1. As these Departmental appeals filed for the assessment years 1975-76, 1976-77 and 1980-81 give rise to common issues, they were heard together and for the sake of convenience, are being disposed of by this common order.
2. These appeals came up for hearing before Bench '"C". The learned Members noted that the question involved was whether royalty income was assessable on cash basis as claimed by the assessee or on Mercantile basis as assessed by the assessing officer. The Appellate Tribunal vide its order dated 16-11-1978 in I.T.A. Nos. 590 and 591 (Del.)/1977-78 in the assessee's case for the assessment years 1975-76 and 1976-77 restored the appeals to the Appellate Assistant Commissioner for deciding the matter afresh after looking into the balance-sheet of the assessee and after allowing the Income-tax Officer to examine the books of account produced before him. After remand of the case, the C.I.T.(Appeals) held that the assessments for the assessment years 1975-76 and 1976-77 should have been on receipt basis. For the assessment year 1980-81 the Income-tax Officer again assessed royalty income on accrual basis and the C.I.T. (Appeals) held that the assessments should have been made on receipt basis. However, for the assessment years 1977-78 and 1978-79 Delhi Bench "E" of the Appellate Tribunal held vide its order dated 26-5-1984 in I.T.A. Nos. 1594 and 1595 (DEL)/1983 that the said income has to be assessed on accrual basis. The learned Members in view of the conflicting views of different Benches of the Tribunal in the assessee's own case, referred the matter to the President for constituting a Special Bench for resolving the controversy whether in the instant case royalty income is assessable on cash basis as claimed by the assessee or on mercantile basis as is the case of the Department. Thereafter, the President constituted a Special Bench and that is how the matter is before us.
3. In all these appeals the common ground raised by the Department is as follows: - On the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals) erred in directing the assessing officer to assess the royalty income on receipt basis as against accrual basis adopted by the assessing Officer at the time of assessment.
4. The assessee is a non-resident German company. It entered into a collaboration agreement with an Indian company namely, M/s. Reinz Talbros (P) Ltd. The assessee-company derived income in India from royalty and dividend from the said Indian company. The assessee's claim is that its royalty income is assessable on cash basis. For the assessment year 1975-76 the assessee declared nil income from royalty and in the assessment year 1976-77 it declared royalty income at Rs. 1,04,986. Returns for both these years were filed on cash basis. The Income-tax Officer, however, took the royalty income at Rs. 1,76,168 for the assessment year 1975-76 on accrual basis and for the assessment year 1976-77 he assessed royalty income on both accrual and cash basis.
For this assessment year besides the royalty income of Rs. 1,04,986 returned by the assessee, the Income-tax Officer subjected to tax a sum of Rs. 1,75,138 as royalty income on accrual basis.
5. Similarly, for the assessment year 1980-81 the Inspecting Assistant Commissioner (Assessment) assessed royalty income of Rs. 3,48,953 on accrual basis as against returned income of Rs. 2,62,580 on cash basis.
6. Against the assessments framed for the assessment years 1975-76 and 1976-77, the assessee appealed to the Appellate Assistant Commissioner who held that inclusion of royalty income on accrual basis for both the assessment years should be deleted. Against this order of the Appellate Assistant Commissioner of Income-tax, the Revenue filed appeals for both the assessment years before the Appellate Tribunal. The Appellate Tribunal vide its order dated 16-11-1978 in I.T.A. Nos. 590 and 591 (DEL)/1977-78 restored the appeals to the Appellate Assistant Commissioner with a view to enable him to examine afresh the matter as also the balance-sheet of the assessee-company. The Appellate Assistant Commissioner was directed to allow the Income-tax Officer to examine the books of account produced before him. While remanding the case to the Appellate Assistant Commissioner for the assessment years 1975-76 and 1976-77, the Tribunal expressed its opinion in the following manner: - We are of the view that if the amount in question had been included in the balance-sheet of the payee (assessee company) in the same year as in the case of the paying company, it would amount to a constructive receipt by the assessee company and amounts would fall for being assessed on accrual basis. However, if the amounts of the royalty amounts were shown by the assessee company on receipt basis only, then the assessments would call for being made on receipt basis. The assessee company of course has in its favour the fact that in the earlier two years the assessments were made on receipt basis but the point, however, would call for being examined in detail.
7. Before the matter could come up before the Appellate Assistant Commissioner of Income-tax after remand of the case by the Tribunal, the Appellate Assistant Commissioner ceased to have jurisdiction in the matter and, therefore, the appeals stood restored to the file of the C.I.T. (Appeals). The C.I.T. (Appeals) in his consolidated impugned order dated 28-3-1984 for the assessment years 1975-76 and 1976-77, stated that he has found that the royalty received by the assessee company from the Indian company was accounted for by the assessee company on receipt basis only. Following the order of the Tribunal dated 16-11-1978, the C.I.T (Appeals) held that the assessment should be made on receipt basis. He accordingly deleted the entire addition made by the Income-tax Officer to the returned income of the assessee for the two assessment years. The assessee also preferred an appeal against the assessment framed for the assessment year 1980-81.
The C.I.T. (Appeals) vide his order dated 28-3-1984 directed the assessing officer to accept the income returned by the assessee which has been correctly worked out on receipt basis. So far this assessment year also the C.I.T. (Appeals) upheld the assessee's contention that its royalty income should be taxed on receipt basis.
8. Aggrieved by the aforesaid orders of the C.I.T. (Appeals), the Revenue has come up in appeal for the three assessment years under consideration.
9. Shri B.K. Gupta, learned Senior Departmental Representative took us through the orders of the authorities below for the three assessment years under appeal as also the orders of the Appellate Tribunal for the assessment years 1975-76 and 1976-77 and for the assessment years 1977-78 and 1978-79. Shri Gupta submitted that the Appellate Tribunal vide its order dated 26-5-1984 in I.T.A. Nos. 1594 and 1595 (DEL)/1983 in the assessee's case for the assessment years 1977-78 and 1978-79 has held that the royalty income is assessable on accrual basis in terms of Section 5(2)(b) of the Income-tax Act, 1961. The learned Sr.
Departmental Representative solely relied upon the order of the Tribunal dated 26-5-1984 in support of the contention that the assessee's royalty income should be assessed on accrual basis. Reliance was also placed on the decision of the Supreme Court in State Bank of India v. CIT [1986] 157 ITR 67 for the proposition that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. It was further submitted before us that directions given by the Tribunal in its order dated 16-11-1978 for the assessment years 1975-76 and 1976-77 were not fully complied with by the lower appellate authority inasmuch as books of account maintained by the assessee company were not examined as directed by the Tribunal.
10. Shri O.P. Vaish, Advocate appearing for the assessee on the other hand, strongly supported the impugned orders of the CIT (Appeals). It was contended that for the assessment years 1975-76 and 1976-77 the Tribunal vide its order dated 16-11-1978 has clearly expressed the opinion that if the royalty amount was shown by the assessee company on receipt basis only, then the assessment would call for being made on receipt basis. It was submitted that the lower appellate authority has found that so far as the royalty income is concerned, the assessee company maintained its account on cash basis and, therefore, the controversy for the first two assessment years stood concluded by the order of the Tribunal dated 16-11-1978 against which no reference was sought by the Revenue. It was then contended that the order of the Tribunal dated 16-11-1978 having become final, it was not open to the revenue to reagitate before the Tribunal that for the assessment years 1975-76 and 1976-77 royalty income should be assessed on accrual basis.
According to Shri Vaish, so far as these two assessment years are concerned, the Tribunal cannot again go into the question whether royalty income is assessable on accrual basis or cash basis. It was pointed out that so far as these two assessment years are concerned, the C.I.T. (Appeals) simply followed the directions of the Tribunal. In support of the contention that the opinion expressed by the Tribunal while remanding the case for the assessment years 1975-76 and 1976-77 has become final and the matter cannot be reagitated for these two assessment years, reliance has been placed on the decision of the Bombay High Court in Trikamlal Maneklal, In re [1958] 33 ITR 725, the decision of the Supreme Court in CIT v. Rao Thakur Narayan Singh [1965] 56 ITR 234, the decision for the Kerala High Court in M.K. Mohammad Kunhi v. CIT [1973] 92 ITR 341 and the decision of the Delhi High Court in R.K. Sawhnay v. CIT [1987] 166 ITR 128/32 Taxman 546.
11. Shri Vaish next contended that from the very first year of assessment, the assessee has been accounting for royalty income on cash basis and on that basis it has all along been offering its royalty income for taxation. In this connection, it was pointed out that so far as the royalty income earned by the assessee company in India is concerned, 1973-74 was the first year of assessment. It was also pointed out that for the assessment years 1973-74 and 1974-75 royalty income was disclosed by the assessee on cash basis and it was taxed as such by the assessing officer. It was thus submitted that for both the first two assessment years the assessing officer having accepted cash basis as the assessee's method of accounting in so far as its royalty income is concerned, and as since then the assessee had been regularly and consistently following cash system of accounting in respect of its royalty income earned in India, Shri Vaish contended that it was not open to the assessing officer to unilaterally change the method of accounting from cash to mercantile system by subjecting royalty income to tax on accrual basis. Dealing with the order of the Tribunal for the years 1977-78 and 1978-79, taking a contrary view, Shri Vaish submitted that the Tribunal relied on the case of CIT v. Standard Triumph Motor Co. Ltd. [l919] 119 ITR 573 (Mad.) for its view, where the assessee was disputing the very chargeability of its royalty income to tax and as in this case the assessee was not disputing the chargeability to tax of its royalty income earned in India, but only contesting the method of its computation, that authority was manifestly distinguishable on facts, and that decision of the Tribunal for those two years was thus erroneous on facts.
12. We have considered the rival submissions as also the facts on record. We have also gone through the paper book filed by the assessee.
As has already been pointed out above, for the assessment years 1975-76 and 1976-77 the case was remanded by Tribunal vide its order dated 16-11-1978 to the lower appellate authority to enable him to examine the matter afresh. While remanding the case the Tribunal in no uncertain words expressed the opinion that if the amounts of royalty were shown by the assessee company on receipt basis only, then the assessment would call for being made on receipt basis. It is thus, clear that the Tribunal did record a categorical finding on the issue under consideration in favour of the assessee. After remand of the case, the issue was examined afresh by the first appellate authority, namely, C.I.T. (Appeals). In the consolidated order passed for the assessment years 1975-76 and 1976-77, the C.I.T. (Appeals) reproduced the following passages from the order of his predecessor passed in the appeal for the assessment year 1977-78: - The non-resident company has its accounting year as 30th September.
However, for the purpose of returning the income in India, it is observing the financial year as its previous year. The Deptt. has accepted the previous year of the appellant. In the light of the directions given by the ITAT for the asst. years 1975-76 and 1976-77 on the basis of the certificate, a copy of which is filed before me, the non-resident company is accounting for the royalty income on receipt/cash basis in their accounting year. The royalty income, relevant to the previous year is being returned on cash basis which figure agrees with the books of account maintained by the agent of the non-resident.
In view of the above, I hold and direct the ITO to assess the royalty income on cash basis and grant necessary relief.
13. The C.I.T. (Appeals) then observed that he has examined the above cited evidence as directed by the Tribunal and was satisfied that the royalty received from the Indian company was accounted for by the assessee company on receipt basis only. So, following the order of the Tribunal dated 16-11-1978, the C.I.T. (Appeals) held that assessments should be made on receipt basis. The order of the C.I.T. (Appeals) for the assessment year 1977-78, a portion whereof has been reproduced above, clearly shows that the C.I.T. (Appeals) did examine the books of account maintained by the agent of the non-resident. He also took into account the certificate filed by the assessee before him. The same evidence was examined by the C.I.T. (Appeals) while complying with the directions of the Tribunal contained in its order dated 16-11-1978. We, therefore, find no substance in the argument advanced on behalf of the Department that in accordance with the directions of the Tribunal, books of account of the assessee company were not examined by the lower appellate authority. Here it may, however, be made clear that the only book of account maintained by the assessee in respect of its royalty income in India is the cash book maintained by its Indian agent. Copies from the cash book for the period beginning from 1-4-1972 to 31-3-1981 have been filed by the assessee and they are at pages 43 to 56 of the paper book. The assessee also filed a copy of the certificate dated 21-4-1981 from its chartered accountant in Germany which shows that payments from the Indian company are taken in the financial books of account of the assessee company on receipt basis. A copy of this certificate appears at page 57 of the paper book. Thus, the evidence produced by the assessee and which was also examined by the C.I.T.(Appeals) fully established that royalty income earned in India was accounted for on receipt basis and, therefore, in view of the opinion expressed by the Tribunal in its order dated 16-11-1978 while remanding the issue to the lower appellate authority for the assessment years 1975-76 and 1976-77, the C.I.T (Appeals) was fully justified in holding that the assessments for these two assessment years should be made on receipt basis.
14. We find considerable force in the argument advanced on behalf of the assessee that since the matter stood concluded by the order of the Tribunal dated 16-11-1978 the same cannot be reagitated in these appeals for the assessment years 1975-76 and 1976-77. There is no dispute that against the order of the Tribunal dated 16-11-1978 no reference was sought by the Revenue. Also, no rectification petition Under Section 254(2) was moved against that order. Therefore, in view of the plain language of Section 254(4) the order of the Tribunal dated 16-11-1978 became final between the parties. Sub-section (4) of Section 254 says that save as provided in Section 256, orders passed by the Appellate Tribunal on appeal shall be final. Under Sub-section (2) of Section 254 the Appellate Tribunal is empowered, at any time within four years from the date of the order, with a view to rectifying any mistake apparent from the record, to amend any order passed by it under Sub-section (1), and shall make such amendment if the mistake is brought to its notice by the assessee or the Income-tax officer. The order of the Tribunal dated 16-11-1978 was not rectified by the Tribunal either suomotuorat the instance of any of the parties and as has already been pointed out above, no reference was sought by the revenue against that order. Here it would be worthwhile to recall even at the risk of repetition that the Tribunal in its order dated 16-11-78 has held that if it is found that the royalty amounts were accounted for by the assessee on receipt basis, then the assessment would be made on receipt basis. This finding of the Tribunal having become final in so far as the assessment years 1975-76 and 1976-77 are concerned, in our opinion, it is not open to the revenue to reagitate this very issue before the Tribunal for these two assessment years in the appeals before us. In taking this view we are fortified by the decisions cited by the assessee on the point. In Trikamlal Maneklal's case (supra), the assessee claimed under Section 12(2) of the Income-tax Act, 1922 a deduction from 'income from other sources' of interest paid on capital borrowed for payment of tax on the ground that the deduction was allowable on capital borrowed, even though utilised for payment of tax, was instrumental in not disturbing the protective assets, namely, the capital utilised for the purpose of earning the income. The Tribunal accepted the assessee's contention, but as it was not in a position to verify the balance-sheet it set aside the order of the Appellate Assistant Commissioner and remand the case to him to dispose of it after verifying the entries in the balance-sheet. Against this order no application was made for reference of the question whether the deduction claimed was allowable under Section 12(2), and when after the Appellate Assistant Commissioner verified the entries in the balance sheet and held that the claim for deduction as interest on capital borrowed was allowable, the matter came up again before the Tribunal.
The Tribunal held that the question could not be reagitated. It was held by the Lordships of the Bombay High Court that as the Tribunal had considered the merits of the contention of the assessee and arrived at a certain decision, the order of remand made by the Tribunal was final under Section 33(6), and it was not open to the Tribunal to permit the correctness of that order to be questioned in the proceedings subsequently brought before it against the final order of assessment, merely because the Tribunal at the later stage is advised that the previous order was erroneous in law. In Rao Thakur Narayan Singh's case (supra), from a reassessment for the assessment year 1942-43 bringing to tax certain forest income and interest income, the assessee preferred an appeal to the Appellate Tribunal objecting to the Income-tax Officer's jurisdiction to initiate reassessment proceedings in respect of the forest income on the ground that he had knowledge of such income when the original assessment was made. The Tribunal upheld his contention but by mistake set aside the entire reassessment order and restored the original assessment order. No steps were taken under Section 35 to rectify the mistake; nor was any reference to the High Court sought against the order of the Appellate Tribunal. Thereafter, the Income-tax Officer initiated fresh reassessment proceedings under Section 34 with respect to the interest income and made a fresh reassessment order for the year 1942-43, to include the interest income. It was held by the Supreme Court that as the order of the Tribunal became final, the finding of the Tribunal, even though by mistake, that the officer could not initiate reassessment proceedings in respect of interest income also, was binding on the Income-tax Officer and he could not reopen the assessment over again to include the interest income. The Kerala High Court in the case of M.K. Mohammed Kunhi (supra) has held that where the Appellate Tribunal remands a case the finality of views expressed by it while doing so depends on the nature of the order of remand. If the remand is in the nature of calling for a finding and the Tribunal keeps seisin of the case it may be permissible for the Tribunal to reconsider its views. On the other hand, if the Tribunal disposes of the appeal while passing the order of remand and another appeal comes before the Tribunal against the order passed after the remand, it has no power to reconsider the finding or opinion. Questions which have become final and concluded by the remand order cannot be reopened.
15. The jurisdictional High Court namely, the Delhi High Court has held in the case of R.K. Sawhney (supra) held that the earlier order of the Tribunal became final under Section 254(4), since the matter had not been pursued and there was no reference from that order. It was further held that to permit the executor to raise the contentions once again offended against the rule of finality of judicial proceedings.
16. A survey of the authorities cited on behalf of the assessee supports the view canvassed before us that the order of the Tribunal dated 16-11-1978 having become final, it is not open to the revenue to reagitate the very same question whether royalty income is assessable on accrual basis or on receipt basis and that is not open to the Tribunal in these appeals to go into this question in so far as the assessment years 1975-76 and 1976-77 are concerned. That apart, the Commissioner of Income-tax on fresh adjudication with reference to books of account maintained by the assessee, and produced before him, recorded an unequivocal finding that the assessee was accounting for the royalty income on cash basis only, and the certificate issued by the Chartered Accountant in West Germany was to the same effect. Apart from the above, this is the method of accounting that the assessee has been consistently following ever since 1973-74 assessment year.
17. However, the question whether royalty income earned by the assessee company is assessable on accrual basis or on receipt basis has to be examined on merit, since the order of the Tribunal dated 16-11-1978 would not cover the assessment year 1980-81.
18. Section 2(45) defines "total income" as "the total amount of income referred to in Section 5, computed in the manner laid down in this Act". It may also be noted that the principal charging Section 4 makes the total income of the previous yea: or previous years subject to charge of income-tax. Section 5(2) reads as under: - 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.
Thus, Section 5 defines the scope of total income referred to in the principal charging section. Sub-section (2) of Section 5 which is relevant for the purpose of these appeals, opens with the words "subject to the provisions of this Act". The result is that while income cannot be taxed, generally speaking, unless it falls within Section 5, it is not necessarily be taxed because it falls within this section. Any other section may operate to save from taxation income which is within the purview of this section say, for example, Section 10 of the Income-tax Act. The definition of "total income" as given in Section 2(45) shows that it is not only the income referred to in Section 5, but it has to be processed and computed in the manner laid down in the Act. At this stage it will be useful to turn to the provision of Section 145(1) which is as under : - 145(1) : Income chargeable under the head 'profits and gains of business or profession' or 'income from other sources', shall be computed in accordance with the method of accounting regularly employed by the assessee: Provided that in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer, but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deducted therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.
19. Section 145(1) requires that the business income or income from other sources shall normally be computed in accordance with the method of accounting regularly employed by the assessee, if the assessee has maintained accounts. The choice of method of accounting lies with the assessee. Although this section leaves it to the assessee to adopt any system of accounting the requirement of law is that, that method should properly show the income from business or profession or else the Income-tax Officer can compute the income in accordance with the such basis as he may choose to adopt, even though the accounts are correct and complete. The emphasis thus is on proper method of accounting and its consistency and capability of showing correct income. In Investment Ltd. v. CIT [1970] 77 ITR 533, it has been held by their Lordships of the Supreme Court that a tax-payer is free to employ for the purpose of his trade, his own method of keeping accounts and for that purpose to value his stock-in-trade either at cost or at market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if in the opinion of the taxing authorities income of the trade cannot be properly deduced therefrom.
20. In the instant case, the assessee company had adopted cash system of accounting in respect of royalty income since the very beginning.
For the assessment years 1973-74 and 1974-75 royalty income was assessed by the assessing officer on receipt basis. The impugned orders of the Commissioner of Income-tax (Appeals) as also the documents available on the record which include extracts from the cash book maintained on behalf of the assessee company by its Indian agent and the certificate from the assessee's Chartered Accountant in Germany, go to establish beyond doubt that from the very beginning the assessee has been regularly and consistently following cash system of accounting in respect of its royalty income. This system of accounting was accepted by the assessing officer for the assessment years 1973-74 and 1974-75.
Nothing was shown by the Department to show that this method is defective. In our opinion, the method of accounting employed by the assessee so regularly and consistently could not have been disturbed by the assessing officer unilaterally merely on the ground of accrual of royalty income in India.
20A. We may now address ourselves to clause 25 on which the Department relied so heavily for its contrary view. A copy of the collaboration agreement dated 16-2-1968 entered into between the non-resident company, namely, the assessee and the Indian company, namely, M/s.
Reinz Talbros Pvt. Ltd. is available on the record. Clause 25 of this agreement is as follows: - 25. In consideration of the grant of the manufacturing rights and the right to use the trade name and trade mark of REINZ and the technical and other assistance supplied or to be supplied by REINZ under this Agreement the Rupee Company shall in addition to the 37,500 'A' Equity Shares of Rs. 10 each as mentioned in clause 2(ii) above pay to REINZ subject to Indian Income-tax a yearly royalty of 3% (three per cent) on the ex-factory selling price of the products for a period of ten years subject to the condition that this payment in any one year shall not exceed DM 50,000 during the first five years and DM 45,000 during the next five years. The first annual payment of this royalty shall be due and payable to REINZ after twelve months of the date on which the production of the said products in the Rupee Company began and the subsequent annual payments becoming due and payable every twelve months thereafter.
21. Under clause 28 all the sums payable by the Rupee Company, namely, the Indian Company to the non-resident company, shall be payable in German currency. Under clause 25 the first annual payment of royalty shall be due and payable to the non-resident company after 12 months of the date on which the production of the products in the Rupee Company began and the subsequent annual payment become due and payable every 12 months thereafter. It was on the basis of this clause that the assessing officer persuaded himself to tax royalty income on accrual basis. It has not been disputed before us on behalf of the assessee that in view of clause 25 there was an accrual of royalty income in India. The question, however, arises as to how it should be computed for tax purposes. Whether it could be taxed on accrual basis simply because according to the provisions of collaborative agreement income accrued in India or on cash basis, for there was delay on receipt which was beyond the control of the assessee. At this stage a reference may be made to the entries in the cash book maintained on behalf of the assessee company by its Indian agent, copies whereof are at pages 43 to 56 of the paper book filed by the assessee. The entries made in the cash book clearly go to show that royalty income is being accounted for on receipt basis from the very beginning. Since royalty income is accounted for on receipt basis in the cash book maintained on behalf of the assessee by its Indian agent, it clearly follows that royalty income is also received in India. In this connection, it may also be pointed out that in the cash book various dates of receipt of royalty income are the same as the dates of remittance to the assessee company.
In this case, therefore, by virtue of Clause (a) of Section 5(2) royalty income is assessable on receipt basis and by accounting for the royalty income on receipt basis the assessee cannot be said to have made an attempt to escape payment of tax in respect of royalty income.
The assessee is not disputing the chargeability of its royalty income to tax. On the other hand, ever since the assessment year 1973-74 the assessee has been offering royalty income for taxation on receipt basis. So, in this case royalty income will not escape taxation if cash system of accounting regularly and consistently employed by the assessee in respect of its royally income is allowed to be continued by the Income-tax authorities.
22. The Division Bench in ITA Nos. 1594 and 1595 (DEL)/1983 in the assessee's case for the assessment years 1977-78 and 1978-79, however, took into consideration clause 25 of the Collaboration Agreement and based on that held that the royalty income in the case of the assessee was assessable on accrual basis in terms of Section 5(2)(b). While expressing this opinion the Division Bench did not take into consideration the provisions of Section 145(1). It also did not go into the question as to what was Ac method of accounting regularly and consistently followed by the assessee company in respect of royalty income. That discussion became relevant to decide whether the income accrued in India or not, on behalf of the assessee concerned. If the Division Bench in that case had taken the above factors having a direct bearing on the issue, into consideration, the result, perhaps, would have been different.
23. Further, the Division Bench in its order dated 26-5-1986 for the assessment years 1977-78 and 1978-79 had followed the decision of the Madras High Court in the case of Standard Triumph Motor Co. Ltd. (supra). This decision has also been followed in the case of Prentice Hall of India (P.) Ltd. [IT Appeal Nos. 1888 (DELHI) of 1979 and 1149 (DELHI) of 1980] which has also been referred to in the order of the Tribunal dated 26-5-1984. It will, therefore, be necessary to discuss the decision of the Madras High Court in the said case in some detail.
In that case the assessee was a non-resident company. The Collaboration Agreement between the assessee and the Indian company provided for payment of royalty in Sterling. For the assessment years 1967-68 and 1968-69 the assessee submitted returns admitting royalty income of Rs. 7,21,600 and Rs. 4,57,311 respectively. The assessee stated in the returns that it was maintaining accounts on mercantile system and did not dispute its liability to assessment. But, for the assessment year 1969-70, the assessee admitted royalty of Rs. 9,25,257 but filed a nil return claiming that it was maintaining account on cash basis and not on mercantile basis and that no part of the royalty has been received and that it was not taxable. On these facts it was held by their Lordships of the Madras High Court that if the contention of the assessee that royalty should be assessed to income-tax or its actual receipt Under Section 5(2)(a) on the ground that it maintained its accounts on cash basis was accepted, the income could not be charged at all as it would be received in England and not in India. It was further held that the assessee company receiving its income outside India could be assessed to tax only under Section 5(2)(b) on accrual basis. Section 5(2)(a) cannot be made applicable to such an assessee. It was further held that in the case of a non-resident, to whom income accrues in India, Section 5(2)(a) will have no application, unless the non-resident receives income in India. Their Lordships further observed that the effect of applying Section 145(1) would be to take the income outside the purview of taxation, though the charge of tax on that income had taken effect on accrual basis. Further, no action for imposition of tax on receipt outside India would arise in the case of a non-resident, because Section 5(2)(a) will apply only to receipt in India. In such circumstances, to apply Section 145(1) would be to defeat the charge under Section 4 and to obliterate the provisions of Section 5(2)(b) and let the income which is taxable escape tax. It is thus clear that in the case decided by the Madras High Court Section 5(2)(a) was not applicable at all as the royalty income was received in England and not in India. In view of the facts of that case, if Section 143 was applied the royalty income would have escaped tax. It was under these circumstances that it was held that to apply Section 145(1) would be to defeat the charge under Section 4 and to obliterate the provisions of Section 5(2)(b). It may further be noted that in that case for the assessment year 1969-70, the assessee who had earlier filed returns for the assessment years 1967-68 and 1968-69 claiming that it was maintaining accounts on mercantile system, filed a nil return showing that it was maintaining accounts on cash basis and claiming that no part of royalty had been received and was thus not taxable. It is thus evident that in that case the assessee denied its liability to be assessed to tax in respect of royalty income setting up the plea that for the assessment year 1969-70 it maintained accounts on cash basis. It will thus be seen that the facts of that case were materially different from the facts of the case in hand. In the instant case, the assessee does not dispute or deny its liability to tax in respect of royalty income. On the other hand, from the very beginning the assessee has offered royalty income for taxation on cash basis. In the cash book maintained on behalf of the assessee by its Indian agent, royalty amounts have been accounted for on receipt basis, from the very beginning. So on the basis of the entries made in the cash book in respect of royalty amounts it can safely be held that the assessee for the purpose of Section 5(2)(a), did receive royalty income in India and, therefore, Section 5(2) (a) comes into operation and is applicable in the instant case. For this reason also, the decision of the Madras High Court in the case of Standard Triumph Motor Co. Ltd. (supra) is not applicable to the facts of the instant case.
24. The decision of the Supreme Court in State Bank of India (supra) cited on behalf of the Department is not at all relevant for the purpose of this case. In that case it was held that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. There is no quarrel about the petition laid down in this case. Here we are concerned with an altogether different question, namely, whether in this case the royalty income earned by the assessee in India should be assessed on receipt basis as claimed by it or on accrual basis as has been done by the assessing officer.
25. For the foregoing reasons, we hold that since the assessee has regularly and consistently kept its accounts in respect of royalty income on receipt basis, and as this system was accepted by the Revenue for the earlier years and approved by the Tribunal too, we hold that the revenue is not justified to convert it into Mercantile system unilaterally and therefore, income is not liable to be taxed on accrual basis and that the royalty income has to be assessed on receipt basis.
In this view of the matter, we confirm the orders of the Commissioner of Income-tax (Appeals) for the three assessment years under appeal.
26. In the result, these Departmental appeals fail and are hereby dismissed.