1990 (12) TMI 124 - AT - Income Tax

Summary

Issues Involved
1. Determination of the cost of acquisition of shares in foreign currency.
2. Computation of capital gains in foreign currency versus Indian currency.
3. Applicability of the doctrine of real income.
4. Relevance of commercial accounting principles.
5. Impact of exchange rate fluctuations on capital gains computation.

Detailed Analysis

1. Determination of the Cost of Acquisition of Shares in Foreign Currency
The appellant, a foreign non-resident company, argued that the cost of acquisition of shares should be determined first in foreign currency and then converted into Indian rupees. The shares were originally allotted in satisfaction of the cost price of machinery supplied, which was in foreign currency. The appellant contended that since the shares were acquired prior to 1-1-1964, the T.T. buying rate as prevalent on 1-1-1964 should be adopted for working out the cost of acquisition of the original shares into Indian rupees. The IAC, however, did not accept these arguments and worked out long-term capital gains on the sale of shares using the market value on 1-1-1964.

2. Computation of Capital Gains in Foreign Currency Versus Indian Currency
The appellant maintained its accounts in Swiss Francs and argued that the capital gain/loss should be computed first in foreign currency and thereafter converted into Indian rupees at the prevailing market rate. The CIT(A) rejected this contention, stating there was no provision in the Act to justify such conversion. The CIT(A) held that the income accrued to the appellant in Indian rupees and not in foreign currency, and thus, the computation by the IAC was correct.

3. Applicability of the Doctrine of Real Income
Shri Bansi Mehta, representing the appellant, argued that the real income of the appellant had to be brought to tax and not the notional income. He cited several judicial precedents to support this argument. However, it was concluded that the doctrine of real income did not apply in this case because the capital gains were earned in Indian currency, and the shares were both purchased and sold in India in terms of Indian currency.

4. Relevance of Commercial Accounting Principles
Shri Mehta also argued that principles of commercial accounting should be applied, relying on various decisions of the Tribunal. However, the Tribunal found that these decisions were distinguishable on facts. The Tribunal noted that the purchase price of the shares was determined in terms of rupees, and the sale was effected in India in terms of Indian rupees. Therefore, the commercial accounting principles cited did not advance the appellant's case.

5. Impact of Exchange Rate Fluctuations on Capital Gains Computation
The Tribunal referred to the Karnataka High Court's decision in Stumpp & Schuele GmbH's case, which held that the acquisition of shares of an Indian company was in Indian currency, and the profit accruing from these transactions had to be computed in Indian currency. The Tribunal found this decision applicable and concluded that the exchange rate fluctuations, which reduced the value of the sale price in terms of Swiss Francs, could not be treated as the cost of acquisition nor allowed as an expenditure incurred.

Conclusion
The Tribunal upheld the computation of capital gains made by the IAC and confirmed by the CIT(A). It held that the capital gains on the sale of shares were rightly calculated in Indian currency. The appellant's arguments regarding the computation of capital gains in foreign currency and the application of the doctrine of real income were not accepted. The appeal was dismissed.