1985 (1) TMI 99 - AT - Income Tax

Summary

Issues:
1. Conversion of income earned in dollars into rupees at different exchange rates.
2. Accrual of income in a non-resident company.
3. Interpretation of the Supreme Court ruling in CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42.
4. Application of exchange rates for income conversion in the context of devaluation.

Analysis:
1. The case involved the question of whether income earned by a non-resident company in dollars should be converted into rupees at different exchange rates based on the timing of earnings. The company filed accounts in dollars until a certain assessment year, after which it switched to rupees for its Bombay branch and continued using dollars for its USA office. The Income Tax Officer (ITO) converted the entire income into rupees at the post-devaluation rate, leading to a dispute.

2. The issue of income accrual in a non-resident company was raised, with the department arguing that income is realized only at the end of the accounting period, necessitating conversion at the year-end rate. The company contended that income accrues before actual receipt, especially for sales completed before the devaluation date. The Commissioner (Appeals) sided with the company, considering income accrued before the devaluation date and allowing the appeal based on this interpretation.

3. The interpretation of the Supreme Court ruling in CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 was crucial in determining the timing of income accrual and conversion. The ITO relied on this ruling to convert the entire income at the post-devaluation rate, while the Commissioner (Appeals) favored the company's argument based on income accrual preceding actual receipt, aligning with the principles established in the Supreme Court case.

4. The application of exchange rates for income conversion in the context of devaluation was a significant aspect of the judgment. The Tribunal deliberated on whether income should be converted partially at pre-devaluation and post-devaluation rates based on the timing of earnings. Ultimately, the Tribunal held that the entire income should be converted into rupees at the prevailing rate on the last day of the accounting period, rejecting the partial conversion proposed by the company and upholding the department's appeal.