Karnataka High CourtD.A. Graham And N.G.F. Graham vs Commissioner Of Income Tax And Ors. on 19 April, 1985Equivalent citations: ILR1985KAR2143, [1985]154ITR879(KAR), [1985]154ITR879(KARN)JUDGMENT

 

 Puttaswamy, J.1. As the questions that arise for determination in these cases are interconnected, we propose to dispose of them by a common order.I.T.R.C. No. 12 of 1975 :2. In this reference made unders. 256(1)of the I.T. 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 that circumstances of the case, the Tribunal was right in holding that the amount that of capital gains and dividends received by the assessee in 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 1968-69 ?"Writ Petition No. 2731 of 1979 :3. In this petition underart. 226of the Constitution, the assessee has challenged r. 115(b) of the I.T. Rules of 1962 ("the Rules"), as ultra vires of the Act.4. But, the 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.5. During the previous year ended March 31, 1968, corresponding to the assessment year 1968-69, the assessee, a British subject but a resident Indian, sold on different dates in the United Kingdom (U.K.), many of them prior to November 19, 1967, and the remaining thereafter but all of them prior to March 31, 1968 certain shares and securities held by him. During the same period, the assessee also received dividends from U.K. prior to November 19, 1969, and thereafter also but all of them prior to March 31, 1969.6. Prior to November 18, 1967, the official exchange rate between pound sterling and the Indian rupee was 1 : 21. On November 18, 1967, U.K. devalued its pound sterling and, therefore, the official exchange rate on and from November 19, 1967, between pound sterling and the rupee was fixed at 1 : 18.7. In his return filed before the Income-tax Officer, Chickmagalur ("ITO"), for the assessment year 1968-69, the assessee claimed that capital gains accruing from the sale of shares and securities in U.K. including dividends from U.K. should be computed at the official exchange rate prevailing as on March 31, 1968, and not as on the very dates they were received, arose or accrued either in U.K. or in India. On January 28, 1971 (annexure A in I.T.R.C. No 12 of 1975), 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 of, the profits 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 gain 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 of and the profit and loss cannot be taken as per the rate of exchange prevalent on the 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 showing 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 1967-68."8. In the first appeal filed by the assessee, the AAC of Income-tax, Mysore Range, Mysore (AAC), by his order dated July 6, 1972 (annex. B in I.T.R.C. No. 12 of 1975), concurred with the ITO. In second appeal filed by the assessee, the Tribunal on June 11, 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 provision of rule 115(b) which are reproduced hereinabove. 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 an assessee in the UK."9. Hence, this reference.10. In sustaining the orders of the ITO and the AAC, the Tribunal for the first time relied on rule 115(b) of the I.T. 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 the parent Act was alone pressed.11. 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.12. Sri Kumar has urged that the official exchange rate between the pound sterling and the rupee prevailing as on March 31, 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 r. 115 of the I.T. Rules providing to the contrary was ultra vires the Act.13. 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 r. 115 only recognised the same as a fact, and was not ultra vires the Act.14. Admittedly, the sale of shares and securities of the assessee were in the UK and were realised there in pound sterling on different dates and there was a devaluation of pound sterling on November 18, 1967, and the official exchange rate between the two currencies stood altered thereafter are not a 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 devaluation in the Indian currency or vice versa also. We are of the view that on this simple common sense economic approach, the answer to the question must be found against the assessee.15. Whether this general and common sense approach of 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] 1 KB 64, at 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 inArunachalam v. CIT[1985] 151 ITR. 172.16.Chapter IV of the Act."E. - Capital Gains", deals with the chargeability of capital gains and the computation to be made in determining the chargeability.Section 45of the Act is the charging section for capital gains.Section 48deals with the mode of computations and deductions relating to 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 insection 53,54,54B,54D,54Eand54F, be chargeable to income-tax under head 'Capital gains', and shall 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 ofsection 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.""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."17. 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 after 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 antithesis 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 ins. 45of 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 deal 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.18. 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."19. Even these authoritative observations in Simon's Taxes support the construction we have earlier placed on ss 45 and 48 of the Act.20.InCIT v. Bangalore Transport Company Limited (Inliquidation) , the Supreme Court, dealing with a case of BTC company on the nationalisation of its transport services and the chargeability of that income receipt to tax under theIndian I.T. Act, 1922, expressed thus (headnote) :"Under the scheme of theIncome-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 crystallize, because there is no income on which the charge of tax may settle."21. 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 of acts and that what really binds is the ratio disdained 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 into 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 inCIT v. Ashokbhai ChimanbhaiandAlapati Venkataramiah v. CIT[1965] 57 ITR 185, under receipt of income chargeable to capital gains under the 1922 Act, is also to the same effect.22. On the above discussion, we hold that the conclusion reached by the Tribunal, though not for its very reasons, but for the reasons given by us, which really unholds 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.23. We have earlier noticed that the Tribunal relied on r. 115 of the I.T. 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 r. 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.24. Rule 115(b) of the I.T. Rules framed by the Board in exercise of the powers conferred on it bys. 295of the Act, as it stood then and was in operation of 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 the rupees of any income shall be as follows :- ...........(b) in respect of income accruing 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, pounds 1 sterling = Rs. 21.00;(ii) after the 18th day of November, 1967, pounds 1 sterling = Rs. 18.00.(2) U.S. $ 1 = Rs. 7.50."25. All that this rule does is to recognise the official exchange rates fixed by the Reserve Bank prior to November 19, 1967, and thereafter till the said rule was substituted on November 1, 1977. We are not here concerned with the new rule substituted on November 1, 1977. 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 this rule.26. What we have found on a construction of r. 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 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 the contention of the petitioner to the contrary. We, are, therefore, hold that the assessee's writ petition is liable to be dismissed.27. 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.28. In the peculiar circumstances of the cases, we direct the parties to bear their own costs in both the cases.