Commissioner Of Income Tax, Karnataka (Central), Bangalore And Ors v. Chowgule And Co. Ltd

COMMISSIONER OF INCOME TAX, KARNATAKA (CENTRAL), BANGALORE AND ORS. v. CHOWGULE AND CO. LTD. JANUARY II, 1996 [DR. A.S. ANAND AND SUHAS C. SEN, JJ.] Income Tax Act, 1961/lncome fax Rules, 1962 : S.143,263/Rule 115-lncome arising out of export of goods-Foreign currenq-Conversion of into rupees-Assessment of to tax-Held, Rule JI 5 fixes rate of exchange for conversion into rupees of income in foreign currency at the end o.f accounting period--Rule applies to any income in .foreign ex-change to be converted for purpose of computing total income for any account-ing period and not to income already converted into rupees during the account-ing period-Rule is not ultra vires the Act. The respondent-company exported iron ore to foreign buyers. The price was paid by the foreign buyers through an Indian bank, which on behalf of the foreign buyers opened letters of Credit, and the amounts receivable by the assessee were credited in its account by its Bank in rupees. The assessee offered for assessment the amount received during the relevant accounting period i.e. July, 1982 to June 30, 1983, as price of the goods sold to the foreign buyers as and when the amounts were received; and as regards the amounts which were not actually received from the foreign buyers during the accounting period the same 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 were brought to tax accordingly. The Commissioner of Income Tax held that the income was wrongly assessed without applying Rule 115 of the Income Tax Rules 1962; he issued a notice under s.263 of the Income Tax Act, 1961 proposing to revise the order of assessment- The assessee challenged the order as also the vires of Rule 115 of the Rules in a writ petition before the High Court, which quashed the order passed by the Commissioner and also declared clause ( C) of Rule 115 as ultra vires the Acl Aggrieved, the Revenue filed the present appeal. It was contended for the Revenue that since the contract specified [1996] 1 S.C.R. 368 SUPREME COURT REPORTS that the payments would be made in foreign exchange and the assessee was entitled to receive the payment in foreign exchange, and though the Bauk at the time of payment might !lave converted the foreign exchang~ irtto rupees and paid the assessee in Indian currency, Rule 115 was clearly attracted, and the amount of foreign exchange received by the Assessee would be. valued on the last day of accounting period on the basis of exchange rate prevalent on that day. Disposing of the appeal, tliiis Court HELD : 1.1. The High Court has wrongly construed Rule 115 of the Income Tax Rules, 1962 and has erred in holding that the rule was. ultra vires the substantive provisions of the Income Tax Act, 1961. (373-G] 1.2. Rule 115 fixes the rate of exchange for conversion into rupees of income held in foreign currency at the end of the accounting period; it does not lay down that entire foreign currency received by an assessee will be converted into rupees only on the last day 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 taken place and on the last day of the previsous year the assessee does not have nay foreign currency in his hand or the assessee is not entitled to receive any foreign currency, then there is no question of applying Rule 115 and converting into rupees any income held in foreign currency. Clause (2), which was introduced on April 1, 1990 is really clarilicatory and does not bring about any change in Rule 115. 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