The Judgment of the Court was delivered by
R.S Mahendra, J.:— The Income-tax Appellate Tribunal, Bangalore Bench (hereinafter referred to as “the Tribunal”), has at the instance of the assessee referred the following questions of law for the opinion of this court under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”).
“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in coming to the conclusion that the capital gains taxable under section 45 of the Income-tax Act in the hands of the non-resident is Rs. 12,60,000 and not Rs. 7,29,891?”
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is wrong in law in coming to the conclusion that the loss arising out of change in the rate of exchange of DM and Rupee between the date of purchase and sale of shares, equivalent to Rs. 5,30,109 is not a capital loss available for set off against capital gains of Rs. 12,60,000 as arrived at by the Department?”
2. The facts as found by the Tribunal leading to the reference are these:
M/s. Stumpp & Schuele GmbH, the assessee, is a non-resident company. As a part of the collaboration agreement with the Indian Company, M/s. Stumpp, Schuele and Somappa (Pvt) Ltd., Bangalore, the assessee supplied in the year 1962 machinery to the Indian company and in lieu of the price of the machinery supplied, the assessee was allotted 7,500 shares of the Indian company of the face value of Rs. 100 per share in the year 1962. The value of the machinery in terms of DM, when it was supplied, was 2,47,590 DMs. Subsequently, the assessee was allotted 10,000 bonus shares on its holding of 7,500 shares resulting in the assessee becoming the holder of 17,500 shares of the Indian company. In January, 1974, the assessee sold 7,000 shares at Rs. 218 per share and received Rs. 15,26,000. For the assessment year 1974–75 relevant to the accounting year ending on December 31, 1973, the assessee filed a return declaring the capital gain at Rs. 7,29,891. The assessee worked out the capital gains on the above sale of shares in DMs on the basis of the prevailing exchange rates as follows:
DMs
DMs
“Money received on sale of 7,000 equity shares of Rs. 100 each at Rs. 218 per share amounting to Rs. 15,26,000 converted at DM 31.10 per Rs. 100 (being the prevailing rate of exchange)
4,74,586
Less: Cost of acquisition:
Cost of 17,500 equity shares (inclusive of 10,000 bonus shares)
6,19,05
Cost per share
6,19,005
35.37
2,47,590
______
______
17,500
Cost of 7,000 equity shares sold as on January 21, 1974, 35.37 × 700
2,26,996
DM 2,26,996 @ 31.10 per Rs. 100 prevailing as on January 21, 1974
7,29,891”
3. As against this, the Income-tax Officer worked out the long-term capital gains at Rs. 12,26,000 as follows:
Rs.
“Sale proceeds in rupees
15,26,000.00
(—) Cost of acquisition
3,00,000.00
_______________
Long-term capital gains
12,26,000.00”
________________
4. The Income-tax Officer accordingly assessed this sum of Rs. 12,26,000 for the assessment year 1974–75. The appeal before the Appellate Assistant Commissioner of Income-tax and the Income-tax Appellate Tribunal having been unsuccessful, the Tribunal has made this reference at the instance of the assessee. We will deal with the questions in the order they are referred to us.
5. Sri G. Sarangan, learned counsel for the assessee, argued that the assessee has paid in DMs for purchasing the machinery supplied to the Indian company and is, therefore, entitled to be paid in lieu thereof only in that currency and, therefore, the value of shares allotted in the first instance as also the bonus shares, has to be determined in foreign currency and the amount realised by selling 7,000 shares has to be converted into foreign currency and then the income or profit realised has to be ascertained. According to him, the income or profit realised by the assessee computed in foreign currency has to be next converted into Indian currency by adopting the current exchange rates and then subject it to tax.
6. Sri. K. Srinivasan, learned standing counsel for the Income-tax Department, appearing for the Revenue, argued that the profit the assessee got in India by the sale of his shares allotted by the Indian company is a capital gain and is chargeable to income-tax. He also referred to rule 115 of the Income-tax Rules, 1962, which provides for conversion of any income in foreign currency into Indian currency and not for the conversion of income in Indian currency into foreign currency for the purpose of computing the income or profit.
7. It is true, pursuant to a collaboration agreement, the assessee supplied the machinery to the Indian company having paid the price for the machinery in foreign currency. But the Indian company has not paid to the assessee the value of the machinery supplied in foreign currency. On the other hand, the Indian company allotted in the year 1962 to the assessee 7,500 shares of the face value of Rs. 100 per share. The value of this 7,500 shares allotted in lieu of the machinery supplied is Rs. 7,50,000 in Indian currency. The Indian company again allotted 10,000 bonus shares to the assessee. The assessee thus held 17,500 shares of the Indian company. The acquisition of these shares was in India and its value was in Indian currency. Payments were not made to the assessee for the supply of machinery in foreign currency but in lieu thereof, the assessee was given shares valued in Indian currency. It is not the case of the assessee that the collaboration agreement provided that payments should be made by the Indian company in foreign currency for the supply of machinery. The acquisition of the shares in the Indian company was in India and in Indian currency. The assessee has some time thereafter sold 7,000 shares of the Indian company in India at Rs. 218 per share and has realised in India Rs. 15,26,000 in Indian currency. The acquisition and sale of shares was in India and, therefore, the profit accruing from these transactions has to be computed in Indian currency.
8. Any profits or gains arising from the “transfer” of a capital asset in the previous year—save as otherwise provided in sections 53, 54, 54B and 54D is chargeable to income-tax under the head “Capital gains” and is deemed to be income of the previous year in which the transfer took place (section 45). “Transfer” in relation to a capital asset as defined in section 2(47) “includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law Mode of computation of “capital gains” is provided in section 48. This section lays down that the “capital gains” should be arrived at or computed after deducting the cost of acquisition of the capital asset to the assessee and the cost of improvements, if any. The sale by the assessee of 7,000 shares at Rs. 218 per share for Rs. 15,26,000 is a transfer within the meaning of section 2(47) and deducting the cost of acquisition of these 7,000 shares, i.e, a sum of Rs. 3,00,000, the income chargeable under the head “Capital gains” will be Rs. 12,26,000 and not Rs. 7,29,891 as claimed by the assessee.
9. Section 4 which is the charging provision provides that income is charged at the rate or rates specified for the year by the Finance Act, on a person on his total income of the previous year computed in accordance with and subject to the provisions of the Act. Section 5 defines “total income” and that part of section 5 relevant for our purpose reads:
“Section 5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes…
10. Section 5. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.”
11. Sub-section (2) of section 5 of the Act provides that persons who are not residents of India in the accounting year are charged on the income received or deemed to be received in India in the accounting year or which accrues or deemed to accrue, or arises or is deemed to arise during the accounting year in India. The assessee, a non-resident, received Rs. 15,26,000 by the transfer of 7,000 shares, his capital asset, and has earned profit in India. The total income chargeable under section 48 is Rs. 12,26,000 received by the assessee in the accounting year and is income and is chargeable under the head “Capital gains” under section 45 of the Act.
12. In Kirloskar Asea Ltd. v. Commissioner Of Income-Tax, Karnataka, [1979] 117 ITR 82 (Kar), it is held that foreign currency is in the nature of a commodity which can be converted into local currency by selling it and the dollars being the property of the assessee, constituted his capital asset and any profit derived on account of its transfer should be treated as capital gain. This decision is no authority for the proposition that the value of the shares acquired and sold in India should first be converted into foreign currency and then the profit or gain should be computed and the profit or gain so computed so converted into Indian currency can only be subjected to tax.
13. Rule 115 provides the rate of exchange for conversion into rupees of income expressed in foreign currency. This rule only regularises official exchange rates fixed by the Reserve Bank of India for enabling the conversion of income earned in foreign currency into Indian currency for the relevant period specified therein. That is so, because under the Act computation of income is made in Indian currency. We are supported in this view by a decision of this court in M/S. D.A Graham v. Commissioner Of Income Tax*, [1985] 154 ITR 879.
14. On the foregoing discussion, we hold that our answer to question No. 1 must be in the affirmative.
15. We now pass on to examine question No. 2.
16. The assessee, being a non-resident, it was argued, is entitled to deduct the loss accruing to him because of change in the rate of exchange from DMs into rupees between the date of acquisition in the year 1962 and the date of transfer in the year 1974. In other words, it is its case that this loss because of conversion from the local currency into foreign currency is a permissible deduction in computing his capital gains.
17. The assessee, as already noticed, though a non-resident who supplied machinery to the Indian company having paid for it in DMs, was not paid in DMs by the Indian company. He was allotted shares valued in rupees in lieu of the supply of machinery. The sale of shares was also in India and the realisation from the sale was in rupees. The capital gain that is subject to tax is the profit or gain arising from the transfer of shares in India by the assessee. The payments are all made in rupees. The capital gain is computed in the way provided in section 48 after giving deductions specified therein. Any loss the assessee may incur by transferring his income to Germany and consequent conversion into DMs is an event after the computation of capital gains and is not deductible under the Act. Under the Act, it is only the income of the assessee that is subjected to tax. The loss the assessee may incur by converting the rupees into DMs has no relation to the capital gain earned by transferring of shares by the assessee in India. The loss, if any, so incurred is not a permissible deduction under section 48 in computing the capital gain. On the foregoing discussion, we hold that our answer to question No. 2 must be in the negative.
18. In the result and for the reasons stated above, we answer question No. 1 in the affirmative and question No. 2 in the negative. Our answers to both the questions are in favour of the Revenue and against the assessee. In the circumstances of the case, we direct the parties to bear their own costs.