When the widow of a merchant navy officer challenged a court ruling that slashed her compensation by treating part of her husband’s salary as taxable in India, she set in motion a case that has now reached the Supreme Court—and could decide the tax fate of thousands who earn abroad but receive their income into Indian banks.
The dispute stems from an appeal against a ruling by the Punjab & Haryana High Court, which upheld the Motor Accident Claims Tribunal’s (MACT) decision in the compensation case. While calculating damages for the officer’s death, the MACT deducted 30% of his monthly salary as income tax liability. His widow contested that deduction, bringing the matter before the Supreme Court.
The issue before the top court extends beyond seafarers, touching anyone who earns income overseas but has it credited directly to an Indian bank account for the first time.
Taxation on ‘receipt of income’
The Supreme Court has previously ruled—in cases such as Diwan Bahadur S.L. Mathias and Raghava Reddi & Anr—that income received in India is taxable, whether it was earned domestically or abroad. The key principle: once income is received in India, its place of origin becomes irrelevant.
But in another case of Laxmipat Singhania, the top court held that if income is taxable at the time of accrual, it cannot later be ignored and taxed only when physically received.
Remittance vs receipt
A critical distinction lies between receipt and remittance. Income is deemed “received” only when it first comes under the control of the person entitled to it. Later transfers of the same income are considered remittances, not fresh receipts, and don’t trigger new taxation.
For example, if a non-resident freelancer earns $1,000 from a client in the US and deposits it in a US bank account, the later transfer of that money to an non-resident external (NRE) account in India isn’t taxable, since it’s a remittance, not new income.
Ongoing uncertainty
Recent rulings by Indian courts and tribunals have reinforced this view, holding that income earned abroad, and not taxable in India at the time it accrues, cannot suddenly become taxable simply because it is credited to an Indian bank account.
India’s Central Board of Direct Taxes (CBDT), in Circular No. 13/2017, has also clarified that salary accrued to a non-resident seafarer for services rendered outside India on a foreign-going ship (whether under an Indian or foreign flag) isn’t taxable merely because it is credited to the seafarer’s NRE account in an Indian bank.
Still, in my view, rulings that exclude such income from taxation on a receipt basis may not hold before the Supreme Court, given its established jurisprudence. Taxation across different heads, including salaries, cannot be interpreted in a way that renders the rules around “receipt in India” redundant by limiting taxability only to cases where income also accrues or arises in Indian territory.
Reliance on CBDT’s circular must also be cautious. The Supreme Court’s constitutional bench, and more recently the Calcutta High Court, have held that circulars contrary to the law carry no binding legal force.
A ray of hope: Tax treaty relief
One potential safeguard for taxpayers lies in double taxation treaties. Under provisions of an applicable tax treaty between India and another jurisdiction, the right to tax income may be allocated exclusively to the foreign jurisdiction. In such cases, the income wouldn’t be taxable in India, provided the treaty conditions are met.
To claim this benefit, the taxpayer must submit required documents—including a valid Tax Residency Certificate (TRC), Form 10F where applicable, and any other supporting evidence, to the payer or employer.
Ashish Karundia is founder of CA firm Ashish Karundia & Co., Chartered Accountants.
