1991 (4) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Allowability of loss incurred due to fluctuation of exchange rates in remittance of profit.
2. Allowability of loss incurred in remittance of dividend.
3. Computation of long-term capital gains arising out of the transfer of original shares and the cost of acquisition of original and bonus shares.

Detailed Analysis:

1. Allowability of Loss Incurred Due to Fluctuation of Exchange Rates in Remittance of Profit:
The first issue relates to the assessee's claim of Rs. 1,71,066 as a loss due to exchange rate fluctuations while remitting profits from India to its UK office. The Tribunal disallowed this claim, stating that the loss was not incurred for the purpose of earning income and was not laid out for the purpose of the business. The Tribunal referenced the Supreme Court's decision in Sutlej Cotton Mills Ltd. [1979] 116 ITR 1 (SC), which distinguished between losses on revenue account and capital account. The Tribunal concluded that the remitted surplus funds did not constitute a trading asset or circulating capital and were intended for distribution as dividends or investment outside India. Consequently, the loss was not considered a trading loss or incidental to business operations. The High Court, following its earlier decision in Goodriche Group Ltd. (No. 1) v. CIT [1993] 201 ITR 261, answered the first question in the negative and in favor of the assessee, thereby disallowing the deduction.

2. Allowability of Loss Incurred in Remittance of Dividend:
The second issue pertains to the assessee's claim of Rs. 368 as a loss due to exchange rate fluctuations while remitting dividends from India to the UK. The Commissioner of Income-tax (Appeals) and the Tribunal rejected this claim on the same grounds as the remittance of profits. The High Court applied the same principle, determining that the loss suffered due to exchange rate fluctuations on remittance of dividends was not allowable as a deduction. Thus, the second question was also answered in the negative and in favor of the assessee.

3. Computation of Long-Term Capital Gains and Cost of Acquisition of Original and Bonus Shares:
The third issue involves the computation of long-term capital gains from the transfer of original shares and the cost of acquisition of original and bonus shares. The assessee-company acquired 1,200 equity shares of Duncan Bros. and Co. Ltd. and was later allotted bonus shares. The entire block of shares was sold, and the assessee contended that the cost of original shares should be taken as the actual cost and the cost of bonus shares should be determined by spreading the cost of original shares over both original and bonus shares. The Tribunal, upholding the decisions of the lower authorities, rejected this method.

The High Court referenced several precedents, including CIT v. Gold Mohore Investment Co. Ltd. [1968] 68 ITR 213 (SC), Dalmia Investment Co. Ltd. [1964] 52 ITR 567 (SC), and Smt. Protima Roy [1982] 138 ITR 536 (Cal), which established that the cost of original shares should be spread over the original and bonus shares collectively to determine the average price. The High Court concluded that the method adopted by the lower authorities and upheld by the Tribunal was correct. Therefore, the third question was answered in the affirmative and in favor of the Revenue.

Conclusion:
The High Court ruled:
1. The loss incurred due to exchange rate fluctuations in remittance of profit is not an allowable deduction.
2. The loss incurred in remittance of dividends is not an allowable deduction.
3. The cost of acquisition of original shares should be spread over both original and bonus shares for computing long-term capital gains.