9911796707
TMI Blog1981 (6) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... iz., assessment years 1967-68, 1968-69, 1969-70 and 1970-71. In order to appreciate the questions, it would be necessary to refer to certain facts. The assessee-company is engaged in the business of supply of electricity. The assessment years concern the previous year ended on 31st March of each year respectively. The assessee is a sterling company incorporated on the 15th January, 1907, with its registered office in England. Clauses 140 to 144 of the articles of association, as adopted by a special resolution passed on the 9th November, 1949, speak about the keeping of the accounts of the company. Clause 140 of the articles of association states that the director should cause to be kept such books of account as were necessary to comply with the provisions of the statute. Clause 141 of the articles of association provides that books of account were to be kept at the office or such other place within Great Britain as the directors think fit and shall always be open to the inspection of the directors. No member, other than a director, should have any right of inspection of any account or book or document of the company except as conferred by the statute or authorised by the direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------- pound 33,44,062 Add: Expenses not allowable----- Legal expenses pound 364 Donations pound 171 Donations-Calcutta pound 480 Professional fees regarding preference staff pound 5,000 Repair charges for let out property pound 54 Insurance pound 4 Occupier's shares for let out property pound 10 Central representation fund pound 113 pound 6,196 ----------------------------- ------------------------------- pound 33,50,258 Less : Depreciation pound 15,73,611 Development rebate pound 2,36,887 Deduction under section 32(1)(iii) pound 5,573 ----------------------------- pound 18,16,071 ------------------------------ pound 15,34,187 Add: Profit under section 41(2) Business income pound 2,283 ---------------------------- pound 15,36,470 @ Rs. 21 Rs. 3,22,65,870 ---------------------------- Thereafter, the assessment order adds back certain amounts. These additions are all expressed in Indian rupees and there is no question of conversion. Thereafter, it deals with the addition of income on interest and on securities which are expressed in rupees as also the interest on debentures, income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was no warrant for taking different written down values on the assets on which depreciation was allowed and that when the assessee, being a sterling company, prepared accounts in sterling and had to determine the profit and loss, according to commercial principles, the tax on income should be determined according to the commercial principle. The depreciation being an outgoing expenditure had to be computed in terms, of s. 32(1)(ii) read with s. 43(6) of the Act and it was also to be calculated on the actual cost of the assets to the assessee as provided in s. 43(6) of the Act. When the actual cost was in sterling, profit and loss were to be determined after allowing depreciation in sterling and then the net profit was to be determined in sterling and then the net profit was to be converted into Indian rupee and this has been done in the instant case, according to the assessee. By referring to the provisions of s. 145(1) of the Act, it was contended on behalf of the assessee that when the assessee's method of accounting was to keep accounts in sterling and when that was a regular method of accounting, the same should not have been disturbed. It was further contended that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation pound 487,56,154 65,66,86,313 Capital expenditure in the form of work-in-progress pound 9,85,902 1,86,93,939 Net value of all assets pound 234,69,640 49,28,62,438 A glance at the balance-sheets of the company or at the above figures will show that fixed assets of the company were mostly acquired out of its rupee resources in India. The company has created statutory as well as other reserves out of profits earned in India. It has also raised debentures in Calcutta as well as in London. Loans were also-obtained in India from Indian banks for the purpose of business. The fixed assets of the company were largely acquired in India out of rupee funds and sometimes acquired outside India out of funds remitted from India and sometimes assets were also acquired outside India out of funds available outside. The Indian rupee which was equivalent to Is. 6d. till 5th June, 1966, was devalued and the exchange rate became Rs. 21 equivalent to pound 1 with effect from 6-6-1966. The depreciable fixed assets of the company which were acquired in India till 5-6-1966 were converted into sterling for incorporation in the U.K. accounts @ 1s. 6d. to the rupee. Similarly, assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rling value of the new rate of exchange, i. e., at their reduced pound value. The capital loss suffered by the company in terms of sterling due to devaluation was written off in the sterling accounts maintained in the U.K. As no such loss was suffered by the company in terms of rupees and as its rupee assets otherwise remained intact, there was no adjustment in the rupee a/c. While preparing the depreciation schedule for income-tax purposes the company did not take the rupee value of the assets for working out the WDV but started with the sterling value of the assets as appeared in the depreciation schedule prior to the devaluation and at the end of the previous year for the assessment year 1966-67. The company did not make any adjustment in the depreciation schedule and did not disturb the WDV of any of its assets in sterling after the devaluation in spite of the fact that the said schedule was prepared in sterling and not in rupee. The ITO, without applying his mind to the problem, accepted the computation and allowed depreciation which, according to me, was much in excess of what the company was entitled to. A simple example is given below for an asset purchased for Rs. 2,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was acquired in rupee in India or in other currencies outside India. The contention is important because this, in our opinion, is the main controversy in this case. It was urged that in computating the taxable profit the income had to be computed in accordance with the method of accounting regularly employed by the assessee as provided in s. 145(1) of the Act. It was urged that the maintenance of accounts in sterling was a regular method of accounting and as such the same should not be disturbed. It was submitted that there was no special provision in the Act which went against the principle and the method of accounting followed, by the company. According to the assessee, the company had not written off a part of its capital asset after devaluation but merely had made an adjustment in the books to bring the sterling value at par with the corresponding rupee value at the new rate of exchange of Rs. 21 Pound= 1. On behalf of the assessee, it was pointed out that the adjustment of the balance-sheet was completely irrelevant for a computation of the profits for income-tax purposes. It was further urged that if two views were possible, one favourable to the taxpayer should be adopted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the learned senior advocate will lead us to an absurd position not contemplated by the Act. 9. This issue can be examined from a different angle also. The value of the fixed assets acquired in any particular currency can be converted into a different currency only at a fixed rate as discussed in para. 3 of the order, viz., they must be converted at the rate of exchange which ruled at the time of their purchase or when the funds were specifically remitted to pay for them. If the cost of such asset is determined in terms of rupees and in terms of sterling at a particular rate and if the depreciation schedule is prepared and WDV is worked out in terms of sterling then the depreciation admissible under section 32 read with rule 5 worked out in sterling will have to be converted into rupees at the same rate of exchange at which the assets were originally converted from rupees to sterling, or from sterling to rupees, as the case may be, with a view to restrict the total depreciation to the cost of the asset in rupees. If this is not done and the depreciation allowance is converted from sterling to rupees at the altered rate of exchange then it will amount to upward revaluation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt. Sub-section (2) of section 43A, however, makes a specific provision that the concession thus provided for determining the actual cost of an asset will not apply for allowing development rebate under section 33. Thus, it is also clear from this section that depreciation has to be computed only on the old rupee value of the assets of the assesseecompany and on the WDV computed on such rupee value determined before the date of devaluation. " He was unable to accept the arguments that by the order that he proposed to make, there was an attempt to insist on changing the method of accounting. According to him, the method of accounting was mercantile and the accounts had to be maintained in accordance with the provisions of law for the purpose of income-tax in Indian rupees. He observed, inter alia, in conclusion on this aspect as follows : " 12. In the present case the assets of this sterling company were in India and as a result of the devaluation of the rupee it suffered a capital loss in terms of sterling as the sterling value of the rupee assets declined. The company took note of this loss and made necessary adjustments in its accounts and the loss was written off against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e general or even universal, could not by itself determine the amount of profits and gains of a trade for tax purposes. It has also been stated by Lord Reid in that case that normally a court attaches great weight to the view of the accountancy profession though the court must always have the last word. Similar view has been expressed in the case of Gold Coast Selection Trust Ltd. v. Humphrey [1948] 30 TC 209; [1949] 17 ITR (Suppl.) 19 (HL). It is also stated that the method of keeping accounts is often a guide but never conclusive in the matter of ascertaining the liability under the Income-tax Act. It thus held that it appeared at first blush that when the total income accrued or arose to the assessee or was deemed to accrue or arise to the assessee at the end of the year, the determination of the total income as was done by the Income-tax Officer appeared to be correct as far as the rule is concerned with conversion of income at the end of the year and that rule I IS of the Income-tax Rules does not state anything about the principle regarding conversion rate in respect of fixed assets and fixed liabilities, current assets and current liabilities and so on as could be found in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the profits in India had to be computed, according to the Indian I.T. Act, in sterling, and it was submitted that any profit so computed was to be converted under the provisions of r. 115, of the I.T. Rules, 1962. In aid of this submission, he referred us to s. 5 of the I.T. Act, 1961, which provided for the inclusion of the income. Sub. section (2) of s. 5 enjoins that the total income of any previous year of person who was a non-resident included all income from whatever source derived which was received or was deemed to be received in India in such year by or on behalf of such person or accrued or arose or was deemed to have accrued or arose to him in India during such year. Explanation I to sub-s. (2) of s. 5 stipulated that income accruing or arising outside India should not be deemed to be received in India within this section by reason only of the fact that it was taken into account in a balance-sheet prepared in India. Explanation 2 stipulated that for the removal of doubts it was declared that the income which had been included in the total income of person on the basis that it had accrued or arisen or was deemed to have accrued or arisen to him should not again be so in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 170 the written down value of any asset shall be the amount which would have been taken as its written down value if the assessment had been made directly on the person succeeded to. Explanation 2.-When any capital asset is transferred by a holding company to its subsidiary company or by a subsidiary company to its holding company, then, if the conditions of clause (iv), or, as the case may be, of clause (v) of section 47, are satisfied, the written down value of the transferred capital asset to the transferee-company shall be taken to be the same as it would have been if the transferor-company had continued to hold the capital asset for the purposes of its business. Explanation 2A.-Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company, and the amalgamated company is an Indian company, the written down value of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its business. Explanation 3.-Any allowance in respect of any depreciation carried forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted, because, that is a fact. In so far as the contention of the assessee that the articles of association of the said company required that the accounts and the balance-sheet of the said company had to be prepared in sterling, this, in our opinion, in view of the provisions of the articles and the facts of this case, has also to be accepted. But, in so far as the assessee urged that the profits in India of the assessee-company had to be computed in accordance with the Indian I.T. Act in sterling, we Ire, however, unable to accept this contention. Indeed, the assessment under the Indian Act had to be made in Indian currency. A reference to some of the sections, as illustration, would make, in our opinion, the position clear. We may refer to Ss. 10, 10B, 10(15), 16, 43(1), 37(2), 40A(6), 80L and 285A as illustration of the fact that the allowances in several cases had to be made in Indian rupees. Therefore, the assessment, as such, must always be made in Indian rupees according to the Indian Act. Therefore, assessment as such must always be made in Indian rupees according to the Indian I.T. Act. But if a particular assessee maintained his accounts in a currency other than the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period, and can in no sense be regarded as the 'source of such profits'. Nor can the place where such valuation is made be regarded as the situs of their accrual. The source of the profits and gains of a "business is indubitably the business, and the place of their accrual is where the business is carried on. As such, profits can be correctly ascertained according to the method adopted by an assessee only after bringing into the trading account his closing stock wherever it may exist, the whole of the profits must be taken to accrue or arise at the place of carrying on the business. On the finding of the income-tax authorities that the 582 bars of silver lying at Bikaner had not been really sold but remained part of the unsold stock of the firm's business at the end of the accounting year, the whole of the profits of that year must be taken to have accrued or arisen at Calcutta where the business was carried on, no part of that business having admittedly been transacted at Bikaner. " It is true in what manner the books are kept is not the system or method of accounting as understood in the background of s. 145(1) of the I.T. Act (sic). In India an assessee might keep his books in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian I.T. Act, 1922, in cl. (b) of s. 43(6) of the Act of 1961. The actual cost determined for a particular asset could be altered or redetermined for particular assessment year. That would not amount to, according to this court, giving retrospective effect to any legislation, nor would the same effect any vested right of the assessee. Each year's assessment was self contained and there was no question of any res judicata or estoppel by way of a previous year's assessment. The written down value and depreciation were not used as having ordinary dictionary meanings but had certain statutory meanings. This court further held that the actual cost and the written down value had to be computed in accordance with the provisions of the Act of 1961, even with reference to assets in use in the previous year for the assessment year 1962-63, but which were acquired prior thereto. Where the assessee derived income from the business of distribution of electricity and depreciation was allowed to it under the Act of 1922, on the basis that the actual cost would include contributions received from customers for installation of service lines, but after the passing of the Act of 1961, such con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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