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 unsustainable. The method of accounting adopted for the relevant years was found to be irrelevant to the taxability of the royalty in question. Consequently, the remand order of the Tribunal-directing verification of whether accounts were maintained on cash basis and fresh assessments accordingly-was held unnecessary. SC declined to examine any alleged conflict between sections 5(2) and 145 or the HC's view on their application to non-residents. The Tribunal was directed to complete the assessments in light of SC's reasoning, and the appeals were dismissed.

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Issues Involved:
1. Method of Accounting (Cash Basis vs. Mercantile Basis)
2. Receipt of Royalty Income
3. Application of Section 5(2)(a) and Section 5(2)(b) of the Income-tax Act, 1961
4. Applicability of Section 145 of the Income-tax Act, 1961
5. Jurisdiction and Powers of the Appellate Authority

Detailed 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.

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