COMMISSIONER OF INCOME-TAX VS E.R. SQUIBB & SONS INC, 2000 PTD-BOMBAY-HIGH-COURT-INDIA 2222 (1998)

Income-tax--

----Capital gains---Non-resident---Computation of capital gains---Purchase and sale of shares of Indian company---Sale proceeds received in Indian currency and remitted to U.S.A. in foreign currency---Rule 115 was not applicable---Capital gains had to be computed in Indian currency---Indian Income Tax Act, 1961, S.45---Indian Income Tax Rules, 1962, 8.115.

Rule 115 of the Income Tax Rules, 1962, prescribes the rate of exchange for conversion into rupees of income expressed in 'foreign currency. It has no application to income expressed in Indian rupees.

The assessee was a non-resident company. On February 19, 1968, the assessee acquired 3,600 shares in an Indian company in United States currency at the face value of Rs.1,000. On April 21, 1978, the assessee sold 600 shares to another non-resident company. The sale proceeds were received by the assessee in Indian currency and remitted to the United States in foreign- currency. Before the Income-tax Officer, the assessee disclosed in its return an income in the sum of 5,084 U.S. Dollars as taxable capital gains and on the basis of Rule 115 of the Income Tax Rules, 1962, after conversion of the foreign currency into Indian currency, arrived at a figure of Rs.42,447 as the 'capital gains. The Income-tax Officer overruled the assessee's claim by holding that the capital gains arose to the assessee immediately. on the sale of the shares in India, and that 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 April 15, 1978, was at the rate of Rs:1,800 per share. On this basis, the Income-tax Officer assessed Rs.4,80,000 as the capital gain. The Tribunal allowed the assessee's appeal and held that the capital gain was only Rs.42,687. On a reference:

Held, that the transaction was in Indian currency, the sale proceeds were received by the assessee in Indian currency and subsequently converted into. U.S. currency and remitted to the assessee. The income accrued to the assessee when the sale took place in India in Indian currency. Therefore, while computing the capital gain one had to reduce the cost of shares from the sale proceeds in Indian currency. This was not a case for application of Rule 115 of the Rules as the income earned by the assessee was in Indian currency and the said amount was subsequently converted into U.S. Dollars. The price was fixed in Indian currency with the approval of the Reserve Bank of India. The approval granted by the Reserve Bank of India was for a transaction in Indian currency. The capital gains - to be taxed was Rs.4,80,000.

CIT v. Pfizer Corporation (1993) 202 ITR 1.15 (Bon.) and Asbestos Cement Ltd. v. CIT (1993) 203 ITR 358 (Bon.) applied.

CIT v. Chowgule & Co. Ltd. (1996) 218 ITR 384 (SC) ref.

Milind Sathe with S.A. Diwan for the Commissioner.

P.I. Kaka instructed by T. Pooran & Company for the Assessee.

JUDGMENT

A.Y. SAKHARE, J.---By this reference under section 256(1) of the Income Tax Act, 1961 (for short "the Act"), the Income-tax Appellate Tribunal, at the instance of the Revenue 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 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 February 19, 1968, the assessee acquired 3,600 shares of Synthetic Limited (an Indian company), in United States currency at the face value of Rs.1,000. On April 21, 1978, the assessee sold 600 shares to Prion Chemicals and Detergent (Pvt.) Ltd. The sale proceeds were received by the assessee in Indian currency and remitted to the United States in foreign currency.?????????

Before the Income-tax Officer, the assessee disclosed in its return an income in the sum of Rs.5,084 U.S $ as taxable capital gain and on the basis of Rule 115 of the Income-tax Rules, 1962 ("the Rules" for short), 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. A similar conversion rate was applied by the assessee in respect of 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 April 15, 1978, was at the rate of Rs.1,800 per share. On this basis, the Income-tax Officer assessed Rs.4,80,000 as the capital gain. In appeal filed by the assessee, the Commissioner of Income-tax (Appeals) held that even though the cost of acquisition of the shares was in 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 for the benefit of Rule 115 of the Rules. The Income-tax Appellate Tribunal allowed the assessee's appeal by holding that Rule 115 of the Rules will be applicable to the assessee's case and the' assessee's claim that the capital gains 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 U.S. currency; the assessee has sold the shares to another non-resident company; the price was fixed in Indian currency with the approval of the Reserve Bank of India, but the assessee-company received monies duly converted , into dollars, therefore, the assessee-company is entitled to conversion rate as per Rule 115 of the Rules.

On February 19, 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 April 21; 1978, the assessee sold 600 shares- to Prion Chemicals and Detergent (Pvt.) Ltd., another non-resident company. On April 15, 1978, the Reserve Bank of India granted approval to the said sale at the rate of R's.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 U.S. currency and remitted to the assessee. The question in this case is, whether on these facts the benefit of Rule 115 of the Rules can be made available to the assessee. The question is no more res integra. This Court in the case of Asbestos Cement Ltd. v. CIT (1993) 203 ITR 358 has held that in such types of transactions the 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 into 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 CIT v. Pfizer Corporation (1993) 202 ITR 115 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 t1fit dividend in India amounting to Rs.72,30,000. This amount was remitted to the assessee in the U.S.A. at the then prevailing rate of exchange and the assessee received U.S. $ 9,55.979.91. The assessee claimed that the amount which was received in dollar] should be converted at the rate of Rs.7.50 per dollar by application of Rule 115 of the Rules 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 assessee's 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 of the Rules had no application.

On behalf of the assessee reliance was placed on the judgment of the Supreme Court ire the case of CIT v. Chowgule & Company Ltd. (1996) 218 ITR 384, to contend that Rule 1 15 of the Rules 115 be made applicable to the present case. We have carefully considered the submission advanced by the assessee, Rule 115 of the Rules 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 of the facts of the present case. The assessee's. case is squarely covered 1:y the decisions of this Court in Asbestos Ltd.'s case (1993) 203 ITR 558 and CIT v. Pfizer Corporation (1993) 202 ITR 115.

The income accrued to the assessee whim. the sale took place in India in Indian currency. 'Therefore, while computing the capital gains, 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 of the Rules as he income earned by the assessee was in Indian currency and the said amount was subsequently converted into U.S. dollars. The price was fixed in Indian currency with the approval of the Reserve Bank of India. The approval granted by the Reserve; Bank of India was for a transaction in Indian currency. Thus, we are of the option that the Income-tax Officer and the Commissioner of Income-tax (Appeals) were right in overruling the assessee's submission for application of Rule 115 of the Rules and the Income-tax. Appellate Tribunal committed an error in accepting the assesses submission and applying Rule 115 of the Rules 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.

M.B.A./4050/FC???????????????????????????????????????????????????????????????????????????????? Order accordingly.