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TMI Blog1992 (3) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh certain facts of this case. The petitioners in this case are a company incorporated under the Companies Act, 1956. The petitioners are exporting iron ore to foreign countries, more particularly to Japan. The petitioners entered into agreements for sale of iron ore with foreign buyers at certain prices. As per the arrangements between the foreign buyers and the petitioners, the foreign buyers opened a letter of credit with a bank in India. As soon as the iron ore is loaded into the ship, the bill of lading is signed by the master of the ship and the petitioners raise invoices against the foreign buyers for the price of the ore shipped. Thereafter, these documents are presented by the petitioners to their banker in India and the petitioners receive payment through the Indian bankers in rupees at the rate of exchange prevailing then. If on the date of closing of the financial year any amount of sale proceeds remains outstanding, it is converted into Indian rupees at the rate of exchange prevailing on the last day of the financial year and is entered in the books of the petitioners and accounted for as their income. The petitioners further contended in the petition that, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. The petitioners, in paragraph 8 of their petition, have stated as under : "The application of rule 115 of the Income-tax Rules, 1962, to the petitioners' export earnings will yield the following result : The petitioners' accounting year relevant to the assessment year 1984-85 was July 1, 1982, to June 30, 1983. Suppose goods worth 100 dollars were exported in the month of July, 1982, when the rate of exchange was Rs. 9.50 per dollar. The petitioner actually received Rs. 950 and accounted for the same as income in the books of the petitioner. If, however, on June 30, 1983, the rate moved to Rs. 10.06 per dollar then, by virtue of rule 115, the petitioner would be assessed on the amount of Rs. 1,006 even though in fact he had realised only Rs. 950 and there was no possibility or question whatsoever of recovering the additional amount of Rs. 56 which was clearly a notional figure. The petitioner would thus be taxed on an amount which was not only not received, but to which he was not entitled at any time and which the petitioner would not be able to realise and which really did not exist." After going through the aforesaid contentions of the petitioners as mentioned in para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpletely valid. According to him, in order to avoid the laborious exercise of finding out the rate of exchange at different points of time, the rule-making power thought it wise to convert all the earnings of the previous year at the rate of foreign exchange prevailing on the last day of the previous year, which is June 30, 1989, in the present case. Therefore, the said rule does not go beyond section 4 read with section 28 of the Income-tax Act, 1961, and the rule-making power was correctly exercised under section 295. Secondly, it was also contended by Mr. Dias, the learned Advocate-General, that the amendment dated April 1, 1990, is prospective and there is nothing in the amendment to show that it is retrospective in nature. Thirdly, it was also submitted by the learned Advocate-General that if the court comes to the conclusion that the said amendment is retrospective, then the same will be applicable only if it is shown that the profits of business are received in accordance with the provisions of the FERA, 1973, more particularly, section 18 of the said Act. In the light of the aforesaid facts and the submissions made by learned counsel appearing on both the sides, we will n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to see in what manner the petitioners receive income and at what point of time income-tax is leviable. In the present case, the petitioners entered into agreements for the sale of iron ore to the foreign buyers at a certain price. This price is agreed in advance. The mode of payment is in foreign currency through the Indian banker who is authorised to give foreign exchange. Under the contract, the payment is made to the petitioners when the documents of bill of lading are presented by the petitioners through their bankers in India. According to the petitioners, it is at this point of time when the petitioners receive money under the contract that they are liable to be taxed. The petitioners have further stated that, during the previous accounting year from July 1, 1982, to June 30, 1983, the petitioners have received various payments on different dates and the petitioners have paid tax on the actual income they received from the bank in Indian currency. It is also contended on behalf of the petitioners that, in fact the petitioners received the money on various dates at the rate of foreign exchange prevailing on the date of the receipt of the money. The petitioners have also suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd gains, then the proportionate part thereof attributable to the sale proceeds received by the agents in India were income, profits and gains received by them at the moment the gross sale proceeds were received by them in India and that being the position the provisions of section 4(1)(a) were immediately attracted and the income, profits and gains so received became chargeable to tax under section 3 of the Act.' The same principle applies to receipts in the course of business of a transport operator." In the aforesaid paragraph 6 of the judgment, a reference is made by the Supreme Court to section 10(1) of the Income-tax Act, 1922. The same provision is there at present in section 28 of the Income-tax Act, 1961. Therefore, in our opinion, whatever has been observed by the Supreme Court in the said paragraph 6 of the judgment will also be applicable to the facts and circumstances of the present case. According to the aforesaid decision of the Supreme Court, under the scheme of the Income-tax Act, whenever an assessee receives in the course of his business money or money's worth, income embedded therein accrues or arises to him, and the same becomes subject to an ambulatory cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of the present case, we will try to see the effect of rule 115(c) of the Income-tax Rules, 1962. Rule 115(c) of the Incometax Rules, 1962, reads as under : "115. The rate of exchange for the calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be receive by him or on his behalf in foreign currency shall be the telegraphic transfer buying rate of such currency as on the specified date . . . (c) in respect of income chargeable under the heads 'Income from house property', 'Profits and gains of business or profession' (not being income referred to in clause (d)) and 'Income from other sources' (not being income by way of dividends), the last day of the previous year of the assessee." On a fair reading of the aforesaid rule, if we apply the said rule to the facts and circumstances of the present case, then even when the petitioners have received payments from the buyer much before the specified date as per clause (c) of rule 115, for conversion of the foreign exchange to Indian currency, the petitioners will have to pay the tax on the basis of the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the said rule is framed under the Act from the point of view of convenience as it is very difficult for the Assessing Officers to follow different rates of foreign exchange of different countries at different times and, in order to avoid this exercise, it is contended by learned Advocate-General that the said rule has fixed the modality as to how the foreign exchange earned by the assessee during the assessment year is to be converted and taxed, i.e., on the last date which is June 30, 1983, in the present case. The reasons given by learned Advocate-General are definitely very attractive at first glance. However, as pointed out earlier, if the said rule is applied to the facts and circumstances of the present case, virtually it would amount to compelling the petitioners to pay tax on income which they have not earned and will never earn in future. It was further contended by learned Advocate-General that, in fact, there is no obligation on the part of the petitioners to convert the foreign exchange on the date on which they receive and that being so, the petitioners could have converted their foreign exchange into Indian currency on the last day of the previous accounting year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e country with sterling currency or in a country with a dollar currency. According to the assessee in that case, since the rate of conversion from Ceylon currency to Indian currency was not mentioned in the said rule 115, the same did not apply in his case. In the said facts and circumstances, the Madras High Court had held that the rule-making authority was interested in providing for the rate of conversion with reference to income earned in all foreign currencies and not only with reference to income earned in the particular currencies. There is also no particular reason as to why the rule-making authority should have singled out the sterling and dollar currency for the purpose of rule-making and leave out the other currencies. From the aforesaid facts of the case as decided by the Madras High Court, it is clear that the only argument advanced by the assessee in that case was that rule 115 as it stood then was not applicable to him as, in the said rule, the rate of conversion from Ceylon currency to Indian currency was not mentioned as has been done in the case of sterling and dollar. The argument advanced in the present case is altogether different, i.e., by applying rule 115(c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artment that the official exchange rate prevailing as on the dates of receipt of capital gains and dividends should alone be the basis for computation under the Act and that rule 115 only recognised the same fact. In this case, the Karnataka High Court has observed that the assessee in that particular case had realised, on different dates, pound sterling prior to devaluation, i.e., before November 18, 1967, and, therefore, the rate of conversion must only be with reference to the date of actual receipt and cannot normally be anything else. It was further observed in that case that taking any other view of the matter would be somewhat illogical and even divorced from the realities and the factual situation. It was further observed that aggregation of all receipts as on the last day of accounting year does not create any incongruity or antithesis in the chargeability of the receipt. What really happens is the postponement of the accounting, chargeability and determination and quantification of the liability to tax due thereon with reference to that and other receipts. If this is the true position of receipts, then, it must necessarily follow that the official exchange rates prevailin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable. At this point of time, we may further point out that the learned Advocate General also had contended that the said amendment is applicable provided the petitioners have complied with the FERA 1973 and not otherwise. He has further contended that the petitioners must show that they received the aforesaid foreign exchange under section 18 of the FERA, 1973. However, according to our opinion, the respondents cannot agitate this contention because, in this petition, the petitioners have clearly stated that all the receipts which they have received during the relevant period were as per the FERA, 1973, and to which there is no challenge by the other side. However, we are not dealing with the controversy as to whether the aforesaid amendment which was brought into force on April 1, 1990, is retrospective or prospective as, on the first point itself, we have already arrived at a conclusion that clause (c) of rule 115 of the Income-tax Rules, 1962, is illegal as the same overrides the substantive provisions of the Act. In view of the aforesaid findings of ours, we quash the order dated March 30, 1989, passed by respondent No. 1 and make the rule absolute in terms of prayer claus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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