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.
• 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.
• 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 taxpayerValidity unconfirmed
  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.
• 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 taxpayer
  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.
• 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 taxpayerValidity unconfirmed
  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.
• 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.
• 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 taxpayerValidity unconfirmed
  We supply telecom equipment with embedded software to Indian operators through our Indian subsidiary. Is the subsidiary our permanent establishment, and is the software royalty?
  No on both counts, on these facts. A wholly-owned Indian subsidiary is a separate legal entity that contracts in its own name, and without proof that a place was at the disposal of the foreign company it is not a fixed place permanent establishment; a liaison office doing advertising and similar work falls within the preparatory and auxiliary exclusion. Software supplied as an integral part of the equipment is part of the sale of goods and not a licence, so the consideration is not royalty, and offshore supply completed outside India produces no Indian income.
• 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.
• 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 taxpayerValidity unconfirmed
  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.
• 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.
• 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.

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.