1. The assessee is a non-resident foreign company. The proceedings relate to its assessment for the assessment year 1977-78 for which the previous year is calendar year 1976. The main source of income for the year is by way of dividend on its shares held in an Indian company styled Nirlon Synthetic Fibres & Chemicals Ltd. As against the gross amount of dividend of Rs. 13,11,200, the assessee offered a sum of Rs. 11,43,366 for taxation. The differential amount of Rs. 1,67,834 was claimed as loss or expenditure. Both the ITO and the Commissioner (Appeals) rejected the claim. The appellate order of the Commissioner (Appeals) is dated 24-1-1980.
2. It appears that, the" Commissioner (Appeals) through inadvertence, omitted to deal with one or two other grounds in his appellate order.
The assessee filed an application under Section 154 of the Income-tax Act, 1961 ('the Act'), which was disposed of by the Commissioner (Appeals) by his order dated 20-3-1980. The assessee has, thus, filed two appeals against the aforesaid two orders of the Commissioner (Appeals). However, the grounds are common and hence the appeals are disposed of together.
3. It was noticed that conflicting views were taken on the issue by different Benches of the Tribunal in this case for different assessment years as well as in other cases. A Special Bench was, therefore, constituted to dispose of these appeals.
4. It may be desirable to mention at the outset that Shri S.E. Dastur, the counsel for the assessee, stated that for the assessment year 1974-75 the Tribunal had decided the issue in favour of the assessee, that the reference application filed by the department arising out of the said order was rejected by the Tribunal and that the department's application under Section 256(2) of the Act was also rejected by the High Court. The department's special leave petition to the Supreme Court against the order of the High Court under Section 256(2), though admitted, it was further stated, has not been finally disposed of. The assessee was not aware of what happened in the other years in the case of the assessee and in other cases because the assessee could know about the fate of the department's application under Section 256(2), if any, only when it would receive a notice. Since no notice has yet been received, it could be reasonably presumed that the department did not prefer an application under Section 256(2) or that such an application has been rejected straightaway, without asking the assessee to appear.
According to Shri Dastur the fact that the High Court rejected the application of the department under Section 256(2) holding that no question of law arose out of the order of the Tribunal indicated that the answer to the question was obvious or of academic interest. He urged that this would mean that the decision of the Tribunal in the case of the assessee for the assessment year 1974-75 had been approved by the High Court and that in that view of the matter not only that it was not open for the Tribunal to reconsider the issue but also that it was not quite proper for the President to constitute a Special Bench for hearing the matter. Shri Dastur placed reliance on the decision of the Bombay High Court in the case of H.A. Shah & Co. v. CIT  30 ITR 618 and the decisions of the Madras High Court in the cases of CIT v. S. Devaraj  73 ITR 1 and CIT v. L.G. Ramamurthi  110 ITR 453 in support of his contention.
5. The learned standing counsel appearing for the revenue, on the other hand, submitted that the rule of estoppel or the principle of res judicata was not applicable to income-tax proceedings. He relied on an English decision in the case of Gaffor v. Inspector of Taxes  AC 585 (the relevant observations being at page 597) in support. He pointed out that the Tribunal has itself taken a contrary view in the assessee's own case for one year and also in the cases of other assessees and, therefore, constituting a Special Bench for hearing these appeals was appropriate.
6. In reply, Shri Dastur submitted that the question raised herein was not that of estoppel or res judicata. It was that of a precedent. The decision of the Bombay High Court is binding on this Tribunal and that being so, it is not open to the Tribunal to sit in judgment over its orders which have been approved by the High Court.
7. In our opinion, the arguments advanced on behalf of the assessee are without merit. The evidence relied upon in this regard is in the shape of the special leave petition of the department before the Supreme Court and the copy of the notice issued by the Court after admitting the special leave petition. On carefully going through the petition and the notice above, we find that the facts found by the Tribunal in that case have been that the assessee, being a non-resident company having no branches or agents or a bank account in India, necessarily received the net dividend income in US currency after deduction of the consolidated charges made by the bank. Such an expenditure or loss claimed was, thus, held allowable under Section 57(1) of the Act, on the footing that it was a sum paid by way of commission or remuneration to a banker for the purposes of realising the dividend income by the assessee. The question of law raised by the revenue was- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs. 34,575, representing a loss that arose to the assessee at the time of remittance of money to it was an allowable deduction under Section 57(1) of the Income-tax Act? Naturally, both the Tribunal and the High Court held that the answer to the question of law suggested, was obvious.
For the year under appeal, the facts, about which there is no dispute, are found to be that Nirlon Synthetic Fibres & Chemicals Ltd., an Indian company, in which the assessee (a non-resident) held 3,27,800 shares, declared dividend at the rate of Rs. 4 per share on 16-8-1976.
As a result, the non-resident assessee became entitled to a dividend of Rs. 13,11,200. The non-resident assessee had no branch or an agent in India nor did it have any bank account in India. The Indian company, therefore, remitted the amount of dividend after deducting therefrom a sum of Rs. 2,62,240, being the tax deducted at source. The amount received by the assessee in dollar currency amounted to $117,483.52. It is common ground that the amount in dollar currency is equivalent to Rs. 10,48,960 at the prevalent market rate.
8. The non-resident assessee claimed that the real income in its hands was in the dollar currency over which alone it had control so much so that for the purpose of- taxing the said income in India, it is to be converted into Indian currency by applying a notional rate of Rs. 7.50 per dollar as laid down in Rule 115 of the Income-tax Rules, 1962 and not at the prevalent market exchange rate. In this manner the assessee offered to tax a sum of Rs. 8,81,126 ($117,483.52x7.50)+Rs. 2,62,242, being tax deducted at source=Rs. 11,43,366 as against the dividend of Rs. 13,11,200 declared by the Indian company. The real dispute is, thus, not about any expenditure or commission or remuneration paid by the non-resident assessee for realising the dividend. It is for a deduction of alleged notional loss as stated above.
It is evident that particularly for the assessment year 1974-75, the Tribunal had proceeded on the assumption of a real loss or expenditure which is not quite correct and that in view of the correct facts found by us in this appeal, the order of the Tribunal for the assessment year 1974-75 in appeal and in reference proceedings as also the order under Section 256(2) of the High Court have no bearing on the issue before us. This is quite apart from the fact that Section 57 has been amended with effect from 1-6-1976 as a result of which the provisions of Section 57(1) or Section 57(3) are not applicable to non-resident foreign assessees at all.
9. For the sake of completeness, it may be mentioned that right from the assessment year 1970-71 to the assessment year 1976-77, the assessee has claimed the expenditure or loss in this regard including the notional loss of the above nature as an expenditure under Section 57 and the claim has been allowed by the Tribunal on that footing.
Applications for reference filed by the department, if any, have also been rejected by the Tribunal. The only exception is in the case of the assessment year 1975-76, where the Tribunal decided the issue against the assessee. The facts pertaining to the assessment year 1974-75 have already been referred to in some detail in the earlier paragraphs. What happened in other cases is not really material and is not, therefore, referred to.
10. The submission on merits on behalf of the assessee is that as laid down by the Bombay High Court in the case of H.M. Kashiparekh & Co.
Ltd. v. CIT  39 ITR 706, it is the 'real income' which is to be assessed unless there is something contrary in the statute. This view, it is stated, has been confirmed by the Supreme Court in the case of CIT v. Birla Gwalior (P.) Ltd.  89 ITR 266. According to Shri Dastur, 'real income' means and can only mean an income over which the assessee has full control. The assessee in this case being a non-resident foreign assessee without any branch, agent or bank account in India, it had and could have control over the money only after the same was remitted to it in US dollar currency. Once it is found that any income is accruing or arising or deemed to accrue or arise to the assessee in foreign currency, Shri Dastur contended, the income will have to be converted into Indian currency for tax purposes in accordance with the provisions of Rule 115 of the Income-tax Rules, 1962. The counsel invited our attention to Section 207 of the Companies Act, 1956, to show that a company was bound to issue dividend within 42 days of the declaration of the dividend. However, in the case of the assessee, the amount of dividend in US dollars was received on 7-11-1976 though the dividend was declared on 16-8-1976. This fact also, according to Shri Dastur, indicated that so far as the non-resident assessee is concerned, the real income was what was received in US dollars.
11. Shri R.G. Joshi, the standing counsel for the department, submitted that the point at issue was very simple. The assessee is a non-resident foreigner. Provisions of Section 57(i) and (iii) are, admittedly, not applicable especially for this year because of the amendment of the Section with effect from 1-6-1976. According to him, Section 5(2)(b) of the Act is applicable in the case of the assessee and is very clear as to its contents. The income by way of dividend accrues to the assessee at the time of declaration of the dividend by the Indian company.
Therefore, there is no scope for application of Rule 115 in the assessee's case. He stated that if the income of a non-resident assessee was deemed to accrue at the point of receipt, it will not be taxable at all as in that case the situs of income would be outside India. In support, the learned standing counsel relied on the decision of the Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd.  119 ITR 573 at page 582 and of the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT  57 ITR 521 at page 12. In reply, Shri Dastur submitted that the decision of the Madras High Court was distinguishable. He also stated that there was no contradiction in the assessee's stand as regards the net amount of dividend and the tax deducted at source. He placed particular reliance on the comments of the learned commentators, Kanga and Palkhivala, in their latest treatise The Law & Practice of Income-tax, Vol. 1 at page 1154.
13. We have carefully gone through the provisions of Sections 194, 198, 5(2) and 9(1)(iv) of the Act and Rule 115. We have also gone through the decision of the Bombay High Court in the case of Kashiparekh (supra) and the decision of the Supreme Court in the case of Birla Gwalior (supra) relied upon by the assessee's counsel and the decision of the Madras High Court in the case of Standard Triumph (supra) and the decision of the Supreme Court in the case of Poona Electric (supra) relied upon by the learned standing counsel.
14. Section 207 of the Companies Act, on which reliance was placed by Shri Dastur, the counsel for the assessee, does not support the assessee's contentions. The section only provides that failure to distribute dividend within 42 days after its declaration by a company will be liable to penalty except in five cases specifically referred to under its proviso. Exceptions (a) and (e) clearly contemplate a situation like the one before us in this case, viz., where the dividend could not be paid by reason of the operation of any law or for some other reason beyond the company's control. It cannot, perhaps, be denied that the Indian company could distribute dividend to a non-resident foreign shareholder only after obtaining permission from the Reserve Bank.
No doubt, it has been held by the Bombay High Court in the case of Kashi-pareth (supra) that it is the real income that is liable to tax and that the real income cannot be arrived at without taking into account the amount forgone by the assessee. However, the above observations were made in the context of different facts. The assessee in that case had earned a commission of Rs. 1,17,644 for the accounting year ending 31-3-1950, but, as a result of the resolution passed by the managed company and the assessee-company it had given up a sum of Rs. 97,000 in December 1950, so much so that it was common ground that, in reality, the assessee had received a commission of Rs. 27,644 only. In the present case, as stated by us above, there is no dispute about the real income, i.e., the amount of dividend as declared by the Indian company. There is also no dispute that the US dollars received by the non-resident assessee are equivalent to the amount of dividend declared less tax deducted by the Indian company in Indian currency, if converted at the prevalent market exchange rate. The so-called loss claimed herein is not a real loss. It is a difference arising on account of conversion of US dollars into Indian currency by applying the exchange rate as provided for in Rule 115 as against the prevalent market exchange rate. The facts in the case of Birla Gwalior (supra) are also identical. Thus, both the decisions relied upon by the assessee's counsel are not applicable to the facts of the case.
Section 5(2), on the other hand, specifically provides that the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arisesor or is deemed to accrue or arise to him in India during such year; or Thus, total income of a non-resident assessee includes all such income that accrues or arises in India. Income by way of dividend accrues to a non-resident assessee, the moment the Indian company declares the dividend. It is only for this that the Indian company has deducted and could deduct tax at source as provided for in Section 194 of the Act.
Indirect support for the proposition is available from the decision of the Madras High Court in the case of Standard Triumph (supra). A nonresident assessee in that case was entitled to payment of royalty under a collaboration agreement from a resideni-assessee. The non-resident assessee claimed that the royalty amount was not taxable in its hands until it was received as the non-resident assessee was maintaining accounts on cash basis. The High Court held that because of the specific provisions of Section 5(2)(b), a non-resident assessee is liable to be taxed on accrual basis and that Section 5(2)(a) applied to only resident-assessee in India. The High Court further held that to apply Section 145(1) of the Act, to the case of a non-resident assessee would be to defeat the charge under Section 4, obliterate Section 5(2)(b) and let the income which is taxable escape tax and this cannot be the intention of the statute. Moreover, Section 9(1)(iv) provides that a dividend paid by an Indian company outside India shall be deemed to accrue or arise in India. Therefore, even on this score the income by way of dividend to the non-resident assessee will be deemed to accrue or arise in India when it was paid or became payable by the Indian company.
15. Having regard to the above discussion, we are inclined to hold that the income by way of dividend accrued or arose to the assessee in India on the date of declaration of dividend by the Indian company which was in Indian currency and, therefore, Rule 115 has no application at all in this case. There being no suggestion that any part of the so-called loss or expenditure represents anything but the notional difference on conversion under Rule 115, we hold that the departmental authorities were justified in rejecting the assessee's claim. In fact, principles of real income are not at all involved in this case.
At one stage it appeared to us that the assessee's stand was contradictory inasmuch as it had not claimed the benefit of Rule 115 in respect of the amount of tax deducted at source. However, having regard to the specific provisions of Section 198 of the Act and the fact that the assessee has been given full credit of the amount deducted as tax at source, we hold that there is no contradiction in the assessee's stand. We may also mention that the decision of the Supreme Court in the case of Poona Electric (supra) does not deem to have a direct bearing on the point at issue. The decision of the Madras High Court in the case of M. Velayutham v. CIT  130 ITR 145 deals with a case of a resident and ordinarily resident assessee and it was held that the foreign income in the hands of such an assessee would have to be assessed only on the basis of accruing or arising outside India during the accounting year even if it is not received in or brought into India. This case has also no direct bearing on the issue involved in these appeals.
16. The second and the last ground is that the deduction of Rs. 5,000 under Section 80VV of the Act, should be allowed entirely against the interest income and not apportioned between the dividend income and the interest income. It is contended that there being no specific provision in the Act warranting such an allocation, it is for the assessee to claim the deduction under Section 80VV against the income under one or the other head. We are inclined to accept the assessee's submission and direct that the deduction of Rs. 5,000 may be allowed against this interest income as claimed.