PETITIONER:
COMMISSIONER OF INCOME TAX.KARNATAKA (CENTRAL), BANGALORE &
Vs.
RESPONDENT:
CHOWGULE & CO. LTD.
DATE OF JUDGMENT: 11/01/1996
BENCH:
HANSARIA B.L. (J)
RAY, G.N. (J)
CITATION:
1996 AIR 1058 1996 SCC (7) 148
JT 1996 (1) 375 1996 SCALE (1)204
ACT
HEADNOTE
JUDGMENT
JUDGMENT SEN, J.
Special leave granted.
The Commissioner of Income Tax has come up in appeal against the judgment of the Division Bench of the Bombay High Court, quashing an order passed by the Commissioner of Income Tax under Section 263 on March 30, 1989. The High Court was also of the view that clause (c) of Rule 115 of the Income Tax Rules, 1962 was in conflict of the substantive provisions of the Income Tax Act and was ultra vires the Act.
The controversy in this case is about the taxability of the amounts received by the assessee from foreign buyers during the period July 1,1982 to June 30, 1983 (assessment year 1984-85). The assessee offered for assessment the amounts received as price of the goods sold to foreign buyers as and when the amounts were received in course of the accounting period and was tawed accordingly. The amounts which were not actually received from the foreign buyers in course of the accounting period were converted into rupees on the basis of the exchange rate on the last day of the accounting year i.e. June 30, 1983 and was brought to tax accordingly for the assessment year 1984-85.
The Commissioner of Income Tax was of the view that the Income Tax Officer had wrongly assessed the quantum of income arising out of the export sales without applying Rule 115. Accordingly, he issued a notice under Section 263 upon the assessee proposing to revise the order of assessment. After giving an hearing to the assessee, the Commissioner of Income Tax passed the following order :-
"The last point is regarding
application of Rule 115 in respect of
earnings on export of iron ore to Japan.
The assessee has taken the income at the
rate at which the amount has actually
been credited by the band. It does not
apple the notional rate as required
under Rule 115. In his reply , the
assessee has contended that Rule 115(c)
can be applied only to income which is
expressed in foreign currency or nor
otherwise. I am afraid this
interpretation is unacceptable. I,
therefore, direct the assessing offer to
find out the actual rate of conversion
in respect of different remittances and
also the Telegraphic Transfer buying
rate at the end of the year and convert
the foreign exchange at the Telegraphic
Transfer buying rate on the last day of
the previous year as required by Rule
115, if that is more favourable to the
revenue, and bring the difference to
tax."
The order was challenged by the assessee by a writ petition in the Bombay High Court in which the vires of Rule 115(c) pf the Income Tax Rules, 1962 was also questioned. The facts of the case, as recorded in the High Court, are as under:-
"The petitioners in this case are a
company incorporated under the Companies
Act, 1956. The petitioners are exporting
iron ore to foreign countries, more
particularly to Japan, the petitioners
entered into agreements for sale of iron
ore with foreign buyers at certain
prices. As per the arrangements between
the petitioners, the foreign buyers
opened a letter of credit with a bank in
India. As soon as the iron ore is loaded
into the ship, the bill of lading is
signed by the master of the ship and the
petitioners raise invoices against the
foreign buyers for the price of the ore
shipped. Thereafter, these documents are
presented by the petitioners to
documents are presented by the
petitioners to their banker in India and
the petitioners receive payment through
the Indian bankers in rupees at the rate
of exchange prevailing then. If on the
date of closing of the financial year
any amount of sale proceeds remains
rupees at the rate of exchange
prevailing on the last date of the
financial year and is entered in the
books of the petitioner and accounted
for as their income."
The High Court further examined the manner in which payment was made to the assessee by the foreign buyers and observed:-
"To come to a right conclusion about
this question, we will have to see in
what manner the petitioners receive
income and at what point of time income
tax is leviable. In the point of time
income tax is leviable. In the present
case, the petitioners entered into
agreements for the sale of iron ore to
the foreign buyers at a certain price.
This price is agreed in advance. The
mode of payment is in foreign currency
through the Indian banker who is
authorised to give foreign exchange.
Under the contract, the payment is made
to the petitioners when the documents of
bill of lading are presented by the
petitioners through their bankers in
India. According to the petitioners, it
is at this point of time when the
petitioners receive money under the
contract that they are liable to be
taxed. The petitioners have further
stated that, during the previous
accounting year from July 1, 1982 to
June 30, 1983, the petitioners have paid
tax on the actual income they received
from the bank in Indian currency. It is
also contended on behalf of the
petitioners that, in fact, the
petitioners received the money on
various dates at the rate of foreign
exchange prevailing on the date of the
receipt of the money. The petitioners
have also supplied a chart showing
therein as to how, during the said
relevant period, they have received the
payment in Indian currency on each date
as per the value of the rate of foreign
exchange prevailing on the date of the
receipt. The petitioners, therefore,
contended that it is the actual money
which they have received during the said
period which is liable to be taxed under
the Act and not any notional income or
income which they have never received
and there is no possibility of realising
the same."
It has been contended on behalf of the appellants that the High Court failed to realise that the payments were made in foreign exchange. The contract specified that the payments will be made in foreign exchange. The price payable in the invoice was also expressed in foreign exchange. Therefore, the payment were all received by the assessee in foreign exchange. The Bank at the time of payment, might have converted the foreign exchange into rupees and paid the assessee in Indian currency. But, the fact remains that the assessee was entitled to receive the price of the goods sold in foreign exchange and, therefore, Rule 115 was clearly attracted and the amount of foreign exchange received by the assessee will have to be valued on the last day of the accounting period on the basis of the exchange rate prevalent on that day.
Rule 115 as it stood on the material date, was as under:-
"115. The rate of exchange for the
calculation of the value in rupees of
any income accruing or arising or deemed
to accrue or arise to the assessee in
foreign currency or arise to the
assessee in foreign currency shall be
the telegraphic transfer buying rate of
such currency as on the specified date.
Explanation : For the purposes of this
rule,-
(1) "telegraphic transfer buying rate"
shall have the same meaning as in the
Explanation to rule 26;
(2) "specified date" means-
(a) in respect of income chargeable
under the head "Salaries" the last day
of the month immediately preceding the
month in which the salary is due or is
paid in advance or in arrears;
(b) in respect of income chargeable
under the head "Interest on securities",
the last day of the month immediately
preceding the month in which the income
is due;
(c) in respect of income chargeable
under the heads "income chargeable under
the heads "Income from house property"
"Profits and gains of business or
profession" [not being income referred
to in clause (d)] and "Income from other
sources" (not being income by way of
dividends) the last day of the previous
year of the assessee;
(d)
(e)
(f)
This rule was later amended by insertion of clause (2) which, it is argued, is only classificatory in nature. Clause (2) which came into reflect from April 1, 1990 is as under:-
"Nothing contained in sub-rule (1) shall
apply in respect of income referred to
in clause (c) of the Explanation to sub-
rule (1) where such income is received
in, or brought into,India by the
assessee or no his behalf before the
specified date in accordance with the
provisions of the Foreign Exchange
Regulation Act, 1973 (46 of 1973)."
Rule 115 merely lays down that "for the calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or receive or deemed to be received by him or on his behalf in foreign currency",the rate of exchange shall be the telegraphic transfer buying rate of such currency as on the ’specified date’ will mean in respect of income chargeable under the heading of "Profits and gains of business or profession", the last day of the previous year of the assessee. This only means that if an assessee is assessable in respect of any income accruing or arising or deemed to have accrued or arisen in foreign currency or has received or deemed to have received income in foreign currency, then such foreign currency shall be converted into rupees nationally at the telegraphic transfer buying rate of the assessee. If on the last day of the previous year, the assessee does not have any foreign currency in his hand or the assessee is not entitled to receive any foreign currency, then there is no question of conversion of such foreign currency into rupees. It is only the foreign currency which will have to be converted into rupees. But, if the foreign currency received by an assessee has been converted into rupees before the specified date, question of application of Rule 115 does not arise. Rule 115 does not lay down that all foreign currencies received by an assessee will be converted into rupees only on the last day of the accounting period. Rule 115 only fixes the rate of conversion of foreign currency. If there is no foreign currency to convert on the last day of accounting period, then no question of invoking Rule 115 will arise. The assessee in this case is agreeable to have the outstanding amount of foreign currency payable to him at the rate of exchange prevalent on the last day of the previous year of the assessee. But, this rule cannot apply to the amounts received by the assessee in course of the accounting period in rupees. Clause (2), which was introduced on April 1, 1990, is really classificatory and does not bring about any change in Rule 115.
We are of the view that the High Court was clearly in error in holding that Rule 115 was ultra vires the substantive provisions of the Income Tax Act, 1961. We are also of the view that the High Court has wrongly construed this rule. The rule fixes the rate of exchange for conversion into rupees of income held in foreign currency at the end of the of the accounting period. This rule can only apply if any income in foreign currency has to be converted for the purpose of computing total income for any accounting period. But, if in course of the accounting period the conversion has already talent place, then there is no question of converting into rupees any income held in foreign currency.
The facts of the case, as stated by the Hugh Court, also makes it clear that the assessee from time to time had exported goods. Price was paid by the foreign buyers through an Indian Bank. The Indian, on behalf of foreign buyers, opened letters of credit. The bells of lading, invoices and other documents were presented by the assessee through their Bank to the Bank of the foreign buyers. The amounts receivable by the assessee were credited in their account by their Bank in rupees. The entire sum received by the assessee was offered for assessment and was duly assessed. We fail to see how the Commissioner of Income Tax came to the conclusion that the assessment was erroneous and prejudicial to the interest of the revenue. In the facts of this case, there cannot be any question of invoking Rule 115, The sale proceeds of the goods exported by the assessee were credited to their bank account in Indian rupees. There is no dispute that the amounts which were outstanding and receivable by the assessee on the last day of the accounting year from the foreign buyers had to be converted into Indian rupees at the rate of exchange prevalent on the last day of the accounting year.
In the circumstances, we hold that the order under Section 263 passed by the Commissioner of Income Tax was rightly quashed by the High Court, But, we also hold that the High Court was in error in striking down Rule 115 of the Income Tax Rules.
The appeal is disposed of accordingly. There will be no order as to costs.