2002 (3) TMI 206 - AT - Income Tax

Summary

Issues:
Interpretation of Rule 115 of the Income-tax Rules, 1962 regarding the conversion of foreign currency income into rupees for tax assessment purposes.

Analysis:
The appeal in this case revolves around the application of the Liberalised Exchange Rate Control Rate Management System (LERMS) to the assessment year 1992-93 as directed by the CIT(A). The controversy primarily focuses on the interpretation of Rule 115 of the Income-tax Rules, 1962, which deals with the rate of exchange for converting foreign currency income into rupees for tax assessment purposes. The assessee, a Hong Kong-based commercial airline, converted its foreign exchange earnings using a combination of market rate and official rate of exchange. The Assessing Officer rejected the application of LERMS for the entire previous year's earnings, citing the RBI Circular's effective date as 1-3-1992. The Assessing Officer proceeded to adopt a flat rate as per Rule 115(c) for conversion, resulting in an addition to the assessed income under section 44BBA. However, the CIT(A) overturned this decision, leading to the revenue's appeal before the ITAT CALCUTTA-A.

Upon careful consideration of the arguments presented, the ITAT CALCUTTA-A analyzed Rule 115 of the Income-tax Rules, 1962, which mandates the conversion of foreign currency income into rupees at the telegraphic transfer buying rate as on the specified date. Referring to the Hon'ble Supreme Court's ruling in CIT v. Chowgule & Co. Ltd., it was established that foreign currency should be converted into rupees at the telegraphic transfer buying rate as on the last day of the previous year. In this case, the LERMS was in force as of 31-3-1992, and the conversion was to be done based on the market rate and official rate as per the RBI Circular. The ITAT CALCUTTA-A found no fault in the assessee's conversion methodology, supporting the CIT(A)'s decision and dismissing the revenue's appeal.

Furthermore, the ITAT CALCUTTA-A highlighted that applying the LERMS conversion method only to March 1992 earnings would have resulted in a significantly lower rupee value compared to the assessee's computation. The Assessing Officer's approach was deemed flawed as it deviated from the Rule 115(c) provisions, which require the use of the telegraphic transfer buying rate for notional conversion of foreign exchange earnings into rupees. The judgment emphasizes the importance of adhering to the specified rate of exchange for accurate tax assessment calculations.

In conclusion, the ITAT CALCUTTA-A dismissed the appeal, affirming the CIT(A)'s decision regarding the application of LERMS and the correct methodology for converting foreign currency earnings into rupees for tax assessment purposes.