S.H. Kapadia, J.

1. Two questions of law have been referred to us under Section 256(1) of the Income Tax Act, 1961, at the instance of the assessee arising in the assessment years 1976-77 and 1977-78, which are as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the final dividend income accrued to the assessee on the date of declaration even though the Reserve Bank of India had not granted permission under the Foreign Exchange Regulation Act, 1973

Whether, on the facts and in the circumstances of the case, the assessee, a non-resident company, can be assessed on the basis that the accounts are maintained on cash basis "

Facts :

2. The assessed-Pfizer Corporation, is a non-resident company. The assessee is a shareholder in its Indian subsidiary--Pfizer Limited--a company registered under the Indian Companies Act, and assessed to tax in Company Circle No. V, Bombay. In this case, we are concerned with the assessment year 1976-77 corresponding to the financial year ending November 30, 1975, and with the assessment year 1977-78 corresponding to the financial year ending November 30, 1976.

3. On July 31, 1975, Pfizer Limited declared final dividend amounting to Rs. 50.40 lakhs. Out of that amount, Rs. 25.20 lakhs stood remitted on September 3, 1976, pursuant to the approval granted by the RBI under the FERA. Similarly, on May 31, 1976, Pfizer Limited declared final dividend of Rs. 79.80 lakhs, out of which Rs. 29.40 lakhs was remitted on July 22, 1977. According to the Department, income accrued to the assessee during the assessment year 1976-77 amounting to Rs. 25.20 lakhs as Pfizer Limited declared final dividend on July 31, 1975, whereas, according to the assessee, that income accrued to the assessee during the assessment year 1977-78 as the remittance was permitted by the RBI on September 3, 1976, i.e., during the assessment year 1977-78. Similarly, according to the Department, dividend income accrued to the assessee during the assessment year 1977-78 as the final dividend was declared by Pfizer Limited on May 31, 1976, whereas, according to the assessee, the dividend income of Rs. 29.40 lakhs accrued to it during the assessment year 1978-79 as the remittance was permitted by the RBI only on July 22, 1977.

4. Therefore, the short point which arises for consideration in this reference is the year in which the dividend income accrued to the assessee. For that purpose, it may be noted that according to the Department, the dividend income accrued to the assessee on the date when Pfizer Limited declared dividend whereas according to the assessee the income accrued only when the RBI granted approval for the remittance. According to the assessee, its right to receive dividend income got crystallised only when the RBI granted approval to the remittance of dividend income in view of the provisions of sections 8 and 9 of the FERA. This is the short point which arises for determination in this case.

Arguments :

5. Mr. Kaka, learned counsel appearing on behalf of the assessee, contended that Section 8 of the FERA prohibits any foreign exchange dealing by a resident of India without previous permission of the RBI and, similarly, Section 9 prohibits payment by a resident of India to a non-resident outside India. He contended that the assessee was a non-resident. He further contended that in view of Section 9(1)(c) of the FERA, no debt arose in favour of the assessee till the RBI gave its approval. He contended that declaration of final dividend did not create legal obligation in the company to pay to the assessee. That, no income accrued to the assessee till the permission was granted by the RBI. He contended that under Section 5(2)(b) of the Income Tax Act income accrued to the assessee only when the right to receive dividend stood crystallised. That, at the highest, on the date of declaration of dividend, the right which accrued to the assessee was an inchoate right, which got crystallised only when the approval was granted by the RBI. He relied on several authorities in support of his arguments. In the circumstances, it was argued that the assessee could be taxed only in the year in which the RBI gave its approval and not in the assessment year when the dividend was declared by Pfizer Limited.

6. On question No. 2, learned counsel for the assessee contended that, in this case, the Tribunal erred in accepting the contention of the Department that all non-residents should be asked to maintain only the mercantile system of accounting. That, it was not open to non-residents to follow the cash system of accounting. He contended that the system of accounting is a topic which is covered by Section 145 of the Income Tax Act. He contended that the system of accounting comes under the computation and it does not fall within the ambit of the charging section. Mr. Kaka pointed out that Section 145 of the Income Tax Act is a part of computation machinery. It decides the year in which the income is to be taxed and that it has no connection with the accrual of income which comes under Section 4 and Section 5 of the Income Tax Act. He contended that the case reported in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 [LQ/MadHC/1978/166] has no application to the facts of the case and, in the alternative, he submitted, with respect, that the judgment was erroneous. He tried to persuade this court to take a different view.

7. Mr. R. V. Desai, learned senior counsel for the Department, contended that Section 5 defines the scope of total income of a person who is a non-resident. He contended that under Section 5(2) the total income of a non-resident would include all income from whatever source derived which is received or is deemed to be received in India or which accrues or is deemed to accrue in India. He contended that, in this case, Section 5(2)(b) applies. He contended that Section 5(2)(b), in this case, should be read with Section 8. He contended that under Section 8(a) any dividend declared, distributed or paid by a company shall be deemed to be the income of the previous year in which it is so declared, distributed or paid as the case may be. Mr. Desai contended that, in the present case, dividend has been declared during the assessment year 1976-77 corresponding to the relevant accounting year ending November 30, 1975, and, therefore, the dividend income amounting to Rs. 25.20 lakhs was taxable in the hands of the assessee during the assessment year 1976-77. That, it cannot be assessed in the year in which the RBI gave approval. That, similarly, dividend income accrued to the assessee amounting to Rs. 29.40 lakhs in the assessment year 1977-78 because, in that year, the dividend was declared by Pfizer Limited. Mr. Desai contended that Section 8 of the Income Tax Act is not superseded by the provisions of the FERA. That, Section 8 stood on its own. Therefore, once a dividend is declared by Pfizer Limited, income accrues to the assessee on the date of the declaration and the assessee gets the right to receive the dividend on that date. That, Section 8 of the Income Tax Act was not subject to any restrictions under the FERA. That, the FERA does not affect accrual of income. He contended that, in this case, Section 9 of the Income Tax Act has no application. He contended that Section 5(2)(b) and Section 9 of the Income Tax Act are charging sections. That, in this case, Section 9(1) is not attracted. He contended that once income accrues to the assessee, the right to receive dividend can never be postponed. That, the effect of the argument of the assessee is postponement of the right to receive dividend. In this connection, he relied upon page 198 of the Law and Practice Of Income Tax by Kanga and Palkhizvala, 7th edition. He contended that the judgment cited by Mr. Kaka has no application. That none of the judgments deal with the question which arises in this case.

8. On question No. 2, Mr. Desai contended that a non-resident cannot be allowed to follow the cash system of accounting. He relied upon the judgment of the Madras High Court in the case of C1T v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 [LQ/MadHC/1978/166] and he submitted that if non-residents are allowed to follow the cash system of accounting then it would be difficult for the Department to deduce income chargeable to tax. That, the Tribunal was right in directing the assessee to follow the mercantile system of accounting as the assessee was the non-resident. He contended that Section 5(2)(b) deals with income deemed to accrue in India in the case of non-residents and, therefore, the Tribunal was right in directing all non-residents including the assessee to follow the mercantile system of accounting.

9. In rejoinder, learned counsel for the assessee submitted that, in this case, Section 9(1)(iv) was applicable. He submitted that Section 9(1)(iv) was an extension of Section 5(2)(b). He relied upon page 195 of Kanga and Palkhiwalas Law and Practice of Income Tax, 7th edition, in support of his contention. He contended that but for Section 9(1)(iv) of the Income Tax Act, non-residents who are not assessable in respect of income accruing abroad, could not have been charged to tax. That, in view of Section 9(1)(iv), read with Section 5(2)(b) such income became taxable and under Section 9(1)(iv) income is deemed to accrue in India only on payment of dividend. That, in Section 9(1)(iv), the word "declared" and the word "distributed" do not find place unlike Section 8 of the Income Tax Act. He contended that Section 8 was a part of computation machinery. That, the computation machinery comes into the picture only if income accrues or is deemed to accrue in India. He contended that in the case of non-residents receiving dividend income abroad, income is deemed to accrue in India only on payment. He, therefore, contended that the non-resident/assessee can be assessed only in the assessment year in which the dividend is actually paid which presupposes approval by the RBI because without such approval Pfizer Limited could not have effected payment of dividend to the assessee.

Findings :

(A) On question No. 1 :

10. For the purposes of deciding this matter we are required to consider Section 5(2)(b), Section 8 and Section 9(1)(iv). Section 5 deals with the scope of total income. It applies to residents and non-residents. Section 5(2), inter alia, states that the total income of a non-resident will include income from whatever source derived which (a) is received or is deemed to be received in India, or which (b) accrues or is deemed to accrue in India. Section 5(2)(b) is applicable in this case. It is required to be read with Section 9(1) which categorises different types of income which form part of the total income. Section 9(1) indicates income which is deemed to accrue or arise in India. Section 9(1)(iv), inter alia, lays down that a dividend paid by an Indian company outside India will constitute income deemed to accrue in India. Therefore, Section 9(1)(iv) is an extension of Section 5(2)(b). Under Section 5 all residents and non-residents are chargeable to tax in respect of income which accrues or is deemed to accrue in India or is received in India. Non-residents who are not assessable in respect of income accruing and received abroad are rendered chargeable to tax under Section 5(2)(b) in respect of income deemed by Section 9(1)(iv) to accrue in India. In other words, but for Section 9(1)(iv), such income could not have fallen under Section 5(2)(b). Therefore, dividend declared by an Indian company and paid to non-resident out of India would be deemed to accrue in India by virtue of Section 9(1)(iv) read with Section 5(2)(b) of the. Therefore, we say that Section 9(1)(iv) is an extension of Section 5(2)(b). We say so because Section 5(2)(b) indicates two types of income assessable to Income Tax, viz., (i) accruing or arising in India, and (ii) deemed to accrue or arise to the non-resident in the taxable territory, i.e., India. The concept of actual accrual/ arising of income in India, although not dependent upon the receipt of income in India, is quite different from the concept of deemed accrual/arising of income. This distinction is very relevant Further, Section 5(2)(b) refers to income accruing/arising or deemed to accrue/arise in India. However, Section 5(2)(b) may not cover income accruing/arising outside India and, therefore, the Legislature has brought in Section 9(1)(iv) and has stated that even if the dividend is paid to a non-resident outside India, such payment will be deemed to be income accruing/arising in India. Therefore, but for Section 9(l)(iv), payment of dividend to a non-resident outside India would not have come within Section 5(2)(b). Therefore, Section 9(1)(iv) is an extension to Section 5(2)(b). An Indian company having a registered office in India issues shares. The situs of the shares is the place where the register is kept. That is in India. But in cases where the question arises of taxing income and not the corpus, one has to consider the place of accrual of the dividend income and the situs of the shares will have no importance. A dividend declared by an Indian company, therefore, would be deemed to accrue in India if the source of income is situated in India. But what happens when dividend is declared in India and paid to a non-resident out of India. To cover such a situation, we have to read Section 5(2)(b) with Section 9(1)(iv). Now under Section 9(1)(iv), it is clearly stipulated that a dividend paid by an Indian company outside India will constitute income deemed to accrue in India on effecting such payment. In Section 9(1)(iv), the words used are "a dividend paid by an Indian company outside India" (underlining supplied by us). This is in contradistinction to Section 8 which refers to a dividend declared, distributed or paid by a company. The words "declared or distributed" occurring in Section 8 do not find place in Section 9(1)(iv). Therefore, it is clear that dividend income paid to a non-resident is deemed to accrue in India only on payment and not on declaration. We would like to give one more illustration in support of our findings. Circular No. 6 of 2001, dated 5th March, 2001, issued by the Central Board of Direct Taxes is reported in [2001] 248 ITR 247. It deals with taxation of foreign telecasting companies. It has laid down the guidelines for computation of profits of FTCs for advertisement payments received by them from India. The total income of FTCs also included income like subscription charges receivable from cable operators in respect of pay channels. This circular directs the Assessing Officer to compute the total income of FTCs by including subscription charges receivable from cable operators by FTCs outside India. The circular makes it clear that the income received under such circumstances by FTCs outside India would fall under Section 5 read with Section 9(1). Therefore, we repeat that where the source of accrual is in India but payment is made to the non-resident outside India, Section 5(2)(b) read with Section 9(1) would make the income deemed to accrue in India. Therefore, in this case, we hold that final dividend amounting to Rs. 25.20 lakhs became taxable in the assessment year 1977-78 when the RBI granted approval and not in the assessment year 1976-77 when the dividend was declared by Pfizer Limited and so also the balance final dividend amounting to Rs. 29.40 lakhs became taxable in the assessment year 1978-79 when the RBI granted permission and not when the dividend was declared in the assessment year 1977-78. Accordingly, question No. 1 is answered in the negative, i.e., in favour of the assessee and against the Department.

11. We can also answer question No. 1 on a different set of reasoning. Section 8 of the Income Tax Act refers to dividend income. Section 8, inter alia, states that for the purposes of inclusion in the total income of an assessee, any dividend declared by a company or distributed or paid by it shall be deemed to be the income of the previous year in which it is so declared, distributed or paid. Section 8 decides the previous year for taxing real and deemed dividends. In other words, Section 8 is a part of computation machinery. It is not a charging section. It is indicated by the language itself of Section 8. It begins by the phrase "for the purposes of including in the total income . . ." which shows that Section 8 is a part of computation. In this case, according to the Department, the income should be taxed in the year in which dividend is declared. Even assuming for the sake of argument that the Department is right, the declaration contemplated by Section 8 must be an effective declaration, it has to be effective because Pfizer Ltd.s obligation to pay dividend to the assessee arises only on obtaining approval of the RBI under the FERA vide Section 8 and Section 9 of the FERA. The debt arises only on approval of the RBI. In the present case, the debt did not arise in the year in which the dividend was declared. The assessees right to receive the dividend accrued only in the year the RBI granted approval. The right to receive dividend was inchoate in the year in which the dividend was declared. The right to receive dividend crystallised only in the year in which approval was granted by the RBI to pay the amount to the assessed/non-resident out of India. Therefore, on either grounds, the Department is wrong in its contentions. We, therefore, hold that the dividend income accrued to the assessee in the year in which the RBI granted approval and not in the year in which dividend was declared. We need not burden this judgment with various authorities.

(B) On question No. 2 :

12. Up to the assessment year 1975-76, the Department had accepted the position that the non-resident assessee, in this case, used to pay tax on receipt basis. Thereafter, for the assessment year 1976-77 and onwards the Department directed the assessee to maintain its accounts on the mercantile system of accounting. In the present case, the Tribunal following the judgment of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573 [LQ/MadHC/1978/166] has held that the assessee was a non-resident and, therefore, the assessee was not entitled to maintain accounts on the cash basis. In that matter the facts were as follows. There was a collaboration agreement between the asses-see-Standard Triumph Motor Company Ltd. (a non-resident company) and an Indian company. Under that agreement, the assessee was entitled to payment of royalty on the sale proceeds of all motor cars sold by the Indian company. For the assessment years 1967-68 and 1968-69, the assessee submitted its returns of income admitting the royalty amounts on the basis of maintenance of accounts on the mercantile basis. However, in its return, for the assessment year 1969-70, the assessee claimed that it was maintaining its account on cash basis and not on mercantile basis and in the absence of actual payment of royalty by the Indian company, the assessee was not assessable on any income by way of royalty. The Income Tax Officer completed the assessments on the basis of the assessee maintaining its accounts on mercantile basis. The assessments were confirmed by the Appellate Assistant Commissioner. However, the Tribunal held that the royalty should be assessed on the cash basis for all the assessment years, namely, 1967-68, 1968-69 and 1969-70, if the books and the balance-sheets were found to be maintained on cash basis. On a reference, the High Court took the view that the entire argument of the assessee was that royalty should be assessed to Income Tax on actual receipt basis under Section 5(2)(a) of theon the ground that it maintains its accounts on cash basis and that if such an argument of the assessee was accepted then income by way of royalty can never be taxed because Section 5(2)(a) cannot apply to nonresidents receiving royalty abroad. The Madras High Court held that such assessees receiving income out of India could be assessed to tax under Section 5(2)(b) only on accrual basis and, therefore, it was not open to the assessee to maintain its accounts on cash basis. It held that Section 145(1) cannot be relied upon by the assessee who contended that they were free to adopt the cash system of accounting. That, if the argument of the assessee on Section 145(1) is accepted then it would result in escapement of tax because the assessee wanted royalty to be assessed only on actual receipt under Section 5(2)(a) of the. According to the High Court, Section 5(2)(a) of thewas not applicable to the assessee and, therefore, if the contention of the assessee was to be accepted that they should be assessed on receipt basis only then the income could never be taxed and, therefore, the High Court held that the assessee was not entitled to switch over from the mercantile system of accounting to the cash system of accounting. The judgment of the Madras High Court has no application to the facts of our case. In our case, the assessee has been following the cash system of accounting up to the assessment year 1975-76. Up to the assessment year 1975-76, the Department accepted the position that the asses- see had to pay tax on receipt basis. Thereafter, the Department itself insisted that the assessee should follow the mercantile system of accounting which the assessee did. In the present case, there is no finding of the Assessing Officer on escapement of tax. Therefore, the judgment of the Madras High Court has no application to the facts of the present case. In the present case, the assessee is being assessed to tax under Section 5(2)(b) of the. In the present case, the dividend income is deemed to accrue in India under Section 5(2)(b) of theread with Section 9(1)(iv) of theTherefore, the judgment of the Madras High Court will not apply to the facts of this case. It was argued, however, on behalf of the Department that in view of the judgment of the Madras High Court, it was not open to non-residents like the assessee, in this case, to maintain accounts on receipt basis. That, all such assessees as a general rule, have to follow only the mercantile system of accounting in view of the judgment of the Madras High Court. We do not agree with this contention. The judgment of the Madras High Court is confined to the facts of the case. However, assuming for the sake of argument that a general norm is sought to be laid down by the Madras High Court in the above case, with respect, we do not agree. There is no provision under the Income Tax Act which debars such non-resident assessees from following the cash system of accounting. Section 145(1) comes in Chapter XIV which deals with procedure for assessment. It comes under the caption "method of accounting". Section 145(1) is not a charging section. It is a part of computation machinery under the. It decides the year in which income becomes taxable. Section 145(1) has nothing to do with the accrual of income under Section 4 and Section 5 of the Income Tax Act. The method followed by an assessee in the matter of accounting cannot be said to restrict the accrual of income under Section 5 of the Income Tax Act. Section 5(2)(b) of the Income Tax Act indicates accrual/deemed accrual of income whereas, Section 145(1) of the Income Tax Act deals with the method of accounting. If this distinction is kept in mind then it is clear that the assessee is free to adopt any of the two methods. In the case of CIT v. Citibank N. A. : [1994]208ITR930(Bom) , the bank followed a hybrid system of accounting in respect of interest on problem loans. The bank was following the mercantile system of accounting for most of its transactions. But the bank kept separate accounts for problem loans. The interest on problem loans was credited only on actual receipt. That system was accepted by the Department in the earlier years prior to the assessment year 1973-74. The Bombay High Court approved the hybrid system of accounting adopted by the assessee-bank. The High Court took the view that in such cases the only power of the Income Tax Officer to interfere with the system followed by the assessee would come into play under the proviso to Section 145(1) if the method employed by the assessee was such that real income could not be deduced. Therefore, the Bombay High Court in the above case of Citibank : [1994]208ITR930(Bom) has approved the hybrid system of accounting followed by Citibank. Therefore, as a general rule, it cannot be laid down that all non-resident assessees have to follow only the mercantile system of accounting. In fact, in cases of contracts between non-residents on the one hand and the Indian company on the other hand, on certain occasions, the Department has insisted on the non-resident assessees following the cash system of accounting so that they could reconcile the books of account of the non-residents on the one hand and the books maintained by the counter-party on the other hand. Lastly, there is no prohibition under the Income Tax Act which prohibits, as a general rule, all non-resident assessees from maintaining accounts on cash basis. They are free to adopt the cash or mercantile system. In fact, the discretion given to the Income Tax Officer by virtue of the proviso to Section 145(1), as it then stood, itself indicates that, in appropriate cases, the Income Tax Officer can direct the assessee to maintain accounts under a particular system as in the case of the Madras High Court reported in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573. [LQ/MadHC/1978/166] Under the said proviso, it is, inter alia, laid down that in any particular case where the accounts are complete but the method employed is such that the income cannot be properly deduced then computation shall be made by the Assessing Officer upon such basis and in such manner as the Assessing Officer may determine. Therefore, this proviso to Section 145(1) as it stood at the relevant time implies that the assessee is free to maintain its accounts either on the mercantile system or on the cash system as long as the Assessing Officer is in a position to deduce the real income.

Conclusion :

13. In the circumstances, question No. 1 is answered in the negative, i.e., in favour of the assessee and against the Department.

14. On question No. 2, our answer is that the assessee was free to follow either mercantile system of accounting or cash system of accounting subject to the proviso which stated that in cases where income cannot be properly deduced, the Assessing Officer can insist on computation of income upon such basis as the Assessing Officer may determine. Therefore, the assessee, in the present case, was entitled to follow the cash system or mercantile system of accounting subject to the first proviso to Section 145(1) as it stood before April 1, 1997.

15. Accordingly, the reference stands disposed of. No order as to costs.