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Pr.Al.M.M Annamalai Chettiar v. Commissioner Of Income Tax, Madras .
Factual and Procedural Background
The appellant is a Hindu undivided family with its head office in Pageneri, Ramanathapuram District, Madras State, and a branch at Paritpuntar in the Federated Malaya States. For Assessment Year 1951-52 the appellant declared a total world income of Rs 2,13,079, which included a profit of $ 21,350 from its Malayan business. In arriving at this figure the appellant claimed an aggregate loss of $ 68,405 arising from the sale of certain house properties and rubber gardens purchased during the Japanese occupation of Malaya.
The Income-tax Officer accepted the loss with respect to three items but, for the remaining three, applied the conversion rates set out in the Schedule to the Debtor and Creditor (Occupation Period) Ordinance, 1948 (Malaya) to scale down the purchase price expressed in Japanese occupation currency. This yielded a net profit of $ 382 instead of the claimed loss. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld that view. The Tribunal refused to state a case under Section 66(1) of the Indian Income-tax Act. A petition under Section 66(2) to the Madras High Court was dismissed, relying on S.L.N. Sathappa Chettiar v. Commissioner of Income-tax, Madras (1959) 35 ITR 641. The present appeal to the Supreme Court is by special leave against that dismissal.
Legal Issues Presented
- Whether the income-tax authorities were justified in using the conversion table in the Schedule to the Debtor and Creditor (Occupation Period) Ordinance, 1948 (Malaya) to translate the purchase price of properties bought in Japanese occupation currency into Malayan currency for computing profit or loss.
- Whether consistency with earlier years’ assessments precluded the authorities from adopting a different method of valuation in the assessment year in question.
Arguments of the Parties
Appellant's Arguments
- The Schedule to the Malayan Ordinance was intended only to determine debtor-creditor obligations and could not legitimately be used for income-tax purposes to value capital assets.
- The appellant maintained regular accounts, and the Department had accepted the original cost of the properties in earlier years without any scaling down; hence there was no justification for a departure in the relevant assessment year.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| S.L.N. Sathappa Chettiar v. Commissioner of Income-tax, Madras (1959) 35 ITR 641 | To determine real profit where property was purchased in Japanese occupation currency and sold in Malayan currency, the purchase price must be converted into Malayan currency using the Schedule to the 1948 Ordinance. | The Supreme Court adopted the same reasoning, holding that a common standard of currency is essential and the Schedule provides the most reliable conversion rate. |
Court's Reasoning and Analysis
The Court noted that profit cannot be accurately computed when purchase and sale are effected in different currencies unless a common standard is used. Japanese occupation currency and post-war Malayan currency were “essentially different,” making direct comparison impossible. The Income-tax Officer’s adoption of the conversion rates in the Schedule to the 1948 Ordinance was therefore “the only correct basis.”
Although the Ordinance was enacted to settle debtor-creditor liabilities, its Schedule resulted from a detailed official inquiry and thus constituted the best available evidence for currency conversion. The Court emphasized that the assessment authority is not estopped from adopting the correct method merely because a different approach may have been applied in prior years; each assessment year is separate.
The Supreme Court found the Madras High Court’s earlier judgment in S.L.N. Sathappa Chettiar directly on point and agreed with its reasoning. No alternative conversion method had been suggested by the appellant, further supporting the authorities’ choice.
Holding and Implications
DISMISSED – The Supreme Court upheld the dismissal of the petition and confirmed the validity of using the Schedule to the 1948 Malayan Ordinance for currency conversion. The appellant is to pay costs.
Implications: The decision re-affirms that, where assets are bought and sold in different currencies because of extraordinary historical circumstances, tax authorities may adopt reliable external conversion tables to compute real profits or losses. The ruling does not create new precedent but solidifies the principle applied in S.L.N. Sathappa Chettiar.
Subba Rao, J.— This appeal by special leave is directed against the order of the High Court of Madras in Tax Case Petition No. 44 of 1961.
2. The appellant is a Hindu undivided family carrying on business with its head office at Pageneri in Ramanathapuram District, Madras State, and also business at Paritpuntar in the Federated Malaya States. In respect of Assessment Year 1951-52, the appellant showed in the return filed on his behalf a total world income of Rs 2,13,079, which included a sum of $ 21,350 as profit from the business at Paritpuntar. In computing the said profit from the business at Paritpuntar the appellant claimed an aggregate loss of $ 68,405 incurred on the sale of house property and rubber gardens as detailed below.
No. Date of Purchase Cost price Sale price $ $ 1. 28 Ani, Angirasa — 14 Silama House. 500 2. 28 Ani, Angirasa — No. 20 Silama House. 4154 3920 3. 23rd Avani, Angirasa — No. 23 Silama House. 2333 1425 4. 5th Avani, Subhanu — (21-8-43) Siradan House. 25,453 7000 5. 24th Avani, Tharana (15-9-44) — 38 Garden. 53,686 5880 6. 8th Purattasai, Tharana (23-9-44) — 35 Garden. 2668 1164 Total 88,294 19,880
In respect of Items 1, 2 and 3 above the Income Tax Officer accepted the claim of the appellant, but in regard to the remaining three items, namely, Items 4, 5 and 6, he held that as the said purchases of property and the outlay thereon were all made during the Japanese occupation of Malaya and in Occupation Currency, then in circulation, the purchase prices of the same required to be scaled down in accordance with the schedule of rates contained in the Debtor and Creditor (Occupation Period) Ordinance, 1948, passed by the Legislative Council of Federated Malaya States and on that basis the profit and loss in respect of the last 3 items of the property were worked out by him as under:
S. No. Sale of Property Purchase price in occupation currency Scaled down value of purchase price Sale amount Profit Loss $ $ $ $ $ 1. Siradan House 25,453 9000 7000 — 2000 2. 38 Garden 53,686 3830 5880 2050 — 3. 35 Garden 668 190 1164 974 —
In the result the Income Tax Officer computed a profit of $ 382 in respect of the sale of the above gardens as against the loss of $ 68,405 claimed by the appellant. On appeal, the Appellate Assistant Commissioner confirmed the order of the Income Tax Officer. On further appeal, the Income Tax Appellate Tribunal took the same view as the Income Tax Officer had taken. The appellant applied to the Tribunal under Section 66(1) of the Income Tax Act requiring it to state a case and refer the following question of law arising out of its order to the decision of the High Court:
“Whether on the facts and in the circumstances of the case the disallowance of the loss of $ 67,764 as claimed and the computation of the profit at $ 3.82 is valid in law.”
The Appellate Tribunal rejected the application. Thereupon, the appellant moved the High Court under Section 66(2) of the Income Tax Act praying for an order directing the Appellate Tribunal to state a case and refer the question of law arising out of its order. The High Court following the decision in S.L.N Sathappa Chettiar v. CIT, (1959) 35 ITR 641 dismissed the application. Hence the appeal.
3. Mr Srinivasan, learned counsel for the appellant, raised before us two points, namely, (1) the conversion table given in the Schedule to the Debtor and Creditor (Occupation Period) Ordinance, 1948, of Malaya, hereinafter called “the Ordinance”, was not intended to provide the rates of conversion for any purpose beyond what the Ordinance was expressly specified to achieve, namely, the determination of the rights and liabilities of debtors and creditors and that the adoption of the conversion rates given in the said Schedule to scale down the cost of properties in question was unwarranted; (2) the appellant maintained regular accounts for all the years including the Japanese occupation period; the original cost of acquisition of the 3 properties was adopted for the purpose of business balance sheets all these years; no loss on revaluation of the said assets by scaling down their values at any time was allowed in any of the earlier years by the Department; and, therefore, there was no justification for a departure in the year of account.
4. He also contended that if the properties were purchased for dollars and sold for dollars, the fact of inflation or deflation of currency would be irrelevant in ascertaining the profits. That may be so in the case of a country's currency, but when a property is purchased and sold in different currencies, say Japanese and Malayan currencies as in the present case, it is not possible to ascertain the profit or loss unless the exchange or conversion rate is ascertained. When a property is purchased in one currency and sold in another currency, how can the profit or loss be ascertained unless the conversion rate of the two currencies is known? There should be a common standard. The two currencies in the present case are essentially different though they were current in the same country during the same or different periods. The extraordinary situation of two currencies co-existing during the occupation period or the situation of one property being purchased during the enemy occupation period in Japanese currency and sold in Malayan currency after the vacation of the enemy occupation cannot be equated with fluctuations in the value of a nation's currency. Unless the cost price expressed in Japanese currency is computed in terms of the Malayan currency, it is not possible to arrive at the real profit accrued to the assessee. That is exactly what the Income Tax Officer did and, in our view, that is the only correct basis.
5. It is not correct to say that the Income Tax Officer applied the said Ordinance to ascertain the profit in the present case. The scheme and the details of the Ordinance have already been considered by us in Civil Appeals Nos. 55 of 1962 etc. The Ordinance was enacted for the purpose of scaling down the payments made by debtors to creditors during the occupation period. A Schedule was appended to the Ordinance providing a table of conversion of the depreciated Japanese currency into Malayan currency. In terms the Ordinance does not directly apply to the scaling down of the cost price of properties purchased in Japanese currency. But to ascertain the real profit, as we have stated earlier, it is necessary to adopt a reasonable conversion rate. The only material that was available to the Income Tax Officer was the Schedule appended to the Ordinance. Though that Schedule was appended to the Ordinance enacted for a different purpose, it was the result of a careful inquiry made by the appropriate and responsible authorities in Malaya. The Income Tax Officer was, therefore, justified in adopting that Schedule for the purpose of ascertaining the cost price of the properties purchased in Japanese currency and sold in the Malayan currency. The fact that the Income Tax Officer adopted some other method in the previous years — no material has been placed before us in regard to the method adopted by the Income Tax Officer — does not prevent him from ascertaining the correct method for the assessment year with which we are concerned.
6. The questions raised before us were the subject-matter of the decision of the Madras High Court in S.L.N Sathappa Chettiar v. CIT (1959) 35 ITR 641. There, as here, the assessee, which carried on a money-lending business and had its head office in India and a branch in the Federated Malaya States, purchased some properties when Malaya was under enemy occupation and sold them after the vacation of the enemy occupation in Malayan currency. In order to ascertain the profits resulting from the sale for the purpose of assessment of the assessee for the year 1952-53 the Department valued the cost of the properties in Malayan currency in accordance with the Schedule appended to the Ordinance. The assessee contended that the cost price of the properties must be taken at the figure accepted by the Department for the purpose of the Government scheme. The High Court held that to ascertain the real profits the Department was right in computing the cost price of the properties in Malayan currency in accordance with the Schedule appended to the Ordinance. The reason for the conclusion is stated thus at p. 649:
“The purchase was paid for in Japanese currency. The sale price was realised in Malayan currency. There was no parity between the two on the date of purchase. Certainly the Japanese currency ceased to be in use on the date of sale. To arrive at a computation of profits or losses where property was purchased in one currency and sold in another, it should be obvious that there should be a common standard; in the circumstances of this case the purchase price had to be computed in terms of Malayan currency in which the property was sold.”
The principle adopted by the High Court appears to be unexceptionable. It accords with our view. Adverting to the second argument that the schedule to the Ordinance should be confined only to the scaling down of debts, the learned Judges pointed out at p. 650:
“The report of the Select Committee which preceded the issue of the Malayan Ordinance has also been made part of the record. That showed that the Committee made a real attempt to ascertain the value of the Japanese currency in relation to the Malayan currency at every stage of the occupation period. Besides, we have to point out that no other basis of conversion was proposed by the assessee at any stage. We are unable to hold that the Department and the Tribunal were in error in adopting the conversion table furnished in the Schedule to the Malayan Ordinance.”
We also agree with this view.
7. In the result the appeal fails and is dismissed with costs.
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