three appeals are by department which pertain to assessment years 1976-77, 1978-79 and 1977-78 respectively. cross-objections have been filed by assessee for assessment years 1976-77 and 1978-79. For sake of convenience, they are disposed of by common order. 2. In department's appeals, main ground pertains to finding of Commissioner (Appeals) that no income is assessable in hands of assessee, non-resident company, for business carried on in India. few facts are necessary to make position clear. 3. assessee-company was doing business in India through its branch which was converted into Indian Company with effect from 1-1-1975. Under scheme of amalgamation of undertaking in India belonging to assessee, that is non-resident, with May & Backer (India) Ltd., Indian company, wholly owned by assessee, entire undertaking of assessee-company's branch in India was to be taken over by Indian company with effect from 1-1-1975, which was designated as appointed date. It was provided that with effect from 1-1-1975, assessee, i.e., parent non-resident company, shall be deemed to have been carrying on business activity of said undertaking for and on account of May & Baker (India) Ltd., until effective date, as defined in clause 16 of scheme. It was made clear in clause 4 of scheme that income, profits or losses in business carried on by assessee with effect from appointed date upto effective date shall be treated as income, profits or losses of Indian company. Clause 16 reads as follows: "This scheme, although operative from appointed date, shall take effect finally upon and from date on which aforesaid sanctions or approvals or orders shall be last obtained, which shall be effective date for purpose of this scheme." While appointed date was agreed date from which scheme was to be effective since it was necessary to obtain permission of High Court Court and of Controller of Capital Issues, effective date from which Indian company was to actually taken over charge of business and necessarily to be later and that effective date was actually in 1979 when High Court finally approved scheme. copy of order of High Court dated 13-6-1979 has been placed before us. High Court has approved scheme o f amalgamation with effect from, 1-1-1975 and with effect from that date, entire business and undertaking in India of transferor-company, i.e., assessee, including all its properties and assets disclosed in its audited Indian branch's balance sheet as on 31-12-1974, remained vested in Indian company. 4. ITO brought to tax income of assessee because parent company had supplied to Indian company certain drugs, etc., and certain amount of profit embedded therein. assessee's case in assessment year 1976-77 was that profit of those sales was 2.9 per cent only as per word 'ratios' certified by auditors. However, since profit on various items sold to Indian subsidiary and other parties in India was not given, ITO estimated profit mark up at 5 per cent and 50 per cent of profits were held attributable to operations in India and were brought to tax. 5. In assessment for assessment year 1977-78, profit was, however, estimated at 10 per cent and 50 per cent thereof were held to be attributable to operation in India. In this year, company had also made direct supplies to other Indian parties on which commission was allowed to Indian subsidiary company. ITO held that 5 per cent of value of supplies made to Indian parties directly would be assessable in India, 50 per cent of net income estimated on those operations at 10 per cent of turnover. In assessment year 1978-79, profit on goods sold to Indian subsidiary was taken at 10 per cent and 50 per cent thereof was held attributable to operations in India and was brought to tax. Similarly, in respect of sales made to various parties directly, income was estimated at 10 per and 50 per cent thereof was brought to tax in India. 6. company went in appeal before Commissioner (Appeals). Commissioner (Appeals) discussed matter threadbare in appellate order for assessment year 1977-78 and this order was followed in remaining two years. Commissioner (Appeals) went through details of articles supplied by assessee to Indian subsidiary which were mainly raw materials and some engineering materials. But, it was stated that engineering materials were supplied to India subsidiary which mainly raw materials and some engineering materials. But, it was stated that engineering materials were supplied to Indian company at cost. Commissioner (Appeals) went through correspondence between ITO and t h e assessee and also CBDT's Circular No. 23, dated 23-7-1960 [see TAXMANn's Direct Taxes Circulars, Vol. 1. 1985 edn., p. 36] and came to conclusion on facts of case, that transactions were on principal basis between assessee and Indian company; that in view of circular, no tax liability arose in respect of sales made to Indian subsidiary and to other parties in view of paragraph 3(2) (i) and (ii) of circular. sales to other parties were about Rs. 9. lakhs and commission on these sales was paid to Indian company. Therefore, nothing further was taxable. transactions between parties were at arm's length at prices which would be normally chargeable from other customers. Commissioner (Appeals), therefore, cancelled assessments in this regard. 7. department is aggrieved and has come up in appeal. We have heard learned departmental representative and also learned counsel for assessee. We have been taken through scheme of amalgamation, order o f High Court, correspondence between IAC and assessee- company and other evidence along with circular of CBDT. scheme of amalgamation is clear and unambiguous, and subject to approval of company judge and sanction or approval of Controller of Capital Issues, entire undertaking, assets and liabilities of assessee-company were to vest in May & Baker (India) Ltd., with effect from appointed date, i.e., 1-1-1975. From appointed date till effective date, which was bound to be later since approval of Court and of Controller of capital Issues had to be obtained, undertaking was to be carried on by assessee but on behalf of Indian company. No sooner High Court gave approval to scheme, it approved entire scheme and made it clear that entire undertaking vested in Indian company with effect from 1-1-1975, i.e., appointed date, and question of undertaking continuing in ownership of assessee after 1-1-1975 cannot, therefore, arise at all. reference to clause 16 to effective date is only because that date would be when, in fact, undertaking would stand transferred to Indian company after approval of High Court and that of Controller of Capital Issues had been obtained. It does not mean that till that date undertaking, with its assets and liabilities, profits or losses, would continue to belong to assessee. This is clear meaning of effective date and we are in doubt whatsoever that entire undertaking vested in Indian company with effect from 1-1-1975, and, therefore, as from that date onwards, it is Indian company which is taxable and not assessee-non-resident company. That Indian company has returned profits earned by it from 1-1-1975 onwards from this very undertaking is not disputed. Therefore, we uphold order of Commissioner (Appeals) in this regard. Our finding is also in line with decision of Bombay High Court in CIT v. Swastik Rubber Products Ltd. [1983] 140 ITR 304. 8. In spite of undertaking having been transferred to Indian company with effect from 1-1-1975, however, assessee could have continued to earn income from its dealings with Indian company and others and next question for decision is whether or not it earned any such income and, if so, what is extent thereof. Reliance has been placed on circular of CBDT, which has been referred to in detail by Commissioner (Appeals) in h i s order for assessment year 1977-78. assessee supplied raw materials, engineering materials, etc., to Indian company during years relevant to accounting periods and also supplied goods to other parties in India. contention of assessee was that so far as goods supplied to Indian company and other customers were concerned, orders were placed on them in England and they were supplying goods against valid import licences. sale proceeds were received in UK and property in goods passed outside Indian as documents of title were received in India duly endorsed in favour of respective Indian parties. Therefore, entire transactions took place outside India and no income accrued in India. It was also urged that transactions between assessee and foreign subsidiary were on principal to principal basis and Circular No. 23 dated 23-7-1969 made it clear that merely because sales were by parent company to subsidiary, it could not be assumed that transactions were not at arm's length. There is no factual challenge by department to finding of Commissioner (Appeals) that transaction were on principal to principal basis and were at arm's length, i.e., at prices which assessee-company charged from other customers. Therefore, no tax liability would arise to assessee-company on sales made to Indian subsidiary. So far as sales to outside parties are concerned, assessee-company having paid commission to Indian subsidiary at 5 per cent and 10 per cent on different types of goods exported and certified world profit ratio being 2,36, 9.69 and 5.23 per cent in respective three years, it would be reasonable to hold that entire margin of profit earned from those parties was paid to Indian subsidiary and, therefore, nothing was to be assessed in hands of assessee. We, therefore, uphold orders of Commissioner (Appeals) that no income was assessable in hands of assessee in respect of supplies made to Indian subsidiary and supplies made to third parties. In view of our finding on first ground, ground Nos. 2 and 3 pertaining to Commissioner (Appeals) entertaining assessee-company's ground of appeal against levy of interest under sections 139(8) and 215 of Income-tax Act, 1961 ('the Act') become redundant because there will be no interest required to be paid since only other income is from dividends on which tax is deducted at source. We, therefore, uphold order of Commissioner (Appeals) in this regard also. In result, department's appeals for all three years are dismissed. 9. There are two cross-objections by assessee-company in which contention raised is that both in assessment years 1976-77 and 1978-79, dividend income could not be taxed in hands of assessee, because having regard to provisions of Foreign Exchange Regulation Act, 1978 (the FERA) dividend incomes were not remitted to assessee-company in England and cannot, therefore, be brought to tax. contention is that they would be taxed only in year in which earnings are remitted to assessee-company in England. contention of assessee is that assessee which is non-resident, gets right to dividend only when Reserve Bank of India gives permission to remit same. dividend assessed in hands of assessee in these two years was remitted to assessee-company in accounting period relevant to assessment year 1982-83, but it was stated on enquiry that since dividend income had been brought to tax in two years under appeal, assessee-company did not return dividend income on basis of actual payment. learned counsel for assessee made statement at bar that assessee was prepared to assessed on this income in assessment year 1982-83. Developing his arguments, it was stated on behalf of assessee that declaration of dividend gave right to recover same to shareholder, that in fact, it gives rise to debt. But sections 9(1) (c), 19(1) (a) and (b) of FERA prohibit resident in India from creating or acknowledging debt to non-resident and assessee-company being non-resident, it cannot be paid dividend in Indian rupees. Reliance was placed on E. D. Sassoon & Co. Ltd., v. CIT [1954] [26 ITR 27 (SC), CIT v. Public Utilities Investment Trust Ltd. (No. 1) [1983] 143 ITR 236 (Bom). and J. Dalmia v. CIT [1964] 53 ITR 83 (SC) for proposition in support of claim made by assessee. On behalf of department reliance was placed on sections 5 and 8 of Act, for proposition that dividend income had to be assessed in year in which dividend is declared and, therefore, arguments that dividend income should be taxed only when it is actually paid in foreign currency to non- resident holds to ground. 10. We have considered rival contentions. assessee-company which is non-resident, received dividends from Indian company. authorities below have taxed same in years in which dividend was declared. Obviously, they applied section 8. assessee contends that, since amount of dividend cannot be remitted to and received by assessee unless RBI gives permission to remit same in pound sterling and that permission was not given in two years under appeal but in assessment year 1982-83, dividend income was not taxable in years in which it was declared. We have to decide whether this stand taken by assessee is correct. 11. Section 8(a) lays down that any dividend declared by company or distributed or paid by it within meaning of section 2(22) (a), (b), (c), (d) and (e) of Act shall be deemed to be income of previous year in which it is so declared, distributed or paid, as case may be. This section would, on face of it, apply to every declaration of dividend and revenue would, thus be correct in assessing it in assessment years 1976-77 and 1978-79. It is not disputed by counsel for assessee that declaration of dividend in annual general meeting gives rise to debt in favour of assessee which assessee was entitled to enforce. But argument is that since FERA bars any resident from creating or acknowledging debt to non-resident, except with approval of RBI. it should be held that no debt arose till RBI permitted Indian company to remit dividends in pounding sterling. 12. k reliance is placed on Bombay High Court ruling in Public Utilities Investment Trust Ltd. (No. 1)'s case (supra). We have carefully gone through said ruling and facts of case. That case related to finding under section 4A (c) of Indian Income-tax Act, 1922 that assessee was non-resident since its income from outside taxable territories exceeded its income in India. assessee-company based in UK and subsidiary of USA company had purchased debentures of Brazilian company. Interest was payable on debentures on 30th June and 31st December every year. Brazilian company was in involved circumstances and failed to pay interest up to 1949. Brazilian Government had also imposed exchange restrictions on remittance of pound sterling from 1946 to 1950 and these restrictions prevented conversion of Brazilian currency to that of another country. case of assessee-company was that (i) because of such restrictions and (ii) otherwise due to fact that Brazilian company was not possessed of pound sterling, interest due during 1950 could not be paid. deed of arrangement dated 20-4-1950 altering obligations was then entered into by which rate of interest was reduced and Brazilian company agreed to hand over all its surplus cash in pound sterling to Barclays Bank, London, to interest suspense account for payment of interest on debentures. interest due in 1950 was, thus, paid in 1951 and question arose whether that was income of assessee for 1951 or for question arose whether that was income of assessee for 1951 or for 1950. High Court held that it was income for 1951 for following reasons: (i) place of payment of interest agreed to was London in pound sterling. (ii) Where by reason of subsequent alteration of agreement or contract o r by reason of intervening supervening legislation, performance of contract in t h e agreed manner is rendered uncertain, original agreed due date for performance becomes irrelevant. In that case, altered agreed terms for payment, entered into on 20-4-1950 showed that interest payment had to be made by remittance by debtor company in pound sterling to credit of interest suspense account which was to be ownership of trustees of debenture trust deed. Up to 1950, payment was rendered impossible due to legislative restrictions on remittances in pound sterling. Therefore, though interest became due on 30-6-1950 and 31-12-1950 it was not payable in those dates due to supervening legislation. 13. We may point out that facts of case before us are entirely different. dividends declared by Indian Company are payable in rupees in India and not in pound sterling, while in case relied upon, interest was payable as per contract by Brazilian company in London and in pound sterling. This distinction on facts is sufficient to reject this plea. 14. We may also point out that FERA restrictions are temporary ones and they do not create moratorium of liability to pay dividends to non- residents. When this was pointed out on behalf of department before High Court; their Lordships observed on page 251 that these are k arguments but they held in favour of assessee on account of altered agreed terms for payment as recorded in agreement dated 20-4-1950. There are no such facts in case before us. Merely because assessee, who owns those shares is non-resident, and has to receive dividends in pound sterling with prior permission of RBI does not mean that on declaration of dividends, debt which arose, on fact and in law, in favour of every shareholder did not so arise only in case of assessee. Indeed, there are restrictions on remittances in foreign exchange in every developing country and even in developed countries, but that does not mean that effect of declaration of dividends is altered thereby. Section 9(1) (c) bars any person in India from acknowledging any debt so that right to receive payment is created or transferred in favour of any person resident outside India. This applies to voluntary acknowledgments but it would be preposterous to say that it bars Indian company from declaring dividend merely because some shares holders non-residents. 15. Security is defined in section 9(5) to include coupons or warrants representing dividends or interest. However, security is not mentioned in section 9(1) (c) but only in section 9(1) (g) which bars it from drawings, issuing or negotiating. Section 19(1) (a), (b) and (c) prohibit transfer of any security outside India, but this has no effect on question when dividends are taxable. 16. We, therefore, find no merit in arguments of Shri Dastur that dividend was assessable not in those years but in year 1982-83. right to dividends both accrued and arose on date of declaration. FERA does not override section 8 of 1961 Act. It only restricts right to remit dividends to England. That does not affect taxability of dividends from accrual to actual payment on receipt by assessee. We, therefore, dismiss cross-objections in both years. 17. In result, appeals filed by department and cross- objections filed by assessee are dismissed. *** INSPECTING ASSISTANT COMMISSIONER v. MAY & BAKER LTD.