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TMI Blog1985 (5) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchase price and of the sale price-should be done in dollars and profit earned should then be converted into Indian reupees. The correctness of the method of computation employed by the ITO, i.e. taking the cost price as incurred by the assessee company on the date of purchase by converting the dollars actually paid into Indian rupees at the prevailing rate of exchange and the sale price also received in dollars by converting the same into rupees on the rate of exchange prevailing on the date of the sale was challenged as incorrect. 4. The further contention is that the assessee company was entitled to deduct cost of improvement of shares amounting to 916181. 5. We have heard the ld. counsel for the assessee and also the ld. Departmental Representative. The first preliminary argument advanced on behalf of the Department was that the memorandum of appeal filed before the CIT (A) was signed by A. Ferguson Co. as Attorneys for the assessee and under s. 249(1) it was not property signed and verified in so far as the director or the managing director has not signed or verified it. Therefore, the contention was that the CIT (A) should have rejected the memorandum of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital gains constituted a complete code so that if the capital gains could not be computed because an time like goodwill had no cost of acquisition, the charge of capital gains would fail. His argument was that insofar as the share of a company were incapable of being improved, the second limb of s. 48 (ii) would not be satisfied i.e., it would be impossible to compute cost of any improvement to the capital asset and, therefore, the charge of capital gains on transfer of shares would fail. His further argument was that in computing the capital gains three item, i.e., No. 48 (1) expenditure incurred wholly and exclusively in connection with such transfer and (2) cost of acquisition and cost of any improvement thereto must be deducted and if any of these could not be ascertained or if there was no such expenditure, there would be no charge of capital gains. 9. As against this the ld. Departmental Representative contended that the correctness of this argument was fallacious and pointed out that the matter in issue before the Supreme Court and before the Bombay High Court, in the cases referred to above, pertained only to goodwill and all the observations in those rulings must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the asset belongs to such a class, it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by s. 49 and its cost, for the purpose of s. 48, is determined in accordance with those provisions. There are other provisions which indicate that s. 48 is concerned with an asset capable of acquisition at a cost. Sec. 50 is one such provision. So also is sub-s. (2) of s. 55. None of the provisions pertaining to the head 'capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax what is charged is the capital value of the asset and not any profit or gain." "In the case of goodwill generated in a new business there is the further circumstance that it is not possible to determine the date when it comes into existence. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian IT Act, 1922. Their Lordships considered the question in detail on pp. 513 to 515 as follows: "Does this, however, make any difference? As we have seen earlier, goodwill is a fluctuating thing. It increases and it decreases, but such increase or decrease is not like the periodic waxing and waning of the moon nor is it like the tide which regularly ebbs and flows twice in twenty-four hours. Goodwill built up over the years can be destroyed in a matter of days, if not much less. Goodwill is never constant. Proteus like it changes constantly, and as goodwill changes from time to time so does its value. It is possible to ascertain the value of goodwill at a particular point of time, and the modes of calculating such value can easily be found in any standard book of accountancy. Our attention had been drawn to several of them, It is, however, needless to burden the judgment with reference to any one of them. That, however, is not decisive of the matter. Merely because goodwill of a business which had been started by someone else had been acquired, and at the time of acquisition its value ascertained, it does not mean that some time or some years later the goodwill enjoyed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Daftary vs. CIT (1977) 106 ITR 998 (Cal). The Supreme Court had also mentioned in it judgment the decision of the High Courts which had earlier taken the same view as the Supreme Court did, and obviously approved of the view expressed by these High Courts. Amongst them is the decision of this High Court in CIT vs. Home Industries Co. (1977) 107 ITR 609 (Bom) which has already been referred to by us earlier in another context. In that case, Tulzapurkar, Actg. C. J. (as he then was) speaking for the Court said as follows: "However, the aspects that in the case of self-created or self-generated goodwill it is impossible to say that it has been acquired at any particular point of time and that the acquisition of such capital assets costs nothing to the owner of business in terms of money seem to use to be a very important aspect which have a bearing on the question as to whether the transfer of such capital asset should give rise to chargeable capital gains or not. Similarly, the aspect that capital asset in question must be such that it is capable of improvement at an ascertainable cost in terms of money would be equally important". Their Lordships rejected the contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by way of foregoing dividends due and appropriation of profits to reserves by the companies should be treated as cost of improvement under s. 48 (ii) or not and the answer was that the assessee was not entitled to claim it as cost of improvement. The main challenge to the order of the CIT (A), therefore, fails. 12. The next ground pertains to the actual computation of capital gains on sale of shares. The CIT (A) has in his detailed order clearly dealt with the matter to come to the conclusion that the capital gains have to be computed by converting the cost price into rupees on the date of purchase and sale price also into rupees on the date of sale. The ld. counsel for the assessee has relied on the various orders of the Tribunal under similar circumstances holding that gains have to be computed first in dollars and then the profit has to be converted into rupees on the date of sale. The ld. Departmental Representative contested the correctness of the view expressed in those orders of the Tribunal and relying on Diecy's "Conflict of Laws", he submitted that computation should depend on lex situs, where the thing is situated. In this case, the shares being of an Indian compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into Indian rupees and the price of the shares was paid in India. It was natural, therefore, that it had entered the transaction in its books of account in USA in dollars because rupees, as such, do not enter into non-resident books, where the currency in which the accounts are kept is dollars. The non-resident company has also sold the shares to another non-resident. The price was, indeed, fixed in Indian rupees with the approval of the Reserve Bank of India but, again, the assessee-company received the money duly converted into dollars and it must have entered the receipt from the sale in its own books of account in dollars. Therefore, if we look to the assessee's books of account maintained in USA, the profit would only be in dollars 5084 equivalent to Rs. 42,687 which the company returned as income from capital gains." "9. If, however, the entire, transaction has to be viewed in rupees, i.e., the price paid by the assessee-company converted into rupees and the price received by it also in rupees, then, the profit comes to Rs. 4,80,000. We are of the opinion, that since assessment was being made in Indian rupees and in India, it would be more reasonable to assess the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany and had sold them later to another foreign non-resident company. The fact there were similar to those in the case before us. The price paid was in Sterling and the price received was also in the same currency, though tit was expressed in rupees and then converted into Sterling. The Tribunal accepted the contention that both the price paid and the selling price must be taken in Sterling and then the profits should be worked out and converted into rupees for assessment. Since the matter is, thus, covered directly by the orders of the Tribunal, we respectfully follow them and allow the assessee's appeal. The capital gains shall be taxed at Rs. 42,687 only." 15. We are not inclined to take different view. Following earlier orders, we accept the appeal in part and direct that capital gains shall be computed by taking both the cost price and the sale price into dollars and, then, converting the profits into rupees on the date of sale. The assessee's appeal is partly allowed. 16. The cross objection filed by the assessee is repetition of the appeal and, therefore, is infructuous and is dismissed. 17. The Departmental appeal has not been pressed because it was filed only be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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