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TMI Blog1990 (12) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... so allotted 96,390 shares at the rate of Rs. 125 per share on right basis. Thus, in the year 1961 itself, the appellant, namely, the foreign company, was in possession of 1,65,240 shares of the Indian company. Although the appellant company was also allotted substantial bonus shares in subsequent years, i.e., 1969, 1971, 1973, 1976 and 1980, we are not concerned with these shares because in the year under appeal what was sold by the appellant were shares of the Indian company received by it out of the original allotment. The short question for consideration is what is the profit or loss earned by the assessee on sale of these shares or, in other words, in what form should such profit be computed. It was the case of the appellant before the assessing officer as well as the first appellate authority that the cost of acquisition of the shares should be determined first in foreign currency and then converted into Indian rupees as the original shares were allotted in satisfaction of the cost price of machinery supplied which was in foreign currency. It was also the stand of the assessee that since the shares were acquired prior to 1-1-1964, T.T. buying rate as prevalent on 1-1-1964 shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irla Gwalior (P.) Ltd. [1973] 89 ITR 266. He also referred to the decision of the Supreme Court in CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 as well as the decision of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367. In support of the proposition that the incidence of capital gains is on actual capital gains and not fictional capital gains, Shri Mehta relied on a decision of the Bombay High Court in the case of Babubhai M. Sanghvi v. CIT [1974] 97 ITR 213. 4.1 The next argument of Shri Mehta was that the principles of commercial accounting should be applied. He relied on a decision of the Supreme Court in Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651. Shri Mehta then relied on several decisions of the Tribunal and, in particular, the decision of A-Bench of the Tribunal in the case of Blundell Permoglass Holding Ltd. [IT Appeal Nos. 1626, 1627, 1933 and 1934 (Bom.) of 1980, dated 3-2-1983] and another decision of the Tribunal (Bombay Bench-B) in Ferrington Data Processing Ltd. [IT Appeal No. 3096 (Bom.) of 1977-78, dated 13-1-1979]. Shri Mehta then argued that the decision of the Karnataka High Court in Stumpp Schuele GmbH v. CIT [1986] 160 ITR 581 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Standard from out of a book called 'Compendium of Statements Standard' published by the Institute of Chartered Accountants of India (First Edition 1986) and particularly the following observations in para 11 : " 11. When an exchange difference has occurred as a result of a severe devaluation or of depreciation of a currency against which there is no practical means of hedging and which affects liabilities arising directly on the recent acquisition of assets invoiced in a foreign currency, the difference is sometimes regarded as an adjustment of cost and included in the carrying amount of the related assets, provided that in each case the adjusted carrying amount does not exceed the lower of replacement cost and the amount recoverable from the use or sale of the asset. " 5. Shri Makhija, the learned departmental representative on the other hand, argued that the shares held by the appellant company were sold in India, the moneys were received in Indian currency, the prospectus of the Indian company was issued in 1958, the capital of the Indian company was authorised in rupees and the share value of the initial subscription was considered in rupees and not in foreign currency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in determining capital gains in Indian currency in respect of assets which were acquired in India in terms of rupees and which were sold in India in terms of rupees. The profit is not a fictional profit and the authorities cited by Shri Mehta in respect of real income theory would not really advance the case of the appellant if we examine the context in which the various judgments relied upon by Shri Mehta were rendered. 7.1 We will first take up Ratilal D. Daftari v. CIT [1959] 36 ITR 18 (Bom.). Here, what had happened was that the assessee had contributed Rs. 25,000 out of the capital of the partnership of Rs. 3,45,000. He was a partner in a firm consisting of 16 partners and there was an agreement between himself and four others who had contributed diverse amounts to make up the amount of Rs. 25,000 contributed in his name to the partnership firm to share the profit or loss in proportion to their individual contribution. On these facts, the Bombay High Court held that even in the case of the assessment of a partner of a registered firm what was to be considered was not the income allocated but his real income. The real income was what remained after deducting the amounts wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... currency only because, the purchase price of the shares was adjusted from out of the foreign currency payment due to it from the Indian company on sale of capital equipment by it to the Indian company. The payment of shares in Swiss Francs was a matter of convenience and expediency and not an agreement of a binding nature. The purchase price of shares was basically determined in terms of rupees. The subscribed capital as indicated in the prospectus, which was issued with the consent of Central Government, was in terms of rupees. Along with the appellant company which was described as one of the promoters of the company and which subscribed 69,000 shares, the Investment Corporation of India Ltd., subscribed 6,000 other shares and 40,000 were offered for public subscription. All these transactions took place in India. The purchase price was determined in terms of rupees and it was only to facilitate the Indian company that on a request made by it the Government of India allowed that company to retain in Italy the capital subscribed by the foreign company so that it could utilise the amount so paid for the purchase of capital equipment as and when necessary. So far as the sale of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is also the principle broadly laid down by the Supreme Court in a recent decision in Sundarjas Kanyalal Bhatija's case and the principle laid down by the Bombay High Court was reiterated by it in a more recent decision in Smt. Nirmalabai K. Darekar's case where the Bombay High Court observed that the Appellate Tribunal, acting anywhere in the country, is obliged to respect the law laid down by the High Court though of a different State, so long as there is no contrary decision of any other High Court on that question. Therefore, for this reason alone, namely, that the issue stands squarely covered by a decision of the Karnataka High Court, the appellant is not entitled to succeed. The point of distinction made by Shri Mehta that the issue about whether the amount was receivable in foreign currency was left open by the Karnataka High Court is a distinction without difference and does not essentially distinguish in substance the principle laid down by the Karnataka High Court in their judgment. 8.1 The authorities relied upon by Shri Mehta, which are mainly the decisions of the Tribunal, we find on perusal, are clearly distinguishable on facts. In Farrington Data Processing Ltd.' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime to time and for that purpose the Indian company had agreed to open an account in a recognized Bank in Italy in the name of the Indian company and it was to be operated by that company or its representative. Thus, the payment in foreign currency towards the subscription of 60% of the issued capital was to benefit the Indian company and was a part of the collaboration agreement. The Government of India in a letter addressed to the Indian company on 12-4-1958 conveyed its no objection to the retention in Italy of the capital subscribed by CEAT S.P.A. namely, the foreign company and its associates, provided the Indian company opened an account with a recognised bank in India in the name of the Indian company and agreed that the amount will not be kept abroad for any period longer than is absolutely necessary. The prospectus was issued in India and the prospectus specifically provided, inter alia, that the capital to be subscribed by CEAT S.P.A. will be provided in foreign currency and will wholly be utilised for purchase of plants and machineries. Further, the consideration on sale of 58,776 equity shares amounting to Rs. 1,19,30,352 was received in Indian rupees. Now, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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