1993 (2) TMI 9 - SC - Income Tax

Royalty taxable despite cash basis claim; conflict between Sections 5(2) and 145 left unresolved for non-residents

SC held that the assessee's contention that royalty income should be assessed on a cash basis was untenable, as its concept of 'receipt' was legally ... Maintaining accounts on cash basis - royalty income - Whether, the Appellate Tribunal was right in holding that the royalty amounts should be assessed on cash basis for 1967-68, 1968-69 and 1969-70 assessment if the books and balance-sheet of such receipts were found to be maintained on cash basis and in directing fresh assessment on such basis ? - Tribunal held that the assessee had not been following any particular method of accounting regularly over the past years. The Tribunal gave liberty to the parties to adduce additional evidence in that behalf. It directed further that, if it is found that the assessee was maintaining its accounts and balance-sheets on cash basis in respect of the royalty, it should be assessed on cash basis. HELD THAT:- The method of accounting adopted by the assessee for the relevant accounting years is really irrelevant. As explained hereinbefore, the very concept of ' receipt ' as espoused by the assessee is untenable and unacceptable. The order of remand made by the Tribunal was thus unnecessary. In the circumstances, we do not think it necessary to express any opinion on the question whether there is any conflict or inconsistency between section 5(2) and section 145 of the Act nor is it necessary to express ourselves on the view expressed by the High Court that, in the case of a non-resident assessee like the petitioner, clause (a) of sub-section (2) of section 5 has no application whatsoever and that section 5(2)(b) governs it irrespective of the fact whether it maintains its accounts on cash basis or mercantile basis. The question referred did not really arise in the facts and circumstances of the case and need not have been answered. The Tribunal shall complete the assessments in question in the light of this judgment. Thus, it is unnecessary for us to deal with the decisions cited by learned counsel for the assessee. The first decision cited by him is in CIT v. McMillan and Co.[1957 (10) TMI 5 - SUPREME COURT] regarding the powers of the appellate authority. The second decision is in Keshav Mills Ltd. v. CIT [1953 (1) TMI 5 - SUPREME COURT]. The principle of this decision does in no way support the principle contended for by the appellant. The appeals, accordingly, fail and are dismissed. Issues Involved:1. Method of Accounting (Cash Basis vs. Mercantile Basis)2. Receipt of Royalty Income3. Application of Section 5(2)(a) and Section 5(2)(b) of the Income-tax Act, 19614. Applicability of Section 145 of the Income-tax Act, 19615. Jurisdiction and Powers of the Appellate AuthorityDetailed Analysis:1. Method of Accounting (Cash Basis vs. Mercantile Basis):The primary issue in this case was whether the royalty income should be assessed on a cash basis or a mercantile basis. The assessee, a non-resident company, initially filed returns on a mercantile basis for the assessment years 1967-68 and 1968-69 but later switched to a cash basis for the assessment years 1969-70 and 1970-71. The Income-tax Officer rejected this switch, maintaining that the assessee's method of accounting was mercantile. The Tribunal, however, allowed the assessee's appeal and remanded the matter for a fresh examination of the method of accounting. The High Court overturned the Tribunal's decision, holding that the method of accounting was irrelevant in this context.2. Receipt of Royalty Income:The crux of the dispute was whether the royalty income was received by the assessee when credited in the books of the Indian company or only upon actual receipt in the U.K. The High Court and Supreme Court both held that the credit entry in the Indian company's books constituted receipt of income by the assessee. The Supreme Court emphasized that the practice of crediting the royalty amount in the Indian company's books was treated as income by the assessee in previous years, and this constituted receipt of income in India, making the actual receipt in the U.K. immaterial.3. Application of Section 5(2)(a) and Section 5(2)(b) of the Income-tax Act, 1961:The High Court observed that accepting the assessee's argument would result in the income escaping taxation in India. Section 5(2)(a) applies to income received in India, while Section 5(2)(b) applies to income that accrues or arises in India. The High Court held that for a non-resident, Section 5(2)(a) would not apply unless the income is received in India, and the royalty income in question would be taxable under Section 5(2)(b) on an accrual basis.4. Applicability of Section 145 of the Income-tax Act, 1961:The assessee argued that under Section 145, the method of accounting regularly adopted by the assessee should be binding on the Department. However, the High Court and Supreme Court held that Section 145 is a machinery provision and cannot override the charging provisions of Section 5(2)(b). The Supreme Court noted that the method of accounting was irrelevant in this case because the credit entry in the Indian company's books constituted receipt of income.5. Jurisdiction and Powers of the Appellate Authority:The assessee contended that the Appellate Assistant Commissioner had the power to consider the method of accounting even for earlier assessment years. The Supreme Court acknowledged this but found it unnecessary to address this issue in detail. The Court emphasized that the Tribunal's order of remand was unnecessary given the clear finding that the credit entry constituted receipt of income.Conclusion:The Supreme Court upheld the High Court's decision, concluding that the credit entry in the Indian company's books amounted to receipt of income by the assessee and was taxable in India. The appeals were dismissed, and the Tribunal was directed to complete the assessments in light of this judgment. The Court did not find it necessary to address the potential conflict between Section 5(2) and Section 145 or the applicability of Section 5(2)(a) to non-residents in detail. The method of accounting adopted by the assessee was deemed irrelevant in the circumstances of the case.