1981 (12) TMI 69 - AT - Income Tax

Issues Involved:
1. Computation of capital gains on the sale of shares by a non-resident company.
2. Applicability of Rule 115 of the Income-tax Rules, 1962.
3. Determination of the cost of acquisition of shares.
4. Relevance of foreign exchange rates in computing capital gains.
5. Applicability of Section 45 of the Income-tax Act, 1961.
6. Relevance of prior Tribunal decisions in similar cases.

Detailed Analysis:

1. Computation of Capital Gains on the Sale of Shares by a Non-Resident Company:
The appellant, a non-resident company, sold 9,520 shares of Bharat Steel Tubes Ltd. and declared capital gains of Rs. 16,016. The ITO rejected this computation, determining the capital gains to be Rs. 49,553 based on the sale price in Indian rupees. The Commissioner (Appeals) upheld this assessment, emphasizing that the transactions occurred in Indian currency and the capital gains should be computed in rupees.

2. Applicability of Rule 115 of the Income-tax Rules, 1962:
The appellant argued that Rule 115 should apply, converting the capital gains into US dollars. However, the Commissioner (Appeals) and the Tribunal held that Rule 115 was not applicable because the transactions were conducted in Indian currency. The capital gains accrued in India and were realized in Indian rupees, making the rule inapplicable.

3. Determination of the Cost of Acquisition of Shares:
The appellant contended that the cost of acquisition should be adjusted to account for devaluation. The Tribunal rejected this, noting that the shares were acquired at Rs. 10 per share (totaling Rs. 47,600) and the cost was correctly determined in Indian rupees. The remittance of funds in US dollars for the purchase was deemed irrelevant for computing the acquisition cost.

4. Relevance of Foreign Exchange Rates in Computing Capital Gains:
The appellant's method of computing capital gains based on US dollars was rejected. The Tribunal emphasized that for tax purposes in India, transactions must be evaluated in terms of Indian rupees. The remittance of sale proceeds in US dollars did not alter the initial receipt in Indian rupees.

5. Applicability of Section 45 of the Income-tax Act, 1961:
The appellant argued that Section 45 should not apply as the capital gains were deemed or illusory. The Tribunal disagreed, affirming that the transactions were real and the capital gains were actual, not fictional. The appellant's own declaration of capital gains in its return further invalidated this argument.

6. Relevance of Prior Tribunal Decisions in Similar Cases:
The Tribunal referenced two prior decisions: Kelvinator International Corporation and Arwood Corporation. Both cases supported the view that capital gains should be computed in Indian rupees. The Tribunal found these decisions directly applicable and rejected the appellant's contention that they were distinguishable. The Tribunal also disagreed with a contrary decision in Abbey Etna Machine Co., favoring the reasoning in Kelvinator and Arwood.

Conclusion:
The Tribunal upheld the ITO's computation of capital gains at Rs. 49,553, dismissing the appellant's method of computation based on US dollars and the applicability of Rule 115. The transactions being in Indian currency necessitated the computation of capital gains in Indian rupees. The appeal was dismissed, affirming the reasoning and conclusions of the Commissioner (Appeals).

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