Commissioner of Income Tax vs E. R. Squibb and Sons Inc.

Sakhare, J.

By this reference u/s 256(1) of the Income Tax Act, 1961, (hereinafter referred to as ''the Act''), the Tribunal, at the instance of the revenue, has referred the following question of law for opinion of this court.

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the capital gains should be taxed at Rs. 42,687 only as against Rs. 4,80,000 computed by the Inspecting Assistant Commissioner (Assessment) ?".

The assessee is a non-resident company. The relevant assessment year is 1979-80.

On 19-2-1968, the assessee acquired 3,600 shares of Synthetic Ltd. (an Indian company), in United States currency at the face value of Rs. 1,000. On 21-4-1978, the assessee sold 600 shares to Prion Chemicals & Detergent (P.) Ltd. The sale proceeds were received by the assessee in Indian-currency and remitted to United States in foreign-currency.

Before the Income Tax Officer, the assessee disclosed in its return an income in the sum of 5084 U.S. $ as taxable capital gain and on the basis of rule 115 of the Income Tax Rules, 1962 (hereinafter referred to as ''the Rules'') after conversion of foreign currency into Indian currency arrived at a figure of Rs. 42,447 as the capital gain. As per the assessee, the cost of acquisition of 600 shares of Synthetic Ltd. was at the rate of U.S.$ 209.8647 per share. Similar conversion rate was applied by the assessee in respect of the receipt of the sale consideration. The Income Tax Officer overruled the assessee''s claim by holding that the capital gain arises to the assessee immediately on the sale of shares in India, the cost of acquisition of 600 shares was Rs. 6 lakhs, and the sale consideration as approved by the Reserve Bank of India by its letter dated 15-4-1978 was at the rate of Rs. 1,800 per share. On this basis, the Income Tax Officer assessed Rs. 4,85,000 as the capital gain. In appeal filed by the assessee, the Commissioner (Appeals) held that even though cost of acquisition of shares was in the foreign currency, the sale proceeds were received in Indian currency and subsequently remitted to the assessee in foreign currency. The appellate authority held that while computing the capital gain the assessee will not be eligible to the benefit of rule 115. The Tribunal allowed the assessee''s appeal by holding that rule 115 will be applicable to the assessee''s case and the assessee''s claim that the capital is only Rs. 42,687 is correct. The Tribunal in its judgment has observed that the assessee has entered the transaction in its books of account in US currency; the assessee has sold the shares to another non-resident company: the price was fixed in Indian currency with the approval of the RBI, but the assessee-company received monies duly converted into Dollars, therefore, the assessee-company is entitled to conversion rate as per rule 115.

On 19-2-1968, the assessee acquired 3,600 shares of Synthetic Ltd. at the value of Rs. 1,000 per share with prior approval of the Reserve Bank of India. On 21-4-1978, the assessee sold 600 shares to Prion Chemicals & Detergent (P) Ltd. another non-resident company. On 15-4-1978, the Reserve Bank of India granted approval to the said sale at the rate of Rs. 1,800 per share. As observed by the authorities, the transaction was in Indian-currency, the sale proceeds were received by the assessee in Indian currency and subsequently converted into US currency and remitted to the assessee. The question in this case is, whether on these facts the benefit of rule 115 can be made available to the assessee. The question is no more res integra. This court in the case of Asbestos Cement Ltd. Vs. Commissioner of Income Tax, has held that in such type of transactions benefit of rule 115 cannot be made available to the assessee. In the said case, the assessee a non-resident company, acquired 1,50,000 shares of an Indian-company at the rate of Rs. 8 per share. It sold the said shares to the Life Insurance Corporation of India and the Unit Trust of India at Rs. 22 per share. The assessee worked out the capital gains by converting the cost of acquisition of the shares into pound-sterling at the then prevailing exchange rate and also by converting the sale price of the shares in pound-sterling at the rate prevailing at the time of transfer. This court held that the place where the assessee resides or the currency in which the money was deposited in the bank for the purpose of purchase, etc., were not relevant factors for determining the income arising from the transactions, as the cost of acquisition and consideration for transfer, etc. were all expressed in Indian rupees. This court found that the transactions of acquisition and sale of shares took place in India in Indian rupees. In these circumstances, this court held that the question of converting the cost of acquisition and sale price into foreign currency at the rates prevailing at the relevant time, and then converting the same into Indian rupees to find out the amount chargeable to Income Tax under the head Capital gains, did not arise. This court in the case of Commissioner of Income Tax Vs. Pfizer Corporation, considered the case of the assessee who received the dividends declared in India. In this case, the assessee, a non-resident company, was a shareholder of an Indian company which was its subsidiary. The assessee received net dividend in India amounting to Rs. 72,30,000. This amount was remitted to the assessee in the USA at the then prevailing rate of exchange and the assessee received US$ 9,55,979.91. The assessee claimed that the amount which was received in Dollars should be converted at the rate of Rs. 7.50 per Dollar by application of rule 115 and the amount, thus, arrived at may be considered for the purpose of taxation in India as the income of the assessee from dividends. By overruling the assessees submission, this court held that the income from the dividend accrued to the assessee the moment it was declared by the Indian company and that being in terms of Indian rupees rule 115 had no application.

On behalf of the assessee reliance was placed on the judgment of the Supreme Court in the case of Commissioner of Income Tax, Karnataka (Central), Bangalore and Others Vs. Chowgule and Co. Ltd., to contend that rule 115 must be made applicable to the present case. We have carefully considered the submission advanced by the assessee, rule 115 and the decision of the Supreme Court referred to above but we are unable to accept the submission of the assessee. The decision of the Supreme Court is not applicable to the facts of the present case. The assessee''s case is squarely covered by the decisions of this court in Asbestos Cement Ltd. Vs. Commissioner of Income Tax, and Commissioner of Income Tax Vs. Pfizer Corporation, .

The income accrued to the assessee when the sale took place in India in Indian currency. Therefore, while computing the capital gain one has to reduce the cost of shares from the sale proceeds in Indian currency. This is not a case for application of rule 115 as the income earned by the assessee was in Indian currency and the said amount was subsequently converted into US Dollars. The price was fixed in Indian currency with the approval of the Reserve Bank of India. The approval granted by the RBI was for a transaction in Indian currency. Thus, we are of the opinion that the Income Tax Officer and the Commissioner (Appeals) were right in overruling the assessee''s submission for application of rule 115 and the Tribunal committed an error in accepting the assessee''s submission and applying rule 115 to the present case.

In the result, we answer the question referred to us in the negative, i.e., against the assessee and in favour of the revenue.

Reference disposed of accordingly, with no costs.