1. These two appeals, involving a common point of dispute, are disposed of together for the sake of convenience.
2. The assessee is an individual and his residential status under the Income-tax Act, 1961 ('the Act'), is 'resident but not ordinarily resident'. The assessment years are 1980-81 and 1981-82 and the relevant previous years are the financial years ended on 31-3-1980 and 31-3-1981, respectively.
3. The assessee is holding a British passport and is not a citizen of India. The assessee left India in 1943 for East Kenya and served with the East African Railways till his retirement in 1963. Thereafter, he came back to India. The assessee received pension of Rs. 28,884 and Rs. 34,680, respectively, for the two years under consideration for the services rendered with the East African Railways from the British Government, which was received by him from the Ministry of Overseas Development, London, through their Crown agents in London.
4. In his returns of income as well as at the time of assessment proceedings, the assessee claimed that the pension received by him was exempt from tax. The ITO, however, framed the assessments with the remarks "as discussed in the assessment order for the assessment year 1979-80 and looking to the status of the assessee as resident but not ordinarily resident, his pension income is clearly taxable". In appeal before the AAC, the assessee reiterated his contentions which were made before the ITO and urged that the pension received by him was exempt from tax. In this connection, reliance was placed on Circular No. 4 [F.No. 73A/2/69-IT(A-II)], dated 20-2-1969--Taxmann's Direct Taxes Circulars; Vol. 1, 1980 edn., pages 31-- issued by the CBDT. The AAC, however, upheld the action of the ITO in the following manner: 'However, the reliance placed by him upon the said circular is not correct as the said circular is with reference to the provisions of Section 9(1)(m) of the Act. According to these provisions, the salaries payable to a citizen of India for the services rendered to the Government at any place outside India are deemed to have accrued or arose in India irrespective of the places of services or the places of salary payment. It is difficult for me to understand how this circular helps the appellant in advancing his claim for the exemption of the pension income.
3. In my opinion, the case of the appellant is fully covered by the provisions of Section 5(1)(c) which lay down that the income from whatever source derived by a person resident in India, even if it accrues or arises to him outside India during the previous year, is taxable as a part of his total income. This view is also supported by the decision of the Madras High Court in B.R. Sundaram v. CIT  117 ITR 960. In that case, the assessee, a resident of Madras, was a pensioner of Malaysian Government. His claim was that his pension was not taxable in India as the pension had been received in Malaysia. This contention was rejected by the High Court which held that the same is taxable in India as the ingredients of Section 5(1)(c) are satisfied. I, therefore, hold that the ITO was justified in bringing to tax the pension income of the appellant.
5. Being aggrieved by the order of the AAC, the assessee has come up in appeal before the Tribunal. The learned Counsel for the assessee submitted that the AAC has failed to appreciate the true intent and purpose of the aforesaid circular dated 20-2-1969. In this connection, he submitted that on the proper appreciation of the said circular, the AAC ought to have held that the pension received by the assessee was exempt from tax under the Act. Inviting the attention of the Tribunal to the decision of the Hon'ble Madras High Court referred to in the order of the AAC, the learned Counsel for the assessee submitted that the AAC was not justified in relying on the said decision as in that case, the pension was paid by the Accountant-General, Madras, in Indian currency. In this connection, he also submitted that the AAC has failed to consider the proviso to subsection (1) of Section 5 of the Act. He, therefore, urged that the pension received by the assessee should not have been brought to tax as was done by the income-tax authorities. The learned representative for the department, on the other hand, strongly relied on the order of the AAC and also pointed out that the assessee's residential status was 'resident' only. He, therefore, urged that the order of the AAC should be upheld. The learned Counsel for the assessee, in his reply, invited the attention of the Tribunal to the assessment orders, more particularly, item 4, wherein the ITO has treated the assessee as resident but not ordinarily resident. Even in the body of the order, the ITO has taken the status of the assessee as 'resident but not ordinarily resident'.
6. We have carefully considered the rival submissions of the parties and we find considerable force in the submissions made on behalf of the assessee. From the material already brought on the record, it is quite clear that the pension was first received in London and thereafter, it was remitted to the assessee. It is in this background, we have to see the true intent and purpose of the circular dated 20-2-1969 issued by the CBDT. We, therefore, reproduce the said circular: Under Section 9(1)(iii), pension accruing abroad is taxable in India only if it is earned in India. Pensions received in India from abroad by pensioners residing in this country, for past services rendered in the foreign countries, will be income accruing to the pensioners abroad, and will not, therefore, be liable to tax in India on the basis of accrual. These pensions will also not be liable to tax in India on receipt basis, if they are drawn and received abroad in the first instance, and thereafter remitted or brought to India.
2. It is only in cases where in pursuance of a definite agreement with the employer or former employer, the pension is received directly by the pensioner in India that the pension would become taxable in India on receipt basis.
3. While the pension earned and received abroad will not be chargeable to tax in India if the residential status of the pensioner is either 'nonresident' or 'resident but not ordinarily resident', it will be so chargeable if the residential status is 'resident and ordinarily resident'. The aforesaid status of 'ordinarily resident' cannot, however, be acquired by a person unless he has been resident in India in at least nine out of the preceding ten years. Circular No. 4 [F. No. 73A/2/69-IT(A-II)], dated 20-2-1969.
On the proper reading of the said circular, we entirely agree with the submissions made on behalf of the assessee that the AAC has failed to comprehend the instructions of the CBDT in this regard. The relevant portion of Section 5 reads as under: (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a 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 arises or is deemed to accrue or arise to him in India during such year; or Provided that, in the case of a person not ordinarily resident in India within the meaning of Sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
It is quite clear from the proviso to Sub-section (1) of Section 5, that the income which accrues or arises to a person outside India is not to be included in the total income of the said person unless it is derived from a business controlled in or a profession set up in India.
In this background, we entirely agree with the submissions made on behalf of the assessee that the decision in the case of B.R. Sundaram (supra) has no application to the facts and circumstances obtaining in this case. With a view to complete our order, we reproduce below the head-notes in the case of B.R. Sundaram (supra): The assessee, resident of Madras, was a pensioner of the Malaysian Government. The pension was paid by the Accountant-General, Madras, in Indian currency in pursuance of block arrangement entered into between the Government of India and the Government of Malaysia as a result of which the Government of India is credited with dollars by the Malaysian Government. The assessee's claim that this pension was not taxable in India as the pension had been received in Malaysia and hence it could not be assessed on accrual basis by applying Section 5(1)(c) was negatived by the departmental authorities and the Tribunal. This was upheld by the High Court on a reference, as the pension had not only accrued but was also received in India by a resident and the ingredients of Section 5(1)(c) of the Income-tax Act, 1961, are satisfied.
7. It would appear from the above that in that case, the pension was paid by the Accountant-General, Madras, in Indian currency and that too in India. While in the instant case, the pension was first paid or collected in London and thereafter, it was remitted to the assessee.
Therefore, we fail to appreciate how the pension received by the assessee could be brought to tax under the Act. We would, therefore, direct the ITO to accept the assessee's claim for exemption in respect of the pension received by him and modify the assessments, accordingly.