Section 5

Section 5 — the law in short

What the courts have decided on section 5, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v Vasisth Chay Vyapar Ltd Supreme CourtHelps taxpayer
  We are an NBFC. The AO wants interest on a non-performing loan taxed on accrual even though we have not recognised it. Can he do that?
  No. The Supreme Court agreed with the Delhi High Court that where the assessee is a non-banking financial company governed by the Reserve Bank of India Act, interest on an advance classified as non-performing cannot be said to have accrued, having regard to s.45Q of that Act and the prudential norms issued under it. It is an application of the real-income principle: income that has not really arisen is not taxed because the books are kept on the mercantile basis.
• Sedco Forex International Inc v CIT Supreme CourtHelps department
  We are a non-resident drilling contractor taxed under section 44BB. Is the mobilisation fee for bringing the rig to India part of the taxable receipts?
  Yes, on these contracts. The Supreme Court held that a fixed mobilisation fee paid for moving a drilling unit to the Indian location falls within clause (a) of section 44BB(2), as an amount paid on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used in, the extraction of mineral oils in India. Clause (a) applies whether the amount is paid in or outside India. By the fiction in section 44BB the amount becomes income under section 5 and is treated as arising in India for section 9. The assessees' appeals were dismissed.
• CWT v Estate of Late HMM Vikramsinhji of Gondal Supreme CourtHelps taxpayer
  The department says our family trust is really a specific trust because the settlor used to show its income in his own return. The trustees have retained the income. Can it be taxed in the beneficiary's hands?
  No, not on those facts. Where the trust deed leaves distribution to the trustees' discretion and the income was in fact retained and not disbursed, the trust remains a discretionary trust and the income is not assessable in the beneficiary's hands. The failure of the settlor or his successor to appoint the persons who were to exercise the discretion does not convert a discretionary trust into a specific trust.
• CIT v Excel Industries Ltd Supreme CourtHelps taxpayer
  The AO has taxed my advance licence and DEPB benefits in the year I exported. Is that the right year?
  No. The benefit accrues only when the imports are actually made, because until then the customs authorities are under no corresponding obligation to give anything up. Income tax is a levy on real income, and until the import happens the entitlement is at best a hypothetical income that may or may not materialise. The Court also declined to let the department reopen a position it had accepted for earlier years without any change in facts or law.
• GE India Technology Centre P Ltd v CIT Supreme CourtHelps taxpayer
  Must you deduct tax on every payment to a non-resident, just to be safe?
  No. The obligation under s.195 arises only where the sum paid is chargeable to tax under the Act. Mere remittance to a non-resident does not attract it, and you need not apply under s.195(2) where nothing is chargeable.
• CIT v. Willamson Financial Services (Supreme Court) — a Chapter VI-A deduction on a tea company's composite income is allowed AFTER the Rule 8(1) sixty-forty apportionment, not against the whole composite income Supreme CourtHelps department
  Our tea company exports. Should the section 80HHC deduction be worked out on the whole composite income before Rule 8 splits it sixty-forty, or only on the forty per cent that is taxable?
  Only on the forty per cent. The Supreme Court held that the deduction under section 80HHC is required to be allowed AFTER the apportionment of income under Rule 8(1), and answered the issue in favour of the Department. The legal fiction in Rule 8(1) is confined to that rule: it assigns chargeability and computability only to the non-agricultural forty per cent, and it cannot be extended into section 80HHC(3)(a), because deductions under Chapter VI-A are made from gross total income and are not part of the computation of income under the head "Profits and gains of business".
• Ishikawajima-Harima Heavy Industries Ltd v DIT Supreme CourtHelps taxpayerSuperseded by amendment
  Our turnkey contract has offshore supply and offshore services alongside Indian work. Is the whole contract taxable in India?
  No — a composite turnkey contract can be split. Profits on equipment supplied and paid for outside India, where title passes outside India, are outside the Indian charge, because the contract being signed in India is immaterial and there must be a sufficient territorial nexus. On offshore services the Court read s.9(1)(vii) as requiring the services to be both utilised in India and rendered in India; that second requirement has since been removed retrospectively by statute, so only the offshore supply holding survives on the domestic law side.
• CIT v P.V.A.L. Kulandagan Chettiar Supreme CourtHelps taxpayer
  I am resident in India but my rubber estate and my business are in Malaysia. The treaty says that income may be taxed there. Can India tax it as well?
  No, on this treaty. The Supreme Court dismissed the Revenue's appeals and held that neither the business income from the Malaysian rubber plantations nor the capital gain on the sale of the Malaysian property could be taxed in India. The property was in Malaysia, the permanent establishment was in Malaysia and there was none in India, so the closer personal and economic relations determined fiscal domicile and residence in India became irrelevant. Capital gains is income arising out of immovable property for the purposes of the Act, so Article 6 covered it. The Court declined to decide the semantic question whether may be taxed allocates the taxing power or merely permits it.
• Union of India v. M.V. Valliappan — a five-Judge Bench upholds s.171(9), and holds that a partial partition after the cut-off has no significance even if an earlier assessment recognised it Supreme CourtHelps department
  The department is ignoring a partial partition my client's family made in April 1979, even though the Income-tax Officer recognised it and gave the family the benefit of it in that very assessment year. Is there any authority that the recognition once given must stand?
  No — the Supreme Court has held the opposite, and by a Constitution Bench. In Union of India v. M.V. Valliappan the Court allowed the Revenue's appeals, set aside the judgments of the Madras and Karnataka High Courts which had struck down s.171(9) of the Income-tax Act, 1961 and s.20A of the Wealth-tax Act, 1957, and dismissed the writ petitions challenging the sub-section. Dealing directly with the argument that a partial partition of 13 April 1979 had been recognised in the assessment year and the benefit given to the assessee, the Court held that this "has no significance in view of crystal clear language used in the sub-section that partial partition taking place after the cut off date is not to be inquired into and if inquired the findings would be null and void."
• UCO Bank v CIT Supreme CourtHelps taxpayer
  A Board circular gives me a benefit the section itself does not clearly allow. Can the Assessing Officer ignore it and apply the strict law instead?
  No. The Supreme Court held that the Central Board of Direct Taxes has statutory power under section 119 to tone down the rigour of the law in favour of assessees and to secure a fair administration of the Act, and that circulars issued in exercise of that power bind the authorities administering the Act. Applying the circular of 9 October 1984, it held that interest on doubtful loans credited by a bank to a suspense account, where nothing had been recovered for three accounting years, was not taxable in the fourth year and afterwards until actually received. The bank's appeal was allowed.
• Godhra Electricity Co Ltd v CIT Supreme CourtHelps taxpayerNo later treatment found
  I raised my rates and booked the higher billing in my accounts, but customers sued and I could never collect. Must I still pay tax on it?
  No. The Supreme Court held that although the company kept its books on the mercantile system and had passed entries for the enhanced charges, no real income accrued to it. Whether income has accrued must be judged by taking the probability or improbability of realisation in a realistic manner, not by the entries. Here representative suits by consumers, an injunction, a State Government letter advising the company to hold its rates, and the later takeover of the undertaking meant the enhanced charges could never be collected. The entries represented hypothetical income only, and the additions were rightly deleted.
• CIT v Kamalini Khatau Supreme CourtHelps department
  A discretionary trust distributed income to me during the year and the trustees have already been assessed on it. Can the Assessing Officer also assess me?
  Yes — the Revenue has an option, and it can assess either the trustees or the beneficiary, but only in respect of income actually distributed to and received by the beneficiary during the accounting year. Section 164 is not a code in itself; it fixes only how tax is charged, while the liability to be assessed comes from s.161, and s.5 read with s.4 lets the beneficiary be taxed directly on what he actually received.
• Jyotendrasinhji v S.I. Tripathi Supreme CourtHelps department
  My father's foreign trust can only be unwound if the settlor and the trustee act together. Does that still make it a revocable transfer taxable in his hands?
  Yes. The Supreme Court held that section 63 does not require the power of revocation to be absolute or unconditional. Where a deed lets the settlor, acting together with the trustee, direct payment of the income or corpus to family members, the settlor has a right to reassume power over the income or assets, and the transfer is revocable. The Court also held that where a trust is discretionary the Revenue has an option under section 166 to assess either the trustees or the beneficiaries, though not both on the same income. The appeals were dismissed.
• Rama Bai v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  The court enhanced my land acquisition compensation years later and awarded interest from the date possession was taken. Is all that interest taxable in the year of the order?
  No, on the law as it then stood. The Supreme Court held that interest on enhanced compensation cannot be taken to have accrued on the date of the court's order granting the enhancement. It accrues year after year, from the date possession of the land was delivered until the date of that order, and must be assessed accordingly. The question had divided the High Courts and came up on references made directly to the Court under section 257. The Court held the point concluded by its own decision in T.N.K. Govindarajulu Chetty, supported by Khorshed Shapoor Chenai, and allowed the appeals.
• CIT v Hindustan Housing and Land Development Trust Ltd Supreme CourtHelps taxpayer
  An arbitrator enhanced the compensation for my land, the State has appealed against the whole of it, and I have taken the money out of court against a security bond. Has that enhanced amount accrued to me?
  Not while the whole of it is in dispute. The Supreme Court held that the extra compensation awarded by the arbitrator had not accrued in the year of the award, because the State Government's appeal put the entire amount in issue and the dispute was real and substantial - a point the Court underlined by the fact that the assessee could only withdraw the deposit on a security bond to refund it if the appeal succeeded. The right to compensation of that kind is inchoate until the amount is finally determined; there is no liability in praesenti, and so no enforceable right to any particular amount, and nothing accrues. The line the Court drew is between a case where the right to receive payment is itself in dispute and a case where the right is admitted and only quantification is left.
• Morvi Industries Ltd v CIT Supreme CourtHelps department
  My company gave up its managing agency commission by a board resolution because the managed company was in losses. The resolution came after the commission fell due but before it was payable. Is it still taxable in my hands?
  Yes. The Supreme Court held that income accrues when it becomes due, and that postponing the date of payment bears only on the time of payment, not on accrual. Under the agency agreement the commission fell due on 31 December each year and was payable only after the managed company's accounts were adopted in general meeting. The board resolutions giving up the commission and the office allowance came after the amounts had fallen due. Since the assessee kept its books on the mercantile system and gave the amounts up unilaterally after accrual, they remained part of its total income.
• C.R. Nagappa v CIT Supreme CourtHelps department
  The trustees of my settlement are being assessed on the trust income. The department has now also included the same income in my own assessment under s.64. Does s.161(2) stop it?
  No. Section 161(2) does not deny the Assessing Officer the option to assess the person represented instead of the representative assessee; it only requires that when the representative assessee is the one assessed, he is assessed under Chapter XV and not under any other provision. But the same income cannot be charged twice — the Court recorded that the assessments already made on the minor beneficiaries would be annulled and any tax recovered refunded.
• CIT v Shoorji Vallabhdas & Co Supreme CourtHelps taxpayer
  I credited commission in my books at the contracted rate but agreed during the year to take a lower rate. Am I taxed on the higher figure?
  No, on these facts. The Supreme Court held that where the agreement itself is altered during the previous year so that the income which accrued and was received is the smaller amount, the larger figure never resulted as income at all, and a book entry cannot make it taxable. Income-tax is a levy on income; the Act fixes two points of time, accrual and receipt, but the substance is the income. The Court distinguished income actually received and later given up, which may still be taxed, from income that never resulted.
• CIT v Nandlal Gandalal Supreme CourtHelps taxpayer
  Our family business is run entirely outside India, but two coparceners are partners in Indian firms with family money. Does that make the family resident in India?
  No, on these facts. The Supreme Court held by a majority that a family is resident unless the control and management of its affairs is situated wholly outside the taxable territories, and that affairs there means affairs capable of being controlled and managed by the family as such. A partnership entered into by a coparcener with strangers is a contract between him and them, not between the family and them; neither partnership law nor Hindu law gives the family any controlling power over it. So the firms could not be affairs of the family and did not make it resident, even though the income from them belonged to the family. Hidayatullah J dissented.
• E.D. Sassoon and Company Ltd v CIT Supreme CourtCuts both ways
  I sold my managing agency part-way through the year. Is the year's commission split between me and the buyer, so that I am taxed on the months I actually worked?
  No. By a majority the Supreme Court answered the referred question — whether the managing agency commission was liable to be apportioned between the assignor and the assignee — in the negative. Under clause 2(d) of the agreements the commission was due yearly on 31 March and payable only after the shareholders passed the annual accounts, so the contract of service was entire and indivisible and nothing was payable for a broken period. Since no income had accrued to the Sassoons when they transferred the agencies, there was nothing to apportion. Jagannadhadas J dissented.
• Chainrup Sampatram v CIT Supreme CourtCuts both ways
  My closing stock is worth more than it cost me. Does the rise in value get taxed, and does it matter that the goods were lying outside the place where I trade?
  No to the first and no to the second. The Supreme Court held that valuing closing stock is only a step in working out the year's trading result, not a source of profit, so no 'notional profit' arises from the valuation and appreciation in unsold stock is not brought to charge — the rule is cost or market price, whichever is lower. But the Court also held that the source of business profits is the business and they accrue where the business is carried on. The silver lying at Bikaner was still the Calcutta firm's unsold stock, so the whole profit accrued at Calcutta and the exemption failed. The appeal was dismissed.
• CIT v Nokia Network OY High CourtHelps taxpayerNo later treatment found
  We supply telecom equipment with embedded software to Indian operators through our Indian subsidiary. Is the subsidiary our permanent establishment?
  No on the permanent establishment question; the software question was never decided. A wholly-owned Indian subsidiary is a separate legal entity, and Article 5(8) of the India-Finland treaty forbids treating it as a permanent establishment merely because it is a subsidiary: the enquiry is factual, governed by disposal and virtual projection, and on these facts the Revenue produced nothing to establish either a fixed place or a dependent agent permanent establishment. The Court did not hold that bundled software is part of a sale of goods rather than a licence. That question was conceded in the assessee's favour in the light of the Supreme Court's decision in Engineering Analysis Centre of Excellence, so this judgment is not authority on it; nor did the Court decide the taxability of offshore supplies as a separate question, treating that as settled by Ishikawajma-Harima.
• Sanjay Baweja v Dy CIT High CourtHelps taxpayerHigh Courts differ
  My employer paid me for the fall in value of options I never exercised. Is that a perquisite?
  No, on this decision. The Delhi High Court held that a one-time voluntary payment made to holders of unexercised stock options after a group disinvestment was not a perquisite under s.17(2)(vi), because the value of specified securities depends on the exercise of the option and no option had been exercised. The refusal of a nil-deduction certificate under s.197 was set aside.
• PCIT v IL & FS Energy Development Company Ltd High CourtHelps taxpayerSuperseded by amendment
  The officer relies on CBDT Circular 5/2014 to disallow under s.14A although I earned no exempt income at all in the year. Does the Circular carry it?
  For years before the Finance Act 2022 Explanation, no. The Delhi High Court held that Circular No. 5/2014 cannot override the express provisions of s.14A read with Rule 8D, because Rule 8D(1) speaks of income not forming part of total income 'for such previous year' — so if no exempt income was earned in the year, no disallowance arises. That position has since been altered prospectively by statute, and the entry must be read with that.
• T. Rajkumar v Union of India High CourtHelps departmentNo later treatment found
  Can Parliament override a tax treaty by notifying the other country as a notified jurisdictional area, and is section 94A constitutionally valid?
  The Madras High Court upheld section 94A(1) and dismissed all nine writ petitions, holding that the challenge to its constitutional validity was without merit and that the notification of 1 November 2013 specifying Cyprus as a notified jurisdictional area was equally unassailable. The Court reasoned that where a treaty partner fails to provide information, it is that partner and not section 94A which dilutes section 90(1)(c), and that the phrase 'any country or territory' in section 94A(1) cannot be read as excluding countries with which India has a treaty.
• National Petroleum Construction Company v DIT High CourtHelps taxpayer
  I am a UAE company that fabricates offshore platforms abroad and installs them in India. My installation ran under nine months with a long break in the middle. Do I have a permanent establishment here?
  No. The Delhi High Court held the UAE company had no permanent establishment in India for assessment years 2007-08 and 2008-09. Under Article 5(2)(h) of the India-UAE treaty the nine-month test looks to the period the enterprise is actually involved at the site; a long interruption when the assessee had no access to the site is excluded, and the installation activity lasted only from November 2006 to April 2007. The Indian consultant was an agent of independent status acting in its ordinary course of business, with no authority to conclude contracts, so it was no dependent agent permanent establishment. The assessment orders and the Tribunal's orders were set aside.
• Vodafone India Services P Ltd v Union of India High CourtHelps taxpayer
  We issued shares to our foreign parent at a premium the Transfer Pricing Officer says is too low. Can he tax the shortfall as income under the transfer pricing provisions?
  No. The Bombay High Court held that the issue of equity shares at a premium by an Indian company to its non-resident holding company is a capital account transaction that gives rise to no income, so Chapter X cannot be applied at all. Chapter X is a machinery provision for arriving at the arm's length price; the charge must be found in sections 4 and 5 and in one of the heads of income. There being no charge, express or implied, on the premium not received, the reference to the Transfer Pricing Officer, his order, the draft assessment order and the Dispute Resolution Panel's order were quashed as without jurisdiction.
• Commissioner of Income-tax v. Justice R.M. Datta (Calcutta High Court, 4 July 1989) — section 176(4) deems the receipt to be income but creates no further fiction bringing it under 'Profits and gains of business, profession or vocation', so arrears received after the profession ceased escape the charge High CourtHelps taxpayer
  I was an advocate on cash basis and stopped practising when I was appointed to the Bench. Fees for old work are still coming in. The Assessing Officer says section 176(4) makes them taxable. Is there an answer?
  There is, and this is it. The Calcutta High Court held that section 176(4) creates only two fictions — that the sum received after discontinuance is deemed to be the income of the recipient, and that it is charged to tax in the year of receipt — and does not create a third fiction deeming the receipt to be income of a business or profession carried on by the assessee in that year. Because the receipt is the fruit of professional activity it falls under the head 'Profits and gains of business, profession or vocation' and cannot be taken to the residuary head; and because the assessee carried on no profession in any part of the relevant previous year, it cannot be computed under sections 28 to 43A. The question referred was answered in the affirmative and in favour of the assessee.
• Ashok Kumar Pandey v ACIT ITATHelps department
  I am resident in both India and the US. Which country wins under the treaty tie-breaker?
  India, on these facts. A permanent home being available in both countries, the Tribunal went to the centre of vital interests and held that personal and economic relations taken together pointed to India — spouse and children here, and active involvement in an Indian company as against passive US holdings. The US-source income was accordingly taxable in India.
• ACIT v Nishant Kanodia ITATHelps taxpayer
  I left India to run my own business abroad, not for a job. Do I get the 182-day test?
  Yes. Explanation 1(a) to s.6(1) is not confined to salaried employment — leaving India to carry on business or a profession abroad falls within it. With a stay of 176 days in India, below 182, the assessee was a non-resident and the Revenue's appeal was dismissed.
• Ranjeet Singh v ITO, Ward-1(1), Bathinda ITATHelps taxpayer
  My land was taken under the National Highways Act, the award was announced in 2014 but the money reached me in 2015. The Assessing Officer says s.96 of the RFCTLARR Act does not apply. Is he right?
  The Tribunal held he was not, and deleted the addition. Where the award under s.3G of the National Highways Act, 1956 had been announced before 31 December 2014 but the compensation had not actually been paid by that date, the compensation falls to be paid in accordance with the First Schedule to the RFCTLARR Act, 2013, and is exempt under s.96 of that Act read with CBDT Circular No. 36/2016 dated 25 October 2016.
• CBDT Press Release 02.02.2020 on residence CBDT Circulars & InstructionsHelps taxpayerSuperseded by amendment
  I work in the Gulf and pay no tax there. Does the deemed residence rule tax my foreign salary?
  No. The Board clarified that the provision is an anti-abuse measure aimed at Indian citizens who shift their stay to a low or no-tax jurisdiction, not at bona fide workers abroad, and that income earned outside India is not taxed here unless it is derived from a business controlled in, or a profession set up in, India.
• Statutory position — place of effective management under section 6(3)(ii) from AY 2017-18, and the CBDT Circular 6/2017 guidelines CBDT Circulars & InstructionsCuts both ways
  A foreign company in my client's group is run largely from India. From when can it be treated as resident here, and what test does the department actually apply?
  From assessment year 2017-18, a company is resident in India if it is an Indian company or if its place of effective management in that year is in India — 'the place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made'. CBDT Circular No. 6 of 2017 dated 24 January 2017 lays down the guidelines: a company 'engaged in active business outside India' is presumed to have its POEM outside India if the majority of its board meetings are held outside India, and only a company failing that test goes through the two-stage enquiry of identifying who actually makes the key management and commercial decisions and then where those decisions are in fact made.
• Statutory position — s.6(2) and s.6(6)(b): an HUF is resident unless control and management is situated WHOLLY outside India, and the not-ordinarily-resident test looks to the manager CBDT Circulars & InstructionsCuts both ways
  The karta of my client's HUF has lived in Dubai for years and all the family's decisions are taken there, but one property is managed from India by his brother. The Assessing Officer says the HUF is resident in India. On what test?
  On the test in s.6(2): a Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case EXCEPT where during that year the control and management of its affairs is situated wholly outside India. The word that decides the case is "wholly". Any part of the control and management of the family's affairs being situated in India during the previous year makes the family resident. If the family is resident, s.6(6)(b) then asks whether it is "not ordinarily resident": it is, if its MANAGER has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for 729 days or less.
• Statutory position — s.5A: equal apportionment between spouses under the Portuguese Civil Code, and the one head of income it leaves alone CBDT Circulars & InstructionsCuts both ways
  We are a married couple in Goa governed by the communiao dos bens. The officer has assessed the whole of the rent and the business income on my husband. Is that right, and what happens to our salaries?
  It is not right. Section 5A applies where husband and wife are governed by the system of community of property known under the Portuguese Civil Code of 1860 as 'COMMUNIAO DOS BENS', in force in the State of Goa and in the Union territories of Dadra and Nagar Haveli and Daman and Diu. Sub-section (1) says that the income of the husband and of the wife under any head of income shall not be assessed as that of the community of property, whether treated as an association of persons or a body of individuals; that such income under each head of income other than under the head 'Salaries' shall be apportioned equally between the husband and the wife; and that the income so apportioned shall be included separately in the total income of each, the remaining provisions of the Act applying accordingly. Sub-section (2) carves salary out: where the husband or the wife has any income under the head 'Salaries', that income is to be included in the total income of the spouse who has actually earned it.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.