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M/S. D.A Graham v. Commissioner Of Income Tax
Structured Summary of the Opinion (Puttaswamy, J.)
Factual and Procedural Background
Two matters were disposed of by a common order because the questions were inter-connected:
-
I.T.R.C. No. 12/1975 — A reference under Section 256(1) of the Income Tax Act, 1961 made by the Income Tax Appellate Tribunal, Bangalore at the instance of the assessee. The Tribunal referred the following question of law to this Court:
Whether capital gains and dividends received by the assessee in the U.K. should be converted into rupees at the exchange rate prevailing on the date when each capital gain arose and each dividend was received, or at the exchange rate prevailing on the last day of the accounting year for the assessment year 1968–1969?
- Writ Petition No. 2731 of 1979 — A petition under Article 226 of the Constitution in which the assessee challenged Rule 115(b) of the Income Tax Rules, 1962 as ultra vires the Income Tax Act.
Relevant undisputed facts:
- The assessee was a British subject but resident in India.
- During the previous year ended 31-3-1968 (assessment year 1968–1969) the assessee sold shares and securities in the United Kingdom on different dates — some prior to 19-11-1967 and others thereafter but all before 31-3-1968.
- The assessee received dividends from the U.K. during the same general period — some prior to 19-11-1967 and some after, but all before 31-3-1969.
- Official exchange rates: prior to 18-11-1967 £1 = Rs.21.00; on and from 19-11-1967 (after U.K. devaluation) £1 = Rs.18.00.
- In his return for 1968–1969 the assessee claimed conversion at the official exchange rate prevailing on 31-3-1968 rather than at the rates prevailing on the dates of each sale/receipt.
- The ITO rejected the assessee's claim; the AAC concurred; the Tribunal affirmed the orders but relied on Rule 115(b) to do so, prompting the reference and the writ challenge.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the amount of capital gains and dividends received by the assessee in the U.K. should be converted into rupees at the exchange rate prevailing on the date when each capital gain arose and each dividend was received, rather than at the exchange rate prevailing on the last day of the accounting year (31-3-1968) for the assessment year 1968–1969?
- Whether Rule 115(b) of the Income Tax Rules, 1962 is ultra vires the Income Tax Act (i.e., whether the Rule exceeds the rule-making power conferred by the Act) as contended in Writ Petition No. 2731 of 1979?
Arguments of the Parties
Assessee's Arguments (Sri K.P. Kumar, Advocate)
- The assessee contended that conversion to rupees for capital gains and dividends should be made at the official exchange rate prevailing on 31-3-1968 (the last day for computing total income for that accounting year), not at varying rates on the dates of individual receipts.
- The assessee challenged Rule 115(b) as ultra vires the Income Tax Act; before this Court the assessee pressed the ground that Rule 115(b) was beyond the parent Act.
Revenue's Arguments (Sri K. Srinivasan, Senior Standing Counsel, assisted by Sri H. Raghavendra Rao)
- The revenue argued that the correct basis for conversion is the official exchange rate prevailing on the dates when capital gains and dividends were actually received or arose.
- Rule 115(b), the revenue submitted, simply recognises and records the official exchange rates to be applied and is not ultra vires the Act.
- The ITO and AAC reasoned that each sale or receipt gives rise to profit or gain at the time of that sale/receipt, so conversion must be applied at the rate prevailing at the time of each sale/receipt; dividends should be taken at the gross figure and at the conversion rate prevailing at the time of each receipt.
- The Tribunal, for its part, relied on Rule 115(b) to require application of varying exchange rates according to the dates on which income accrued or was received.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Cape Brandy Syndicate v. IRC (1921) IKB 64, p. 71 (Rowlatt, J.) | Classical passage on construing taxation provisions and methodology of statutory construction in tax law. | The Court invoked this passage as a guiding rule on how taxation provisions should be construed when determining whether the Act alters the common-sense conclusion that conversion should be by reference to the date of receipt. |
| C. Arunachalam…* v. Commissioner Of Income Tax… (Full Bench, ILR 1984 KAR p. 1387, para 11) | Reference to well-settled rules of construction of statutes as noticed by the Full Bench. | The Court cited this Full Bench decision along with Cape Brandy Syndicate to underline accepted principles of statutory interpretation relevant to tax provisions. |
| Commissioner of Income Tax, Mysore v. Bangalore Transport Company Limited (in liquidation) (BTC), 66 ITR 373 (Supreme Court) | Principle that income embedded in money or money's worth accrues when received in the course of business and becomes subject to an ambulatory charge; if on making up accounts there is no overall income, the charge does not crystallize. | The Court applied the BTC principle to capital gains, holding that the timing of accrual/receipt governs chargeability and, therefore, conversion from foreign currency to rupees must follow the same timing principle. |
| Commissioner of Income Tax, Gujarat v. Ashokbhai Chimanbhai, 56 ITR 42 (Supreme Court) | Earlier Supreme Court ratio concerning receipt of incomes chargeable to capital gains under the 1922 Act. | The Court treated this authority as supporting the same proposition that timing of receipts determines chargeability and thus informs the conversion rule for foreign currency receipts. |
| Alapati Venkataramiah v. Commissioner Of Income Tax, Hyderabad, 57 ITR 185 (Supreme Court) | Earlier Supreme Court ratio on receipt of incomes chargeable to capital gains under the 1922 Act. | The Court cited this decision as further supporting the general principle that the timing of receipt/accrual is determinative for chargeability and hence conversion considerations. |
Court's Reasoning and Analysis
The Court's analysis proceeded in the following sequence, staying strictly within the reasoning contained in the opinion:
- Factual foundation: The Court first recorded the undisputed facts — the sales and dividend receipts occurred in the U.K. on different dates, and there was a devaluation of the pound on 18-11-1967 resulting in different official exchange rates before and after that date.
- Common-sense economic approach: The Court observed that, without more, conversion of foreign-currency receipts must be with reference to the date of actual receipt and "cannot normally be anything else." The Court explained that using a single rate (e.g., the rate on the last day of the accounting year) would be illogical and divorced from economic reality, particularly when currency values change.
- Statutory construction — Sections 45 and 48: The Court examined Chapter IVE (capital gains), quoting Section 45 (chargeability) and Section 48 (computation). The Court reasoned that the chargeability of capital gains depends on the full value of consideration "received or accruing as a result of the transfer," and that the receipt charged to tax is the actual receipt. Aggregating receipts to the year-end is merely a postponement of accounting and quantification of liability and does not change the fact that the individual receipt is the taxed event.
- Interaction of the "deemed to be the income of the previous year" language: The Court rejected the assessee's emphasis on the phrase "and shall be deemed to be the income of the previous year in which the transfer took place" in Section 45 as contradicting or negating the earlier provisions on chargeability and computation. In short, that deeming language does not displace the requirement to treat each receipt according to when it arose or was received.
- Supporting authority of an authoritative tax text: The Court quoted Simon's Taxes (3rd Edn., Vol. C, p. 892) which states that a gain accrues on disposal of assets and it is important to identify when the disposal took place. The Court said this supports its construction of Sections 45 and 48.
- Precedents: The Court relied on the Supreme Court's enunciation in BTC (66 ITR 373) that income embedded in money or money's worth accrues when received and becomes subject to an ambulatory charge. The Court treated BTC and earlier Supreme Court authorities (Ashokbhai Chimanbhai and Alapati Venkataramiah) as applying equally to capital gains and bearing on the question of conversion from one currency to another.
- On Rule 115(b): The Tribunal had relied on Rule 115(b) to conclude the controversy. The Court analysed Rule 115(b) and concluded that the rule merely recognises the official exchange rates fixed by the Reserve Bank for specified periods; it does not attempt to regulate the chargeability or computation of income for capital gains. Therefore, the Tribunal was in error in holding that Rule 115(b) by itself concluded the controversy. Nevertheless, the Court went on to consider the validity of the Rule and held that, as construed, it was within the Board's rule-making power under Section 295 of the Act.
- Conclusion of reasoning: On the combined reading of statutory provisions, the economic reality of receipts, supportive secondary authority, and controlling precedents, the Court concluded that conversion must be done with reference to the date on which each capital gain arose or each dividend was received.
Holding and Implications
Core Rulings:
- The question referred to the Court is answered in the affirmative — against the assessee and in favour of the Revenue. Concretely, capital gains and dividends received in the U.K. must be converted into rupees at the official exchange rate prevailing on the date when each capital gain arose or each dividend was received, not at a single rate fixed at the end of the accounting year.
- Writ Petition No. 2731 of 1979 is dismissed and the rule issued in the case is discharged.
Implications (as stated in the opinion)
- Direct effect on the parties: The ITO's, AAC's and Tribunal's treatment (insofar as they applied date-specific conversion rates) is upheld by the Court's statutory construction; the assessee's claim to use the exchange rate as on 31-3-1968 is rejected.
- Validity of Rule 115(b): The Court held that Rule 115(b), properly construed, merely recognises official exchange rates and is within the Board's rule-making authority under Section 295 of the Act; the writ challenge to the Rule fails.
- Broader legal effect stated by the Court: The decision rests on statutory construction and application of existing authoritative precedent; the Court did not purport to overturn or create a novel precedent beyond applying those principles to the facts at hand.
Outcome summary: (a) Question referred answered in the affirmative against the assessee and in favour of the Revenue; (b) Writ Petition No. 2731 of 1979 dismissed.
Puttaswamy, J.:—
As the questions that arise for determination in these cases are inter-connected, we propose to dispose of them by a common order.
2-1. I.T.R.C No. 12/1975: In this reference made under Section 256(1) of the Income Tax Act of 1961 (Central Act No. 43 of 1961) (‘the Act’) the Income Tax Appellate Tribunal, Bangalore (‘Tribunal’) 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 1968-1969?”
2-2. WRIT PETITION No. 2731 OF 1979: In this Petition under Article 226 of the Constitution, the assessee has challenged Rule 115(b) of the Income Tax Rules of 1962 (‘the Rules’) as ultra vires of the Act.
2-3. 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.
3. During the previous year ended 31-3-1968, corresponding to the assessment year 1968-1969, 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 19-11-1969 and thereafter also but all of them prior to 31-3-1969.
4. Prior to 18-11-1967 the official exchange rate between pound sterling of UK and the Indian rupee of India 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.
5. In his return filed before the Income Tax Officer, Chickmagalur (‘ITO’) for the assessment year 1968-1969, 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 ITRC 12/75) the ITO completed his assessment rejecting the said claim with which only we are concerned in these cases for these reasons:
“6. 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 having 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.
7. For the same reasons, U.K dividends will be taken by adopting the conversion rate prevailing at the time of each receipt. The U.K dividends will further be taken at the gross figure and not at the net figure as shown by the assessee for reasons stated in the assessment order for 1967-1968”.
In the first appeal filed by the assessee the Appellate Assistant Commissioner of Income Tax, Mysore Range, Mysore (AAC), by his order dated 6-7-1972 (Annexure-B in I.T.R.C No. 12 of 1975) concurred with they 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 herein above. 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 the UK.”
Hence, this reference.
6. In sustaining the order of the AAC and the ITO, the Tribunal for the first time relied on Rule 115(b) of the Rules 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.
7. Sri K.P Kumar, Learned Advocate appeared for the assessee. Sri K. Srinivasan, Learned Senior Standing Counsel for the Income Tax Department assisted by Sri H. Raghavendra Rao, Learned Junior Standing Counsel appeared for the revenue.
8. Sri 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 of the Rules providing to the contrary was ultra vires of the Act.
9. Sri 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.
10-1. 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 of 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 de-valuation in the Indian currency or vice-versa also. We are of the view that on this simple common sense economic aproach the answer to the question must be found against the assessee.
10-2. 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. IKB 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. Commissioner Of Income Tax…. . ILR 1984 KAR p. 1387 at para 11..
11. Chapter IVE of the Act ‘Capital Gains’ deals with the chargeability of capital gains and the computations to be made in determining the chargeability.
12. Section 45 of the Act is the charging Section for capital gains. Sections 48 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 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.
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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 anti-thesis 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 in 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 of the Act on which great emphasis was laid by Sri 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 Edition Vol. C expresses at page 892 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.”
Even these authoritative observations of Simon's Taxes supports the construction we have earlier placed on Sections 45 and 48 of the Act.
13. In Commissioner of Income Tax, Mysore v. Bangalore Transport Company Limited (in liquidation)(BTC) . 66 ITR 373. the Supreme Court was dealing with a case of the BTC company on the nationalisation of its transport services and the chargeability of that income receipt to tax under the Income Tax Act, 1922 expressed thus:
“In the scheme of the Income Tax Act, whenever the 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 crystalize, because there is no income on which the charge of tax may settle.”
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 Courts and Tribunals in the country. We are of the view that the enunciation made by the Supreme Court in BTC's case 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 on 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 v. Ashokbhai Chimanbhai . 56 ITR 42. and Alapati Venkataramiah v. Commissioner Of Income Tax, Hyderabad . 57 ITR 185., under receipt of incomes chargeable to capital gains under the 1922 Act is also to the same effect.
14. 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.
15. We have earlier noticed that the Tribunal relied on Rule 115 of the Rules 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 proper to examine that also and briefly express our views on them.
16. Rule 115(b) of the Rules 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:
“115. 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) xxxxxxxxxxxx
(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”
All this rule does is to recognise the official exchange rates fixed by the Reserve Bank prior to 19-11-1967 and thereafter till the said Rule was substituted on 1-11-1967. We are not here concerned with the new rule substituted on 1-11-1967. 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.
17. 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.
18. 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.
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