Foreign dividend taxation: only the net amount actually received is taxable, not foreign tax deducted abroad.

Only the net foreign dividend actually received by a resident assessee was includible in total income under section 5(1)(c) of the Income-tax Act, 1961, because that provision covers income that actually accrues or arises outside India. The court distinguished actual accrual from deeming fictions and noted that, although the Act contains a specific deeming rule for certain dividend receipts from Indian companies, it contains no equivalent rule treating foreign tax deducted abroad as income of the shareholder. Amounts deducted as foreign tax never accrued to the assessee and could not be taxed as part of the gross dividend.

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Issues: Whether only the net foreign dividend received by a resident assessee was includible in total income under section 5(1)(c) of the Income-tax Act, 1961, or whether the gross dividend, including tax deducted abroad, was taxable.

Analysis: The relevant charging provision for a resident's foreign income includes only income that actually accrues or arises outside India. The statutory scheme distinguishes actual accrual from deeming fictions, and the Act contains a specific deeming provision for certain dividend receipts from Indian companies, but no comparable deeming provision for tax deducted abroad from foreign-company dividends. The amounts deducted as foreign tax never accrued to the assessee and the assessee received only the net dividend. The court followed the principle that, for section 5(1)(c), only the actual foreign income received or accrued can be included, and a foreign tax deduction cannot be treated as income accruing to the shareholder.

Conclusion: Only the net foreign dividend was includible in the assessee's total income. The question was answered in favour of the assessee and against the Revenue.

Final Conclusion: The reference was answered by holding that foreign tax deducted at source from the dividend did not form part of the resident assessee's taxable foreign income.

Ratio Decidendi: Under section 5(1)(c) of the Income-tax Act, 1961, only income that actually accrues or arises outside India is includible in a resident's total income, and foreign tax deducted before remittance of dividend does not constitute income accrued to the shareholder absent a deeming provision.

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