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Judgment
K.S. Puttaswamy, J.—As the questions that arise for determination in these cases are interconnected, we propose to dispose of them by a common order.
IT Reference Case No. 12 of 1975: In this reference made u/s 256(1) of the income tax Act of 1961 (''the Act'') the Tribunal, Bangalore at the instance of the assessee, has referred the following question of law for the opinion of this Court:
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of capital gains and dividends received by the assessee in the U.K. should be converted into rupees on the basis of the exchange rate prevailing as on the date when each capital gain arose and each dividend was received and not on the basis of the exchange rate prevailing as on the last day of the accounting year for the assessment year 1968-69?
1.2 Writ Petition No. 2731 of 1979 : In this petition under article 226 of the Constitution of India, the assessee has challenged rule 115(b) of the income tax Rules, 1962 (''the Rules'') as ultra vires of the Act.
1.3. But, in order to appreciate the question referred to us and raised in the writ petition, it is first necessary to notice the facts that are not in dispute.
During the previous year ended on 31-3-1968, corresponding to the assessment year 1968-69, the assessee, a British subject but a resident Indian sold on different dates in the United Kingdom (UK) many of them prior to 19-11-1967 and the remaining thereafter but all of them prior to 31-3-1968, certain shares and securities held by him. During the same period, the assessee also received dividends from UK prior to 19-11-1967 and thereafter also, but all of them prior to 31-3-1969.
Prior to 18-11-1977, the official exchange rate between pound sterling of UK and the Indian rupee was 1 : 21. On 18-11-1967, UK devalued its pound sterling and, therefore, the official exchange rate on and from 19-11-1967 between pound sterling and the rupee was fixed at 1 : 18.
In his return filed before the ITO, Chickmagalur for the assessment year 1968-69, the assessee claimed that capital gains accrued from the sale of shares and securities in UK including dividends from UK should be computed at the official exchange rate prevailing as on 31-3-1968 and not as on the very dates they were received, arose or accrued either in UK or in India. On 28-1-1971 (Annexure-A in IT Reference Case No. 12 of 1975), the ITO completed his assessment rejecting the said claim with which only we are concerned in these cases for these reasons:
The above contention is rather fallacious and cannot be accepted because the investments made by the assessee, surplus on realisation of which have to be treated as capital gains, is not a composite one so that it could be said that only after all the investments were disposed, the profit or gains could be arrived at. Further, the profit accrues and arises at the time of each sale and at the time of each transaction and, therefore, the capital gains have to be evaluated at the rate of exchange prevailing at the time of each sale and not at the end of the last sale. The defect in the argument of the assessee could also be seen from the fact that the assessee must be Laving still some foreign investments to be disposed and the profit and loss cannot be taken as per the rate of exchange prevalent on the date on which the last of those investments might be sold, perhaps, after some years. In the circumstances, the contention of the assessee is rejected and the capital gains would be taken at the figures at which they were originally shown in the return of income.
For the same reasons UK dividends will be taken by adopting the conversion rate prevailing at the time of each receipt, UK dividends will further be taken at the gross figure and not at the net figure as shown by the assessee for the reasons stated in the assessment order for 1967-68.
In the first appeal filed by the assessee, the AAC by his order dated 6-7-1972 (Annexure-B in IT Reference Case No. 12 of 1975) concurred with the ITO. In a second appeal filed by the assessee, the Tribunal on 11-6-1973 has affirmed those orders but for a different reason and that is this:
But, in any case, the case is clearly governed by the provisions of rule 115(b), which are reproduced hereinabove. On a reading of the above rule, in our opinion, there can be no doubt that the varying exchange rates have to be applied to the different items of income or profit or gains having regard to the date on which such income accrued or arose to an assessee in UK.
Hence, this reference.
In sustaining the orders of the AAC and the ITO, the Tribunal for the first time relied on rule 115(b) and went so far as to hold that the same concluded the controversy. The assessee has challenged the vires of that rule on a number of grounds. But, at the hearing, the ground that the rule was ultra vires of the parent Act was alone pressed.
Shri K.P. Kumar, the learned advocate appeared for the assessee. Shri K. Srinivasan, the learned senior standing counsel for the income tax Department assisted by Shri H. Raghavendra Rao, the learned junior standing counsel appeared for the revenue.
Shri K.P. Kumar has urged that the official exchange rate between the pound sterling and the rupee prevailing as on 31-3-1968, that being the last day for computation of total income for that accounting year or the following assessment year should alone be the basis and not the different rates that prevailed on the dates of receipts and rule 115 providing to the contrary was ultra vires of the Act.
Shri K. Srinivasan has urged that the official exchange rate prevailing as on the dates of receipts of capital gains and dividends should alone be the basis for computation under the Act and that rule 115 that only recognised the same, as a fact, was not ultra vires of the Act.
9.1. Admittedly, the sale of shares and securities of the assessee were in UK and were realised there in pound sterling on different dates and there was a devaluation on pound sterling on 18-11-1967 and the official exchange rate between the two currencies stood altered thereafter are not-in dispute. This is also true of the dividends received by the assessee during the same period. When this is so, without anything more, the conversion must only be with reference to the date of actual receipt and cannot normally be anything else. If it is otherwise, it would be somewhat illogical and even divorced from the realities and the factual situation. This will be too apparent if there was an appreciation in the UK currency and devaluation in the Indian currency or vice versa also. We are of the view that on this simple common sense economic approach, the answer to the question must be found against the assessee.
9.2. Whether this general and common sense approach to the problem is in any way altered by the language of the Act is the short and interesting question that calls for our examination. But, in determining the same, it is necessary to bear in mind the oft-quoted classical passage of Rowlatt, J. in Cape Brandy Syndicate v. IRC [1921] 1 K.B. 64, p. 71 in construing a taxation provision and other well settled rules of construction of statutes that are noticed by the Full Bench of this Court in C. Arunachalam v. CIT [1984] 2 ILR 1387 (Kar.) at paragraph No. 11.
Chapter 1V-E of the Act ''Capital Gains'' deals with the chargeability of capital gains and the computations to be made in deter mining the chargeability.
Section 45 of the Act is the charging section for capital gains. Section 48 of the Act deals with the mode of computations and deductions of capital gains. Both these sections that are material read, thus:
45.(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54, 54B, 54D, 54E and 54F, be chargeable to income tax under the head ''Capital gains'', and shall be deemed to be the income of the previous year in which the transfer took place.
(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset."
"48. The income chargeable under the head ''Capital gains'' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.
The chargeability of income for ''capital gains'' is with reference to the full value of the consideration received or accruing as a result of the transfer of the capital deducting the expenditure incurred thereon. The receipt charged to tax for ''capital gains'' is the very receipt. The aggregation of all receipts as on the last day of the accounting year does not create any incongruity or antithesis in the chargeability of the receipt. What really happens is the postponement of the accounting, chargeability and determination and quantification of the liability to tax due thereon with reference to that and other receipts. If this is the true position of receipts then, it must necessarily follows that the official exchange rates prevailing with reference to those receipts must inevitably be the basis in computing the charge-ability to taxes under the Act. The sentence ''and shall be deemed to be the income of the previous year in which the transfer took place'' occurring in section 45 on which great emphasis was laid by Shri K.P. Kumar cannot be read as contradicting, enlarging or destroying the effect of the earlier provisions of the same section that really deals with chargeability of income to capital gains. We are, therefore, of the view that on a combined reading of these provisions in conjunction with all other provisions, the claim of the assessee is not well-founded.
On the computation of capital gains in England, Simon''s Taxes, 3rd edn. Vol. C expresses thus:
A gain accrues on the disposal of assets so it is important to identify exactly what asset has been disposed of and when the disposal took place." (p. 892)
Even these authoritative observations of Simon''s Taxes supports the construction we have earlier placed on sections 45 and 48.
In Commissioner of Income Tax, Mysore Vs. Bangalore Transport Company Ltd. (In Liquidation), the Supreme Court was dealing with a case of the Bangalore Transport Co. Ltd. on the nationalization of its transport services and the chargeability of that income receipt to tax under the Indian income tax Act, 1922 (''the 1922 Act'') expressed thus:
...Under the scheme of the income tax Act, whenever an assessee receives in the course of his business money or money''s worth, income embedded therein accrues or arises to him, and becomes subject to an ambulatory charge. If at the end of the previous year, on making up accounts, there is no overall income, the charge does not crystallise because there is no income on which the charge of tax may settle...." (p. 375)
The Tribunal while rightly noticing this ruling relied on by the revenue, in support of its case has glossed over the same by observing that it was doubtful of its application to the facts of the case before it. We need hardly say that no case is an authority on facts and that what really binds is the ratio decidendi or the principle decided by a superior court and more so by the Supreme Court, which is binding on all the Courts and the Tribunals in the country. We are of the view that the enunciation made by the Supreme Court in Bangalore Transport Co. Ltd.''s case (supra) on the scope and ambit of a receipt of income, equally applies to a receipt of income chargeable to capital gains and is not distinguishable and bears on the question. If that principle bears en the question, then it follows that its conversion thereto from one currency to another currency which is the only other question must necessarily be as ruled by the Supreme Court in that case only. Even the ratio of the earlier two cases of the Supreme Court in Commissioner of Income Tax, Gujarat Vs. Ashokbhai Chimanbhai, and Alapati Venkataramiah Vs. Commissioner of Income Tax Hyderabad, under receipt of incomes chargeable to capital gains under the 1922 Act is also to the same effect.
On the above discussion, we hold that the conclusion reached by the Tribunal, though not for the very reasons, but for the reasons given by us, which really upholds the views expressed by the AAC and the ITO on the very construction of the provisions is correct and right and our answer to the question referred to us must be in the affirmative and against the assessee.
We have earlier noticed that the Tribunal relied on rule 115 and held that the question was concluded by the same. But, before us, the revenue did not place reliance on the same and relied on the construction of the provisions of the Act only as had been done by the AAC and the ITO which we have upheld. From this, it follows that there is hardly any ground for us to examine the scope and ambit of rule 115 or its validity that was canvassed in Writ Petition No. 2731 of 1979. But, as our order is subject to an appeal, we deem it pro per to examine that also and briefly express our views on them.
Rule 115(b) framed by the Board in exercise of the powers conferred on it by section 295 of the Act, as it stood then and was in operation for the period in dispute reads, thus:
Rate of exchange for conversion into rupees of income expressed in foreign currency. -The rates of exchange for the calculation of the value in rupees of any income shall be as follows:
(a) ****
(b) in respect of income accruing or arising or deemed to accrue or arise to the assessee or received or deemed to be received by him or on his behalf on or after the 6th of June, 1966-
(1) where such income accrues or arises or is deemed to accrue or arise to the assessee or is received or deemed to be received by him or on his behalf-
(i) before the 19th day of November, 1967, � 1 sterling=Rs. 21.00;
(ii) after the 18th day of November, 1967, � 1 sterling=Rs. 18.00;
(2) U.S. $ l=Rs. 7.50.
All this rule does is to recognise the official exchange rates fixed by the Reserve Bank of India (RBI) prior to 19-11-1977 and thereafter till the said rule was substituted on 1-11-1977. We are not here concerned with the new rule substituted on 1-11-1977. This rule does not purport to regulate the chargeability or computation of income for capital gains. Except for this, this rule has no other purpose to serve. We are of the view that the Tribunal was in error in holding that the controversy between the parties was concluded by the rule.
What we have found on the construction of rule 115 is sufficient to hold that the assessee''s writ petition is wholly misconceived. Even otherwise, on the construction placed by us, it is clear that the rule made by the Board was for purposes of the Act and cannot be said to be beyond the rule making power conferred on it. We see no merit in this contention of the petitioner to the contrary. We, therefore, hold that the assessee''s writ petition is liable to be dismissed.
In the light of our above discussion : (a) we answer the question referred to us in the affirmative, against the assessee and in favour of the revenue;
(b) we dismiss Writ Petition No. 2731 of 1979 and discharge the rule issued in the case.
In the peculiar circumstances of the cases, we direct the parties to bear their own costs in both the cases.