1987 (3) TMI 145 - AT - Income Tax

Tax Tribunal Upholds CIT Orders on Taxable Income Credited to Assessees' Accounts

The Tribunal dismissed the appeals, upholding the CIT's orders for both assessment years. It held that the income was taxable in India when the rupee ... Taxability of foreign dividend - first receipt principle - deemed receipt in India under section 5(2)(a) - agency and substituted agent - privity of contract - residence under FERA and effect on foreign accounts - arrangement as device to avoid taxFirst receipt principle - deemed receipt in India under section 5(2)(a) - taxability of foreign dividend - Whether the dividend on shares of Hongkong & Shanghai Banking Corporation was received outside India or was received/ deemed to be received in India and therefore taxable - HELD THAT: - The Tribunal examined when the assessees had control over the dividend and held that the assessees did not acquire control over the sums when the Hongkong office collected the dividend warrants. The rupee equivalents were remitted by the Hongkong office to the assessees' accounts in the Bombay office of the Chartered Bank and only then could the assessees utilize the amounts. The Tribunal applied the principle that the first receipt of income determines the place of receipt; since the assessees obtained effective control only on remittance and credit to their Bombay accounts, the first receipt was in India. Consequently the receipts fell within the scope of income received or deemed to be received in India under section 5(2)(a) and were taxable, notwithstanding that the dividends were declared abroad. [Paras 8, 10]Dividend income was received for the first time in India on remittance and credit to the Bombay accounts and is taxable as income received or deemed to be received in India under section 5(2)(a).Agency and substituted agent - privity of contract - residence under FERA and effect on foreign accounts - arrangement as device to avoid tax - Whether the Hongkong office of the Chartered Bank acted as a substituted agent of the assessees (creating privity of contract) so that the dividend was received abroad, and whether the arrangement was a device to avoid tax - HELD THAT: - On the facts the Tribunal found no evidence of a Power of Attorney executed by the Bombay office in favour of its Hongkong office nor of direct authority from the assessees to the Hongkong office. The Bombay office itself corresponded with the Hongkong Bank, authorised payment to the Hongkong office and assured that receipts there would discharge liability; the Hongkong office only performed limited collection functions. Thus the Hongkong office acted merely as a collecting agent, not as a substituted agent of the assessees under the principle in section 194 Indian Contract Act. Further, having regard to notifications and residence concept under FERA, the assessees remained residents under FERA and could not open foreign accounts; the prompt remittance of rupee equivalents and retention of an Indian residence and bank account supported the conclusion that the arrangement was designed to present the income as earned abroad while control and receipt occurred in India. Accordingly there was no privity of contract with the Hongkong office and the arrangement did not displace tax liability. [Paras 7, 9, 10]The Hongkong office was only a collecting agent and not a substituted agent creating privity of contract; the arrangement was a prior design to avoid tax and does not prevent taxation in India.Final Conclusion: Both appeals dismissed: the Tribunal upheld the CIT(A)'s decision for 1980-81 and the CIT's order under section 263 for 1979-80, holding that the foreign dividends were received or deemed to be received in India when remitted and credited to the assessees' Bombay accounts and that the Hongkong office was only a collecting agent and not a substituted agent of the assessees. Issues Involved:1. Residential status of the assessees.2. Taxability of foreign dividend income.3. Validity of the Power of Attorney and the role of the Chartered Bank, Hongkong.4. Application of section 5(2)(a) of the Income-tax Act.5. Relevance of the Foreign Exchange Regulation Act (FERA).6. Allegation of tax avoidance.Detailed Analysis:1. Residential Status of the Assessees:The assessees claimed non-resident status for the assessment years 1979-80 and 1980-81, supported by their absence from India between 28-3-1978 and 10-4-1980. The Income-tax Officer (ITO) accepted this claim for the assessment year 1979-80 but later, the Commissioner of Income Tax (CIT) questioned this status under section 263 of the Income-tax Act.2. Taxability of Foreign Dividend Income:The assessees argued that the dividend income from shares held in the Hongkong & Shanghai Banking Corporation (Hongkong Bank) was received abroad and thus not taxable in India. The ITO initially accepted this for 1979-80 but later included it for 1980-81, asserting that the income was taxable under section 5(2)(a) of the Income-tax Act when remitted to India.3. Validity of the Power of Attorney and the Role of the Chartered Bank, Hongkong:The assessees issued a Power of Attorney to the Chartered Bank, Bombay, authorizing it to appoint the Chartered Bank, Hongkong, as a substitute agent to collect dividends. However, no specific Power of Attorney from the Chartered Bank, Bombay, to its Hongkong office was produced. The Hongkong office acted only as a collecting agent, not a substitute agent, as argued by the department.4. Application of Section 5(2)(a) of the Income-tax Act:The department argued that the income was received in India when the rupee equivalent of the foreign dividend was credited to the assessees' accounts in Bombay. The Tribunal agreed, stating that the assessees had control over the income only upon its remittance to India, thus making it taxable under section 5(2)(a).5. Relevance of the Foreign Exchange Regulation Act (FERA):The CIT(A) considered the provisions of FERA, noting that the assessees could not open accounts with foreign banks without the Reserve Bank of India's permission. This restriction indicated that the assessees were residents under FERA, further supporting the department's stance that the income was effectively received in India.6. Allegation of Tax Avoidance:The department alleged that the assessees devised a plan to avoid tax by creating evidence of their non-resident status and arranging for the dividend to be collected abroad. The Tribunal found this argument persuasive, noting the meticulous steps taken by the assessees to appear as non-residents and the prompt remittance of dividends to India.Conclusion:The Tribunal dismissed the appeals, confirming the orders of the CIT for both assessment years. It held that the income was received in India when the rupee equivalent was credited to the assessees' accounts, making it taxable under section 5(2)(a) of the Income-tax Act. The Tribunal also found no evidence of the Hongkong office functioning as a substituted agent for the assessees, and the arrangement was seen as a tax avoidance device. The relevance of FERA further supported the department's case, establishing the assessees' resident status under that Act.