(a) Income-tax--

----Income---Income deemed to accrue or arise in India---Income for services rendered in India---Law applicable---Effect of Explanation added to S.9(1)(ii) with effect from 1-4-1979---Explanation does. not have retrospective effect---Not applicable for assessment year 1977-78---Indian Income Tax Act, 1961, S.9.

An Explanation was added to section 9(1)(ii) of the Income Tax Act, 1961 with effect from April 1, 1979. It declares that income of the nature referred to in that clause payable for service rendered in India should be regarded as income earned in India. The Explanation cannot be said to be merely declaratory and it cannot apply to a period anterior to April 1, 1979. Before the insertion of the Explanation by the Finance Act, 1983, the words "earned in India" in section 9(1)(ii) must mean "arising or accruing in India". If the income does not accrue in Indian clause (ii) would not apply even though such income might have been derived from services rendered in India.

CIT v. S.R. Patron (1992) 193 ITR 49 (Guj.) fol.

Held, also that the Tribunal was right in law in not treating the housing and motor car expenses of the assessee as perquisites.

CIT v. S. G. Pgnatale (1980) 124 ITR 391 (Guj.) fol.

Alessandro Constantini v. CIT (1997) 226 ITR 883 (Guj) ref.

(b) Income-tax--

----Salary---Perquisites---Housing and motor car expenses cannot be treated as perquisites---Indian Income Tax Act, 1961.

Mihir Joshi and Manish R. Bhatt for the Commissioner,

Manish J. Shah and J.P. Shah for the Assessee.

JUDGMENT

C. K. THAKKAR, J.---The following two questions are referred for our consideration:

"(1). Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the remittance of Rs.1,47,750 was trot liable to be included in the income of the assessee under section 9 or under section 16 of the Income Tax Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in not treating .the housing and motor car expenses of the assessee as. perquisites?"

Mr. Shah, the learned Advocate for the assessee, submitted that so far as the first question is concerned, it is answered in favour of the assessee by this Court in Alessandro Constantini v. CIT (1997) 226 ITR 883. It is not disputed that the point is covered by a Division Bench in the above case.

Mr. Joshi, for the Revenue, however, submitted that the attention of the Court was not invited to Explanation added to section 9(1)(ii) of the Income Tax Act, 1961 ("the Act"), which was added by the Finance Act, 1983 with effect from April 1, 1979. The said Explanation reads as under:

"Explanation.---For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for service rendered in India shall be regarded as income earned in India."

Mr. Joshi submitted that the Explanation specifically stated that for the removal of doubts, it was declared that income of the nature referred to in that clause payable for service rendered in India should be regarded as income earned in India. Inasmuch as the Explanation was "clarificatory" in nature and for the purpose of "removal of doubts" it was added, it would have retrospective effect and though in the instant case, the Court is concerned with the assessment year 1977-78, the Explanation will have to be read even in respect of that assessment year. If it is so, the reference must be decided in the affirmative, i.e., in favour of the Revenue and. against the assessee.

Almost in similar, circumstances, the question came up for consideration before the High Court of Kerala in CIT v. S. R. Patton (1992) 193 ITR 49. There also, it was contended on behalf of the Revenue that as the Explanation was clarificatory, it should be given effect even prior to the date on which it was inserted with effect from April 1, 1979. The said argument was, however, negatived by the High Court of Kerala, observing that the Explanation cannot be said to be merely declaratory and it cannot apply to a period anterior to April 1, 1979.

This Court in CIT v. S. G. Pgnatale (1980) 124 ITR 391, held before the insertion of the Explanation by the Finance Act, 1983, that the words, "earned in India" in section 9(1)(ii) must mean "arising or accruing in India". If the income does not accrue in India, clause (ii) would not apply even though such income might have been derived from services rendered in India.

Then the Explanation came to be added by the Finance Act,. which was given effect from April 1, 1979. Dealing with the decision of this Court in S.G. Pgnatale's case (1980) 124 ITR 391 and the Explanation, the High Court of Kerala (see (1992) 193 ITR 49 observed (page 56):

"It is evident that the Gujarat High Court did not accept the views of the tax book writes regarding the scope of section 9(1)(ii) of the Act as it stood, before the addition of the Explanation. It was, perhaps, due to the above controversy regarding the scope of section 9(1)(ii) of the Act that the Legislature intervened and added the Explanation to section 9(1)(ii) of the Act, with effect from April 1, 1979. In the circumstances, the purpose behind the addition of the Explanation was only to clarify and settle the controversy. The Explanation was to have effect only from April 1, 1979. We are, therefore, of the view that the Explanation to section 9 1 ii of the Act cannot be considered to be declaratory nor can it apply to any period anterior to April 1, 1979. (emphasis supplied)."

We are in agreement with the view taken by the High Court of Kerala.

In view of the above legal position and the decision of the Kerala High Court, question No. 1 must be decided in the negative (sic), i.e. against the Revenue and in favour of the assessee.

So far as the second question is concerned, it is covered by the decision in S.G. Pgnatale's case (1980) 124 ITR 391 (Guj.), reiterated in Income-tax Reference No.102 of 1988, referred to in Alessandro Constantini's case (1997) 226 ITR 883 (Guj). The second question, therefore, must be decided in the negative (sic), i.e., against the Revenue and in favour of the assessee.

For the foregoing reasons, both questions Nos. 1 and 2 are answered in the negative, i.e., against the Revenue and in favour of the assessee. The reference is, accordingly, disposed of in the facts and circumstances of the case. No order as to costs.

M.B.A./18/FC???????????????????????????????????????????????????????????????????????????????????? Reference answered.