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Unit 2: Residential Status and Taxation

2.5.2 Meaning of Income ‘Accruing’ and ‘Arising’ Notes

Accrue refers to the right to receive income, whereas due refers to the right to enforce payment
of the same. For e.g. salary for work done in December will accrue throughout the month, day
to day, but will become due on the salary bill being passed on 31st December or 1st January.
Similarly, on Government securities, interest payable on specified dates arise during the period
of holding, day to day, but will become due for payment on the specified dates.

Example: Interest on Government securities is usually payable on specified dates, say on
1st January and 1st July. In all such cases, the interest would be said to accrue from 1st July to 31st
December and on 1st January, it will fall due for payment.
It must be noted that income which has been taxed on accrual basis cannot be assessed again on
receipt basis, as it will amount to double taxation. For example, when a loan to a director has
already been treated as dividend under section 2(22) (e) and later dividend is declared, distributed
and adjusted against the loan, the same cannot be treated as dividend income again.

With a view to removing difficulties and clarifying doubts, the taxation of income, provides that
an item of income accruing or arising outside India shall not be deemed to be received in India
merely because it is taken into account in a balance sheet prepared in India.
Further, once an item of income is included in the assessee total income and subjected to tax on
the ground of its accrual/deemed accrual or receipt, it cannot again be included in the person’s
total income and subjected to tax either in the same or in a subsequent year on the ground of its
receipt – whether actual or deemed.

2.5.3 Income Deemed to Accrue or Arise in India (Section 9)

Certain types of income are deemed to accrue or arise in India even though they may actually
accrue or arise outside India. The categories of income which are deemed to accrue or arise in
India are:
Any income accruing or arising to an assessee in any place outside India whether directly or
indirectly

Through or from any business connection in India,
Through or from any property in India,
Through or from any asset or source of income in India or
Through the transfer of a capital asset situated in India.

Did u know? The legislative intent of this clause relating to the transfer of a capital asset
situated in India is to cover incomes, which are accruing or arising, directly or indirectly
from a source in India. The section codifies the source rule of taxation, which signifies that
where a corporate structure is created to route funds, the actual gain or income arises only
in consequence of the investment made in the activity to which such gains are attributable
and not the mode through which such gains are realized.
This principle which supports the source country’s right to tax the gains derived from
offshore transactions where the value is attributable to the underlying assets, is recognized
internationally by several countries.

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