Tax deducted at source outside India from foreign dividends and interest income is not part of total income and thus, not assessable in the hands of the assessee under the Income-tax Act, 1961.

A.K. Mathur, Actg. C.J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the applicant/Revenue and the following question of law has been referred by the Tribunal for answer by this court, which reads as under :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that tax deducted at source outside India from foreign dividends and interest income was not part of total income and thus, not assessable in the hands of the assessee under the Income-tax Act, 1961 ?"

The facts giving rise to this case are that the assessee/non-applicants are co-heirs of the estate of the late Rashid Khan of Bhopal. As co-heirs, they had foreign income in the shape of dividends and interest. The tax at source was deducted from the above income and net amount was remitted to these assessees in India. The Income-tax Officer held that gross income, i.e., net income plus tax deducted at source was chargeable to income-tax. On appeal, in the cases of Begum Rashid, Mrs. Nilofarkhan and Smt. Mohabano Ali, the Assistant Commissioner rejected the appeals but the Commissioner of Income-tax (Appeals) in the appeals of Nadir Rashid and Yawar Rashid, accepted their claim and held that only the net amount received in India could be said to have accrued or arisen to them. The Revenue challenged the order of the Commissioner of Income-tax (Appeals) before the Tribunal and the Tribunal relying on the decision of the Kerala High Court in the case of CIT v. Y.N.S. Hobbs [1979] 116 ITR 20 and that of the Calcutta High Court in CIT v. Shaw Wallace and Co. Ltd. [1983] 143 ITR 207 held that under Section 5(1)(c) of the Income-tax Act, only the actual receipt can be included in the total income of the assessee and the income which can be deemed to accrue or arise outside India, is not liable to be included in the total income of the assessees under the above clause. Consequently, it was held that tax deducted at source outside India cannot be treated as part of the total income of the assessees. Hence, the application under Section 256(1) of the Income-tax Act was made by the Revenue for referring the aforesaid questions of law before this court for answer.

2. Before we examine the question in detail, it will be necessary to refer to the relevant provisions of law which have a bearing on the subject-matter of this reference. Section 5 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), which deals with the total income, reads as under ;

"Section 5. Scope of total income.--(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which -

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or

(c) accrues or arises to him outside India during such year :

Provided that, in the case of a person not ordinarily resident in India within the meaning of Sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year."

According to Section 5 of the Act, the total income of the assessee of the previous year who is a resident in India, includes all income from whatever source, i.e., which is received or deemed to be received in India in such year by or on behalf of such person ; or accrues or arises or is deemed to accrue or arise to him in India during such year or