CIT ROHTAK vs. RITU JAIN

Income Tax Reference No.43 of 1991 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. 1.Income Tax Reference No.43 of 1991 Smt.Trishla Jain, Faridabad ---Petitioner Versus Income Tax Commissioner, Rohtak ---Respondent 2.Income Tax Reference No.44 of 1991 Smt.Nandita Jain, Faridabad ---Petitioner Versus Income Tax Commissioner, Rohtak ---Respondent 3.Income Tax Reference No.45 of 1991 Smt.Sangya Jain, Faridabad ---Petitioner Versus Income Tax Commissioner, Rohtak ---Respondent 4.Income Tax Reference No.46 of 1991 Ashok Jain, Faridabad ---Petitioner Versus Income Tax Commissioner, Rohtak ---Respondent 5.Income Tax Reference No.47 of 1991 Smt.Ritu Jain, Faridabad ---Petitioner Versus Income Tax Commissioner, Rohtak ---Respondent 6.Income Tax Reference No.48 of 1991

Parash Dass Jain, Faridabad ---Petitioner Versus Income Tax Commissioner, Rohtak ---Respondent

Income Tax Reference No.43 of 1991 2 Date of Decision:-6.1.2009 CORAM:- HON'BLE MR.JUSTICE J.S.KHEHAR HON'BLE MR.JUSTICE NAWAB SINGH PRESENT:-S/Shri Arihant Jain and Arun Jindal, Advocates for the petitioners. Mr.Yogesh Putney, Advocate for the respondent. J.S.KHEHAR, J.(ORAL) The instant order will dispose of Income Tax Reference Nos.43 to 48 of 1991. The controversy in each of the cases being identical, a common order is being passed to dispose of all the six references. It is not a matter of dispute that the assessees in all the six references are individuals being non-residents in terms of Section 6 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). In so far as the factual matrix is concerned, all the assessees had subscribed to two sets of debentures issued by M/s Oswal Agro Mills Limited. The first set of debentures was issued on 2.7.1984; whereas the second set of debentures was issued on 23.6.1986. The assessees had paid for these debentures through convertible foreign exchange by remittances from abroad. As such, the assets in the hands of the assessees were in the nature of foreign exchange assets as defined in Section 115 C of the Act. The controversy in the present references pertains to the interest income derived by the assessees from the aforesaid debentures. The claim of the assessees is that the aforesaid income derived as interest from debentures should be assessed on receipt basis, and not on accrual basis. The claim of the Revenue is to the contrary. Interest on the aforesaid two sets of debentures was payable biannually. Interest on the debentures accrued on 1st July and 31st December of every year. The issue to be adjudicated upon in the instant six references

Income Tax Reference No.43 of 1991 3 is, whether interest on the debentures would be deemed to have accrued/arisen to the assessees on 1st July and 31st December, or whether the assessees would be liable to payment of tax on the actual receipt of the interest from the said debentures. On the receipt of interest by the assessees in the financial year 1986-87 (which had accrued/arisen to the assessees in the preceding financial year 1985-86), the assessees were desirous of including the same as taxable income for the financial year 1986-87, and not as income for the preceding financial year i.e. 1985-86 (even though the aforesaid interest had accrued to them on Ist July and 31st December of the preceding financial year i.e. 1985-86). Accordingly, in their returns for the assessment year 1987-88, the assessees included the component of interest on the debentures referred to above as they have actually received the same in the financial year 1986-87. On the same analogy as has been noticed here-in-above, the assessees did not include their income derived from interest on debentures, which had accrued/arisen to them during the financial year 1986-87 for the same reason, namely, that they were not in receipt of the same during the said financial year. The same factual position continued for later years as well, which are the subject of consideration in the connected references. The Assessing Officer did not agree with the plea raised on behalf of the assesses. The Assessing Officer took the view that the interest income from the debentures payable to the assessees by M/s Oswal Agro Mills Limited was assessable on accrual basis. The Assessing Officer, accordingly, added to the taxable income of the assessees, interest from the debentures, which had accrued to the assessees in the financial year 1986-

Income Tax Reference No.43 of 1991 4 87, even though the same had not been received by the assessees during the said financial year. The Appellate Authorities i.e. the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal affirmed the view assessed by the Assessing Officer. It is in the aforesaid factual background that the instant references have been made to this Court. The question of law referred to this Court is being extracted hereunder:- “Whether in the facts and circumstances of the case, the Income-tax Appellate Tribunal was right to hold that income from interest on debentures which was a “foreign exchange asset” was assessable on accrual basis and not on receipt basis.?”

We have considered the submissions advanced by the learned counsel for the rival parties. In fact, the entire controversy revolves around the interpretation of Section 5 (2) of the Act. Section 5 (2) of the Act is being extracted here as under:- “5.Scope of total income-(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person, or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1- Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into Income Tax Reference No.43 of 1991 5 account in a balance-sheet prepared in India. Explanation 2- For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.” Since it is not a matter of dispute that from the two sets of debentures, the assessees were earning interest, which accrued to them on Ist July of every year, as well as, on 31st December of every year. The component of income, which accrued to the assessees (as interest on debentures) on the aforesaid two dates stood crystalized on Ist July and 31st December every year. Thus viewed the aforesaid income clearly accrued to the assessees on 1st July 1986 and 31st December 1986, and likewise in every subsequent year. Both these components of interest, which accrued/arose to the assessees in the financial year 1986-87, were assessed as their income for the assessment year 1987-88. To repudiate the aforesaid claim, it is the vehement contention of learned counsel for the assessees that in spite of accrual of the aforesaid interest on the debentures purchased by the assessees, they did not receive the same during the financial year 1986-87. It is the case of the assessees that they had to approach this Court through Company Petition No.51 of 1998 and as a consequence of the directions issued by this Court therein, vide order dated 31.10.1998, the assessees eventually received the interest on the aforesaid debentures. It is, therefore, the vehement contention of the learned counsel for the assessees that it is neither just nor appropriate to Income Tax Reference No.43 of 1991 6 compute the interest component on the debentures purchased by them, as income in the hands of the assessees for computing income-tax for the financial year 1986-87 i.e. the assessment year 1987-88. We have also analyzed scope of Section 5 (2) (b) of the Act. A plain reading of clause (b) of Section 5 (2) of the Act, reveals 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. The aforesaid interpretation of the provision on its plain reading is affirmed by reading Explanation 2 (recorded under Section 5 (2) of the Act), which clarifies that the income of a person, who is a non-resident, once subjected to determine the liability of tax on accrual basis, shall not again be added to the income of the assessee as and when the same is received by him at a later juncture, in a subsequent financial (assessment 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, we are satisfied that the income of a non-resident has to be included in the previous year on accrual basis, i.e. as and when such income arises (or is deemed to have arisen) to the assessee, in a specific definite and crystalized measure. The debentures purchased by the assessees from M/s Oswal Agro Mills Limited bore interest receivable by the assessees on the 1st day of July of every year as well as on the 31st December of every year. In the aforesaid view of the undisputed factual position, the interest income from the debentures purchased by the assessees must be deemed to have accrued or arisen to the assessees, in specific definite and crystalized amount on 1st

Income Tax Reference No.43 of 1991 7 July 1986, as also on, 31st December 1986, and as such, was required to be added to income received by the assessees during the financial year 1986-87 (i.e. the assessment year 1987-88). The same factual position applies to the subsequent financial years as well. In the aforesaid view of the matter, it is inevitable to answer the reference in favour of the revenue and against the assessees. In spite of the submissions (and conclusions) recorded here-in- above, learned counsel for the petitioners also invited our attention to the scope of Section 195 (1) of the Act. Section 195 (1) of the Act is being extracted here under:-

Income Tax Reference No.43 of 1991 10 While we are in agreement with the learned counsel for the petitioners that the primary determination rendered in the judgments referred to here-in- above was based on a plea in respect of method of accounting, yet we have no doubt in our mind that the judgments referred to here-in-above clearly and ambiguously hold that for a non-resident, income which accrues or arises “during such year” shall be treated as income for that “previous year” for the purposes of income-tax assessment irrespective of the method of accounting adopted by the assessee. As such, we hereby affirm the submissions advanced by the learned counsel for the revenue. References are, accordingly, disposed of. (J.S.Khehar) Judge (Nawab Singh) 6.1.2009 Judge AS