1985 (5) TMI 82 - AT - Income Tax

Summary

Issues Involved:
1. Assessment of capital gains on the sale of shares.
2. Correctness of the method of computation of capital gains.
3. Deductibility of the cost of improvement of shares.
4. Validity of the memorandum of appeal signed by attorneys.

Detailed Analysis:

1. Assessment of Capital Gains on the Sale of Shares:
The primary issue pertains to the assessment of capital gains arising from the sale of 628,670 equity shares of I.D.L. Chemicals Ltd. by the assessee-company to Nitre Nobel AB of Sweden. Both parties involved in the transaction are non-residents, and the transaction was approved by the Government of India and the Reserve Bank of India, with the consideration settled in American dollars. The assessee contended that no capital gains arose from the sale of these shares. Alternatively, if capital gains did arise, the computation should be in dollars, with the profit then converted into Indian rupees.

2. Correctness of the Method of Computation:
The Income Tax Officer (ITO) computed the capital gains by converting the cost price and the sale price from dollars to Indian rupees based on the prevailing exchange rates on the respective dates of purchase and sale. The assessee challenged this method, arguing that both the purchase price and sale price should be computed in dollars first, and the resultant profit should then be converted into Indian rupees. This contention was supported by previous Tribunal decisions which held that the computation should be done in the currency in which the transaction was recorded in the assessee's books, i.e., dollars, and then converted to rupees for assessment.

3. Deductibility of the Cost of Improvement:
The assessee claimed a deduction for the cost of improvement of shares amounting to Rs. 916,181. However, this claim was not pressed following the Tribunal's decision in the case of Investment Corporation of India Ltd. vs. ITO, which held that the shareholders foregoing, surrendering, or losing profits transferred to reserves did not justify a conclusion that the assessee incurred any cost on the improvement of shares under Section 48(ii). The assessee's alternative argument was that if shares could not be improved within the meaning of Section 48(ii), no capital gains tax should be levied, citing the Supreme Court decision in CIT vs. B. C. Srinivasa Shetty and the Bombay High Court decision in Evans Fraser & Co. vs. CIT. The Tribunal rejected this argument, stating that the interpretation of Section 48(ii) does not imply that an asset must be capable of improvement for capital gains to be assessed.

4. Validity of the Memorandum of Appeal:
The Department contended that the memorandum of appeal filed before the CIT (A) was improperly signed and verified by A. Ferguson & Co. as Attorneys for the assessee, rather than by the director or managing director as required under Section 249(1). However, the assessee rectified this irregularity by subsequently filing a properly signed memorandum of appeal. The Tribunal found that the CIT (A) was justified in disposing of the appeal on merits, and the Department's preliminary objection failed.

Conclusion:
The Tribunal concluded that the method of computation of capital gains should follow the precedent set by previous Tribunal decisions. The capital gains should be computed by taking both the cost price and the sale price in dollars and then converting the profit into Indian rupees on the date of sale. The assessee's appeal was partly allowed on this basis. The cross objection filed by the assessee was dismissed as infructuous, and the Department's appeal was also dismissed as it was not pressed.