STANDARD TRIUMPH MOTOR CO. LTD. vs. COMMISSIONER OF INCOME TAX, MADRAS

CIVIL APPEAL No. 1022/1982Supreme Court[1993] 2 S.C.R. 9625 February 1993Bench: 2 JudgesAuthor: B.P. JEEVAN REDDY, N. VENKATACHALA A STANDARD TRIUMPH MOTOR CO. LTD.13 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court dismissed the appeals, holding that the credit entry of royalty in the Indian company's books to the assessee's account constituted 'receipt' of income in India and was therefore taxable. The Court found it immaterial when the income was actually received in the UK. The reasoning was that the Indian company maintained an account for the assessee, credited the royalty amount after making up its accounts, and this was recorded as income by the assessee in its earlier returns. The Court cited Raghava Reddi v. C.I.T., Andhra Pradesh, 44 I.T.R. 720, where a credit entry in the assessee's books was held to be a 'receipt' for a non-resident company. The Court stated that a non-resident might choose not to repatriate income to their parent country but plough it back in India, which still constitutes receipt in India. The method of accounting adopted by the assessee was deemed irrelevant in this context. The order of remand by the Tribunal was considered unnecessary. The Court did not express an opinion on the potential conflict between Section 5(2) and Section 145, or the High Court's view on the applicability of Section 5(2)(a) to non-residents.

What were the facts?

The assessee, a non-resident company from the UK, had a collaboration agreement with an Indian company since 1939, entitling it to a 5% royalty on sales. For assessment years 1967-68 and 1968-69, the assessee filed returns disclosing royalty income and stating it maintained accounts on a mercantile basis. For assessment years 1969-70 and 1970-71, the assessee claimed to maintain accounts on a cash basis, stating no royalty had been received and thus nothing was taxable. The Income-Tax Officer taxed the disclosed royalty for 1969-70 and 1970-71, rejecting the cash basis plea. Appeals to the Appellate Assistant Commissioner and the Tribunal followed, with the Tribunal remanding the matter to the Income-Tax Officer. The High Court, on reference, ruled in favour of the revenue.

What were the issues?

1. Whether, for assessment years 1969-70 and 1970-71, the assessee's claim of maintaining accounts on a cash basis, leading to no taxable income due to non-receipt, is valid, considering it had previously declared income on a mercantile basis for earlier years? (Mixed law and fact, concerning Section 145 of the Income Tax Act, 1961). 2. Whether a credit entry of royalty in the Indian company's books to the non-resident assessee's account constitutes 'receipt' of income in India, making it taxable, irrespective of actual remittance to the UK? (Mixed law and fact, concerning Section 5(2) of the Income Tax Act, 1961). Assessee's Contentions: The assessee argued that it had not been following any particular method of accounting regularly. It claimed the Indian company, which filed returns on its behalf, made a mistake in earlier years by incorporating figures from its profit and loss account. The assessee asserted that for 1969-70 onwards, it correctly filed returns on a cash receipt basis, and since no royalty was actually received in the UK, nothing was taxable. They relied on the principle that receipt is only when the amount is remitted to the UK. Revenue's Contentions: The revenue contended that the assessee was maintaining accounts on a mercantile basis and that the disclosed royalty amounts were taxable. They argued that it was not open to the assessee to change its accounting method without the Income-Tax Officer's approval. The High Court held that it was immaterial whether the assessee kept accounts on a cash basis; income accruing in India to a non-resident was taxable under Section 5(2)(a), and Section 145(1) could not override this.

Which sections of the Income-tax Act were involved?

Section 5(2),Section 145

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'"</ A STANDARD TRIUMPH MOTOR CO. LTD. v. COMMISSIONER OF INCOME TAX, MADRAS y- FEBRUARY 25, 1993 B (B.P. JEEVAN REDDY AND N. VENKATACHALA, JJ.)

Income Tax Ac4 1961: )- Sections 5(2) and 145-Non Resident Company and Indian Com- c pany-Collaboration agreement-Indian Company to apy royalty to non resi- dent company on all sales-Royalty to be remitted to non resident in pounds - Sterli11g-Royalty credited by Indian Compa11y to non resident in its account books-Credit entries-Whether amount to receipt of income-Whether non resident liable to tax-Method of accounting ad<ipte~W/1ether relevant. D The assessee-appellaot in the appeal is a non resident company ---\ having its place of business at Coventry in tbe United Kingdom. It entered into a collaboration agreement with an Indian company in November, 1939 the assessee being entitled to royalty of 5% on all sales effected by the Indian Company, and this amount less the Indian tax had to be remitted E by the assessee in Sterling currency. The assessee's accounting year was the year ending 30th September and with respect to its Indian income, it was tiling its returns through tbe Indian Company. The aforesaid col·

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