Persons who are not resident in India are liable to tax under section 5(2) of the Income Tax Act, 1961. They may be taxed under clause (a) on income received or deemed to be received in India even if it accrues outside India, or under clause (b) on income, which accrues or arises or is deemed to accrue or arise in India even if it is received abroad.
Clause (b) is to be read with section 9(1), which sets out certain types of income, which are deemed to accrue or arise in India (Pfizer Corporation v CIT (259 ITR 391)). All non-residents are assessable on such income at the relevant rate, without regard to their other foreign income or world income. In Attareekhat v CIT (201 ITR 752) and CIT v Vijay Ship (261 ITR 113), it was held that what happens after the income is earned is not relevant so far as taxability in India is concerned.
Where the assessee is a firm, the residence or non-residence of any of its partners is immaterial for the purpose of computing and charging the firm’s profits. The Privy Council laid down in Badridas Daga v CIT (17 ITR 209) and the Supreme Court in Ramanathan Chettiar v CIT (78 ITR 10) that a non-resident partner of a registered resident firm is not entitled to exclude from his total income a proportion of his share of the firm’s income corresponding to the portion of the firm’s income, which accrued or arose outside India.
Section 5(2)(b) of the Act stipulates that the total income of a non-resident in the previous year will include such income, which accrues or arises to him as well as such income, which will deemed to accrue or arise to him, in the previous year. Explanation 2 to section 5(2) clarifies that the income of a person, who is a non-resident, once subjected to tax on accrual basis, would not again be added to the income of the assessee as and when it is received by him in a subsequent financial year.
If an effective and final conclusion can be drawn on the issue of accrual of income to a non-resident, the actual date of receipt is inconsequential. It is for the purpose of determining the year of assessment to which the income of a non-resident relates, that the mandate of section 5(2) of the Act makes a specific provision, requiring income which has accrued to a non-resident, to be treated as income for the previous year in which such income has accrued. Reference to section 195(1) for this purpose is irrelevant.
This point was considered by the Punjab and Haryana High Court in Trishla Jain and others v CIT (310 ITR 274). The facts in the case were that the assessees were non-residents. All of them had subscribed to two sets of debentures issued by 0swal Agro Mills Ltd. Interest on the two sets of debentures was payable on July 1 and December 31 of every year.
The assessees declared the interest in the return for the year in which they received the interest, not in the year of accrual. Accordingly, in their returns for the assessment year 1987-88, the assessees included the component of interest on the debentures, which they had actually received in the relevant financial year but did not include their income derived from interest on debentures, which had accrued/arisen to them during the financial year 1986-87 for the reason that they were not in receipt of the same during such financial year.
The assessing officer took the view that the interest income from the debentures payable to the assessees by the company was assessable on accrual basis. This was upheld by the commissioner (appeals) and the Tribunal.
The High Court analysed the scope of section 5(2)(b) of the Act. According to the court, a plain reading of clause (b) indicates that the total income of a non-resident in the previous year will include such income which “accrues or arises to him”, as well as, such income which is “deemed to accrue or arise to him” in the previous year. This interpretation of the provision on its plain reading is affirmed by Explanation 2 to section 5(2) of the Act which clarifies that the income of a person, who is a non-resident, once subjected to tax on accrual basis, would not again be added to the income of the assessee as and when the same is received by him at a later date in a subsequent financial year.
In other words, the provision leaves no room for any doubt or ambiguity that if an effective and final conclusion can be drawn on the issue of accrual of income to a non-resident, the actual date of receipt is inconsequential. In view of the above, the court held that the income of a non-resident has to be included in the previous year on accrual basis, ie, as and when such income arises (or is deemed to have arisen) to the assessee, in a specific, definite and crystallised manner.
The debentures purchased by the assessees from M/s Oswal Agro Mills Limited earned interest receivable by the assessees on July 1 of every year as well as on December 31 of every year. In view of the undisputed factual position, the interest income from the debentures must be deemed to have accrued or arisen to the assessees, in specific definite and crystallised amount on July 1, 1986, as also on December 31, 1986.
Hence, it was required to be added to the income received by the assessees during the financial year 1986-87 relevant to the assessment year 1987-88. The same factual position applies to subsequent financial years as well. In the aforesaid view of the matter, the court decided the issue in favour of the revenue and against the assessees.
The aforesaid decision is correct in law and is likely to be confirmed in appeal if pursued before the Supreme Court.
The author is advocate, Supreme Court
