SMT. SUMANA BANDYOPADHYAY & ANR. vs THE DEPUTY DIRECTOR OF INCOME TAX, (INTERNATIONAL TAXATION) 3(1)

The appellants are legal heirs of the original assessee, who passed

away intestate on 10th April 2013. The assessee was a marine

engineer and the subject of dispute of this appeal is taxability of a

substantial portion of his income earned during the previous year

relevant to the assessment year 2010-11. The total sum involved is

Rs.14,79,598/-, and this was earned by the appellant as salary from

two concerns, Great Offshore Limited and Bibby Ship Management

(Singapore) Pte. Ltd. The appellant in his return had declared total

income of Rs.3,95,099/-. The aforesaid sum was added to his disclosed income in scrutiny assessment. Admitted position is that

during that year, the assessee had the status of non-resident under

Section 6 of the Income Tax Act, 1961. The assessee had received the

said sum from his two employers in a Non-Resident (external) bank

account, commonly referred to NRE account.

The appeal of the assessee against the aforesaid order failed before the

Commissioner of Income Tax and the Income Tax Appellate Tribunal

also sustained the finding of the Assessing Officer, rejecting

contention of the assessee that the said income was exempted, having

been received from outside India in foreign currency. The basic

reasoning of the Revenue for including the aforesaid sum to income

chargeable to tax was that the said sum was received by him in the

NRE account directly from his employers and this constituted receipt

of the said sum in India. Revenue''s stand is that the said sum

attracts Section 5(2)(a) of the Act.

We had admitted the appeal on 11th July 2017 on the following

question:-

"Whether on the facts and in the circumstances

of the case and in law, income by way of salary

which became due and has accrued to the

assessee, a non-resident, for services rendered

outside India and which is not chargeable to tax in India on the "due" or "accrual" basis, can be

said to be chargeable to tax on the "receipt"

basis merely because the foreign employers, on

the instructions of the assessee, have remitted a

part of amount of salary to the assessee''s NRE

bank account in India?"

This judgment is assailed before us by Mr. Khaitan, learned Senior

Counsel appearing on behalf of the appellant. His submission is that

income of the assessee constituted earning outside India while the

assessee was an NRI and mere receipt of the said sum in the

assessee''s NRE account would not subject it to tax under the 1961

Act. He has relied on a Bench decision of the Karnataka High Court

Director of Income-tax (International Taxation) Vs. Prahlad

Vijendra Rao (IT Appeal No. 833 of 2009) on this point. In this

appeal, it was observed and held:-

"6.Having heard the learned advocates

appearing for the parties and after perusing the

orders passed by the authorities and after

having given our anxious consideration to the

contentions raised, we are of the considered

view that there is no substantial question of law

involved in this appeal for being formulated and

the adjudicated for the following reasons: (a) The revenue does not dispute that assessee

had worked as a Chief Engineer on the board of

a ship bebnging to his employer "M/s. Live Stock

Transport & Trading Company, Kuwait and

during the relevant period the assesses had

stayed outside India for a period of 225 days

and the salary that was earned by him was on

account of the work discharged by him on board

during the said period which is outside the

shores of India.

b) The CIT (A) has placed reliance in the case of

CIT Vs. Avtar Singh Wadhwan [2001] 247 ITR

260 (Bom) wherein it has been held that salary

received by the non resilient marine engineer for

services rendered by him on a foreign going

Indian ship which mainly remained away from

the Indian coast during the relevant accounting

year accrued outside India and was not taxable

in India. While answering the question of law

there under with reference to Section 9(1)(Xii) in

the said case it has also been held that the

salary which is earned in India will alone be

regarded as income arising in India and not otherwise. The principles laid down in the said

case are squarely applicable to the facts of

present case also.

c) The criteria of applying the definition of

Section 5(2)(b) would be such income which is

earned in India for the services rendered in

India and not otherwise.

d) Under section 15 of Act even on accrual basis

salary income is taxable i.e., it becomes taxable

irrespective of the fact whether it is actually

received or not only when services rendered in

India it becomes taxable by implication.

However, if services are rendered outside India

such income would not be taxable in India."

As regards the legal position in a similar situation, clarification has

been given by the Ministry of Finance on 11th April 2017 under

Circular No. 13/2017. This Circular specifies:-

"Subject: Clarification regarding liability to

income-tax in India for a non-resident seafarer

receiving remuneration in NRE (Non Resident

External) account maintained with an Indian

Bank. Representations have been received in the

Board that income by way of salary, received by

non-resident seafarers, for services rendered

outside India on-board foreign ships, are being

subjected to tax in India for the reason that the

salary has been received by the seafarer into

the NRE bank account maintained in India by

the seafarer.

The matter has been examined in the Board

Section 5(2)(a) of the Income-tax Act provides

that only such income of a non-resident shall be

subjected to tax in India that is either received or

is deemed to be received in India. It is hereby

clarified that salary accrued to a non-resident

seafarer for services rendered outside India on a

foreign ship shall not be included in the total

income merely because the said salary has been

credited in the NRE account maintained with an

Indian bank by the seafarer."

We concur with the ratio of the decision of the Karnataka High Court

and in our opinion the interpretation be given to sub Section (b) of

Section 5(2) of the Act would also apply to Section 5(2)(a) of the Act.

The Circular is clarificatory in nature and is applicable for construing the aforesaid provision for the relevant assessment year. In our

opinion the authorities under the Income Tax Act did not properly

apply the provisions of law to the case of the assessee. We are of the

view that the Assessing Officer was wrong in adding the aforesaid sum

to the income chargeable to tax of the assessee for the relevant

assessment year. We accordingly allow the appeal and answer the

question framed by us in favour of the assessee.

Urgent Photostat certified copy be given to the parties expeditiously, if

applied for.