Commissioner of Income-tax Vs. Yawar Rashid and ors. - Court Judgment

A.K. Mathur, Actg. C.J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the applicant/Revenue and the following question of law has been referred by the Tribunal for answer by this court, which reads as under :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that tax deducted at source outside India from foreign dividends and interest income was not part of total income and thus, not assessable in the hands of the assessee under the Income-tax Act, 1961 ?'

The facts giving rise to this case are that the assessee/non-applicants are co-heirs of the estate of the late Rashid Khan of Bhopal. As co-heirs, they had foreign income in the shape of dividends and interest. The tax at source was deducted from the above income and net amount was remitted to these assessees in India. The Income-tax Officer held that gross income, i.e., net income plus tax deducted at source was chargeable to income-tax. On appeal, in the cases of Begum Rashid, Mrs. Nilofarkhanand Smt. Mohabano Ali, the Assistant Commissioner rejected the appeals but the Commissioner of Income-tax (Appeals) in the appeals of Nadir Rashid and Yawar Rashid, accepted their claim and held that only the net amount received in India could be said to have accrued or arisen to them. The Revenue challenged the order of the Commissioner of Income-tax (Appeals) before the Tribunal and the Tribunal relying on the decision of the Kerala High Court in the case of CIT v. Y.N.S. Hobbs : [1979]116ITR20(Ker) and that of the Calcutta High Court in CIT v. Shaw Wallace and Co. Ltd. : [1983]143ITR207(Cal) held that under Section 5(1)(c) of the Income-tax Act, only the actual receipt can be included in the total income of the assessee and the income which can be deemed to accrue or arise outside India, is not liable to be included in the total income of the assessees under the above clause. Consequently, it was held that tax deducted at source outside India cannot be treated as part of the total income of the assessees. Hence, the application under Section 256(1) of the Income-tax Act was made by the Revenue for referring the aforesaid questions of law before this court for answer.

2. Before we examine the question in detail, it will be necessary to refer to the relevant provisions of law which have a bearing on the subject-matter of this reference. Section 5 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), which deals with the total income, reads as under ;

'Section 5. Scope of total income.--(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a 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 ; or

(c) accrues or arises to him outside India during such year :

Provided that, in the case of a person not ordinarily resident in India within the meaning of Sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(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.'

According to Section 5 of the Act, the total income of the assessee of the previous year who is a resident in India, includes all income from whatever source, i.e., which is received or deemed to be received in India in such year by or on behalf of such person ; or accrues or arises or is deemed to accrue or arise to him in India during such year or accrues or arises to him outside India during such year. There are three categories which have been contemplated--one is that a person who has received the income or is deemed to have received the income in India ; second that income which accrues or arises or is deemed to accrue or arise to him in India and third which accrues or arises to him outside India. In the first category the person who has already received the income that he is having the actual receipt of the income and in the second category any income which accrues or arises that means income in the ordinary course under any law, accrues or arises to him or it could be deemed to have accrued to him or it could be deemed to have arisen to him, i.e., whatever income under any law that it has not been received by him in hand ; but it accrues or arises to him on account of loan from any source, Therefore, in category (b), it is fictionally deemed that even if the income which has not been received in hand but it arises or accrues to him from any source, that will be treated to be the total income. But as against this, in category (c), it only talks about the income, i.e., which accrues or arises to him from outside India during that year. Therefore, a distinction has to be made between three clauses, i.e., Clause (a) means the actual income received, Clause (b) talks about the income which accrues or arises to him though it has not been received in hand, and Clause (c) means that it accrues or arises to him from outside India that shows that income which has been received by the assessee from outside India, shall only be entitled to be taken as total income. This distinction has to be kept in mind that what income from abroad should be accounted towards the income of the assessee residing in India. Clause (c) as against Clauses (a) and (b) stands on a different footing, i.e., Clause (c) is in contradiction of Clauses (a) and (b). In Clause (a) money received or deemed to have been received in India, or Clause (b) accrues or arises to him under any law in India. But as against Clause (c) which is in the present tense means which accrues or arises to him outside India that means that only the income actually accrues or arises to him, that is the only total income. Therefore, in both the clauses, the word used 'is received or is deemed to be received or accrues or arises or is deemed to accrue or arise in India', i.e., in both Clauses (a) and (b), no distinction has been made that what is due to him shall be counted. As against in Clause (c), it makes clear that what is actual income accrues or arises to him from outside India shall be counted, i.e., the gross income in Clause (c) is not to be counted, but actual income which is received at the hands of the assessee, is to be counted.

3. Similarly, Section 198 of the Act says how tax deducted should be included in the gross income under the various provisions of the Income-tax Act. Section 198 of the Act reads as under ;

'Section 198. Tax deducted is income received. --All sums deducted in accordance with the provisions of Sections 192 to 194, Sections 194A, 194B, 194BB, 194C, 194D, 194E, 194EE, 194F, 194G, 194H, 194, 194J, 194K, 195, 196A, 196B, 196C and Section 196D, shall, for the purpose of computing the income of an assessee, be deemed to be income received.'

That all sums deducted under the various provisions, Sections 192 to 194, 194A and 194B, etc., shall for the purpose of computing the income of the assessee be deemed to be income received. That shows that notwithstanding that various provisions appearing in the Act where certain deductions are permissible, still in order to arrive at the gross income for the purpose of computing the income of the assessee, all those deductions shall be treated to be a part of the income in order to work out the total gross income for the purpose of the tax. That shows that under Section 5(1)(a) and (b), what is to be taken is the gross income of the assessee irrespective of the fact that such deductions are permissible. Under Clause (c), if any deduction has been made abroad according to the law prevailing in that country then that deduction has not been prohibited. So far as Clause (c) is concerned, there is no prohibition under the Act that what is the income has been deducted at source abroad according to law of that country, then that income is to be counted so as to arrive at the gross income of the assessee. There is no such inclusion under Section 198 of the Act of the income deducted at source abroad. That gives an indication that the Legislature deliberately did not want to include that deduction as a part of the assessee's income for the purpose of computing his gross income or it is a case of a bona fide omissions. But none the less, the fact remains that there is no provision which mandates that if any income has been deducted at source abroad then that income should also be computed for the purpose arriving at the gross income of the assessee for tax liability.

4. A reference has been made to Section 91 which caters to the contingency of an income arisen abroad where there is no agreement with India for tax relief or avoidance of double taxation, any tax has been paid according to the laws of that country, then he will be entitled to deduction in India for payment of tax on that doubly taxed income at the Indian, rate of tax or rate of tax of the said country, whichever is the lower, or at the Indian rate of tax, if both rates are equal. Sub-section (1) of Section 91 which is relevant for our purposes, reads as under :

'Section 91(1). Countries with which no agreement exists.--If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under Section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax, if both the rates are equal.'

This Section does cater the contingencies for such Indian resident to whom such foreign income accrues, they can claim the deduction on the income which is doubly taxed, whichever rate of tax is lower, will be admissible and if both the rates are equal, then the rate which is applicable in India will be applicable to him. But a close reading of Section 91 will reveal that it is not applicable in the present situation. If any income which accrues or arises to any Indian resident from abroad and it does not fall in Clause (c) under Section 5(1) which talks about the total income, then there is no question of claiming the benefit of Section 91 of the Income-tax Act of double taxation of that income. If the income has already been deducted under the law of that country at source and the assessee gets the actual income in his hand, that means that he is only receiving the income which has already suffered the tax of that country and that income is a net income in his hand and that is not includible under Section 198 then the question of double taxation would not arise at all. That shows that Section 5(1)(a) and (b) read with Section 198 make it a one code and that leaves out Section 5(1)(c), that means that such income which has been deducted at source abroad that will not be counted for the purpose of computing the total income of the assessee for tax liability in India. Therefore, these two provisions make it a harmonious reading and leaves out Section 91 which is not applicable. It is only when the income which has already suffered a tax, is being sought to be doubly taxed in India, then the question will arise that how the assessee shall be taxed and on what rate. But, if the assessee has only received the actual income and not the income which is deemed to accrue or is deemed to arise to him in that case, Section 91 will not be applicable. But there is divergent judicial opinion in India. The Kerala, Calcutta and Bombay High Courts have consistently taken the view that such income which has been actually received in India, shall only be treated to be an actual income and not the income which accrued to the assessee abroad and in that connection, the expression 'deemed to accrue or arise' appearing in Section 5(1)(b) has been emphasised and it was pointed out that as against in Clause (c), there is no expression used 'deemed to accrue or arise'. Therefore, in contradistinction with Clause 5(l)(b) and Clause 5(1)(c), Section 5(1) shall mean the actual money which is received by the assessee, resident of India, should be counted and not the gross income that means income which is deemed to have accrued or arisen to him abroad. As against this; the Madras High Court has taken a contrary view, but after bestowing our best of consideration to the conflicting decisions of their Lordships, we are inclined to accept the views of the Kerala, Calcutta and Bombay High Courts because they advance the cause of the citizen.

5. Learned counsel has invited our attention to the case of CIT v. Y.N.S. Hobbs : [1979]116ITR20(Ker) and in that case, it was observed (headnote) :

'Section 194 provides for deduction of tax at source from dividends from Indian companies and Section 198 contains a specific provision that the tax deducted shall be deemed to be income received by the assessee. There is no similar deeming provision in respect of dividends received from a foreign company. Section 5(1)(c) contemplates and permits inclusion in the total income of an assessee of only the actual receipts in the case of income which accrues or arises to the assessee outside India during the year in question and not income deemed to accrue or arise outside India as is provided for by Clauses (a) and (b) of Section 5(1). Therefore, having regard to the provisions of Section 5(1)(c) and Section 198, as tax deducted at source by a foreign company on foreign dividends cannot be regarded as income received by the assessee, it is not assessable under the Income-tax Act, 1961 : CIT v. Blundell Spence and Co. Ltd. : [1952]21ITR28(Bom) applied.'

A similar view has been expressed by the Calcutta High Court in the case of CIT v. Oriental Co. Ltd. : [1982]137ITR777(Cal) and Sabyasachi Mukharji J., as he then was, observed (headnote) :

'Income is assessable in the hands of an assessee who is resident in India only if it falls under Section 5(1)(a) or (b) or (c) of the Income-tax Act, 1961. Income which is deemed to be received in a foreign country is not assessable. Sometimes the expression 'deemed' is included to give a comprehensive description that includes what is obvious, what is uncertain and what is in the ordinary sense impossible. A deeming provision, however, is never used by the Legislature to mean what is obvious or to include the natural meaning of the expression.

Under Section 8, dividend income is deemed to be income of the previous year in which it was declared. In other words, the statutory fiction determines the year in which dividend is to be treated as income and the fiction does not provide for the quantum of the dividend which is to be treated as the income of the shareholder.

Both under Section 185(2) of the U. K. Income-tax Act, 1952, and Section 47(2) of the U. K. Finance Act, 1965, the amount deducted by the company at the time of distribution of dividends to its shareholders is deemed to be the income of the shareholders. It is a statutory receipt or fictional income. It is not liable to be taxed in the hands of an assessee in India. Section 8 of the Income-tax Act, 1961, read with Sections 194 and 198, makes it clear that so far as the U. K. tax portion of the dividend is concerned, there is diversion of that portion by statute at the declaration stage. Therefore, it is not a case of application of income after accrual. That income, in the eye of law, never accrues in the sense of a debt owed by the company to the assessee. It is a debt by the company to the Revenue but no debt on that amount accrues in favour of the assessee. Hence, only the net amount of the dividends paid by the U. K. companies after deduction of the U. K. .tax at source should be included in an assessee's total income. The assessee is entitled to double taxation relief under Section 91 on such net amount.'

This view was again reiterated by the Calcutta High Court in the case of CIT v. Shaw Wallace and Co. Ltd. : [1983]143ITR207(Cal) . Recently, the Bombay High' Court has followed these cases in the case of CIT v. Ambalal Kilachand : [1994]210ITR844(Bom) and their Lordships have stated that in the case of dividends received from companies in the United Kingdom by shareholders outside the U. K. the net dividend is assessable and the tax deducted at source on dividends in the U. K. is not includible in the totalincome of the assessee. Their Lordships after interpreting Section 5(1)(a), (b) and (c), have taken the view and it was observed (headnote) :

' Therefore, the only entitlement of a shareholder outside the United Kingdom is to receive dividend as reduced by the deduction of the corporation tax. Hence, the tax deducted by the companies in the United Kingdom and paid into the treasury in the United Kingdom after deducting the same from dividends and interest on securities, paid to the assessee are not includible in the chargeable income of the assessee under the income-tax Act, 1961.' However, their Lordships did not examine the impact of Section 91 of the Income-tax Act in that case':

As against this, our attention was invited to the decision of the Madras High Court given in the case of B. R. Sundaram v. CIT : [1979]117ITR960(Mad) and A.F.W. Low v. CIT [1995] 211 ITR 213. In B.R. Sundaram's case : [1979]117ITR960(Mad) , it was a case in which pension was received from the Malaysian Government and paid to the incumbent in Indian currency in India and the question was whether he is liable to tax in India under Section 5(1)(c) of the Income-tax Act. In that case, their Lordships did not examine the matter in detail and disposed of that on accrual basis. The argument on behalf of the assessee was that the pension having been received from Malaysia it could not be assessed on accrual basis by applying Section 5(1)(c) of the Income-tax Act. Their Lordships only observed that as regards a resident, tax will be attracted as soon as Section 5(1)(c) is satisfied. But their Lordships did not dilate on what according to their Lordships were the necessary ingredients of Section 5(1)(c), therefore, that case does not provide any assistance whatsoever.

6. In the case of A F. W. Low [1995] 211 ITR 213 , their Lordships observed (headnote) :

'Prior to the U. K. Finance Act, 1965, amounts deducted by way of tax from the dividends distributed by companies incorporated in the U. K. at the standard rates were allowed to be retained by the companies, but after 1965, the amounts had to be paid over to the Inland Revenue. Under the U. K. Income-tax Act, 1952, there is no provision to the effect that amounts deducted from dividend income of a member constituted payment of income-tax by the member. Provision is made under Section 91(1) of the Income-tax Act, 1961, corresponding to Section 49D of the Indian Income-tax Act, 1922, to make available to the assessee double income-tax relief, subject to the fulfilment of the requirements in that regard. Having regard to Section 91 providing for double income-tax relief, the gross dividend alone should be regarded as having accrued or arisen or even received by the assessee.'

In that case, their Lordships did not agree with the decision of the Calcutta High Court in the case of Oriental Co. Ltd. : [1982]137ITR777(Cal) and their Lordships did not examine the matter that what is the effect of Section 5(1)(c), vis-a-vis Section 5(1)(a) and (b) as well as with reference to Section 198. Their Lordships, of course, made a reference to the decision of the Supreme Court in the case of CIT v. Clive Insurance Co. Ltd. : [1978]113ITR636(SC) . This case was considered by the Calcutta High Court in Oriental Co. Ltd.'s case : [1982]137ITR777(Cal) . In Clive Insurance Co. Ltd.'s case : [1978]113ITR636(SC) , their Lordships were concerned with the double taxation and after considering that judgment, their Lordships in Oriental Co. Ltd.'s case : [1982]137ITR777(Cal) , at page 784, observed :

'The Supreme Court in the case of CIT v. Clive Insurance Co. : [1978]113ITR636(SC) , proceeded on the basis of granting relief under Section 49D of the Indian Income-tax Act, 1922, that the net amount received by the assessee was franked income and, therefore, could not be taxed again. The main ratio, in our opinion, would be applicable even in the case of pre-1965 as well as post-1965 income in respect of the dividends declared by the company in the United Kingdom.'

Therefore, that decision receiving a due consideration by the Calcutta High Court and after distinguishing that case, their Lordships proceed in the matter with regard to the interpretation of Section 5(1)(c) of the Act. We are in full agreement with the view taken by the Calcutta High Court. In this view of the matter, we are of the opinion that the view taken by the Tribunal is correct and the reference is answered in favour of the assessee and against the Revenue.