COMMISSIONER OF INCOME TAX, KARNATAKA (CENTRAL), BANGALORE AND ORS. vs. CHOWGULE AND CO. LTD.

the following order : H

A B c 370 SUPREME COURT REPORTS [1996] l S.C.R. "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 been credited by the bank. It did not apply the notional rate as required under Rule

- -"· COMMR. OF 1.T. KARNATAKA '" CHOWGULE & CO., LTD. [SEN, J.] 371 "To come to a right conclusion about this question, we will have to A see in what manner the petitioners receive income and at what 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. This price is agreed in advance. The mode of payment is in foreign currency through the Indian banker who is B 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 thati 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. c D 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 E 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 F contract specified that the payments will be made in foreign exchange. The price payable in the invoice was also expressed in foreign exchange. There- fore, the payments 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 G assessee was entitled to receive the price of the goods sold in foreign exchange and, therefore, Rule ll5 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 ll5, as it stood on the material date, was as under : H

A B c D E F G H 372 SUPREME COURT REPORTS [1996] l S.C.R. "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 received or deemed to be received by him or on his behalf in foreign currency shall be the telegraphic transfer buying rate of such currency as on the specified date. Explanation : For the purpose of this rule, - ( 1) "telegraphic transfer buy mg rate" shall have the same meaning as in the Explanation to rule 26; (2) "specified dated" 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 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) ·································································································· (t) ·································································································· This rule was later amended by insertion of clause (2) which, it is argued, is only clarificatory in nature. Clause (2) which came into effect from April 1, 1990 is as under : "Nothing contained in sub-rule (I) 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 lirought into, India by the assessee or on his behalf before the specified date in accordance with the provi- loo••

- ' COMMR. OF I.T. KARNATAKA v. CHOWGULE & CO., LTD. [SEN, J.] 373 sions of the Foreign Exchange Regulation Act, 1973 (46 of 1973)." A Rule 115 merely lays down that "for the calculation of the value of rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received 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. Explanation (2) has clarified that the 'specified date' will mean in respect of income chargeable under the heading of "Profits and gains of business or profession", the last day B 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 re- C ceived income in foreign currency, then such foreign currency shall be con- verted into rupees notionally at the telegraphic transfer buying rate of such currency as on the last day of the previous year 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 D 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 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 account- ing period in rupees. Clause (2), which was introduced on April 1, 1990, is really clarificatory and does not bring about any change in Rule 115. E F 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, G 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 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 H

374 SUPREME COURT REPORTS [1996] l S.C.R. A accounting period the conversion has already taken 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 High Court, also makes it clear '"'JI that the assessee from time to time had exported goods. Price was paid by the B foreign buyers through an Indian Bank. The Indian bank, on behalf of foreign buyers, opened letters of credit. The bills 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 c 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 D 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. E 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. R.P. Appeal disposed of.