1996 (1) TMI 7 - SC - Income Tax

Export - taxability of the amounts received by the assessee from foreign buyers - no dispute that the amounts which were outstanding and receivable by the assessee on the last day of the accounting year from the foreign buyers had to be converted into Indian rupees at the rate of exchange prevalent on the last day of the accounting year - order under section 263 passed by the CIT that assessment are prejudicial to interest of Revenue was rightly quashed by HC

Summary

Issues:
Taxability of amounts received from foreign buyers, Interpretation of rule 115 of Income-tax Rules, 1962, Validity of Commissioner of Income-tax's order under section 263, Application of rule 115 in converting foreign exchange into rupees for assessment.

Analysis:
The Supreme Court heard an appeal regarding the taxability of amounts received by an assessee from foreign buyers during a specific period. The Commissioner of Income-tax challenged the assessment made by the Income-tax Officer, claiming that rule 115 of the Income-tax Rules, 1962, was not correctly applied. The Commissioner issued a notice under section 263 to revise the assessment, directing the conversion of foreign exchange into rupees based on the telegraphic transfer buying rate on the last day of the accounting period. The High Court quashed the Commissioner's order, stating that rule 115 was ultra vires the Income-tax Act, 1961.

The High Court noted that the assessee received payments from foreign buyers in foreign exchange, which were then converted into rupees by the bank. The High Court emphasized that the assessee should be taxed on the actual income received, not on notional income. The appellants argued that the payments were made in foreign exchange as per the contract, and therefore, rule 115 applied to value the foreign exchange received by the assessee on the last day of the accounting period.

The Supreme Court analyzed rule 115 and its application, clarifying that it only mandates the conversion of foreign currency into rupees at the telegraphic transfer buying rate on the last day of the previous year if such foreign currency is held by the assessee. The Court emphasized that if the conversion had already taken place during the accounting period, rule 115 does not apply. In this case, the assessee received payments in Indian rupees for goods exported, which were duly assessed. The Court held that the Commissioner's order under section 263 was rightly quashed by the High Court, but the High Court erred in striking down rule 115 of the Income-tax Rules.

Therefore, the Supreme Court disposed of the appeal, upholding the quashing of the Commissioner's order but reinstating the validity of rule 115. No costs were awarded in the matter.