Amalgamation vesting and dividend accrual rules determine taxability of business receipts and declared dividend income.

Where an approved amalgamation scheme vested the undertaking in the transferee company from the appointed date, income from supplies made thereafter was not taxable in the transferor non-resident, as the business was carried on on behalf of the transferee and no taxable profit margin remained with the transferor. Dividend income, however, accrued on declaration under section 8 of the Income-tax Act, and foreign exchange controls affected only remittance, not the year of taxability. The business income issue was decided in favour of the assessee, while dividend income remained taxable in the years of declaration.

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Issues: (i) Whether the income from supplies made by the non-resident company to its Indian subsidiary and to third parties in India was assessable in the hands of the non-resident company or in the hands of the Indian company from the appointed date under the amalgamation scheme; (ii) Whether dividend income declared by an Indian company was taxable in the hands of the non-resident shareholder in the years of declaration or only in the year of remittance after Reserve Bank permission.

Issue (i): Whether the income from supplies made by the non-resident company to its Indian subsidiary and to third parties in India was assessable in the hands of the non-resident company or in the hands of the Indian company from the appointed date under the amalgamation scheme.

Analysis: The amalgamation scheme, as approved, vested the entire undertaking in the Indian company with effect from the appointed date, and the business was thereafter carried on on behalf of the Indian company until the effective date. The transactions with the Indian subsidiary were found to be on principal to principal basis and at arm's length. The sales to third parties were also held not to leave any taxable margin in the hands of the non-resident company, the commission arrangement showing that the profit element had not remained with it.

Conclusion: The income from the supplies was not assessable in the hands of the non-resident company, and the finding was in favour of the assessee.

Issue (ii): Whether dividend income declared by an Indian company was taxable in the hands of the non-resident shareholder in the years of declaration or only in the year of remittance after Reserve Bank permission.

Analysis: Section 8 deems dividend to be income of the previous year in which it is declared, distributed, or paid. The foreign exchange restrictions under the Foreign Exchange Regulation Act did not alter the accrual of the dividend or postpone the arising of the debt created by declaration. They only affected remittance, not taxability. The dividend therefore accrued on declaration and remained taxable in the year of declaration.

Conclusion: The dividend was taxable in the years of declaration, and the contention that it was taxable only on remittance was rejected.

Final Conclusion: The department's appeals and the assessee's cross-objections failed, and the overall decision left the assessee with no additional tax liability on the disputed business receipts while upholding taxation of dividend income in the declaration years.

Ratio Decidendi: Where business has vested in the transferee company from the appointed date under an approved amalgamation scheme, income from that undertaking is not taxable in the transferor thereafter; and dividend income accrues on declaration under section 8 of the Income-tax Act, 1961, unaffected by foreign exchange restrictions that merely regulate remittance.

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