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PETITIONER: PR.  AL.  M. M. ANNAMALAI CHETTIAR

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS

DATE OF JUDGMENT: 26/10/1964

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1965 AIR 1210            1965 SCR  (1) 827

ACT: Income Tax-Purchase and sale of Property in  Malaya-Purchase in Japanese currency and sale in Malayan Currency-Method  of computing profit and loss.

HEADNOTE:   The  assessee  whose  head office was in  India  was  also carrying  on  business in the Federated Malaya  States.   In respect of the assessment year 1951-52, the assessee claimed that  a loss was incurred as a result of the sale  of  house properties  and rubber gardens.  Those properties were  pur- chassed  by  the assessee, in Malaya,  during  the  Japanese occupation,  in  Japanese  currency,  but  sold  in  Malayan currency after enemy occupation had ceased.  The  Income-tax Officer  scaled down the purchase prices in accordance  with the  Schedule of rates contained in the Debtor and  Creditor (Occupation Period) Ordinance, 1948, of the Federated Malaya States.  The result was that the assessee was shown to  have made  a profit instead of suffering any loss.  On appeal  by the  assessee, the Appellate Assistant Commissioner and  the Appellate  Tribunal  confirmed the order of  the  Income-tax Officer.   The Tribunal also refused to state a case to  the High  Court  and  the High  Court  rejected  the  assessee’s application  to direct the Tribunal to do so.  The  assessee appealed to the Supreme Court.    HELD:  The  Income-tax Officer was justified in  adopting the  schedule appended to the Ordinance for the  purpose  of ascertaining  the  cost price of the properties  in  Malayan Currency. [831 A-B]     When a property is purchased in one currency and sold in another,  the profit or loss -can be ascertained  only  when the  conversion  rate of the two currencies is  known.   The only material available to the officer for determining  that common  standard was the Schedule in the Ordinance.   Though the Ordinance does not in terms apply to the scaling down of the  cost price was enacted for the purpose of scaling  down payments made by debtors to creditors during the  occupation period-still, it was the result of a careful enquiry made by appropriate and responsible authorities in Malaya.  Even  if he  bad adopted some other method in the previous  years  it did  not prevent him from utilizing the correct  method  for

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the assessment year. [830 C; 830 G-831 A; 831 B-C]    S.     L. N. Sathappa Chettiar v. Commissioner of Income- tax, Madras, (1959) 35 I.T.R. 641, approved.

JUDGMENT:    CIVIL  APPELLATE JURISDICTION : Civil Appeal No.  131  of 1963.   Appeal by special leave from the order dated July 31, 1961 of  the  Madras High Court in Tax Case Petition  No.  44  of 1961.  K. Srinivasan and R. Gopalakrishnan, for the appellant.   C. K. Daphtary, Attorney-General, S. V. Gupte,  Solicitor- General,  N. D. Karkhanis, R. H. Dhebar and R. N.  Sachthey, for the respondent. 828 The Judgment of the Court was delivered by   Subba  Rao  J. This appeal by special  leave  is  directed against  the order of the High Court of Madras in  Tax  Case Petition No. 44 of 1961.   The  appellant  is a Hindu undivided  family  carrying  on business with its head office at Pageneri in  Ramanathapuram District, Madras State, and also business at Paritpuntar  in the  Federated Malaya States.  In respect of the  assessment year  1951-52, the appellant showed in the return  filed  on his  behalf  a  total world income of  Rs.  2,13,079,  which included  a sum of $ 21,350 as profit from the  business  at Paritpuntar.  In computing the said profit from the business at Paritpuntar the appellant claimed an aggregate loss of  $ 68,405 incurred on the sale of house property and rubber gardens as detailed below ---------------------------------------------------------- SI No.  Date of Purchase             Cost price    Sale price                                                (in dollars) ---------------------------------------------------------- 1. 28 of Ani, Angirasa 14 Silama House.     500 2. 28 Ani, Angirasa-No. 20 Silama House.    4154     3920 3. 23rd Avani, Angirasa-No. 23 Silama House. 2333     1425 4. 5th Avani, Subhanu-(21-8-43) Siradan House. 25453   7000 5. 24th Avani, Tharana (15-9-44)-38 Garden.   536865880 6. 8th Purattasai Tharana (23-9-44)-35 Garden.  26681164           TOTAL                               88294    19880 ------------------------------------------------------------ In  respect  of items Nos. 1, 2 and 3 above  the  Income-tax Officer  accepted the claim of the appellant, but in  regard to the remaining three items, namely, items Nos. 4, 5 and 6, he  held  that  as the said purchases of  property  and  the outlay thereon were all made during the Japanese  occupation of  Malaya and in Occupation Currency, then in  circulation, the  purchase prices of the same required to be scaled  down in  accordance with the schedule of rates contained  in  the Debtor  and  Creditor (Occupation Period)  Ordinance,  1948, passed by the Legislative Council of Federated Malaya States and on that basis the profit and loss in respect of the last 3 items of the property were worked out by him as under 829 ------------------------------------------------------------                  Purchase   Scaled S. No. Sale of   price in   down       Sale   Profit   Loss      property    occupation value of  amount                  currency   purchase                             price -------------------------------------------------------------

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                 $          $          $       $       $ 1. Siradan House    25453      9000       7000    -    2000 2. 38 Garden        53686      3830       5880   2050    - 3. 35 Garden         2668       190       1164    974    - ------------------------------------------------------------- In the result the Income-tax Officer computed a, profit of $ 382  in respect of the sale of the above gardens as  against the  loss of $ 68,405 claimed by the appellant.  On  appeal, the Appellate Assistant Commissioner confirmed the order  of the  Income-tax Officer. On further appeal,  the  Income-tax Appellate  Tribunal  took the same view  as  the  Income-tax Officer  had taken.  The appellant applied to  the  Tribunal under s. 66(1) of the Income-tax Act requiring it to state a case and refer the following question of law arising out  of its order to the decision of the High Court               "Whether on the facts and in the circumstances               of  the case the disallowance of the  loss  of               $67,764 as claimed and the computation of  the               profit at $382 is valid in law." The Appellate Tribunal rejected the application.  Thereupon, the:  appellant moved the High Court under s. 66(2)  of  the Income-tax Act praying for an order directing the  Appellate Tribunal  to,  state a case and refer the  question  of  law arising  out  of its order.  The High Court,  following  the decision  in  S.L.N. Sathappa Chettiar  v.  Commissioner  of Income-tax, Madras(1), dismissed the application.  Hence the appeal. Mr.  Srinivasan, learned counsel for the  appellant,  raised before us two points, namely, (1) the conversion table given in  the  Schedule  to the Debtor  and  Creditor  (Occupation Period)  Ordinance, 1948, of Malaya, hereinafter called  the Ordinance,  was  not  intended  to  provide  the  rates   of conversion  for  any purpose beyond what the  Ordinance  was expressly specified to achieve, namely, the determination of the rights and liabilities of debtors and creditors and that the  adoption  of  the conversion rates given  in  the  said Schedule  to scale down the cost of properties  in  question was  unwarranted;  (2)  the  appellant  maintained   regular accounts     for  all  the  years  including   the   Japanese occupation period; the original cost of acquisition of the 3 properties was adopted for the (1)  (1959) 35 I.T.R. 641. 830 purpose of business balance-sheets all these years; no  loss on  revaluation  of the said assets by  scaling  down  their values  at any time was allowed in any of the earlier  years by   the   Department;   and,  therefore,   there   was   no justification for a departure in the year of account. He also contended that if the properties were purchased  for dollars  and  sold  for dollars, the fact  of  inflation  or deflation  of currency would be irrelevant  in  ascertaining the  profits.   That may be so in the case  of  a  country’s currency,  but  when  a property is purchased  and  sold  in different currencies, say Japanese and Malayan currencies as in  the present case, it is not ’possible to  ascertain  the profit  or  loss unless the exchange or conversion  rate  is ascertained.   When a property is purchased in one  currency and sold in another currency, how can the profit or loss  be ascertained unless the conversion rate of the two currencies is  known  ?  There should be a common  standard.   The  two currencies  in  the present case are  essentially  different though they were current in the same country during the same or  different periods.  The extraordinary situation  of  two currencies  coexisting during the occupation period  or  the situation  of one property being purchased during the  enemy

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occupation  period in Japanese currency and sold in  Malayan currency  after the vacation of the enemy occupation  cannot be  equated  with fluctuations in the value  of  a  nation’s currency.   Unless  the  cost price  expressed  in  Japanese currency is computed in terms of the Malayan currency, it is not  possible  to arrive at the real profit accrued  to  the assessee.   That is exactly what the Income-tax Officer  did and. in our view, that is the only correct basis. It is not correct to say that the Income-tax Officer applied the  said Ordinance to ascertain the profit in  the  present case.   The  scheme and the details of  the  Ordinance  have already  been considered by us in civil Appeals Nos.  55  of 1962  etc.   The Ordinance was enacted for  the  purpose  of scaling  down  the  payments made by  debtors  to  creditors during  the occupation period.  A Schedule was  appended  to the  Ordinance  providing  a  table  of  conversion  of  the depreciated  Japanese  currency into Malayan  currency.   In terms  the Ordinance does not directly apply to the  scaling down  of the cost price of properties purchased in  Japanese currency.   But  to ascertain the real profit,  as  we  have stated  earlier.,  it  is necessary to  adopt  a  reasonable conversion  rate.  The only material that was  available  to the  Income-tax  Officer was the Schedule  impended  to  the Ordinance.  Though that Schedule                             831 was  appended  to,  the Ordinance enacted  for  a  different purpose, it was the result of a careful inquiry made by  the appropriate  and  responsible authorities  in  Malaya.   The Income-tax  Officer was, therefore, justified  -in  adopting that Schedule for the purpose of ascertaining the cost price of the properties purchased in Japanese currency and sold in the Malayan currency.  The fact that the Income-tax  Officer adopted some other method in the previous years material has been  placed before us in regard to’ the method  adopted  by the   Income-tax   Officer--does  not   prevent   him   from ascertaining the correct method for the assesment year  with which we are concerned. The  questions raised before us were the  subject-matter  of the  decision  of the Madras High Court in  S.L.N.  Sathappa Chettiar  v. Commissioner of Income-tax, Madras(1).   There, as  here,  the  assessee, which carried  on  a  moneylending business  and had its head office in India and a  branch  in the Federated Malaya States, purchased some properties  when Malaya  was under enemy occupation and sold them  after  the vacation  of the enemy occupation in Malayan  currency.   In order  to ascertain the profits resulting from the sale  for the purpose of assessment of the assessee for the year 1952- 53  the  Department  valued the cost of  the  properties  in Malayan currency in accordance with the Schedule appended to the  Ordinance.  The assessee contended that the cost  price of  the properties must be taken at the figure  accepted  by the  Department  for the purpose of the  Government  scheme. The  High Court held that to ascertain the real profits  the Department  was  right in computing the cost  price  of  the properties  in  Malayan  currency  in  accordance  with  the Schedule  appended  to the Ordinance.  The  reason  for  the conclusion is stated thus at p. 649.               "The   purchase  was  paid  for  in   Japanese               currency.   The  sale price  was  realised  in               Malayan currency.  There was no parity between               the  two on the date of  purchase.   Certainly               the  Japanese currency ceased to be in use               on   the  date  of  sale.   To  arrive  at   a               computation   of  profits  or   losses   where               property  was  purchased in one  currency  and

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             sold  in  another, it should be  obvious  that               there  should  be a common  standard;  in  the               circumstances of this case the purchase  price               had  to  be  computed  in  terms  of   Malayan               currency in which the property was sold." The principle adopted by the High Court appears to be  unex- ceptionable.   It accords with our view.  Adverting  to  the second (1)  (1959) 35 T.R. 641. 832 argument  that  the  schedule to  the  Ordinance  should  be confined  only  to the scaling down of  debts,  the  learned Judges pointed out at p. 650 :               "The Report of the Select Committee which pre-               ceded  the issue of the Malayan Ordinance  has               also  been  made  part of  the  record.   That               showed that the Committee made a real  attempt               to   ascertain  the  value  of  the   Japanese               currency  in relation to the Malayan  currency               at  every  stage  of  the  occupation  period.               Besides,  we have to point out that  no  other               basis  of  conversion  was  proposed  by   the               assessee at any stage.  We are unable to  hold               that  the Department and the Tribunal were  in               error   in  adopting  the   conversion   table               furnished  in  the  Schedule  to  the  Malayan               Ordinance."               We also agree with this view.               In   the  result  the  appeal  fails  and   is               dismissed with costs. Appeal dismissed. 834