By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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Part C — International Tax Decisions
12 Mustaq Ahmed, in re
(2008) (AAR) (Unreported)
S. 5(2), Explanation 1(b) to 9(1)(i), Income-tax Act
Dated : 19-11-2008
Issue :
Where income accrues or arises u/s.5(2), S. 9(1)(i) would
have no application.
Facts :
The applicant was a resident of Singapore. He carried on sole
proprietary business of manufacture and sale of gold jewellery in Chennai. He
was also engaged in the activity of purchasing and exporting gold ornaments. The
exports were made to Singapore company in which the applicant held substantial
shares. The purchase orders from SingCo were accepted and sales were executed in
India. Sale proceeds were also received in the assessee’s bank maintained in
India.
Before the AAR, the applicant contended that its activities
of purchase of gold and gold ornaments for exports was unrelated to its sole
proprietary business, since the purchase and export of gold jewellery was for
the purpose of export and since the applicant was a non-resident, the income
accruing or arising through or from these operations, which were confined to the
purchase of goods in India for the purpose of exports was not taxable in India
in terms of Explanation 1(a) and (b) to S. 9(1)(i). The applicant also contended
that ‘receipt’ follows ‘accrual’ and once there is no ‘accrual’ u/s.9, tax
liability cannot arise merely on account of ‘receipt’. The applicant also
contented that since Explanation 1(b) to S. 9(1)(i) is a beneficial provision
for promotion of exports from India, it should be construed so as to advance
that objective.
Before the AAR, the tax authorities contended that deeming
provisions of S. 9 had no role to play as the charge of taxation was attracted
u/s.5(2) and consequentially exemption carved out u/s.9 as the income actually
accrued in India and was received in India. The tax authorities supported their
contention with various documents which showed that exports were not to self (i.e.,
to applicant), but to foreign companies; exports were made in regular course of
business and in accordance with rules and regulations governing resident
exporters.
Held :
The AAR referred to S. 5(2) and S. 9(1)(i) and Explanation
thereto. It also referred to the following decisions :
- CIT v. Ahmedbhai Umarbhai and Co., (1950) 18 ITR 472 (SC)
- Anglo-French Textile Company Ltd. v. CIT, (1953) 23 ITR 101 (SC)
- Bikaner Textile Merchants Syndicate Ltd. v. CIT, (1965) 58 ITR 169 (Raj.)
- Turner Morrison & Co Ltd. v. CIT, (1953) 23 ITR 152 (SC)
- Hira Mills Ltd. v. ITO, [1946] 14 ITR 417 (All.)
- CIT v. Ashokbhai Chimanbhai, (1965) 56 ITR 42 (SC)
The AAR observed that the expression ‘subject to the
provisions of this Act’ in S. 5(2) would mean that a non-resident’s income from
whatever source derived on account of actual or deemed receipt or actual or
deemed accrual shall be computed in accordance with other provisions of the Act.
After considering the modus operandi of the business
of the applicant, the AAR held that the right to receive payment had arisen in
India; once the income actually accrued or arose in India, Explanation 1(b) did
not have the effect of altogether preventing the accrual of income. Hence, the
income derived by the applicant from purchase and exports activities undertaken
by him attracted charge to tax u/s.5(2), as it represented income accrued or
received in India. The AAR held that benefit of exception of Explanation 1(b) to
S. 9(1)(i) was not available to the applicant.
