http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

PETITIONER: COMMISSIONER OF INCOME TAX.KARNATAKA (CENTRAL), BANGALORE &

       Vs.

RESPONDENT: CHOWGULE & CO. LTD.

DATE OF JUDGMENT:       11/01/1996

BENCH: HANSARIA B.L. (J) BENCH: HANSARIA B.L. (J) RAY, G.N. (J)

CITATION:  1996 AIR 1058            1996 SCC  (7) 148  JT 1996 (1)   375        1996 SCALE  (1)204

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T SEN, J.      Special leave granted.      The Commissioner  of Income  Tax has  come up in appeal against the  judgment of  the Division  Bench of  the Bombay High Court,  quashing an order passed by the Commissioner of Income Tax  under Section  263 on  March 30,  1989. The High Court was  also of  the view  that clause (c) of Rule 115 of the  Income   Tax  Rules,   1962  was  in  conflict  of  the substantive   provisions of the Income Tax Act and was ultra vires the Act.      The controversy in this case is about the taxability of the amounts  received by  the assessee  from foreign  buyers during the  period July  1,1982 to June 30, 1983 (assessment year 1984-85).  The  assessee  offered  for  assessment  the amounts received  as price  of the  goods  sold  to  foreign buyers as  and when  the amounts  were received in course of the accounting period and was tawed accordingly. The amounts which were  not actually received from the foreign buyers in course of  the accounting  period were converted into rupees on the   basis  of the  exchange rate on the last day of the accounting year  i.e. June  30, 1983  and was brought to tax accordingly for the assessment year 1984-85.      The Commissioner of Income Tax was of the view that the Income Tax  Officer had  wrongly  assessed  the  quantum  of income arising out of the export sales without applying Rule 115. Accordingly,  he issued a notice under Section 263 upon the assessee  proposing to  revise the  order of assessment. After giving an hearing to the assessee, the Commissioner of Income Tax passed the following order :-           "The  last   point   is   regarding      application of  Rule 115  in respect  of      earnings on export of iron ore to Japan.      The assessee has taken the income at the      rate at  which the  amount has  actually

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

    been credited  by the  band. It does not      apple  the  notional  rate  as  required      under Rule  115.  In  his  reply  ,  the      assessee has  contended that Rule 115(c)      can be  applied only  to income which is      expressed in  foreign  currency  or  nor      otherwise.    I     am    afraid    this      interpretation   is   unacceptable.   I,      therefore, direct the assessing offer to      find out  the actual  rate of conversion      in respect  of different remittances and      also  the  Telegraphic  Transfer  buying      rate at  the end of the year and convert      the foreign  exchange at the Telegraphic      Transfer buying  rate on the last day of      the previous  year as  required by  Rule      115, if  that is  more favourable to the      revenue, and  bring  the  difference  to      tax."      The order  was challenged  by the  assessee by  a  writ petition in the Bombay High Court in which the vires of Rule 115(c) pf  the Income  Tax Rules,  1962 was also questioned. The facts of the case, as recorded in the High Court, are as under:-      "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  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      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      rupees   at   the   rate   of   exchange      prevailing  on  the  last  date  of  the      financial year  and is  entered  in  the      books of  the petitioner  and  accounted      for as their income."      The High  Court further  examined the  manner in  which payment was  made to  the assessee by the foreign buyers and observed:-      "To come  to a  right  conclusion  about      this question,  we will  have to  see in      what  manner   the  petitioners  receive      income and  at what point of time income      tax is  leviable. In  the 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.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

    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 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   supplied  a  chart  showing      therein  as  to  how,  during  the  said      relevant period,  they have received the      payment in  Indian currency on each date      as per  the value of the rate of foreign      exchange prevailing  on the  date of the      receipt.  The   petitioners,  therefore,      contended that  it is  the actual  money      which they have received during the said      period which is liable to be taxed under      the Act  and not  any notional income or      income which  they have  never  received      and there is no possibility of realising      the same."      It has  been contended on behalf of the appellants that the High Court failed to realise that the payments were made in  foreign   exchange.  The  contract  specified  that  the payments will be made in foreign exchange. The price payable in the  invoice was  also  expressed  in  foreign  exchange. Therefore, the  payment were all received by the assessee in foreign exchange.  The Bank  at the  time of  payment, might have converted the foreign exchange into rupees and paid the assessee in  Indian currency. But, the fact remains that the assessee was entitled to receive the price of the goods sold in foreign  exchange and,  therefore, Rule  115 was  clearly attracted and the amount of foreign exchange received by the assessee will  have to  be valued  on the  last day  of  the accounting  period   on  the  basis  of  the  exchange  rate prevalent on that day.      Rule 115  as it  stood on  the material  date,  was  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  arise   to   the      assessee in  foreign currency  shall  be      the telegraphic  transfer buying rate of      such currency as on the specified date.      Explanation : For the purposes of this      rule,-

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

    (1) "telegraphic  transfer buying  rate"      shall have  the same  meaning as  in the      Explanation to rule 26;      (2) "specified date" means-      (a)  in  respect  of  income  chargeable      under the  head "Salaries"  the last day      of the  month immediately  preceding the      month in which the salary is due or is      paid in advance or in arrears;      (b)  in  respect  of  income  chargeable      under the head "Interest on securities",      the last  day of  the month  immediately      preceding the  month in which the income      is due;      (c)  in  respect  of  income  chargeable      under the heads "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;      (d)      (e)      (f)      This rule  was later amended by insertion of clause (2) which, it  is argued,  is  only  classificatory  in  nature. Clause (2)  which came into reflect from April 1, 1990 is as under:-      "Nothing contained in sub-rule (1) shall      apply in  respect of  income referred to      in clause (c) of the Explanation to sub-      rule (1)  where such  income is received      in,  or   brought  into,India   by   the      assessee or  no his  behalf  before  the      specified date  in accordance  with  the      provisions  of   the  Foreign   Exchange      Regulation Act, 1973 (46 of 1973)."      Rule 115  merely lays down that "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  receive or  deemed to  be received by him or on his behalf  in foreign  currency",the rate of exchange shall be the  telegraphic transfer buying rate of such currency as on the  ’specified date’  will mean  in  respect  of  income chargeable under  the  heading  of  "Profits  and  gains  of business or  profession", the  last day of the previous year of the  assessee. This  only means  that if  an assessee  is assessable in  respect of  any income accruing or arising or deemed to  have accrued or arisen in foreign currency or has received or  deemed  to  have  received  income  in  foreign currency, then such foreign currency shall be converted into rupees nationally at the telegraphic transfer buying rate of the assessee.  If on  the last day of the previous year, the assessee does  not have  any foreign currency in his hand or the  assessee   is  not  entitled  to  receive  any  foreign currency, then  there is  no question  of conversion of such foreign  currency  into  rupees.  It  is  only  the  foreign currency which  will have  to be converted into rupees. But, if the  foreign currency  received by  an assessee  has been converted into rupees before the specified date, question of application of  Rule 115  does not  arise. Rule 115 does not lay down that all foreign currencies received by an assessee will be  converted into  rupees only  on the last day of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

accounting  period.   Rule  115   only  fixes  the  rate  of conversion of  foreign currency.  If  there  is  no  foreign currency to  convert on  the last  day of accounting period, then no  question   of invoking  Rule 115  will  arise.  The assessee in  this case  is agreeable to have the outstanding amount of  foreign currency  payable to  him at  the rate of exchange prevalent  on the  last day of the previous year of the assessee.  But, this  rule cannot  apply to  the amounts received by  the assessee in course of the accounting period in rupees.  Clause (2),  which was  introduced on  April  1, 1990, is  really classificatory and does not bring about any change in Rule 115.      We are  of the  view that the High Court was clearly in error  in   holding  that  Rule  115  was  ultra  vires  the substantive provisions  of the  Income Tax Act, 1961. We are also of  the view  that the High Court has wrongly construed this  rule.   The  rule  fixes  the  rate  of  exchange  for conversion into rupees of income held in foreign currency at the end  of the of the accounting period. This rule can only apply if  any income in foreign currency has to be converted for the purpose of computing total income for any accounting period. But,  if in  course of  the  accounting  period  the conversion has  already  talent  place,  then  there  is  no question of  converting  into  rupees  any  income  held  in foreign currency.      The facts  of the  case, as  stated by  the Hugh Court, also makes  it clear that the assessee from time to time had exported goods. Price was paid by the foreign buyers through an Indian  Bank. The  Indian, on  behalf of  foreign buyers, opened letters  of credit. The bells of lading, invoices and other documents were presented by the assessee through their Bank  to  the  Bank  of  the  foreign  buyers.  The  amounts receivable by the assessee were credited in their account by their Bank  in  rupees.  The  entire  sum  received  by  the assessee was  offered for  assessment and was duly assessed. We fail  to see  how the  Commissioner of Income Tax came to the  conclusion   that  the  assessment  was  erroneous  and prejudicial to  the interest of the revenue. In the facts of this case,  there cannot  be any  question of  invoking Rule 115, The sale proceeds of the goods exported by the assessee were credited  to their bank account in Indian rupees. There is no  dispute that  the amounts  which were outstanding and receivable by the assessee on the last day of the accounting year from the foreign buyers had to be converted into Indian rupees at  the rate of exchange prevalent on the last day of the accounting year.      In the  circumstances, we  hold that  the  order  under Section 263  passed by  the Commissioner  of Income  Tax was rightly quashed  by the  High Court,  But, we also hold that the High Court was in error in striking down Rule 115 of the Income Tax Rules.      The appeal is disposed of accordingly. There will be no order as to costs.