Case Note & Summary
The dispute concerned the taxability of export sale proceeds received by the assessee, a company exporting iron ore to foreign buyers, primarily Japan, during the accounting period July 1, 1982 to June 30, 1983 for assessment year 1984-85. The assessee entered into agreements for sale at fixed prices, payments were made through Indian banks against letters of credit, and the foreign buyers paid in foreign currency. The Indian banks credited the assessee's accounts in Indian rupees at the prevailing exchange rate on the date of receipt. The assessee offered for assessment the actual rupee amounts received during the accounting year and also converted outstanding receivables from foreign buyers into rupees at the exchange rate on the last day of the accounting year, June 30, 1983. The Income Tax Officer accepted this. The Commissioner of Income Tax, however, considered the assessment erroneous and prejudicial to revenue, stating that Rule 115 required conversion of all export earnings at the telegraphic transfer buying rate on the last day of the previous year, and issued a notice under Section 263 of the Income Tax Act, 1961. After hearing the assessee, the Commissioner directed the assessing officer to apply Rule 115 and bring the difference to tax. The assessee challenged the order in the Bombay High Court, contending that actual rupee receipts had already been taxed and Rule 115 could not apply to amounts already converted; the assessee also challenged the vires of Rule 115(c). The High Court quashed the Section 263 order and held Rule 115(c) ultra vires the Income Tax Act. The Commissioner appealed to the Supreme Court. Appellants argued that payments were made in foreign exchange as per contracts and invoices, bank conversion did not alter the character, and Rule 115 was attracted, requiring valuation at year-end rate. Respondent argued that actual Indian rupee amounts received from banks on various dates were already offered for tax and no notional income could be taxed. The Supreme Court analysed Rule 115, which fixes the telegraphic transfer buying rate for conversion of income in foreign currency as on the specified date. The Court held that Rule 115 only fixes the rate of conversion and applies only when foreign currency remains to be converted at the end of the accounting period. If the foreign currency had already been converted into rupees during the accounting year, no question of invoking Rule 115 arose. The facts showed the assessee's sale proceeds were credited to their bank account in Indian rupees; no foreign currency remained except outstanding receivables, which the assessee had already converted at year-end rate. Therefore, the Commissioner's Section 263 order was based on a mistaken premise and was rightly quashed by the High Court. However, the High Court erred in striking down Rule 115 as ultra vires; the rule was not in conflict with the substantive provisions of the Income Tax Act and the 1990 insertion of clause (2) was clarificatory. The appeal was disposed of accordingly, with no order as to costs.
Headnote
A) Income Tax - Assessment of Foreign Exchange Income - Rule 115 Income Tax Rules, 1962 - Applicability of telegraphic transfer buying rate conversion - Rule 115 fixes the exchange rate for income in foreign currency as on the specified date and applies only when foreign currency remains to be converted at the end of the previous year; if the assessee received export sale proceeds in Indian rupees through bank credits during the accounting year, the foreign currency had already been converted, so Rule 115 was not attracted. The Commissioner's revision under Section 263 based on notional conversion was erroneous. Held that High Court rightly quashed the Section 263 order. B) Constitutional Law - Delegated Legislation - Ultra Vires - Rule 115(c) of Income Tax Rules, 1962 in conflict with Income Tax Act, 1961 - High Court's finding that Rule 115(c) was ultra vires the Act was erroneous; the rule does not mandate conversion of all foreign currencies on the last day, only fixes the rate, and the later insertion of clause (2) in 1990 was clarificatory. Held that Rule 115 was not ultra vires and the High Court's invalidation was set aside. C) Income Tax - Revision of Assessment - Section 263 Income Tax Act, 1961 - Erroneous and prejudicial assessment - Commissioner invoked Section 263 on ground that ITO failed to apply Rule 115; because assessee had already offered actual rupee receipts and no foreign currency income remained, assessment was not erroneous. Held that Section 263 order was rightly quashed by High Court; no notional double conversion can be imposed.
Issue of Consideration
Whether Rule 115 of Income Tax Rules, 1962 applies to export sale proceeds credited in Indian rupees during the accounting year; whether Rule 115(c) is ultra vires the Income Tax Act, 1961; whether the Commissioner's order under Section 263 was valid.
Final Decision
The Supreme Court held that the Commissioner's Section 263 order was rightly quashed by the High Court because Rule 115 did not apply to amounts already credited in rupees; however, the High Court erred in striking down Rule 115 as ultra vires. Appeal disposed of accordingly with no order as to costs.
Law Points
- Rule 115 fixes rate of exchange for income in foreign currency only if foreign currency exists at end of previous year
- If foreign currency already converted to rupees during accounting year Rule 115 not applicable
- Section 263 revision cannot be invoked when assessment not erroneous
- Rule 115 not ultra vires Income Tax Act
