Smt. Jayakumari and Smt. Dilharkumari vs Commissioner of Income Tax

M.P. Chandrakantharaj Urs, J.—The Bangalore Bench, (the Tribunal) has referred these two cases u/s 256(1) of the income tax Act, 1961 (''the Act'') formulating as many as seven questions for our answer with a statement of the case. The questions referred are as follows : 1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the administration of the estate of the deceased is not complete and, therefore, the assessment has been rightly made on the executors u/s 168(3) of the income tax Act, 1961?

Whether, on the facts and in the circumstances of the case, and having regard to the clear language used in section 158(3) of the income tax Act, 1961, one assessment made on the executors is sustainable in law?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that both the installments of principal amount and interest of annuity deposit are taxable under the provisions of the Income- tax Act, 1961?

If the answer to the above third question is in the affirmative, whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that the proportionate of estate duty payable on the annuity deposit is not deductible from the annuity deposit assessable as income?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in upholding the disallowance of proportionate estate duty paid on the assets sold, namely, war stock bonds, land and jewellery, while computing the gains?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in adopting the market value of the jewellery as on 1-1-1954 as the cost for the purpose of computing the capital gains?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in upholding the computation of the capital loss at Rs. 27,27,820 by adopting the cost as on 1-1-1954 on the basis of the rate of exchange prevalent in that year?

The learned counsel for the petitioner as well as the learned counsel for revenue are agreed that the first six questions referred stand answered by the decisions of this Court rendered in the case of Jayakumari and Dilharkumari (Executrixes and Trustees of Late H.H. Rajkuverba) Vs. Commissioner of Income Tax (No. 2), In the aforementioned decisions, the Bench was concerned with five of the questions referred as follows: 1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in upholding the assessment made by the income tax Officer on the assessees u/s 168 of the income tax Act, 1961?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that both the instalments of principal amount and interest on annuity deposit are taxable under the provisions of the Income- tax Act, 1961?

If the answer to the above second question is in the affirmative, whether on the facts and in the circumstances of the case, the Tribunal is justified in holding that the proportionate estate duty payable on the annuity deposit is not deductible from the annuity deposit assessable as income?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the claim for deduction of the devaluation loss of Rs. 1,67,863?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the alternative plea of the appellants that the devaluation loss could be split into capital and revenue and treated as such in setting them off against capital gains and income of the assessee stated.

''so far as the first three questions are concerned, the answers rendered by this Court in Jayakumari and Dilharkumari (Executrixes and Trustees of Late H.H. Rajkuverba) Vs. Commissioner of Income Tax (No. 2), which is between the same parties would cover the said questions. There, we have answered the said questions in the affirmative and against the assessee. Similar answers should follow in these questions also.''

The two other questions which came to be answered, are also answered in the affirmative and against the assessee. In the result, we have to reiterate on the conclusion made by the counsel on both sides that the first six questions referred in these two cases are also answered in the affirmative and against the assessee.

What remains to be considered by us in the 7th question which has not been answered in the aforementioned cases. The brief facts may be stated relating to question No. 7 and they are as follows.

The estate of late H.H. Rajkuverba, Dowagar Maharani Saheb of Gondal was assessed for the years 1975-76 and 1976-77 in the hands of the executrix of her estate. It appears, for the assessment year 1975-76 certain jewellery was sold, as a result of which certain gains accrued under the ''capital gains'' and the same was sought to be set-off against the loss incurred in the earlier years and brought forward. That came to be accepted by the assessing authority and assessment concluded as such. In regard to that year, the assessee does not raise any dispute. However, for the assessment years 1976-77, under the heading capital gain/loss was computed as follows:

"Capital gain/loss is computed as under:

Rs.

( a )

Sale of war stock bonds

15,80,610.00

Less : Cost of War Stock

Bonds � 3,23,213 at Rs. 13.35 as on 1-1-1954

43,08,430.00

Net loss on sale of Stock Bond

27,27,820.00

( b )

Sale of Gondal land

2,25,000.00

Less : Market value for wealth-tax purposes,

the value of this land was taken at Rs. 15,114

as on 31-12-1958.

The market value as on 1-1-1954 is taken at

Rs. 12,000

- 12,000.00

( ii )

Expenses of sale as per details

8,450.00

Profit on sale of land

20,450.00

Sale of jewellery

2,04,550.00

Less : The assessee has taken the cost of jewellery as on 1-4-1973. The assessee had not purchased these jewellery. These were all received from the late Maharaja of Gondal. The value as per the assessee''s

39,658.00

letter was only Rs. 15,000 for wealth-tax

Rs.

Rs.

purposes. Other details not given

5,000.00

Profit on sale of jewellery

34,658.00

Abstract of capital gain/loss:

Loss on sale of War Stock Bonds

27,27,820.00

Less : Profit on sale of Gondal land

2,04,550

2,39,208.00

Profit on sale of jewellery

34,658

24,88,612.00

and the assessment was concluded. Aggrieved by the computation of loss under clause (a) relating to sale of war stock bonds the assessee appealed to the Commissioner (Appeals-2). The said Commissioner by his order dated 29-3-1979 allowed the appeal partly but did not give relief in regard to the capital loss computed at Rs. 27,27,820.00. It was on further appeal to the Tribunal, that the Tribunal came to affirm the assessment orders as concluded and confirmed in appeals. It is in that circumstance the question has been referred.

Shri S.P. Bhat, learned counsel for the assessee-petitioners, contended before us that the assessing authority and the appellate authorities erred in computing the capital loss in regard to the sale of war stock bonds converting the acquisition value which was � 3,23,213 as on 1-1-1954 at the exchange rate then prevalent and then converting the sale price in the year in question in the sum of � 88,00,98 at the rate prevalent after the devaluation of the rupee in 1976, thereby arriving at the capital loss of Rs. 27,27,820. It is further the contention of the learned counsel that the acquisition value and the sale value should be computed only in pound sterling as on the date of the sale and such sum resulting in capital loss should thereafter be converted into rupees as on the date of sale as returned by the assessee-petitioner in which case the capital loss would be much higher than the sum arrived at by the assessing authority. In other words, the claim is that the capital loss should be worked out on the capital loss at � 2,35,115 at the rate of Rs. 18 per pound, the exchange rate prevalent subsequent to the devaluation of rupee amounting to Rs. 42,32,070.

Shri S.P. Bhat, the learned counsel for the petitioners, has drawn our attention to rule 115 of the income tax Rules, 1962 ('' the Rules'') as it was then which reads, as follows:

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) 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 before the 6th day of June, 1966-

(i) 1 sh. 6 d. = Re. 1/-;

(ii) U.S. $ =Rs. 4.762/-;

(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 day 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. $ 1 = Rs. 7.50.

He contends that the rule mandatorily directs that having regard to the period involved, capital gains which is income should be assessed in India in terms of the rule and also, capital loss being income, as held by the Supreme Court in the case of Commissioner of Income Tax, Bangalore Vs. J.H. Gotla, Yadagiri, that income included loss and, therefore capital loss should also be computed in terms of rule 115 as obtaining at the relevant time. The thrust of the argument is that the computation as made by the assessing authority and as confirmed by the appellate authorities that the acquisition value as on 1-1-1954 should be at the exchange rate then prevalent, i.e., at Rs. 13.65 per one sterling pound and there afterwards calculating the sale value realised at Rs. 18 the rate of exchange prevalent in the year of sale of the same war stock bonds was erroneous applying non-existent rule which denied considerable advantage to the estate of the assessee in the hands of the executrix. In other words, the learned counsel''s contention is that having regard to section 48 which provides for computation of gains, the acquisition value less the expenditure incurred for sale of the capital estate as well as the cost of improvement if any should be the value of the capital asset and the difference between that and the sale price should be the capital gain or loss. Therefore, he commended to us that if the rule or the provisions of the Act are capable of being interpreted in more than one way, then that interpretation which ensures to the advantage of the assessee should be followed by the Courts.

We are in full agreement with the learned counsel. The capital gain or loss as income to be included or excluded should be worked out in the year in which such gain or loss has occurred, such year being the previous year to the assessment. Therefore, it stands to reason that the exchange value prescribed in rule 115 must necessarily be followed in computing the capital gains or loss as the case may be. If the revenue takes the value of sterling pound as on 1-1-1954 for the purpose of determining the acquisition value of the capital asset and the exchange rate of the sterling pound as on the date of sale, it would be acting outside the scope of rule and, therefore, outside the provisions of the Act. We are of the view, even if the revenue contends that acquisition value as on 1-1-1954 would be relevant, that the rate of exchange determining the acquisition value must remain uniform when applied to the sale price realised on the sale of the capital asset computed in terms of section 48. In other words, assuming that rule 115 is not attracted for computing the capital gain or loss the uniform rate of exchange must be applied in determining the capital gain or loss arising out of the difference between the sale price and the cost of acquisition of the capital asset. That proposition not only stands to reason but appears to be in conformity with the rule 115 as it was then and as it now stands amended.

In the scheme of the Act or the Rules, there is no other provision which throws any light on the above question except section 43A of the Act which came to be inserted after the devaluation of the rupee in 1976. But then that provision is attracted only when the acquisition price in foreign currency is yet to be paid in full and not otherwise. Therefore, the method which has uniformity and certainty and which is advantageous to the assessee should be adopted in order to determine the exchange rate of the value of acquisition as well as the consideration received for sale of such asset in computing the capital gain or the loss under the Act. This Court, while interpreting rule 115(6) as it was then in the case of D.A. Graham and N.G.F. Graham Vs. Commissioner of Income Tax and Others, ruled as follows : No case is an authority on facts and 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 courts and Tribunals in the country. The enunciation made by the Supreme Court in Commissioner of Income Tax, Mysore Vs. Bangalore Transport Company Ltd. (In Liquidation), on the scope and ambit of a receipt of income equally applies to a receipt of income chargeable to capital gains. The Supreme Court has laid down that in the scheme of the IT Act, whenever an assessee receives in the course of his business, money or money''s worth, income embedded therein accrues or arises to him. 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 asset, 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 follow that the official exchange rates prevailing with reference to those receipts must inevitably be the basis for computing the chargeability 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 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." (p. 879)

Therefore, it is clear that if rule 115 must have any meaning, the view we have taken must necessarily prevail and the revenue is bound to apply the rate of exchange uniformly for the purpose of computing the capital gains or loss formally devised by the Legislature in terms of section 48. In the result, we answer the question in the negative in favour of the assessee and direct that the assessment order made for the year 1976-77 in computing the capital gains be modified in the manner we have indicated i.e., calculating the capital loss at the exchange rate prevalent on the date of sale in terms of rule 115 (b) and allow a capital loss to the assessee in the sum of Rs. 42,32,070.

Order accordingly.