(a) Income Tax Ordinance (XXXI of 1979)---

----Second Sched., cl. (78)---Exemption---Real income accrued to assessee has to be brought to tax and not the hypothetical accrual of income---Foreign Exchange rate gain or foreign currency account being in nature of capital transaction could not be subject to tax.

CIT v. Shoorji Vallabhdas & Company Limited (1962), 46 ITR 144 fol.

CIT v. Smith Kline & French of Pakistan Limited 1991 SCMR 2374 = 1991 PTD 999; CIT, Bengal v. Shew Wallace & Co. AIR 1932 PC 138; Inspector of Taxes v. FW Woolworth PLC 1992 PTD 1259 and CIT v. Pfizer Limited 1993 PTD 927 ref.

(b) Income Tax Ordinance (XXXI of 1979)---

----Second Sched., cl. (78)---Exemption---Interest earned on foreign currency account ---Addition---Validity---Assessee being not a foreign national and he himself having opted the status of a resident while filing the return, his income of interest on foreign currency account was not exempted.

Rashid Sarwar, C.A. for Appellant.

Shahbaz Butt, L.A. and M. Akram Tahir, D.R. for Respondent.

Date of hearing: 5th March, 1997.

ORDER

NASIM SIKANDAR (JUDICIAL MEMBER). ---The assessee in these further appeals for the years 1980-90 to 1990-91 is an individual and a Director of a private limited company. In the three years involved incomes were respectively disclosed at Rs.1,33,341, Rs.97,183 and Rs.50,590 Instead the assessments were framed at total income at Rs.2,36,139, Rs.1,68,366 and Rs.2,55,1t17. From the wealth statement filed with the returns the assessing officer found that exchange rate gain on foreign currency account indicated therein was not disclosed in the Income Tax Returns. After serving the assessee with a show-cause notice the gain respectively at Rs.1,02,708, Rs.78,183 and Rs.1,09,472 was added towards income in the three years. In the year 1990-91 an amount of Rs.89,045 was also added towards income which was found to have accrued to the assessee as interest on foreign currency account. The claim of the assessee that it was exempted under clause 78 of the Second Schedule to the Income Tax Ordinance was not accepted. The treatment of foreign exchange gain was discussed in detail in the year 1990-91 in the following words:---

"Regarding exchange rate gain of Rs. 1,09,472 he contended that treatment has been given in accordance with the international accounting standard as well as Companies Ordinance, 1984. He was required vide this office letter referred to above to indicate the provisions of the Income Tax Ordinance under which exchange rate is exempt. But he failed to quote any provision to support his contention. His argument that he was revalued his assets according to the international standard is not valid. The assessee is free to keep his accounts on whatever standard he likes. Income Tax Department has nothing to do with it. The department has to see the receipts in view of tax rules. It is to be taxed, if the same has not been provided exemption under the Income Tax Ordinance, 1979. The said receipts is taxable under section 13(1) of the Income Tax Ordinance, 1979 under the head 'income from other source'. "

2. Learned first appellate authority CIT(A)-I, Lahore through its order recorded on 9-12-1991 maintained the additions made on account of foreign exchange rate gain in the three years as also the interest on foreign currency account in the third year viz. 1990-91. Learned first appellate authority disagreed with the contention of the assessee that the gain arisen to the appellant on re-valuation c" pound sterling lying in a foreign bank was of capital nature and therefore, not liable to tax. The other submissions that the assessee showed the increase in wealth statement by converting the sterling pound into Pakistan rupees only for the purpose of indicating the latest wealth position though actually no gain on this account had accrued to him during the relevant periods was also not accepted. Learned first appellate authority also disagreed that the assessee was not liable to be taxed on interest earned on foreign currency account in view of his dual nationality.

3. This has brought the assessee in further appeal before us.

4. Parties have been heard. Learned A.R. for the assessee strongly contends that no income whatsoever accrued to the assessee on account of foreign exchange rate gain on foreign currency account and that its declaration in wealth statement was only in accordance with the international accounting standard. Further states that no income whatsoever having been accrued to the assessee it could not be brought to the tax net. In support of the submissions he has relied upon the ratio settled. in CIT v. Shoorji Vallabhdas & Company Limited (1962) 46 ITR 144 wherein the Supreme Court of India held that only those receipts which amounted to "income" were liable to be taxed and that it was not hypothetical accrual of income which could be subjected to tax. Also 1991 SCMR 2374 = 1991 PTD 999 re: CIT v. Smith Kline & French of Pakistan Limited is quoted wherein their Lordships of the Supreme Court of Pakistan while considering the meaning and connotation or word "income" cited with favour the view of Privy Council in AIR 1932 PC 138 re: CIT, Bengal v. Shew Wallace & Co.

"Income, their Lordships think in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. "

Reliance has also been placed on 1992 PTD 1259 re: Beauchamp (Inspector of Taxes v. FW Woolworth PLC wherein the House of Lords held that currency exchange loss incurred on purchase of foreign currency to repay loans being a capital transaction could not be allowed to be deducted while computing profits. Support is also sought from the ratio settled by their Lordships of the Bombay High Court in 1993 PTD 927 re: CIT v , Pfizer Limited. In that case the paid-up share capital of a company included the .amount in Dollors subscribed for its share by a foreign corporation. The amount so contributed was kept outside India with Reserve Bank's permission. The Indian rupee was devalued consequent whereupon increase in rupee's value of the same amount of American Dollar was shown in the balance-sheet and credited to an account "Dollars re-valuation reserve" Their Lordships found that for the purpose of Indian Companies (Profit Surtax Act, 1964) the value of an asset was not re-valued and that the amount constituted a reserve arid was, therefore, includable in the capital base of the company. The addition of interest amount accruing in foreign currency account in the year 1990-91 is also challenged on the, ground that clause 78 of the aforesaid Schedule to the Ordinance allows an express exemption to the assessee.

4. learned L.A. while supporting the orders of the authorities below submits that the assessee having himself shown an appreciation in his wealth by certain sums when compared with the immediate preceding year he could ,not be allowed to be heard to say that no income accrued to him or that the addition was only hypothetical The addition of interest on foreign currency account is also supported on the ground that the assessee is not a foreign national and that he himself opted the status of a resident while filing returns for the three years involved.

5. Having heard the parties we will agree with the submissions made for the assessee as for the addition in the three years under the head exchange rate gain on foreign currency account is concerned. The authorities below clearly misdirected themselves by holding that the assessee had in any way earned "income". If the assessee had indicated his wealth only in terms of sterling Pound lying in foreign banks the Revenue could not have disputed the same on the ground that their value in terms of Pakistan rupees had increased in the meanwhile. The aforesaid cases relied upon by the assessee, particularly re: CIT v. Shoorji Wallabhdas & Company support the assessee that it is not hypothetical accrual of income which could be taken into consideration but the real accrual of income which could be brought to tax. In the case before us no real income accrued to the assessee. Therefore, the treatment extended to gain on re-valuation of sterling Pound was not real income as long the foreign currency was not actually exchanged for Pakistan rupees. We are also inclined to agree with the submission that even otherwise the currency exchange gain was in nature of capital transaction and therefore not liable to tax.

6. As for the interest on foreign currency account is concerned the assessee has not been able to persuade us that its case falls within the exemption provisions as contained in clause 78 of the Second Schedule to the Income Tax Ordinance. A bare reading of this clause supports the view adopted by he Revenue that the assessee in the circumstances of the case is not allowed to avail the exemption contemplated therein.

7. Therefore, these three appeals succeed only to the extent that- the foreign exchange rate gain declared in wealth statement but not in Income Tax returns and added accordingly towards income shall stand deleted. Rest of the relief claimed is refused.

M.B.A./403/Trib. Order accordingly.