1. The department is objecting to the findings of the Commissioner (Appeals) regarding the date of accrual of income, by way of dividend, declared by an Indian company for these three assessment years. The assessee, in the cross-objections for the same years, seeks to support the findings of the Commissioner (Appeals) on another ground, i.e., maintenance of books of account on cash basis.
2. The assessee is a non-resident company. The accounts are closed on November 30. This company holds shares in its Indian subsidiary. The Indian company had declared dividends, both interim and final, in the course of the three accounting years we are concerned with.
3. The chart below shows the dates of declaration and the dates of remittance by the Indian company after obtaining the permission of the Reserve Bank of India ('RBI') :Sl. No. Type of Date of Amount Date of dividend declaration Rs. remittance1.
Final 31-7-1975 50,40,000 Rs. 25,40,000 on 3-9-19763.
Final 31-5-1976 79,80,000 Rs. 50,40,000 on 21-9-1976 We may mention that the tax was deducted from the dividends only at the time of remittance.
4. The assessee filed returns showing the income from the dividends in the respective years they were remitted. The assessing authority, however, included the dividend income in the respective years the dividend was declared. This method was followed both for the interim as well as the final dividends. The Commissioner (Appeals) was of the opinion that the dividend can be assessed only in the year in which the RBI gave permission for remittance.
5. Before we consider the contentions of both the parties, we would point out that the uniform method adopted, both for interim and final dividends, would not be in accordance with law. As far as the interim dividends are concerned, there is no enforceable obligation on the part of the company. The directors declare the interim dividend and they have the power to rescind the declaration any time before the actual payment. This is a well settled position in law, ever since the decision of the Supreme Court in the case of J. Dalmia v. CIT  53 ITR 83. Even if the Indian company obtained permission of the RBI to remit the amount abroad, it is open for the directors to withhold remittance. Therefore, as far as the interim dividend is concerned, the year of assessment would be the year in which the dividend was remitted.
6. So, the controversy can only be in respect of the final dividends declared : Rs. 50,40,000, declared on 31-7-1975, is included in the assessment year 1976-77, whereas the assessee has shown it partly in 1977-78 and partly in 1978-79. The final dividend of Rs. 79.8 lakhs, declared on 31-5-1976, was assessed for 1977-78 and the assessee had admitted the assessment for 1977-78 to the extent of Rs. 49.4 lakhs and the balance of Rs. 29.4 lakhs was admitted only for 1978-79.
7. The department's case is very simple. Reliance is placed on Section 8 of the Income-tax Act, 1961 ('the Act'), and since the dividend was declared during the accounting years, the income has accrued on that date. The company's argument is that as far as a non-resident shareholder is concerned, nothing accrues till the RBI permits remittance. Till such time, the provisions of the Foreign Exchange Regulations Act, 1973 ('the FERA'), does not even permit credit to a non-resident's account with the amount due. So, no right is created in favour of the non-resident shareholder till the permission contemplated by the FERA is given.
8. So, we have to consider the provisions of the FERA and determine how far the assessee's right to receive dividend is affected by them.
Reference has been made to Section 9 of the FERA which states that no person shall make any payment to or credit any person resident outside India, except where exemption is granted by the RBI. Section 9(1)(e) also places a bar in crediting any sum to a non-resident. Reference is made to Section 9(5), which states that securities include dividends also. Section 19(1)(a) of the FERA prevents taking or sending any security to any place outside India.
9. Now, the question is, are these provisions to be so construed that they override the provisions of Section 8 of the Income-tax Act. We do not think so. Section 8 is a special provision, dealing with the point of accrual of income from dividend. As per this section, income accrues on the date of declaration of dividend. That date is the annual general meeting of the shareholders. The non-resident is also a shareholder. In the case of a non-resident, permission has to be taken from the RBI under Section 29 of the FERA to hold share in Indian companies. This section, in substance, prevents a company not incorporated in India from acquiring or purchasing the shares of an Indian company. It applies to companies having more than 40 per cent of interest in an Indian company. Section 29(4)(a), prevents the continuing of holding of such shares unless the RBI gives special permission. Thus, the assessee is a shareholder, only with the permission of the RBI. The fact that the assessee is a shareholder, then, clothes them with all the rights under the Companies Act, 1956. So, the assessee is entitled to the dividends declared.
10. Thus, on the above analysis, the non-resident shareholder has also an enforceable right against the company, regarding the dividend declared, in any annual general meeting. The provisions of Sections 9 and 19 of the FERA do not stand in the way of the assessee's right to enforce payment. That is because, Section 47 of the FERA has clearly provided that the provisions of FERA will not prevent any legal proceedings taken for recovering any amount. The said section is reproduced below : 47. Contracts on evasion of the Act.--(1) No person shall enter into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of this Act or of any rule, direction or order made thereunder.
(2) Any provision of, or having effect under, this Act that a thing shall not be done without the permission of the Central Government or the Reserve Bank, shall not render invalid any agreement by any person to do that thing, if it is a term of the agreement that that thing shall not be done unless permission is granted by the Central Government or the Reserve Bank, as the case may be ; and it shall be an implied term of every contract governed by the law of any part of India that anything agreed to be done by any term of that contract which is prohibited to be done by or under any of the provisions of this Act except with the permission of the Central Government or the Reserve Bank, shall not be done unless such permission is granted.
(3) Neither the provisions of this Act nor any term (whether express or implied) contained in any contract that anything for which the permission of the Central Government or the Reserve Bank is required by the said provisions shall not be done without that permission, shall prevent legal proceedings being brought in India, to recover any sum which, apart from the said provisions and any such term, would be due, whether as debt, damages or otherwise, but-- (a) the said provisions shall apply to sums required to be paid by any judgment or order of any court as they apply in relation to other sums ; (b) no steps shall be taken for the purpose of enforcing any judgment or order for the payment of any sum to which the said provisions apply except as respects so much thereof as the Central Government or the Reserve Bank, as the case may be, may permit to be paid ; and (c) for the purpose of considering whether or not to grant such permission, the Central Government or the Reserve Bank, as the case may be, may require the person entitled to the benefit of the judgment or order and the debtor under the judgment or order, to produce such documents and to give such information as may be specified in the requisition.
(4) Notwithstanding anything contained in the Negotiable Instruments Act, 1881 (26 of 1881), neither the provisions of this Act or of any rule, direction or order made thereunder, nor any condition, whether expressed or to be implied having regard to those provisions, that any payment shall not be made without permission under this Act, shall be deemed to prevent any instrument being a bill of exchange or promissory note.
It will be seen from the above that Sub-section (3) is very categorical, It says that neither the provisions of the Act, i.e., FERA, nor terms in the contract will prevent legal proceedings being brought in India to recover any sums whether as debt, damages or otherwise. This right, however, is subject to the three limitations given in Sub-section (3) of Section 47 itself. These limitations will come into force after a declaration is made by the Court that certain amounts are due to the parties. In other words, the limitations will come only at the stage of execution proceedings. At this stage, the RBI will have to be approached for granting permission. However, as far as enforcing the debt is concerned, the provisions are categorical. That being so, the provisions of Sections 9 and 19 do not stand in the way of non-resident shareholder, if he so chooses, from enforcing his right to receive the dividend. Now, a non-resident can enforce any right only if the law recognizes that he has a right. It, therefore, follows that as soon as a dividend is declared, a shareholder, whether non-resident, or not, has an enforceable right. This is enough to say that income has accrued as far as dividend is concerned. This will nullify the provisions, relied on by the assessee before us in their submissions, that no dividend would accrue to a non-resident. Section 47 places a non-resident shareholder on par with a resident shareholder as far as the obligations of the company declaring dividend are concerned.
Therefore, there should be no difficulty in holding that income had accrued on the date of declaration.
11. Shri Dastur had placed reliance in the case of CIT v. Public Utilities Investment Trust Ltd.  143 ITR 236 (Bom.). In that case, the Bombay High Court was considering the question whether any income, by way of dividend, accrued to the assessee in London in respect of certain debentures held in Brazil in South America. The contention of the assessee was that the foreign exchange regulation placed by the Government of Brazil on remittances, was a supervening factor, which prevented the accrual of income by way of interest. In the case before us, on considering the FERA as a whole, especially the provisions of Section 47, read with other provisions, relied on by the assessee, it will not be possible to say that there is a prevention of remittances. FERA is only for regulation of the foreign exchange. FERA itself, as pointed out, allows enforcement of debt in India. It also allows remittance, if the regulatory provisions are complied with.
Therefore, the case can be distinguished on facts.
12. Alternatively, it can also be held that the permission given under Section 29(4), allowing the assessee to hold shares by implication, grants the assessee an exemption to enjoy the dividend which arises from the holding of the shares. After all, holding of shares is not an end in itself. It is only a means to have the income by way of dividends, in respect of those shares. So, when the RBI has permitted the assessee to hold shares, it has also by implication permitted the assessee to enjoy the income arising thereof. It means that whenever a dividend has been declared by an Indian company, the RBI is bound to grant permission for remittance of the dividend. Therefore, the provisions in FERA have to be construed as procedural for remitting the dividend under these circumstances. A procedural part for remittance cannot be held to suspend accrual of income.
13. The Commissioner (Appeals) had decided the issue, based on authorities given under the Indian Income-tax Act, 1922 ('the 1922 Act'). The expression used in the 1922 Act is different from the expression found in Section 8 of the 1961 Act. In the 1922 Act, the dividend income accrued only when the amount is credited, distributed or paid. Under Section 8, dividend income accrues when it is declared, distributed or paid. The expression 'declared' was absent in the 1922 Act. Therefore, the case laws in the 1922 Act will not be relevant while deciding the issue.
14. Therefore, we give a finding that the final dividend accrues to the assessee on the date of declaration, in the annual general meeting.
15. We take up the cross-objections. The assessee has claimed that they are maintaining accounts on cash basis and, therefore, the income should be assessed only on the date of receipt. We are unable to accept this submission. In this connection, the department has rightly relied on the decision of the Madras High Court in the case of CIT v. Standard Triumph Motors Co. Ltd.  119 ITR 573. The Madras High Court has held that as far as a non-resident is concerned, income has to be assessed on the basis of accrual only. The accrual of income cannot be defeated by the non-resident, claiming that the method of accounting followed by them is cash system. Shri Dastur, at the time of hearing, submitted that there is another decision of the Orissa High Court on the same point, i.e., CIT v. American Consulting Corpn.  123 ITR 513. In our opinion, the decision cited has not gone into the issue whether the non-resident can have a cash system of accounting in respect of income which accrues in India. In that case, the Tribunal found that the non-resident assessee was maintaining accounts on cash basis. The proceedings before the Tribunal as well as the High Court proceeded only on the basis that it was open for a non-resident to maintain accounts on cash basis and account for the income accruing in India on that basis. Therefore, the issue considered by the Madras High Court was not considered by the Orissa High Court. We, therefore, hold that it is not open for the assessee to claim that they should be assessed on cash basis.
16. We find that the Commissioner (Appeals) in his order, which is objected to by the department as well as the assessee, had only laid down certain principles regarding the assessment. The last sentence in his order in para 11 reads as follows : Inasmuch as on this basic issue necessary facts which are not on record have to be found and it is accordingly that the assessments are to be made, I consider it wholly essential that each of the three assessments should be set aside and that on this issue each of the three assessments should go back to the return stage.
Thus, he had set aside the assessments and sent the same back to the assessing authority to proceed from the return stage. We uphold the setting aside of the assessment orders ; however, instead of the principle laid down by the Commissioner (Appeals) that the date of permission granted by the RBI would be the date of accrual, we would direct the ITO to re-do the assessments by applying the principles we have laid down in the above paragraphs.
17. In the above paragraphs, we have given our finding on the issue raised before us. While we hold that our finding, in our considered opinion, is the correct position in law, we feel bound to refer to certain practical aspects. Now, it would be seen that in some years the income would accrue in one year, but the corresponding tax would be deducted in the following year. As Section 199 of the Act reads, it may not be possible to get the credit for the tax deducted at source in the year in which the income accrues and js assessable. Consequently, when the assessee is called upon to file the returns, it would appear on the face of the returns filed that some tax would have to be paid. The assessee, being a non-resident having no branch or Bank in India, will have to arrange for remittance of funds from USA. The assessee would be unnecessarily called upon to pay the tax which, as per statutory provisions, is only to be deducted at source. It is even doubtful whether the assessee could be called upon to pay the tax even as per returns, in view of the peculiar wording of Section 205 of the Act.
This section bars recovery of taxes from the assessee where there is provision for deduction at source. Unlike Section 199, which states the year for which tax credit would be allowed, Section 205 makes no such reference to any assessment year. Even if the credit for tax deducted at source is being given for another assessment year, no steps can be taken for recovery of the tax in the year in which income subject to tax deduction is assessed.
18. That being the position, an assessment on the non-resident of dividend income on accrual basis does not give the department any advantage. It does not affect the quantum of tax to be collected, because that is to be deducted at source. It does not advance the collection of tax either. Thus, the department has no benefit at all, only avoidable paper work. On the other hand, it does place the assessee at a disadvantage, exposing him to the trouble of arranging for funds, and possibly proceedings under Sections 140A(3), 139(8) of the Act for interest, etc. Is it, therefore, desirable to follow the strict provisions of law under these circumstances The balance of convenience would be in favour of the assessment on remittance basis.
We would seriously suggest that the department, while taking consequent proceeding on our order, would keep this in view.
19. With these remarks, the appeals of the department would be allowed for statistical purposes and the cross-objections dismissed.