the Apex Court in Standard Triumph Motor Co.Ltd.v.Commissioner of Income-Tax, (1993) Vol.201 ITR 391. Relying on theaforesaid decisions, learned counsel for the assessees vehemently contendedthat the issue canvassed and adjudicated upon by the Madras High Court, aswell as by the Apex Court, pertained to the method of accounting adoptedby the assessee for determination of the tax liability of the assessee. It was,therefore, submitted that the aforesaid judgments were irrelevant to the factsand circumstances of the present reference. Whereas, learned counsel for therevenue submitted that the Madras High Court as well the Apex Court hadaffirmatively concluded that for a non-resident, income which accrues orarises “during such year” must be treated as income for that “previous year”irrespective of the consideration whether it has actually been received, or it has actually been deemed to be received, or even it has not been received. Income Tax Reference No.43 of 1991 10 While we are in agreement with the learned counsel for the petitioners thatthe primary determination rendered in the judgments referred to here-in-above was based on a plea in respect of method of accounting, yet we haveno doubt in our mind that the judgments referred to here-in-above clearlyand ambiguously hold that for a non-resident, income which accrues orarises “during such year” shall be treated as income for that “previous year”for the purposes of income-tax assessment irrespective of the method ofaccounting adopted by the assessee. As such, we hereby affirm thesubmissions advanced by the learned counsel for the revenue. References are, accordingly, disposed of. (J.S.Khehar) Judge (Nawab Singh) 6.1.2009 JudgeAS