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M. Velayutham Vs. Commissioner of Income-tax, Madras - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 600 of 1976 (Reference No. 474 of 1976)
Judge
Reported in[1981]130ITR145(Mad)
ActsIncome Tax Act, 1961 - Sections 5 and 220(7)
AppellantM. Velayutham
RespondentCommissioner of Income-tax, Madras
Appellant AdvocateS. Swaminathan and ;S.A. Balasubramanian, Advs.
Respondent AdvocateJ. Jayaraman, Adv.
Excerpt:
direct taxation - resident and ordinarily resident - sections 5 and 220 (7) of income tax act, 1961 - in respect of assessee who is to be assessed in status of resident and ordinarily resident his foreign income would have to be assessed only on basis of its accruing out of india during accounting year - same applicable even though same income might not be received in or brought in india - accrual of income in previous year is only relevant factor and not its remittances or bringing into india - charge on income accruing or received in india imposed by section 5 cannot be avoided by any method of accounting. - .....year 1970-71. in the return submitted by him, he had disclosed a sum of rs. 33,761 as foreign income accrued in ceylon. while making the assessment order, the ito converted this ceylon income into indian currency at rs. 43,550 with reference to r. 115 of the i. t. rules and made an assessment order on that basis. the assessee preferred an appeal contending that the ito went wrong in coverting the ceylon income into its equivalent in indian money applying r. 115. he contended that there were certain restrictions imposed by the ceylon govt. in the matter of remittances of income from ceylon and that under these restrictions before any money earned in ceylon was repatriated to any other country a foreign exchange entitlement certificate would have to be obtained and only to the extent.....
Judgment:

Ramaswami, J.

1. The assessee, an individual, was assessed in the status of a resident and ordinarily resident for the assessment year 1970-71. In the return submitted by him, he had disclosed a sum of Rs. 33,761 as foreign income accrued in Ceylon. While making the assessment order, the ITO converted this Ceylon income into Indian currency at Rs. 43,550 with reference to r. 115 of the I. T. Rules and made an assessment order on that basis. The assessee preferred an appeal contending that the ITO went wrong in coverting the Ceylon income into its equivalent in Indian money applying r. 115. He contended that there were certain restrictions imposed by the Ceylon Govt. in the matter of remittances of income from Ceylon and that under these restrictions before any money earned in Ceylon was repatriated to any other country a foreign exchange entitlement certificate would have to be obtained and only to the extent of the amount shown in the certificate, that amount could be remitted. Under that scheme, only 45% of the value of the income would be remittable to India and the balance would have been absorbed by the Govt. of Ceylon as premium and that, therefore, only 45% of the Ceylon income could be converted into Indian currency. This contention was rejected by the AAC on the ground that the basis of charging tax on an income accruing or arising abroad has nothing to do with the question whether or not such income is remittable to India and that, if the income arising outside India is expressed in terms of a foreign currency it shall have to be converted into its equivalent in Indian money under r. 115. The rate applied by the ITO being in conformity with the said rule, the appeal was liable to be dismissed. The Tribunal also took the same view and dismissed the appeal. At the instance of the assessee, the following question of law has been referred :

'Whether, on the facts and in the circumstances of the case, and having regard to the laws of Ceylon, the Tribunal was justified in law in including Rs. 43,550 as the accrued foreign income which is liable to be taken into account in making the assessment in Indian for the assessment year 1970-71 ?'

2. The learned counsel for the assessee contended that he can be taxed only on his real income whatever be the basis, whether accrual or receipt, and his real income : in view of the restrictions on remittances of income from Ceylon into this country should be taken only at 45% of the income accrued at Ceylon. In this connection, he also invited our attention to S. 220, clause (7), of the I. T. Act, 1961, which takes note of such prohibition or restrictions while considering the question as to whether an assessee can be considered to be in default in payment of any tax. He further contended that the same principle will have to be applied in the case of even applying r. 115 for the conversion of the money into Indian currency. In order to give an answer to this argument, it is necessary for us to see the scheme of taxation of income accruing or arising outside India.

3. Under s. 5(1)(a) of the I. T. Act, the total income of any previous year of a person who is a resident shall include his income accruing or arising to him outside India during such year. In Sutlej Cotton Mills Ltd. v. CIT : [1979]116ITR1(SC) , the Supreme Court had occasion to consider a case, where income accrued in one year was remitted in a subsequent year but by the time it was remitted there was a devaluation of the rupee. When the assessee claimed a deduction on account of loss due to exchange fluctuation, the Supreme Court held that he would be entitled to a deduction of the same. Though this decision did not deal with the specific question as to the point at which the income accruing outside India is to be taxed, it proceed on the basis that it shall be included in the year in which the income had accrued to the assessee outside India. In the case of CIT v. Mandiram Pillai [1980] 126 ITR 88 also the profits had been taxed in the relevant assessment years on accrual basis and the assessee claimed a sum of Rs. 49,333, which was deducted under the Foreign Exchange Entitlement Certificate Scheme by the Ceylon Govt. in respect of an income of Rs. 95,264 as a loss. This court rejected the claim on the ground that the assessee in that case did not carry on any business in India which had any connection with the foreign business and that, therefore, the loss, if any, was personal and not a trading loss and assessee. In CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573, this court considered the question whether s. 145(1) could in any way, control or affect the liability of any income to tax under s. 5. That was a case of a non-resident who was maintaining its accounts on cash basis claiming that the income which had accrued to it in India by way of royalty was not assessable to tax on the ground that the amount had not been actually received by it abroad. After pointing out that if royalty should be assessed to income-tax only on actual receipt on the ground that it maintains its accounts on cash basis, the income could not be taxed at all as it would be received in England and not in India and it would not also be liable to tax under s. 5(2)(b), this court observed (p. 582) :

'The question then is, whether in such circumstances the assessee concerned (non-resident to whom income had accrued in India) can insist that, since he has kept his accounts in regard to that income on the cash basis, he is not liable to be taxed on the accrual basis. In other words, the question is whether s. 145(1) can be applied in such circumstances. The effect of applying the section would be to take the income outside the purview of taxation, though the charge of tax on that income had taken effect on the accrual basis. Further, no occasion for imposing tax on receipt outside India would arise in the case of a non-resident, because s. 5(2)(a) will apply only to receipt in India. In such circumstances, to apply s. 145(1), would be to defeat the charge under s. 4 and to obliterate the provisions of s. 5(2)(b) and let the income which is taxable escape tax. Such a result is not certainly intended by the statue. Section 145(1) is only an enabling provision to effectuate the charge. The section cannot be used for destroying the charge to tax and the provisions of s. 5(2)(b), though by merely looking at the wording of s. 145(1) it may appear that in all cases the method of accounting must be followed, unless in any case where the accounts are correct, but the method is such that, in the opinion of the ITO, the income cannot properly deduced therefrom.

But, it must be remembered that s. 145 is only a machinery provision and cannot qualify the charging section so as to make the latter otiose. So, s. 145(1) should be permitted to be applied in such circumstances as those which arise from the facts of this case. It is, therefore, immaterial whether the assessee is keeping his accounts in regard to a particular income regularly on the cash basis. Even if the assessee is keeping his accounts on the cash basis in regard to his income, the assessee is liable to tax under s. 5(2)(b). To hold otherwise would be to take the income outside the purview of taxation under the Act, though such income had accrued in India to a non-resident and under s. 5(2)(b) the charge to tax had taken effect and there is no possibility of s. 5(2)(b) ever coming into operation. We cannot give to s. 145(1) such an overriding effect as to defeat the charge and the provisions of s. 5(2)(b).'

4. This leads to the necessary conclusion that in respect of an assessee, who is to be assessed in the status of resident and ordinarily resident, his foreign income would have to be assessed only on the basis of its accruing or arising outside India during the accounting year even if it is not received in or brought into India. The accrual of the income in the previous year is the only relevant factor and not its remittances or bringing into India. In other words, as pointed out by Kanga, the charge on income accruing or received in India imposed by s. 5 cannot be avoided by any method of accounting. This conclusion results also from another point, namely, the income is chargeable at the earlier charging point. In Laxmipat Singhania v. CIT : [1969]72ITR291(SC) , the Supreme Court observed (p. 294) :

'It is a fundamental rule of the law of taxation that, unless otherwise expressly provided, income cannot be taxed twice. Again, it is not open to the Income-tax Officer, if income has accrued to the assessee, and is liable to be included in the total income of a particular year, to ignore the accrual and thereafter to tax it as income of another year on the basis of receipt.'

5. In the result, therefore, the Ceylon income of the assessee was includible in the year in which it had accrued to him outside India. Since at the time of accrual the question of any discount does not arise, for the purpose of computation of the total income of the assessee, the accrued income will have to be taken into account without reference to the foreign exchange entitlement certificate scheme. Whether on a future occasion when he repatriates that money from Ceylon to India, the assessee would be entitled to a deduction as a loss in respect of such discount and if so, on what amount, does not arise for consideration in this case. Nor are we concerned with the staying of collection under s. 220(7) on any ground of prohibition or restriction on such remittances. Suffice it to state that the contention of the learned counsel that the discount under the certificate scheme will have to be taken into account in ascertaining the real conversion into rupees as provided under r. 115 had to be applied only in respect of the entire income accrued in Ceylon and not in respect of any amount that would have been discounted if it had to be remitted into India.

6. In the result, the question is answered in the affirmative and against the assessee. The revenue will be entitled to its costs. Counsel's fee, Rs. 500.


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