Skip to content


indulal Kanji Parekh Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 132 of 1978
Judge
Reported in(1986)53CTR(Guj)186; [1987]163ITR102(Guj)
ActsIncome Tax Act, 1961 - Sections 4, 5, 5(2), 10(4A) and 145
Appellantindulal Kanji Parekh
RespondentCommissioner of Income-tax
Appellant Advocate J.P. Shah, Adv.
Respondent Advocate S.N. Shelat, Adv.
Cases ReferredIn New Bank of India Ltd. v. Pearey Lal
Excerpt:
.....as well as interest on bank deposits during the assessment year 1973-74. initially, he submitted a return disclosing a total income of rs. the word 'again' clearly conveys that it was initially credited in the non-resident account of the assessee before its transfer to the suspense account and after the advice of the reserve bank of india was received, it was 'again' credited to the non-resident (external) account of the assessee. it must, however, be noted that, while doing so, the assessee clearly described the amount as interest received during the relevant assessment years and kept in the suspense account because of the special arrangement arrived at between him and the bank......in the account of the assessee with the bank. we are, therefore, of the opinion that when the bank credited the interest amount to the account of the assessee, there was receipt, at least a constructive receipt, of the interest amount by the assessee within the meaning of clause (a) of sub-section (2) of section 5 of the act. it was on account of the special instructions or special arrangement between the bank and the assessee that the amount of interest was held in the suspense account during the period the advice of the reserve bank of india was awaited on the question whether the non-resident account of the assessee could be converted into a non-resident (external) account. as part of that arrangement, with the consent of the assessee, the amount of interest credited in the.....
Judgment:

A.M. Ahmadi, J.

1. The assessee, a resident of Africa at the relevant point of time, derived income from house property as well as interest on bank deposits during the assessment year 1973-74. Initially, he submitted a return disclosing a total income of Rs. 4,000 in the status of non-resident but revised it to 'resident, but not ordinarily resident' subsequently and disclosed an interest income of Rs. 33,410 plus income from house property of Rs. 3,710. The original return was filed on March 23, 1974, and the revised return was submitted on September 10, 1974. In the course of the assessment proceedings, it was noticed that he had received an amount of Rs. 92,958.92, i.e., Rs. 92,959, by way of interest and the same was credited in his accounts maintained with the Bank of India at Rajkot and Bombay as non-resident account. The year-wise break-up of the interest is as under :

Assessment year Status Amount of interest1970-71 Non-resident Rs. 37,744.521971-72 Resident but not ordi- Rs. 17,015.54narily resident1972-73 Non-resident Rs. 7,027.761973-74 Resident but not ordi- Rs. 31,171.10narily resident_______________Rs. 92,958.92Say Rs. 92,959.00

2. So far as the payment of tax on the last item of Rs. 31,171.10 is concerned, there is no dispute between the parties. The dispute centres round the taxability of the interest amount in respect of the assessment years 1970-71 to 1972-73 aggregating to Rs. 61,787.82, i.e., Rs. 61,788, out of the total of Rs. 92,959. The assessee's contention throughout has been that the interest amount of Rs. 61,788 was assessable in the respective assessment years between 1970-71 and 1972-73, but the same could not be brought to tax in the assessment year in question, that is, 1973-74. The contention of the Revenue, on the other hand, is that the said amount of Rs. 61,788 plus the amount of Rs. 31,171, that is, the total amount of Rs. 92,959, was received by the assessee in the assessment year 1973-74 and, therefore, the same was liable to tax in the said assessment year.

3. The assessee, a resident of Africa,. with a view to taking advantage of the National Defence Remittance Scheme remitted certain amounts to India by opening accounts with the Bank of India at Rajkot and Bombay. The assessee mainly operated the Rajkot account. The deposits were kept in his non-resident account, but after the amendment of section 10(4A) of the Income-tax Act, 1961 (hereinafter called 'the Act'), the exemption was restricted to interest on moneys deposited in a 'non-resident (external) account' only. In view of this change in law, the assessee requested his bankers to convert his non-resident account into a non-resident (external) account with effect from April 1, 1968. However, as the assessee's bankers entertained some doubt in this behalf, the issue was referred to the Reserve Bank of India and in the meantime, with the consent of the assessee, the interest amount was transferred to a suspense account with the bank with a view to obviating the bank's liability to deduct income-tax at source from the interest amount in the assessee's non-resident account. In a communication addressed by the bankers to the assessee, he was informed that since the legal position was not clear and a reference was made to the Reserve Bank of India, the interest in the non resident account would be liable to income-tax and the bank would be obliged to make a deduction therefrom which would only create difficulties for the assessee to obtain refund from the income-tax authorities and in order to obviate such a situation, it was desirable to transfer the interest amount to a suspense account till instructions were received from the Reserve Bank of India. On December 7, 1972, the Reserve Bank informed the Bank of India that it could convert the assessee's non-resident account into a non-resident (external) account with retrospective effect from April 1, 1968. It was also clarified by the Reserve Bank that the amount held by the bankers in the non-resident account of the assessee may be deemed to have been held in the non-resident (external) account of the assessee from April 1, 1968. In view of these developments, the assessee, while crediting the interest amount relating to the assessment years 1970-71 to 1972-73 amounting to Rs. 61,788 in his account books, carried the same to the capital account after adjusting his income and expenditure account. To put it differently, he credited Rs. 31,171 towards interest whereas the balance of Rs. 61,788 was carried to the capital account de hors the profit and loss account. In view of these book entries, the Income-tax Officer held that the entire amount of Rs. 92,959 was taxable in the assessment year 1973-74. On appeal, the Appellate Assistant Commissioner concurred with the view of the Income-tax Officer. In further appeal, the Tribunal after referring to the decision of the Supreme Court in Raghava Reddi v. Commissioner of Income-tax : [1962]44ITR720(SC) and after perusing the correspondence on record, concluded that the bank had not parted with the domain over the funds in question in the relevant years, 1970-71 to 1972-73, and the entire amount of Rs. 61,788 was received by the assessee in the assessment year 1973-74 and was, therefore, rightly brought to tax by the authorities below. The Tribunal, therefore, dismissed the appeal.

4. The assessee sought a reference under section 256(1) of the Act. The question referred for our opinion reads as under :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of interest of Rs. 61,788 was rightly assessed to tax by the Revenue authorities during the assessment year 1973-74.'

5. For reasons which we will immediately indicate, we are of the opinion that the question must be answered in the negative, that is, in favour of the assessee and against the Revenue.

6. It is clear from the facts narrated above that the interest of Rs. 61,788 relates to the assessment years 1970-71 to 1972-73. Ordinarily, the amount of interest would have been credited to the account of the assessee with the Bank of India during the assessment years in question. However, since the question whether the non-resident account of the assessee could be converted into a non-resident (external) account with effect from April 1, 1968, in view of the amendment in section 10(4A) of the Act was in a flux and the advice of the Reserve Bank of India was awaited thereon, the Bank of India found itself in the difficult situation of either deducting tax at source from the interest amount earned on the fixed deposits by the assessee during the relevant assessment years or of transferring the said amount to a suspense account while the advice of the Reserve Bank was awaited. In order to transfer the amount from the non-resident account of the assessee to the suspense account, the assessee's consent was obtained by the bank and thereafter the amount was transferred pending decision by the Reserve Bank to the suspense account. After the Reserve Bank's opinion was received, the entire amount was transferred to the non-resident (external) account of the assessee

7. At the hearing of this reference, Mr. Shelat, the learned advocate for the Revenue, raised a doubt on a question of fact, namely, whether the interest amount was in fact credited to the non-resident account of the assessee before the same came to be transferred to the suspense account. In this connection, he invited our attention to the letter, annexure 'B', dated October 5, 1974, written by the Bank of India to the Income-tax Officer, Rajkot. In paragraph (ii), it was stated that the interest amount was kept in suspense account pending approval from the Reserve Bank of India to convert the account into non-resident (external) account. In paragraph (iii) of the letter, the bank indicated the circumstances under which it became necessary to transfer the interest amount to the suspense account. In the said paragraph, it was further pointed out that the Reserve Bank had granted approval by its communication of December 7, 1972, to designate the non-resident account of the assessee as 'non-resident (external) account' with effect from April 1, 1968. It is, therefore, explained that in view of this change in status, no tax was required to be deducted from the interest amount credited to the account of the assessee in view of the amended section 10(4A) of the Act.

8. This communication does not indicate that before the interest amount was placed in the suspense account of the assessee, it was not deposited in his non-resident account. However, in the statement of the case submitted by the Tribunal to this court, the following statement appears :

'Now, pending decision of the Reserve Bank of India, the Bank of India credited the interest on non-resident accounts at the end of every six months to a suspense account as set out in the above Table and on receiving communication from the Reserve Bank of India, the Bank of India again credited the entire amount to non-resident (external) account.'

9. It is clear from this statement of fact that pending the decision of the Reserve Bank of India on the question whether the non-resident account of the assessee could be converted into a non-resident (external) account with effect from April 1, 1968, the interest was initially credited in the non-resident account at the end of every six months and was thereafter carried to the suspense account. After receiving the advice of the Reserve Bank of India, the Bank of India 'again' credited the entire amount to non-resident (external) account of the assessee. The word 'again' clearly conveys that it was initially credited in the non-resident account of the assessee before its transfer to the suspense account and after the advice of the Reserve Bank of India was received, it was 'again' credited to the non-resident (external) account of the assessee. Since our opinion is to be expressed on the stated facts. we must proceed on the premise that the interest amount was initially credited in the non-resident account of the assessee before it came to be transferred to the suspense account. Even the letter on which Mr. Shelat relies does not positively rule out such a factual situation.

10. Mr. Shah, the learned advocate for the assessee, pointed out that under section 4 read with section 5(2) of the Act, income derived by a non-resident from whatever source which is received or is deemed to be received in India by or on behalf of such person becomes liable to tax. He submitted that when the non-resident account of the assessee was credited with the interest amount before the same came to be transferred to the suspense account, he could be said to have received or deemed to have received the said amount and was, therefore, liable to pay tax thereon under section 4 unless specifically exempted. Alternatively, he submitted that even if the interest amount cannot be said to have been received or deemed to be received because it was transferred to the suspense account from which it could not be withdrawn, it can safely be stated that it fell within clause (b) of sub-section (2) of section 5, namely, income accruing or arising or is deemed to accrue or arise to the assessee in India during the relevant year. As against this contention Mr. Shelat, the learned counsel for the Revenue, submitted that since the amount was carried to the suspense account from which it could not be withdrawn, there was neither receipt nor accrual, actual or constructive, and therefore, it was rightly taxed in the assessment year 1973-74 when it was actually transferred from the suspense account to the non-resident (external) account of the assessee. He further submitted that under section 145 of the Act, income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' is to be computed in accordance with the method of accounting regularly employed by the assessee. According to him, the assessee was employing the cash method of accounting as is clear from the statement of account produced at annexure 'I' (annexure 'H' is the English translation thereof) and since the interest stated to have been earned in the assessment years 1970-71 to 1972-73 was not creclited in the account books of the assessee, he was liable to pay tax thereon in the assessment year 1973-74 on the entire amount of Rs. 92,959 inclusive of Rs. 61,788 shown as received in that year. It may, however, be clarified, that so far as the amount of Rs. 61,788 is concerned, the entries have been split up and related to the relevant assessment years and the amount has been brought by way of capital to the non-resident account of the assessee. In other words, he has not credited the said amount of Rs. 61,788 as interest but has carried it to capital. It is clear to us from the aforequoted statement of fact found in the statement of the case submitted to this court that the amount of interest was first credited to the non-resident account of the assessee at the end of every six months and thereafter debited to the suspense account opened to meet with a peculiar situation arising on account of the reference made to the Reserve Bank of India by the Bank of India on the assessee's request to convert his non-resident account into a non-resident (external) account with effect from April 1, 1968. Once the amount of interest was credited even temporarily in the assessee's non-resident account, it was by way of receipt or deemed receipt within the meaning of clause (a) of sub-section (2) of section 5 of the Act and the assessee became liable to pay tax thereon unless exempted by law The methodology of opening a suspense account for transfer of the interest, amount, assuming the same was not initially credited in the assessee's non-resident account as argued by Mr. Shelat, should also make no difference because this was a special arrangement made with the consent of the assessee to avoid deduction of tax because the Bank was of the view that if the amount is credited in the non-resident account, it will be obliged to deduat tax at source. Such a course would have required the assessee to claim refund at a later date after the account was converted into a non-resident (external) account. The fact of the assessee having agreed not to withdraw the amount from the suspense account till the doubt was cleared would not change the fact that the interest had accrued on the fixed deposits and had been temporarily credited in the suspense account of the assessee. We do not think we would be justified in taking the techinical view, regardless of the peculiar circumstances necessitating a special arrangement, that there was no receipt or accrual of the interest amount to the assessee.

11. We may at the outset examine the relationship between the banker and customer in law. In New Bank of India Ltd. v. Pearey Lal [1962] 32 Comp Cas 91, Pearey Lal, a customer of the bank, having his registered office at Lahore, paid an amount into the bank at Lahore to transmit the same to a branch of the bank which was proposed to be opened at Calcutta, for making fixed deposits according to his instructions on or after the opening date. The amount was remitted to Calcutta and a branch of the bank was opened there. But within a few days of the opening, an Ordinance was issued declaring a moratorium on the bank and prohibiting it from making payments. No instructions were, however, issued by the customer regarding the amount. Under the scheme sanctioned by the High Court, the depositors of the bank were to be paid 70.5 per cent. of the deposits. The Supreme Court held that the transaction was primarily one of entrustment of the amount to the bank for transmission to Calcutta. After the purpose for which the amount was entrusted was carried out, in the absence of further instructions, the bank did not cease to be a trustee and so long as instructions were not given, the bank continued to hold the amount as trustee. On the general law on the subject, the Supreme Court stated that in the absence of other evidence, a person paying money into a bank, whether he is a constituent of the bank or not, may be presumed to have paid the money to be held as bankers ordinarily hold the moneys of their constituents. If no specific instructions are given at the time of payment or thereafter, and even if the money is held in a suspense account, the bank does not thereby become a trustee for the amount paid. In other words, when a person dealing with a bank delivers money to the bank, an intention to create a relation of creditor and debtor between him and the bank is presumed, it being the normal course of the business of the bank to accept deposits from its customers. But this presumption is one of fact arising from the nature of the business carried on by the bank and is rebutted by proof of special instructions or circumstances attending the transaction. So, where the money is paid with special instructions to retain the same pending further instructions or to pay over the same to another person and the bank accepts the same and holds the money awaiting instructions from the other person, or where instructions are given that a part of the amount be transferred to another bank to meet a bill to become due and payable by him, the trust results and the presumption stands rebutted.

12. In Raghav Reddi's case : [1962]44ITR720(SC) , the assessee-firm was exporting mica to Japan. It appointed a Japanese company to negotiate orders and to handle its affairs in Japan, undertaking, to pay a commission on the gross proceeds of the sales effected in Japan. The Japanese company instructed the assessee to credit the amounts due to it as commission in the account books of the assessee without remitting them to Japan until further instructions. The income-tax authorities treated the assessee as the statutory agent of the Japanese company under section 43 of the Indian Income-tax Act, 1922, and assessed the amounts credited in the assessee's books to the Japanese company as income derived by the Japanese company in India through the assessee. The assessee contended that mere entry in the account books cannot amount to receipt and the amounts could not be assessed until they were actually paid over to the Japanese company or dealt with according to its directions. The Supreme Court held that the legal effect of the direction given by the Japanese company was that, as soon as the assessee credited the amounts to the company in the assessee's accounts, the relationship between the parties ceased to be that of debtor and creditor and the amount credited in the accounts had to be treated as moneys deposited by the Japanese company itself with the assessee. The moneys were thus 'received' by the Japanese company in India on being credited and the assessee could be assessed as their statutory agent in respect of such moneys.

13. In the instant case, the assessee deposited certain amounts as fixed deposits with the Bank of India as is evidenced by annedxure 'K' appended to the statment of the case. On these deposits, the assessee was entitled to interest with six-monthly rests. On the instruction s of the assessee, this amount of interest was to be credited by the bank in his account, it can safely be stated that the interest was received by the assesse. The bank could not have transferred the interest amount to the suspense account without specific instructions from the assessee. It was for that reason that the bank obtained the consent of the assessee to transfer the amount to the suspense account. In other words, the assesse specifically instructed the bank that in view of the situation created because of a doubt entetained by the bank on the question whether his non-resident (external) account, the interest amount may be carried to a suspense account; the assessee also tacitly agreed not to withdraw the interest amount from the suspense account till the doubt was cleared and his account was converted into a non-resident (external) account. On such conversion, the instructions to the bank were that the interest amount lying in the suspense account should be transferred to the non-resident (external) account with the bank. It would, therefore, appear from the above facts that the bank was under an obligation to pay interest on the fixed deposits at the rate agreed to by and between the pareties with six-monthly rests. Instead of receiving the amount in cash, the assessee desired that the same may be deposited in his account with the bank. Unless the amount is taken as having been received by the assessee and simultaneously deposited or credited in his account, the relationship of debtor and creditor which ordinarily comes into being when a customer deposits his money with the bank would not arise because the bank which was under an obligation to pay the interest cannot be said to have discharged the obligation unless the same is paid to the assessee. As per the arrangement with the bank, the mode of discharging the obligation to pay interest was that the bank will deposit the amounty by making a credit entry in the account of the assessee with the bank. We are, therefore, of the opinion that when the bank credited the interest amount to the account of the assessee, there was receipt, at least a constructive receipt, of the interest amount by the assessee within the meaning of clause (a) of sub-section (2) of section 5 of the Act. It was on account of the special instructions or special arrangement between the bank and the assessee that the amount of interest was held in the suspense account during the period the advice of the Reserve Bank of india was awaited on the question whether the non-resident account of the assessee could be converted into a non-resident (external) account. As part of that arrangement, with the consent of the assessee, the amount of interest credited in the suspense account of the assessee was not to be withdrawn till the doubt was cleared by the Reserve Bank. Therefore, the fetter against withdrawal of the amount would not change the character of the amount being interest paid on fixed deposits held by the bank.

14. Mr. Shelat submitted that since the assessee followed the cash system of accounting unless the amount was shown as receipts in the accounts of the relevant years, it could not be said that the amount was received by the assessee during those assessment years. In support of this contention, he invited our attention to annexure 'H' which shows that the entire amount of Rs. 61,788 was carried to the capital account after the doubt was cleared by the Reserve Bank. It must, however, be noted that, while doing so, the assessee clearly described the amount as interest received during the relevant assessment years and kept in the suspense account because of the special arrangement arrived at between him and the bank. The first three items totalling Rs. 61,788 have been taken to the capital account while the last item of Rs. 31,171.10 is shown to be interest amount carried to he non-resident (external) account of the assessee. It is, therefore, clear from these entries also that the assessee treated the amount of Rs. 61,788 as having been taken to the capital account while the last item of Rs. 31,171.10 is shown to be interest amount carried to the non-resident (external) account of the assessee. It is, therefore, clear from these entries also that the assessee treated the amount of Rs. 61,788 as having been received towards interest during the relevant assessment years, but since the same was lying in the suspense account in view of the special arrangement between him and the bank, he carried the said amount to the capital account after the doubt was cleared by the Reserve Bank. The entries have to be read in the context of the peculiar facts and the peculiar situation in which the assessee, a non-resident, was placed because of the insistence on the part of the Bank of India to obtain instructions from the Reserve Bank before converting his account into a non-resident (external) account. As the bank stated that it would find itself in difficulties if it continued to retain the amount in the non-resident account of the assessee because of the obligation to deduct tax at source, the assessee agreed to the arrangement of the interest amount being deposited in the suspense amount and further agreed not to withdraw therefrom till the doubt was cleared. His concession not to withdraw from the suspence account till the doubt was cleared by the Reserve Bank would not change the character of the money credited to his account towards interest payable on his fixed deposits. Viewed from this point of view, we are of the opinion that the amount of interest was received by the assessee in the respective assessment years and merely because he agreed not to withdraw the same would not materially alter the nature of the transaction between him and the bank. That was the special arrangement arrived at between him and the bank to meet with the special situation, but that arrangement cannot change the character of the initial paynment in the account of the assessee. In this view that we take, we are of the opinion that the Truibunal was in error in holding that the entire amount was received in the assessment year 1973-74 only and could be brought to tax in that year. Since we are of the view that the case is covered by clause (a) of sub-section (2) of section 5 of the Act, we need not examine the alternativw argument based on clause (b) of that sub-section which was advanced before us by Mr. Shah, the learned advocate for the assessee.

15. For the reason stated above, we answer the question referred for our opinion in the negative, that is, in favour of the assessee and against the Revenue. The reference is disposed of accordingly with no order as to costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //