Karnataka High Court
Jayakumari And Dilharkumari vs Commissioner Of Income-Tax on 27 November, 1990
Equivalent citations: [1991]189ITR99(KAR), [1991]189ITR99(KARN)
JUDGMENT
M.P. Chandrakantharaj Urs J.
1. The Income-tax Appellate Tribunal, Bangalore Bench (hereinafter referred as the Tribunal), has referred these two cases under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), formulating as many as seven questions for our answer with a statement of the case. The questions referred are as follows :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the administration of the estate of the deceased is not complete and, therefore, the assessment has been rightly made on the executors under section 168(3) of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case and having regard to the clear language used in section 168(3) of the Income-tax Act, 1961, one assessment made on the executors is sustainable in law ?"
(3) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that both the instalments of principal amount and interest on annuity deposit are taxable under the provisions of the Income-tax Act, 1961 ?
(4) If the answer to the above third question is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the proportionate estate duty payable on the annuity deposit is not deductible from the annuity deposit assessable as income ?
(5) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in upholding the disallowance of proportionate estate duty paid on the assets sold, namely, war stock bonds, lands and jewellery, while computing the gains ?
(6) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in adopting the market value of the jewellery as on January 1, 1954, as the cost for the purpose of computing the capital gains ?
(7) Whether, on the facts and in the circumstances of the case, the Tribunal, is justified in upholding the computation of the capital loss at Rs.27,27,820 by adopting the cost as on January 1, 1954, on the basis of the rate of exchange prevalent in that year ?"
3. Learned counsel for the petitioner as well as learned counsel for Revenue are agreed that the first six questions referred stand answered by the decisions of this court rendered in the cases of Jayakumari and Dilharkumari (No. 2) v. CIT [1987] 165 ITR 791 and Jayakumari and Dilharkumari (No. 3) v. CIT [1987] 165 ITR 792. In the aforementioned decisions, the Bench was concerned with five of the questions referred as follows (at page 788 of 165 ITR) :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in upholding the assessment made by the Income-tax Officer on the assessees under section 168 of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that both the instalment of principal amount and interest on annuity deposit are taxable under the provisions of the Income-tax Act, 1961 ?
(3) If the answer to the above second question is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the proportionate estate duty payable on the annuity deposit is not deductible from the annuity deposit assessable as income ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the claim for deduction of the devaluation loss of Rs. 1,67,863 ?
(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the alternative plea of the appellants that the devaluation loss could be split into capital and revenue and treated as such in setting them off against capital gains and income of the assessee ?
'So far as the first three questions are concerned, the answers rendered by this court in I.T.R.C. No. 15 of 1981 (Jayakumari and Dilharkumari v. CIT (No. 2) [1987] 165 ITR 791 (Kar) (infra)) which is between the same parties would cover the said questions. There, we have answered the said questions in the affirmative and against the assessee. Similar answers should follows in these questions also'."
4. The two other questions which came to be answered, also were answered in the affirmative and against the assessee. In the result, we have to reiterate on the concession made by counsel on both sides that the first six questions referred in these two cases are also answered in the affirmative and against the assessee.
5. What remains to be considered by us is the 7th question which has not been answered in the aforementioned cases. Brief facts may be stated relating to question No. 7 and they are as follows :
6. The estate of late H. H. Rajkuvera, Dowager Maharani Saheb of Gondal was assessed for the years 1975-76 and 1976-77 in the hands of the executrix of her estate. It appears that for the assessment year 1975-76, certain jewellery was sold as a result of which certain gains accured under the head "capital gains" and the same was sought to be set off against the loss incurred in the earlier years and brought forward. That came to be accepted by the assessing authority and assessment concluded as such. In regard to that year, the assessee does not raise any dispute. However, for the assessment year 1976-77, under the heading "capital gain/loss" was computed as follows :
"Capital gain/loss is computed as under :
(Rs.) (Rs.)
(a) Sale of war stock bonds 15,80,610
Less: Cost of war stock
bonds Pounds 3,23,213 at
Rs.13.35 as on
1-1-1954 43,08,430
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Net loss on sale of stock bond 27,27,820
(b) Sale of Gondal land 2,25,000
Less: Market value for wealth-tax
purposes, the value of
this land was taken
at Rs. 15,114 as on
31-12-1958.
The market value as on
1-1-1954 is taken at
Rs. 12,000 12,000
(ii) Expenses of sale
as per details 8,450
-------
20,450
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Profit on sale of land ... 2,04,550
Sale of jewellery 39,658
Less: The assessee has taken
the cost of jewellery as on
1-4-1973. The assessee
has not purchased this
jewellery. These were all
received from the late
Maharaja of Gondal. The
value as per the asses-
see's letter was only
Rs. 15,000 for wealth-tax
purposes. Other details
not given. 5,000
------
Profit on sale of jewellery 34,658
Abstract of capital gain/loss:
Loss on sale of war stock bonds 27,27,820
Less: Profit on sale of
Gondal land 2,04,550
Profit on sale of jewellery 34,658
----------
2,39,208
---------
24,88,612
---------
and the assessment was concluded. Aggrieved by the computation of loss under clause (a) relating to sale of war stock bonds, the assessee appealed to the Commissioner of Income-tax (Appeals-2). The said Commissioner, by his order dated March 29, 1979, allowed the appeal partly but did not give the relief in regard to the capital loss computed at Rs. 27,27,820. On further appeal to the Tribunal, the Tribunal came to affirm the assessment orders as concluded and confirmed in appeals. In those circumstances, the question has been referred.
7. Shri S. P. Bhat, learned counsel for the assessee-petitioners, contended before us that the assessing authority and the appellate authorities erred in computing the capital loss in regard to the sale of war stock bonds converting the acquisition value which was Pounds 3,23,213 as on January 1, 1954, at the exchange rate then prevalent and then converting the sale price in the year in question in the sum of Pounds 88,00,98 at the rate prevalent after the devaluation of the rupee in 1976, thereby arriving at the capital loss of Rs. 27,27,820.00. It is the further contention of learned counsel that the acquisition value and the sale value should be computed only in pound sterling as on the date of the sale and such sum resulting in capital loss should, thereafter, be converted into rupees as on the date of sale as returned by the assessee-petitioner in which case the capital loss would be much higher than the sum arrived at by the assessing authority. In other words, the claim is that the capital loss should be worked out on the capital loss at Pounds 2,35,115 at the rate of Rs. 18 per pound, the exchange rate prevalent subsequent to the devaluation of rupee amounting to Rs. 42,32,070.
8. Shri S. P. Bhat, learned counsel for the petitioners, has drawn our attention to rule 115 of the Income-tax Rules, 1962 (hereinafter referred to as "the Rules"), as it was then, which reads as follows :
"115. Rate of exchange for conversion into rupees of income expressed in foreign currency. - The rates of exchange for the calculation of the value in rupees of any income shall be as follows :-
(a) in respect of income accruing or arising or deemed to accrue or arise to the assessee or received or deemed to be received by him or on his behalf before June 6, 1966 -
(i) 1 sh. 6 d. = Re. 1;
(ii) U.S.$ 1 = Rs. 4.762;
(b) in respect of income accruing or arising or deemed to accrue or arise to the assessee or received or deemed to be received by him or on his behalf on or after June 6, 1966 -
(1) where such income accrues or arises or is deemed to accrue or arise to the assessee or is received or deemed to be received by him or on his behalf.
(i) before November 19, 1967, Pound 1 Sterling = Rs. 21.00
(ii) after November 18, 1967, Pound 1 Sterling = Rs. 18.00 (2) U.S.$ 1 = Rs. 7.50."
9. He contends that the rule mandatorily directs that having regard to the period involved, capital gain which is income should be assessed in India in terms of the rule and capital loss also being income as held by the Supreme Court in the case of CIT v. J. H. Gotla that income included loss and, therefore, capital loss should also be computed in terms of rule 115 of the Rules as obtaining at the relevant time. The thrust of the argument is that the computation as made by the assessing authority and as confirmed by the appellate authorities that the acquisition value as on January 1, 1954, should be at the exchange rate then prevalent, i.e., at Rs. 13.65 per one pound sterling and thereafterwards calculating the sale value realised at Rs. 18 the rate of exchange prevalent in the year of sale of the same war stock bonds was erroneous, applying a non-existent rule which denied considerable advantage to the estate of the assessee in the hands of the executrix. In other words, learned counsel's contention is that, having regard to section 48 of the Act which provides for computation of gains, the acquisition value less the expenditure incurred for sale of the capital asset as well as the cost of improvement, if any, should be the value of the capital asset and the difference between that and the sale price should be the capital gain or loss. Therefore, he commended to us that if the Rules or the provisions of the Act are capable of being interpreted in more than one way, then that interpretation which enures to the advantage of the assessee should be followed by the courts.
10. We are in full agreement with learned counsel. The capital gains or loss as income to be included or excluded should be worked out in the year in which such gain or loss has occurred, such year being the previous year to the assessment. Therefore, it stands to reason that the exchange value prescribed in rule 115 of the Rules must necessarily be followed in computing the capital gains or loss, as the case may be. If the Revenue takes the value of pound sterling as on January 1, 1954, for the purpose of determining the acquisition value of the capital asset and the exchange rate of the pound sterling as on the date of sale, it would be acting outside the scope of the Rules and, therefore, outside the provisions of the Act. We are of the view, even if the Revenue contends that the acquisition value as on January 1, 1954, would be relevant, then the rate of exchange determining the acquisition value must remain uniform when applied to the sale price realised on the sale of the capital asset computed in terms of section 48 of the Act. In other words, assuming that rule 115 of the Rules is not attracted for computing the capital gain or loss, the uniform rate of exchange must be applied in determining the capital gain or loss arising out of the difference between the sale price and the cost of acquisition of the capital asset. That proposition not only stands to reason but appears to be in conformity with rule 115 of the Rules as it then was and as it now stands amended.
11. In the scheme of the Act or the Rules, there is no other provision which throws any light on the above question except section 43A of the Act which came to be inserted after the devaluation of the rupee in 1976. But then, that provision is attracted only when the acquisition price in foreign currency is yet to be paid in full and not otherwise. Therefore, the method which has uniformity and certainty and which is advantageous to the assessee should be adopted in order to determine the exchange rate or the value of acquisition as well as the consideration received for sale of such asset in computing the capital gain or the loss under the Act. This court, while interpreting rule 115(b) of the Rules as it then was in the case of D. A. Graham and N. G. F. Graham v. CIT [1985] 154 ITR 879 (Kar) ruled as follows (headnote) :
"No case is an authority on facts and what really binds is the ratio decidendi or the principle decided by a superior court and more so by the Supreme Court which is binding on all courts and Tribunals in the country. The enunciation made by the Supreme Court in CIT v. Bangalore Transport Co. Ltd. , on the scope and ambit of a receipt of income equally applies to a receipt of income chargeable to capital gains. The Supreme Court has laid down that in the scheme of the Income-tax Act, whenever an assessee receives in the course of his business, money or money's worth, income embedded therein accrues or arises to him. The chargeability of income to 'capital gain' is with reference to the full value of the consideration received or accruing as a result of the transfer of the capital asset, deducting the expenditure incurred thereon. The receipt charged to tax for 'capital gains' is the very receipt. The aggregation of all receipts as on the last day of the accounting year does not create any incongruity or antithesis in the chargeability of the receipt. What really happens is the postponement of the accounting, chargeability and determination and quantification of the liability to tax due thereon with reference to that and other receipts. If this is the true position of receipts, then it must necessarily follow that the official exchange rates prevailing with reference to those receipts must inevitably be the basis for computing the chargeability to tax under the Act. The sentence 'and shall be deemed to be the income of the previous year in which the transfer took place' occurring in section 45 cannot be read as contradicting, enlarging or destroying the effect of the earlier provisions of the same section that really deals with chargeability of income to capital gains."
12. Therefore, it is clear that, if rule 115 of the Rules must have any meaning, the view we have taken must necessarily prevail and the Revenue is bound to apply the rate of exchange uniformly for the purpose of computing the capital gains or loss formally devised by the Legislature in terms of section 48 of the Act.
13. In the result, we answer the question in the negative, in favour of the assessee and direct that the assessment order made for the year 1976-77 in computing the capital gains be modified in the manner we have indicated, i.e., calculating the capital loss at the exchange rate prevalent on the date of sale in terms of rule 115(b) of the Rules and allow a capital loss to the assessee in the sum of Rs. 42,32,070.
14. Order accordingly.