Bombay High Court
Commissioner Of Income-Tax vs Pfizer Corporation on 18 January, 1993
Equivalent citations: [1993]202ITR115(BOM)
JUDGMENT DR. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following three questions to this court for opinion :
"1. Whether, on the facts and in the circumstances of the case, the assessee in its assessment for the accounting period relevant to the assessment year 1973-74 is entitled to claim the deduction of Rs. 60,151 being the exchange difference from the gross dividend income in India of Rs. 87,00,000 under section 57(i) of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to the said deduction of Rs. 60,151 out of the said gross dividend amount of Rs. 87,00,000 by virtue of the principle that the net dividend income was the assessee's real income taxable under the Income-tax Act, 1961 ?
3. Whether, on the facts and in the circumstances of the case, the gross dividend income of Rs. 87,00,000 without the deduction of the said amount of Rs. 60,151 is taxable in the hands of the assessee by virtue of section 8(1) of the Income-tax Act, 1961 ?"
2. The assessee, Messrs. Pfizer Corporation, is a non-resident company. The year of assessment involved in this reference is 1973-74, the relevant previous year being the year ended on November 30, 1972. The assessee-company is a shareholder of an Indian company, Messrs. Pfizer Corporation Ltd., which is also its subsidiary. During the relevant previous year, the assessee's only source of income was dividend income on its shareholding in the said Indian Company. During this year, the assessee got dividend amounting to Rs. 87 lakhs. The tax deducted at source by the Indian company on the gross dividend was Rs. 14,70,000 thus leaving the net dividend in India of Rs. 72,30,000. This amount was remitted to the assessee in the U. S. A. and at the then prevailing rate of exchange the assessee received in U. S. dollars, $9,55,979.91. The assessee claimed that this amount of $9,55,979.91 should be converted at the rate of 1$ equal to Rs. 7.50 by application of rule 115 of the Income-tax Rules, 1962, and the amount thus arrived at should be considered for the purpose of taxation in India as the income of the assessee from dividend. According to the assessee, the amount received by it in terms of U. S. dollars converted into rupees at the time of receipt by him would be Rs. 71,69,849. The assessee, therefore, claimed that the difference between Rs. 72,30,000 being the net amount of dividend as stated above and the amount of Rs. 71,69,849, i.e., Rs. 60,151, should be allowed as expenses of remittance. Alternatively, the assessee claimed that the difference of Rs. 60,151 should be allowed as expenses for the purpose of realising the dividends under section 57(i) or as the amount expended wholly and exclusively for the purpose of making and earning the dividend income under section 57(iii). This claim is based on the presumption that the income was earned by the assessee only when he received the amount in dollars in the U. S. A. The claim of the assessee was rejected by the Income-tax Officer by holding that the amount of Rs. 60,151 was not allowable either under section 57(i) or under section 57(iii) of the Act. Aggrieved by the order of the Income-tax Officer, the assessee went in appeal before the Appellate Assistant Commissioner of Income-tax, who upheld the order of the Income-tax Officer. The assessee thereupon went in further appeal to the Income-tax Appellate Tribunal. The Tribunal accepted the contention of the assessee. It held that so far as the assessee is concerned, the income would be only the net amount received by him in the U. S. A. after deduction of the charges levied by the exchange bank and that the income would have to be taxed in India by converting it into rupees as laid down in rule 115 of the Income-tax Rules. The Tribunal further held that the amount of Rs. 60,151 was also allowable under section 57(i) of the Act. In view of the aforesaid finding, the Tribunal did not decide the question whether the said amount was also deductible under section 57(iii) of the Act.
3. Aggrieved by the order of the Tribunal, the Revenue applied for a reference under section 256(1) of the Act and the Tribunal, on being satisfied that the questions of law did arise out of its order in appeal, referred the aforesaid questions to this court.
4. Dr. Balasubramaniam, learned counsel for the Revenue, submits that the Tribunal erred in holding that the income of the assessee from dividend received in India has to be taken in terms of the sum in dollars received by him in the U. S. A. and then converted into rupees by applying rule 115. According to him, in the instant case, the income having accrued to the assessee in Indian rupees, rule 115 had no application. The question of conversion into Indian rupees did not arise. Learned counsel further submits that under section 57(i), the assessee is entitled only to claim any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend on his behalf. The amount claimed in this case does not fall under any of these heads.
5. In reply, learned counsel for the assessee submits that the income received by the assessee being the amount received by him in U. S. dollars, its value in terms of rupees has to be treated as his income. According to him, the income of the assessee is only the net amount received by him in the U. S. A. and it is only that amount which can be subjected to tax in India and for that purpose it is necessary to convert it in terms of rupees and that will bring rule 115 of the Rules into operation. In the alternative, learned counsel submits that the difference between the amount of dividend declared and the amount received by the assessee has to be treated as remuneration for the purpose of realising such dividend within the meaning of section 57(i) of the Act. Counsel also submits that in any view of the matter this amount will be deductible under section 57(iii) of the Act.
6. We have carefully considered the rival submissions of counsel for the parties. We find force in the submission of counsel for the Revenue that the income from dividend accrued to the assessee the moment it was declared by the company and that being in terms of Indian rupees, rule 115 of the Rules has no application. We are of the clear opinion that the dividend income that accrued to the assessee was Rs. 72,30,000 and not U. S. A. dollars 9,55,979.91. That being so, rule 115 has no application. Rule 115 prescribes the rate of exchange for conversion into rupees of income expressed in foreign currency. Apparently, it has no application to the incomes expressed in Indian rupees itself.
7. So far as the claim of deduction under sections 57(i) and 57(ii) of the Act is concerned, we find that the difference between income accrued to the assessee in Indian rupees and received by him on remittance in foreign exchange converted into Indian rupees, is not converted by sections 57(i) or 57(iii). The difference may be for various reasons. It may be on account of fluctuation in the rate of exchange, which is the case in the instant case or it may be because of the payment of commission or remuneration, etc., or any other expenditure contemplated by the aforesaid provisions. Section 57(i) and (iii) provide :
"57. Deductions. - The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely :
(i) in the case of dividends, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend on behalf of the assessee;.....
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income."
8. From a bare reading of the aforesaid provision, it is clear that clause (i) allows deduction of any sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend on behalf of the assessee. Clause (iii) allows deduction of expenditure laid out wholly and exclusively for earning such income.
9. In the instant case, the income had been earned by the assessee from the dividend declared by the company which was Rs. 72,70,000. The claim of the assessee for deduction evidently does not meet the description given in section 57(i) of the Act. This provision, therefore, has no application. In that view of the matter, the first question referred to us is answered in the negative, i.e., against the assessee and in favour of the Revenue. Similarly, the deduction claimed in the present case cannot fall under clause (iii) of section 57 as it is not an expenditure incurred for the purpose of making or earning dividend income. The assessee's income was the income from dividend that accrued to him in terms of rupees on the same being declared by the company. The amount claimed by the assessee was spent or lost by him only after the dividend income had accrued to him. Hence, clause (iii) also has no application. That being so, the second question also has to be answered in the negative, that is, in favour of the Revenue.
10. It is an agreed position that in view of the answer to the above two questions in favour of the Revenue, answer to question No. 3 is not necessary. The same is, therefore, not answered. The reference is disposed of accordingly.
11. No order as to costs.